Emission Reduction
    We considered a BSER that comprises strategies from building blocks
1 and 2.

In this system, emission reductions at the most carbon-intensive
individual affected EGUs would occur through a combination of heat rate
improvements (resulting in a decrease in emission rates) and
substitution of generation at less carbon-intensive affected EGUs,
notably existing NGCC units. One reason for considering a BSER
comprising these two building blocks is that it involves only affected
EGUs and generation from affected EGUs.
    The EPA believes that the combination of building blocks 1 and 2
would be a ``system of emission reduction'' capable of achieving
significant reductions in CO2 emissions from affected EGUs
at a reasonable cost. As discussed in Section VI.C above, each of the
two building blocks independently would be capable of achieving
meaningful CO2 emission reductions at reasonable costs. In
combination, the need to achieve the level of emission reductions
achievable through use of building block 2 can mitigate the concern
that building block 1, implemented alone, would make coal-fired EGUs
more economically competitive and lead to increased generation that
would offset the emission reduction benefits of the carbon-intensity
improvements. While combining the building blocks may also raise the
cost per ton of emission reductions achieved through heat rate
improvements (by reducing the quantity of MWh generated from the EGUs
with improved heat rates and therefore also reducing the aggregate
emission reductions achieved at those EGUs by the heat rate
improvements), the costs of heat rate improvements are low enough that
we believe their cost per ton of emission reduction would remain
reasonable.
    Nevertheless, the EPA is not proposing that a combination of
building blocks 1 and 2 is the BSER, because the proposed combination
of all four building blocks discussed below--in other words, adding to
the measures in building blocks 1 and 2 the measures in building blocks
3 and 4, which we and stakeholders have identified as already in use--
is capable of achieving even greater CO2 emission reductions
from affected EGUs at reasonable costs. The state-specific goals that
would be computed consistent with a BSER based on the combination of
only building blocks 1 and 2 (i.e., goals computed using the goal
computation methodology discussed in Section VII below, except for the
omission of building blocks 3 and 4) are presented in the Goal
Computation TSD available in the docket. Further information on the
EPA's evaluation of this combination is available in the ``Analysis of
Emission Reductions, Costs, Benefits and Economic Impacts Associated
with Building Blocks 1 and 2'' available in the docket. We invite
comment on a potential BSER comprising a combination of building blocks
1 and 2.
3. A Combination of all Four Building Blocks as the Best System of
Emission Reduction
    Our proposal for the BSER is a combination of all four building
blocks. As discussed in Section VI.C above, each of the four building
blocks is a proven way to support either improvements in emissions
rates at affected EGUs or reductions in EGU mass emissions; each is in
widespread use and is independently capable of supporting significant
CO2 reductions from affected EGUs, either on an emission
rate or mass-emissions basis, at a reasonable cost consistent with
ensuring system reliability. As discussed in Section VI.E below, the
combination of all four building blocks provides the basis for
satisfying the legal criteria to be considered the BSER. Further, as
discussed in Section X below, the combination of all four building
blocks can achieve greater overall CO2 emission reductions
from affected EGUs, at a lower cost per unit of CO2
eliminated, than the combination of building blocks 1 and 2.
    In the large and highly integrated electricity system, where
electricity is fungible and the demand for electricity services can be
met in many ways (including through demand-side energy efficiency),
states and the industry have long pursued a wide variety of strategies
for ensuring that the demand for electricity services is met reliably,
at reasonable costs, and in a manner consistent with evolving
constraints, including environmental objectives. These strategies have
long extended to the measures in all four building blocks. We believe
the combination of all four building blocks fairly represents the range
of measures that states and the industry will consider when developing
state plans and strategies for reducing CO2 emissions from
affected EGUs while continuing to meet demand for electricity services
reliably and affordably. Therefore, we believe it is appropriate to
consider that same combination as the BSER upon which the required
CO2 standards of performance for affected EGUs should be
based.

E. Determination of the Best System of Emission Reduction

1. Overview
    In this section, the EPA explains the ``best system of emission
reduction . . . adequately demonstrated.'' This explanation includes
what the EPA proposes to determine as the BSER and why. In addition the
EPA explains how the BSER forms the basis for each state's overall
emission limitation requirement, which the EPA determines as the state
goal and the state adopts into its planning process as the emissions
performance level. The emission performance level, in turn, constitutes
the minimum degree of stringency for the standards of performance that,
taken as a whole, the state must establish for its affected EGUs (or,
if the state adopts the portfolio approach, for the requirements
imposed on the affected EGUs and other entities). Through this process,
the BSER informs the minimum stringency of the standards of
performance, although the state retains flexibility in its allocation
of emission limitations among its sources. As the EPA explains, central
to this overall approach is the fact that the EPA applies the BSER on a
state-wide basis, which is consistent with the interconnected nature of
the electricity system.
    The EPA is proposing two alternative formulations for the BSER,
each of which is based on, although in different ways, the four
building blocks. Under the first approach, emission rate improvements
and mass emission reductions at affected EGUs facilitated through the
adoption of the four building blocks themselves meet the criteria for
the BSER because they will amount to substantial reductions in
CO2 emissions achieved while maintaining fuel diversity and
a reliable, affordable electricity supply for the United States. Under
the second approach, the BSER consists of building block 1 coupled with
reduced utilization in specified amounts from, in general, higher-
emitting affected EGUs. Under this latter approach, the measures in
building blocks 2, 3, and 4 serve to justify those amounts and the
``adequate[ ] demonstrat[ion]'' because they are proven measures that
are already being pursued by states and the industry, at least in part
for the purpose of reducing CO2 emissions from affected
EGUs.
    The remainder of this discussion is organized into the following
subsections. Subsection 2 contains a summary of relevant considerations
for the BSER as defined in the statute and further interpreted in court
decisions. Subsection 3 discusses characteristics of the electricity
industry relevant to

interpretation of the BSER for purposes of this proposal, most notably
the industry's highly interconnected and integrated nature. Subsection
4 provides a discussion of how the building blocks would satisfy the
BSER criteria in isolation or support the alternative formulation of
the BSER as including reduced utilization in specified amounts.
Subsection 5 evaluates two combinations of building blocks--a
combination of building blocks 1 and 2, and the proposed combination of
all four building blocks--against the BSER criteria, and explains why
we propose that the combination of all four is the BSER. Subsection 6
addresses additional considerations related to the inclusion of
building blocks 2, 3, and 4 as parts of the basis supporting the BSER.
In subsection 7, we describe and seek comment on the alternate
interpretation that the BSER includes, in addition to building block 1,
a component consisting of reduced generation from higher-emitting
affected EGUs, with the measures in the other building blocks serving
as the basis for quantifying the amounts of generation reductions and
consequent CO2 emission reductions that can be achieved
while continuing to meet the demand for electricity services in a
reliable and affordable manner. In subsection 8, we discuss the
discretion that the case law gives us in weighing the various criteria
to determine the BSER. In subsection 9, we discuss how the BSER and the
state-wide manner in which the EPA applies it form the basis for the
emission standards that the state includes in the plan, and we explain
why that approach is consistent with the applicable section 111
requirements. The final three subsections address the topics of
combining source categories, severability, and certain other specific
issues on which we are seeking comment. Additional discussion is
provided in the Legal Memorandum available in the docket.
2. Statutory and Regulatory Provisions Related to Determination and
Application of the BSER
    The EPA's explanation for this BSER proposal begins with the
statutory definition of a ``standard of performance'':

    The term ``standard of performance'' means a standard for
emissions of air pollutants which reflects the degree of emission
limitation achievable through the application of the best system of
emission reduction which (taking into account the cost of achieving
such reduction and any nonair quality health and environmental
impact and energy requirements) the Administrator determines has
been adequately demonstrated.

42 U.S.C. 7411(a)(1).

    The U.S. Court of Appeals for the D.C. Circuit (D.C. Circuit or
Court) has handed down case law over a 40-year period that interprets
this CAA provision, including its component elements.\194\ Under this
case law, the EPA determines the BSER based on the following key
considerations, among others:
---------------------------------------------------------------------------

    \194\ Portland Cement Ass'n v. Ruckelshaus, 486 F.2d 375 (D.C.
Cir. 1973), cert. denied, 416 U.S. 969 (1974); Essex Chemical Corp.
v. Ruckelshaus, 486 F.2d 427 (D.C. Cir. 1973), cert. denied,
Appalachian Power Co. v. EPA, 416 U.S. 969 (1974); Sierra Club v.
Costle, 657 F.2d 298 (D.C. Cir. 1981); Portland Cement Ass'n v. EPA,
665 F.3d 177 (D.C. Cir. 2011). Although this case law concerns the
meaning of the definition of ``standard of performance'' for
purposes of rulemakings that the EPA promulgated under CAA section
111(b), the same term is used for section 111(d), and as a result,
this case law is relevant for the present rulemaking under section
111(d).
---------------------------------------------------------------------------

     The system of emission reduction must be technically
feasible.
     The EPA must consider the amount of emission reductions
that the system would generate.
     The costs of the system must be reasonable. The EPA may
consider costs at the source level, the industry level, and, at least
in the case of the power sector, the national level in terms of the
overall costs of electricity and the impact on the national economy
over time.\195\
---------------------------------------------------------------------------

    \195\ As discussed in the January 2014 Proposal, the D.C.
Circuit's case law formulates the cost consideration in various
ways: The costs must not be ``exorbitant[ ]'', Essex Chemical Corp.
v. Ruckelshaus, 486 F.2d at 433, see Lignite Energy Council v. EPA,
198 F.3d 930, 933 (D.C. Cir. 1999); ``greater than the industry
could bear and survive,'' Portland Cement Ass'n v. EPA, 513 F.2d
506, 508 (D.C. Cir. 1975); or ``excessive'' or ``unreasonable,''
Sierra Club v. Costle, 657 F.2d at 343. In the January 2014
Proposal, the EPA stated that ``these various formulations of the
cost standard . . . are synonymous,'' and, for convenience, we used
``reasonableness'' as the formulation. We take the same approach in
this rulemaking.
---------------------------------------------------------------------------

     The EPA must also consider that CAA section 111 is
designed to promote the development and implementation of technology,
including the diffusion of existing technology as the BSER,\196\ the
development of new technology that may be treated as the BSER,\197\ and
the development of other emerging technology.\198\
---------------------------------------------------------------------------

    \196\ See 1970 Senate Committee Report No. 91-1196 at 15 (``The
maximum use of available means of preventing and controlling air
pollution is essential to the elimination of new pollution
problems'').
    \197\ See Portland Cement Ass'n v. Ruckelshaus, 486 F.2d at 391
(the best system of emission reduction must ``look[ ] toward what
may fairly be projected for the regulated future, rather than the
state of the art at present'').
    \198\ See Sierra Club v. Costle, 657 F.2d at 351 (upholding a
standard of performance designed to promote the use of an emerging
technology).
---------------------------------------------------------------------------

    Another consideration particularly relevant to this rulemaking is
energy impacts, which, as with costs, the EPA may consider at the
source level, the industry level, and the national level over time. In
the context of the electricity industry and this proposal, the EPA
believes that the scope of energy impacts that may be considered
encompasses assurance of the continued ability of the industry to meet
the evolving demand for electricity services in a reliable manner,
while providing sufficient flexibility to enable affected sources to
follow state energy plans.
    Importantly, the EPA has discretion to weigh these various
considerations, may determine that some merit greater weight than
others, and may vary the weighting depending on the source category.
    It is a well-established principle that states have discretion
regarding the measures adopted in their state implementation plans
under CAA section 110 to attain the NAAQS.\199\ The EPA believes that
the same principle applies in the context of state plans under section
111(d) as well, such that each state has the discretion to adopt
emission reduction measures other than the measures found by the EPA to
comprise the BSER, or to place greater or lesser emphasis than the EPA
on certain measures, provided that the state's plan achieves the
required level of emission performance for affected sources.
---------------------------------------------------------------------------

    \199\ See Train v. Natural Res. Def. Council, 421 U.S. 60
(1975).
---------------------------------------------------------------------------

    The EPA discussed the CAA requirements and Court interpretations of
the BSER at length in the January 2014 Proposal, 79 FR at 1,462/1-
1,467/3, and incorporates by reference that discussion into this
rulemaking.
    Over the last forty years, under CAA section 111(d), the agency has
regulated four pollutants from five source categories (i.e., phosphate
fertilizer plants (fluorides), sulfuric acid plants (acid mist),
primary aluminum plants (fluorides), Kraft pulp plants (total reduced
sulfur), and municipal solid waste landfills (landfill gases)).\200\ In
addition, the agency has regulated additional pollutants under CAA

section 111(d) in conjunction with CAA section 129.\201\ However, the
agency has not previously regulated CO2 or any other
greenhouse gas under CAA section 111(d) (although because landfill
gases include methane, the agency's regulation of landfill gases
reduced emissions of that greenhouse gas). Further, the electricity
industry differs in important ways from the source categories
previously regulated under section 111(d) in terms of its large scale,
its central importance to the economy, and, as discussed below, its
highly interconnected and integrated nature.
---------------------------------------------------------------------------

    \200\ See ``Phosphate Fertilizer Plants; Final Guideline
Document Availability,'' 42 FR 12022 (Mar. 1, 1977); ``Standards of
Performance for New Stationary Sources; Emission Guideline for
Sulfuric Acid Mist,'' 42 FR 55796 (Oct. 18, 1977); ``Kraft Pulp
Mills, Notice of Availability of Final Guideline Document,'' 44 FR
29828 (May 22, 1979); ``Primary Aluminum Plants; Availability of
Final Guideline Document,'' 45 FR 26294 (Apr. 17, 1980); ``Standards
of Performance for New Stationary Sources and Guidelines for Control
of Existing Sources: Municipal Solid Waste Landfills, Final Rule,''
61 FR 9905 (Mar. 12, 1996).
    \201\ See, e.g., ``Standards of Performance for New Stationary
Sources and Emission Guidelines for Existing Sources: Sewage Sludge
Incineration Units, Final Rule,'' 76 FR 15372 (Mar. 21, 2011).
---------------------------------------------------------------------------

3. The Interconnected Nature of the U.S. Electricity Sector
    The U.S. electricity system is a highly interconnected, integrated
system in which large numbers of EGUs using diverse fuels and
generating technologies are operated in a coordinated manner to produce
fungible electricity services for customers. Because electricity
storage is costly and has not been widely deployed, the amounts of
electricity demanded and supplied must be continuously matched, and
system operators typically have flexibility to choose among multiple
EGUs when selecting where to obtain the next MWh of generation needed.
Coordination over short- and long-term time scales is accomplished
through a variety of institutions including vertically integrated
utilities, state regulatory agencies, independent system operators and
regional transmission organizations (ISOs/RTOs), and market mechanisms.
The electricity sector is both critical to the nation's economy and the
source of more than 30 percent of U.S. greenhouse gas emissions,
predominantly in the form of CO2.
    The integrated electricity system allows increased generation from
less carbon-intensive NGCC units to substitute for generation from more
carbon-intensive steam EGUs (building block 2), thereby lowering
CO2 emissions from the group of affected EGUs as a whole.
The electricity system similarly allows increased generation resulting
from expansion of the amount of available low- or zero-carbon
generating capacity connected to the electric grid (building block 3),
as well as avoided generation resulting from reductions in electricity
demand (building block 4), to substitute for fossil fuel-fired
generation, thereby reducing CO2 emissions from affected
EGUs. Each of these measures already routinely occurs within this
integrated system for providing electricity and electricity services.
    The integrated nature of the electricity system has long played a
central role in the industry's continuing efforts to assure reliability
and to manage costs generally. Specifically in the area of pollution
control, state governments and the federal government have repeatedly
taken advantage of the integrated nature of the electricity system when
designing programs to allow the industry to meet the pollution control
objectives in a least-cost manner. Examples include several cap-and-
trade programs to reduce national or regional emissions of
SO2 and NOX: The SO2-related portion
of the CAA Title IV Acid Rain Program, the Ozone Transport Commission
(OTC) NOX Budget Program, the NOX SIP Call
NOX Budget Trading Program, and the Clean Air Interstate
Rule (CAIR) annual SO2, annual NOX, and ozone-
season NOX trading programs. While the Acid Rain Program was
created by federal legislation, the OTC NOX Budget Program
was developed primarily through the joint efforts of a group of
northeastern states. In the NOX SIP Call and CAIR programs,
the federal government set emission budgets and developed trading
programs that states could use as a compliance option.\202\ Each of
these programs was designed to take advantage of the fact that in an
integrated electricity system, some EGUs can reduce emissions at lower
costs than others, and that by allowing the industry to determine
through market mechanisms which EGUs to control and which to leave
uncontrolled, and which EGUs to potentially operate more and which to
potentially operate less, overall compliance costs can be reduced. The
integrated electricity system plays the important function of allowing
some EGUs to reduce their generation while ensuring that overall demand
for electricity services can be reliably met. It is worth noting that
adoption by affected EGUs of any of the measures in the building blocks
could be (or could have been) used to facilitate compliance with each
of the programs just described.\203\
---------------------------------------------------------------------------

    \202\ In the Regional Greenhouse Gas Initiative, described in
more detail below, participating states use emission budgets and a
trading program to address CO2 emissions from the
electricity sector.
    \203\ In addition to the already-implemented programs mentioned
above--the SO2-related portion of the Acid Rain Program,
the OTC NOX Budget Program, the NOX SIP Call
NOX Budget Trading Program, and the Clean Air Interstate
Rule trading programs--use of measures in the building blocks would
also facilitate compliance with the cap-and-trade programs
established by the Cross-State Air Pollution Rule (76 FR 48208, Aug.
8, 2011).
---------------------------------------------------------------------------

    Some states are already relying on the integrated nature of the
electricity system to establish the policy contexts within which
affected EGUs will reduce their CO2 emissions.\204\
California and Colorado provide two examples of how statewide targets
(or company-wide targets within a state) can be designed with
consideration of the wide range of CO2 mitigation options
and affected EGUs' flexibility to use those options.
---------------------------------------------------------------------------

    \204\ A number of utilities also have climate mitigation plans.
Examples include National Grid, http://www2.nationalgrid.com/responsibility/how-were-doing/grid-data-centre/climate-change/;
Exelon, http://www.exeloncorp.com/newsroom/pr_20140423_EXC_Exelon2020.aspx; PG&E, http://www.pge.com/about/environment/pge/climate/; and Austin Energy, http://austinenergy.com/wps/portal/ae/about/environment/austin-climate-protection-plan/!ut/p/a0/04_Sj9CPykssy0xPLMnMz0vMAfGjzOINjCyMPJwNjDzdzY0sDBzdnZ28TcP8DAMMDPQLsh0VAU4fG7s!/.
---------------------------------------------------------------------------

    California enacted its Global Warming Solutions Act (also known as
AB32) in 2006, requiring the state to reduce its GHG emissions to 1990
levels by 2020 and 80 percent below 1990 levels by 2050.\205\ According
to California, ``the integrated nature of the power grid means that
policies which displace the need for fossil generation can often cut
emissions from covered sources more deeply, and more cost-effectively
than can engineering changes at the plants alone, though these source-
level control efforts are a vital starting point.'' \206\ California
therefore relied on a suite of mechanisms to provide fossil fuel-fired
generation substitutes and incentives for EGUs to reduce their
emissions, including demand-side energy efficiency programs, renewable
energy programs, and an economy-wide cap-and-trade program, along with
other programs.\207\ The California plan has put in place mechanisms
that through market dynamics affect both companies' longer-term
planning decisions and their short-term dispatch decisions. The need to
hold emissions allowances and the reduced demand from demand-side
energy efficiency programs impact longer-term decisions companies make
about investment in both existing and new EGUs. The price of emission
allowances also impacts hourly dispatch decisions; where emission
allowance requirements are in effect, EGU owners

routinely recognize the costs of emission allowances as components of
the variable operating costs that are relied on for these
decisions.\208\ In this manner, allowance prices constitute market
signals encouraging reduced use of higher-emitting EGUs and increased
use of lower-emitting EGUs.
---------------------------------------------------------------------------

    \205\ State of California Global Warming Solutions Act of 2006,
Assembly Bill 32, http://www.leginfo.ca.gov/pub/05-06/bill/asm/ab_0001-0050/ab_32_bill_20060927_chaptered.pdf.
    \206\ December 27, 2013 Letter from Mary D. Nichols, Chairman of
California Air Resources Board, to EPA Administrator Gina McCarthy.
    \207\ See Cal. Air Res. Bd., Climate Change Scoping Plan 31-32,
41-46 (2008), available at http://www.arb.ca.gov/cc/scopingplan/document/adopted_scoping_plan.pdf.
    \208\ The requirement to hold allowances covering their
CO2 emissions went into effect for EGUs in California on
January 1, 2013.
---------------------------------------------------------------------------

    The Colorado Clean Air, Clean Jobs Act (CACJA), signed into law on
April 19, 2010, required each investor-owned utility with coal-fired
EGUs to submit to the state a multi-pollutant plan for meeting current
and foreseeable EPA standards for emissions of NOX,
SO2, particulates, mercury, and CO2. Rather than
fully prescribing specific control technologies, the law provided
flexibility for each utility to select the best set of measures to
achieve the emission reductions.\209\ For example, a utility could
choose to retrofit or repower EGUs, or it could choose to retire
higher-emitting EGUs and replace them with NGCC units and other low- or
non-emitting energy plants or with end-use efficiency measures.\210\
The Colorado plan generally focused more on impacting companies'
longer-term planning decisions than on affecting short-term dispatch
decisions. In response, Colorado utilities have adopted a mix of
measures including retrofits, natural gas conversions and retirements
of coal-fired EGUs, as well as construction of new NGCC units.
---------------------------------------------------------------------------

    \209\ The law also set some explicit requirements, such as
requirements for development of new renewable generating capacity
and requirements to phase out older coal-fired EGUs.
    \210\ See State of Colorado House Bill 10-1365, available at
http://www.leg.state.co.us/clics/clics2010a/csl.nsf/fsbillcont/0CA296732C8CEF4D872576E400641B74?Open&file=1365_ren.pdf.
---------------------------------------------------------------------------

    Multi-state mechanisms with analogous impacts on both longer-term
planning decisions and short-term dispatch decisions have also been put
in place. For example, nine northeastern and Mid-Atlantic States \211\
participate in the Regional Greenhouse Gas Initiative (RGGI), a market-
based emissions budget trading program that sets an aggregate limit on
CO2 emissions from fossil fuel-fired EGUs in the
participating states. To comply with the program, each EGU must acquire
allowances equal to its emissions in each compliance period--through
purchases or by allocation from the state--and must surrender the
allowances at the end of the period. The RGGI program offers
flexibility to regulated parties through provisions for multi-year
compliance periods, allowance banking, offsets, an auction reserve
price, and a cost-containment reserve of allowances, and further
encourages emission allowance market development by authorizing trading
between regulated and non-regulated parties.\212\ Operating in this
regime, EGUs could take a variety of compliance actions, including
replacing generation at higher-emitting EGUs with generation at lower-
emitting EGUs or achieving emissions reductions at EGUs by means of
end-use energy efficiency programs.
---------------------------------------------------------------------------

    \211\ Participating states include Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and
Vermont.
    \212\ See RGGI Web site at http://www.rggi.org/rggi.
---------------------------------------------------------------------------

    An approach to determination of the BSER that recognizes the
integrated nature of the electricity system is also consistent with the
way in which the electricity industry already addresses resource
planning issues. For example, in states where the price of EGUs'
generation remains subject to regulation, utilities generally prepare
integrated resource plans setting forth their strategies for meeting
future demand for electricity services in a cost-effective manner.
These plans may include measures from building blocks 2, 3, and 4. In
most states where generation is no longer subject to price regulation,
regional transmission organizations (RTOs) or independent system
operators (ISOs) ensure the adequacy of future generation supplies by
administering auctions for forward capacity. In these auctions, owners
of existing EGUs (with consideration of building blocks 1 and 2),\213\
developers of new EGUs including renewable generating capacity
(building block 3), and developers of demand-side resources (building
block 4) all compete to provide potential resources for meeting the
projected demand for electricity services.
---------------------------------------------------------------------------

    \213\ Potential heat rate improvements create opportunities for
EGU owners to reduce their variable costs, which increase potential
operating profits from generation and thereby create opportunities
to lower the prices at which the owners would bid the capacity of
their EGUs into the auctions.
---------------------------------------------------------------------------

    As indicated by the foregoing discussion, in the U.S. electricity
system the demand for electricity services is met, on both a short-term
and longer-term basis and in both regulated and deregulated contexts,
through integrated consideration of a wide variety of possible options,
coordinated by some combination of utilities, regulators, system
operators, and market mechanisms. The EPA believes that the BSER for
CO2 emissions from existing EGUs should reflect this
integrated character.
    A final, important point regarding the integrated electricity
system is that the sets of actions that enable the demand for
electricity services to be continuously met can be undertaken in
different orders, with changes in some interconnected elements
eliciting compensating responses from other interconnected elements.
Thus, the CO2 emissions reductions associated with building
blocks 2, 3, and 4 can be achieved in either of two ways: (i) First
instituting measures in building blocks 2, 3, and 4, which, due to the
interconnected and integrated nature of the grid, would elicit the
response of reducing generation at some or all affected EGUs, thereby
lowering those EGUs' emissions; or (ii) first reducing generation and
therefore emissions from some or all affected EGUs (or planning to make
those reductions), which due to the interconnected and integrated
nature of the grid, would elicit the responses identified in building
blocks 2, 3, and 4 of increasing generation at lower-emitting EGUs or
reducing the demand for electricity services. (In some cases, the
change and response could be planned simultaneously.) Each of these
sets of actions, with the building blocks as the initial change or the
reduced generation at affected EGUs as the initial change, may be
considered to be part of a ``system of emission reduction,'' as
discussed below.
    Further discussion of the ways in which the ``system of emission
reduction'' for affected EGUs is influenced by the interconnected and
integrated nature of the electricity system is provided below in the
context of the EPA's rationale for proposing to base the BSER on the
combination of all four building blocks. This topic is also discussed
in the Legal Memorandum available in the docket.
4. Evaluation of Individual Building Blocks Against the BSER Criteria
    In this subsection we explain why (i) the individual building
blocks meet the criteria to qualify as components of the ``best system
of emission reduction . . . adequately demonstrated'' and (ii) why,
under the alternative formulation of the BSER as including reduced
utilization of higher-emitting affected EGUs in specified amounts,
building blocks 2, 3, and 4 serve as the basis for those amounts and
why the reduced utilization is ``adequately demonstrated.''
a. Building Block 1--Heat Rate Improvements
    Building block 1--reducing the carbon intensity of generation at
individual affected coal-fired steam EGUs through heat rate
improvements--is a component of the BSER because the measures the
affected sources may

undertake to achieve heat rate improvements are technically feasible
and of reasonable cost, and meet the other requirements to qualify as a
component of the ``best system of emission reduction . . . adequately
demonstrated.''
    The EPA's analysis and conclusions regarding the technical
feasibility, costs, and magnitude of CO2 emission reductions
achievable through heat rate improvements are discussed in Section
VI.C.1 above. We consider heat rate improvement to be a common and
well-established practice within the industry.
    Other BSER criteria also favor building block 1 as a component of
the BSER. For example, with respect to non-air health and environmental
impacts, heat rate improvements cause fuel to be used more efficiently,
reducing the volumes of and therefore the adverse impacts associated
with disposal of coal combustion solid waste products. With respect to
technological innovation, building block 1 encourages the spread of
more advanced technology to EGUs currently using components with older
designs. The EPA has not specifically evaluated the extent to which
enhanced maintenance practices leading to heat rate improvements might
also lead to electricity reliability improvements, but generally
expects that enhanced maintenance would be more likely to improve than
to degrade EGU availability, which would tend to improve electricity
system reliability.
    As noted above, the EPA is concerned about the potential ``rebound
effect'' associated with building block 1 if applied in isolation. More
specifically, we noted that in the context of the integrated
electricity system, absent other incentives to reduce generation and
CO2 emissions from coal-fired EGUs, heat rate improvements
and consequent variable cost reductions at those EGUs would cause them
to become more competitive compared to other EGUs and increase their
generation, leading to smaller overall reductions in CO2
emissions (depending on the CO2 emission rates of the
displaced generating capacity). However, we believe that this concern
can be readily addressed by ensuring that the BSER also reflects other
CO2 reduction strategies that encourage increases in
generation from lower- or zero-carbon EGUs or in demand-side energy
efficiency, thereby allowing building block 1 to be considered part of
the BSER for CO2 emissions at affected EGUs.
b. Building Block 2--Re-Dispatch
    Building block 2--reducing CO2 emissions at and
substituting for generation from the most carbon-intensive affected
EGUs with generation from less carbon-intensive affected EGUs
(specifically NGCC units that are currently operating or under
construction)--is a component of the BSER because the shifts in
generation that it involves demonstrate that reducing mass
CO2 emissions at higher-emitting EGUs is technically
feasible, will not jeopardize system reliability, is of reasonable
cost, and meets the other requirements for a component of the ``best
system of emission reduction . . . adequately demonstrated.''
    The EPA's analysis and conclusions regarding the technical
feasibility, costs, and magnitude of CO2 emission reductions
achievable at high-emitting EGUs through re-dispatch among affected
EGUs are discussed in Section VI.C.2 above. We consider re-dispatch
among the large number of diverse EGUs that are linked to one another
and to customers by extensive regional transmission grids to be a
routine and well-established operating practice within the industry
that is used to facilitate the achievement of a wide variety of
objectives, including environmental objectives, while meeting the
demand for electricity services. As discussed above, in the
interconnected and integrated electricity industry, fossil fuel-fired
steam EGUs are able to reduce their generation and NGCC units are able
to increase their generation in a coordinated manner through
mechanisms--in some cases centralized and in others not--that regularly
deal with such changes on both a short-term and a longer-term basis.
    Both the achievability of this building block and the
reasonableness of its costs are supported by the fact that there has
been a long-term trend in the industry away from coal-fired generation
and toward NGCC generation for a variety of reasons. As part of their
CO2 reduction strategies, states can encourage this trend in
a variety of ways. First, a state could use its permitting authority to
impose limits on the hours of operation (or emissions) of individual
steam generating units over a given time period. Second, a state could
change the relative costs of generation for more carbon-intensive and
less carbon-intensive generating units by imposing a cost on carbon
emissions. A state could do so through any of several market-based
mechanisms. One would be to adopt an allowance-based system. An example
is the Regional Greenhouse Gas Initiative, an allowance-based system in
which sources purchase allowances in periodic auctions. Another way
would be through a tradable emission rate system, under which the state
would impose an emission rate limit on the steam generating unit that
the unit could meet only by purchasing the right to average its
emission rate with a unit with a lower rate, such as an NGCC unit. Most
broadly, an allowance system would provide the greatest incentive for
the most carbon-intensive affected sources to reduce emissions as much
as possible so as to reduce their need to purchase allowances (or to
allow them to sell un-needed allowances), and the same would be true
for a tradable emission rate system.
    The emission reductions achievable or supported by the application
of building block 2 also perform well against other BSER criteria. For
example, we expect that building block 2 would have positive non-air
health and environmental impacts. Coal combustion for electricity
generation produces large volumes of solid wastes that require
disposal, with some potential for adverse environmental impacts; these
wastes are not produced by natural gas combustion. The intake and
discharge of water for cooling at many EGUs also carries some potential
for adverse environmental impacts; NGCC units generally require less
cooling water than steam EGUs.\214\ As already noted, with respect to
energy impacts, the EPA believes that building block 2 (at least at the
level of stringency proposed for purposes of establishing state goals)
would not pose risks to reliability. Building block 2 also promotes
greater use of the advanced NGCC technology installed in the existing
fleet of NGCC units.
---------------------------------------------------------------------------

    \214\ According to a DOE/NETL study, the relative amount of
water consumption for a new pulverized coal plant is 2.5 times the
consumption for a new NGCC unit of similar size. ``Cost and
Performance Baseline for Fossil Energy Plants: Volume 1: Bituminous
Coal and Natural Gas to Electricity,'' Rev 2a, September 2013,
National Energy Technology Laboratory Report DOE/NETL-2010/1397.
---------------------------------------------------------------------------

    It should be observed that, by definition of the elements of this
building block, the shifts in generation taking place under building
block 2 occur entirely among existing EGUs subject to this
rulemaking.\215\ Through application of this building block considered
in isolation, some affected sources--mostly coal-fired steam EGUs--
would reduce their generation and CO2 emissions, while other
affected sources--NGCC units--would increase their generation and
CO2 emissions.\216\

However, because for each MWh of generation, NGCC units produce less
CO2 emissions than coal-fired steam EGUs, the total quantity
of CO2 emissions from all affected sources in aggregate
would decrease. In the context of the integrated electricity system,
where the operation of affected EGUs of multiple types is routinely
coordinated to provide a fungible service, and in the context of
CO2 emissions, where location is a less important factor
than is the case for other pollutants, the EPA believes that a measure
that takes advantage of that integration to reduce CO2
emissions from the overall set of affected EGUs is readily encompassed
within the meaning of a ``system of emission reduction'' for
CO2 emissions at affected EGUs even if the measure would
increase CO2 emissions from a subset of those affected EGUs.
Indeed, our review of the data and discussions with states reveal that
some states are already moving in this direction for this purpose
(while others are moving in the same direction for other purposes).
Emission trading or averaging approaches can facilitate the
implementation of such a ``system'' and have already been used in the
electricity industry to address CO2 as well as other
pollutants, as discussed above.
---------------------------------------------------------------------------

    \215\ For purposes of this rulemaking, ``existing'' EGUs include
units under construction as of January 8, 2014, the date of
publication in the Federal Register of the Carbon Pollution
Standards for new fossil fuel-fired EGUs.
    \216\ Because building blocks 3 and 4 reduce generation and
CO2 emissions from all fossil fuel-fired affected EGUs as
a group, including NGCC units, the increase in generation and
CO2 emissions from NGCC units under building block 2 is
mitigated to some extent by including those building blocks in the
BSER along with building block 2.
---------------------------------------------------------------------------

    Finally, the EPA notes that the alternative interpretation of the
BSER discussed later is based in part on the re-dispatch measures in
building block 2. In this alternative, as it relates to building block
2, reduced generation from the subset of affected EGUs consisting of
fossil fuel-fired steam EGUs--i.e., the most carbon-intensive subset of
affected EGUs--is a component of the BSER. The potential to use
increased generation from less carbon-intensive affected NGCC units
would serve as a basis for quantifying the amounts of generation
reductions and CO2 emission reductions at more carbon-
intensive affected EGUs that could be achieved while continuing to meet
the demand for electricity services in a reliable and affordable
manner. This alternative is discussed further in Section VI.E.7 below.
c. Building Block 3--Use of Expanded Low- and Zero-Carbon Generating
Capacity
    Building block 3--reducing CO2 emissions at and
substituting for generation from affected EGUs by using expanded
amounts of low- and zero-carbon generating capacity--is a component of
the BSER because the expansion and use of renewable generating
capacity, completion and use of nuclear capacity currently under
construction, and avoidance of nuclear capacity retirements all
establish the foundation for a determination that mass emission
reductions from affected EGUs are technically feasible, do not
jeopardize system reliability, are of reasonable cost, and meet the
other requirements for a component of the ``best system of emission
reduction . . . adequately demonstrated.''
    The EPA's analysis and conclusions regarding the technical
feasibility, costs, and magnitude of the measures in building block 3
are discussed in Section VI.C.3 above. We consider all of these
measures to be proven, well-established practices within the industry,
and development of renewable capacity in particular is consistent with
recent industry trends. States are already pursuing policies that
encourage production of greater amounts of renewable energy, such as
the establishment of targets for procurement of renewable generating
capacity. Moreover, markets for renewable energy certificates, which
facilitate investment in renewable energy, are already well-
established. As noted above with re-dispatch, an allowance system or
tradable emission rate system would provide incentives for sources to
reduce their emissions as much as possible, including through
substituting for their generation with generation from renewable
energy. In addition, owners of existing nuclear units and nuclear units
currently under construction can take action to complete or preserve
that capacity, the generation from which likewise can be dispatched in
a coordinated manner to substitute for fossil fuel-fired generation. As
discussed above, coordination of these decisions in the integrated
electricity system can occur through a variety of mechanisms, some
centralized and some not.
    The renewable capacity measures in building block 3 generally
perform well against other BSER criteria. For example, incentives for
expansion of renewable capacity encourage technological innovation in
improved renewable technologies as well as more extensive deployment of
current advanced technologies. Generation from wind turbines (the most
common renewable technology) does not produce solid waste or require
cooling water, a better environmental outcome than if that amount of
generation had instead been produced at a typical range of fossil fuel-
fired EGUs. Although the intermittent nature of generation from
renewable resources such as wind and solar units requires special
consideration from grid operators, renewable generation has grown
quickly in recent years, as discussed above, and the EPA has seen no
evidence that operators will be less able to cope with future growth
than they have with rapid past growth.
    The EPA believes that the performance of the nuclear measures in
building block 3 against the other BSER measures is also positive on
balance. With respect to encouragement of technological innovation,
incentives for completion of nuclear capacity currently under
construction encourage deployment of nuclear unit designs that reflect
advances over earlier designs. The nation's nuclear fleet today
routinely operates at high average utilization rates, suggesting no
reason to expect adverse reliability consequences from completion or
preservation of additional nuclear capacity. The five nuclear units
currently under construction are all designed to use closed-cycle
cooling systems with lower cooling water usage than some existing
fossil fuel-fired EGUs;\217\ existing nuclear units may use amounts of
cooling water comparable to the amounts used by those fossil fuel-fired
steam EGUs. The EPA recognizes that nuclear generation poses unique
waste disposal issues (although it avoids the solid waste issues
specific to coal-fired generation). However, we do not consider that
potential disadvantage of nuclear generation relative to fossil fuel-
fired generation as outweighing nuclear generation's other advantages
as an element of building block 3. For all these reasons, we consider
building block 3 to be a component of the ``best system of emission
reduction . . . adequately demonstrated.''
---------------------------------------------------------------------------

    \217\ See U.S. NRC, Watts Bar Unit 2 Final Environmental
Statement, Final Report at 3-3, available at http://pbadupws.nrc.gov/docs/ML1314/ML13144A092.pdf; U.S. NRC, Summer Units
2-3 Final Environmental Impact Statement, Final Report at 3-14,
available at http://pbadupws.nrc.gov/docs/ML1109/ML11098A044.pdf;
U.S. NRC, Vogtle Units 3-4 Final Environmental Impact Statement,
Final Report at 3-5, available at http://pbadupws.nrc.gov/docs/ML0822/ML082240145.pdf. Relative to the once-through systems at many
existing power plants, closed-cycle cooling systems withdraw from
and discharge to external water bodies substantially less overall
cooling water, although they also consume larger amounts of water
through evaporation. See Department of Energy/Office of Fossil
Energy's Power Plant Water Management R&D Program, available at
http://www.netl.doe.gov/File%20Library/Research/Energy%20Analysis/Publications/PowerPlantWaterMgtR-D-Final-1.pdf.
---------------------------------------------------------------------------

    Finally, the EPA notes that the alternative BSER discussed later
would include a component consisting of reduced generation from
affected EGUs,

with the measures in building block 3 serving as a basis for
quantifying the amount of reduced generation and consequent
CO2 emission reductions. Because of the availability of
those measures, the amount of reduced generation can be achieved while
continuing to meet the demand for electricity services in a reliable
and affordable manner. This alternative BSER is discussed in Section
VI.E.7 below.
d. Building Block 4--Increased Demand-Side Energy Efficiency
    Building block 4--reducing CO2 emissions at and reducing
generation from affected EGUs by promoting demand-side energy
efficiency that reduces the amount of generation required from affected
EGUs--is a component of the BSER because the demand-side energy
efficiency is technically feasible and of reasonable cost, and meets
the other requirements for a component of the ``best system of emission
reduction . . . adequately demonstrated.''
    The EPA's analysis and conclusions regarding the technical
feasibility, costs, and magnitude of building block 4 are discussed in
Section VI.C.4 above. We consider demand-side energy efficiency
programs to be proven, well-established practices within the industry
that are consistent with industry trends. Greater demand-side energy
efficiency is already a common policy goal among states, and most
states already authorize or require implementation of demand-side
energy efficiency programs. Fossil fuel-fired EGUs can reduce their
generation. Owners of affected EGUs as well as other parties can
contract for demand-side energy efficiency. As discussed above,
coordination of these decisions in the integrated electricity system
can occur through a variety of mechanisms, some centralized and some
not. For example, an allowance system or tradable emission rate system
would provide incentives that promote the measures in building block 4
in the same manner as discussed above for other building blocks.
    Building block 4 is also very attractive under other BSER criteria.
Demand-side energy efficiency avoids the non-air health and
environmental effects of the fossil fuel-fired generation for which it
substitutes. Further, by reducing the overall amount of electricity
that needs to be transmitted between EGUs and customers, demand-side
energy efficiency tends to relieve stress on the grid, thereby
increasing system reliability. Creating incentives for additional
demand-side energy efficiency is also consistent with the goals of
encouraging technological innovation in energy efficiency and
encouraging deployment of current advanced technologies. For all these
reasons, the measures in building block 4 qualify as a component of the
``best system of emission reduction . . . adequately demonstrated.''
    The EPA notes that the alternative BSER discussed later would
include a component consisting of reduced generation from affected
EGUs, with demand-side energy efficiency serving as a basis for
quantifying the amounts of generation reductions and consequent
CO2 emission reductions that can be achieved while
continuing to meet the demand for electricity services in a reliable
and affordable manner. This alternate interpretation of the BSER is
discussed in Section VI.E.7 below.
5. Evaluation of Building Block Combinations Against the BSER Criteria
a. Combination of Building Blocks 1 and 2
    The EPA has considered whether a combination of building blocks 1
and 2 would be the BSER. As described in Section VI.D above, we believe
that such a combination is technically feasible and would be a ``system
of emission reduction'' capable of achieving meaningful reductions in
CO2 emissions from affected EGUs at a reasonable cost. The
combination would also satisfy other BSER criteria. Nevertheless, we do
not propose that this combination should be the BSER because the
proposed combination of all four building blocks is capable of
achieving greater reductions in CO2 emissions from affected
EGUs at a lower cost.
    The EPA believes that both building blocks 1 and 2 individually
satisfy the BSER criteria identified by the statute and the D.C.
Circuit, with one possible concern, related to a ``rebound effect,''
noted earlier. That concern is the potential for the heat rate
improvements in building block 1, if implemented in isolation, to make
coal-fired steam EGUs more competitive compared to other EGUs and cause
them to increase their generation, creating a ``rebound effect'' that
would make building block 1 less effective at reducing CO2
emissions. As discussed above, building blocks 1 and 2 each appear
attractive or neutral with respect to each of the other BSER criteria.
    With respect to most of the BSER criteria, there is no reason to
expect that the combination of building blocks 1 and 2 would be
evaluated differently from the individual building blocks. However, as
noted earlier, the combination addresses the concern about building
block 1 regarding a potential rebound effect, and in that important
respect it performs better than building block 1 considered in
isolation. The substitution of NGCC generation for generation from
coal-fired and other steam EGUs ensures that generation from coal-fired
EGUs, as a group, would not increase as a result of their improved
variable costs, with the result that the reduction in CO2
emission rates of coal-fired EGUs brought about by heat rate
improvements would not be offset by an increase in CO2
emissions due to increased generation from those EGUs. The combination
of building blocks would therefore be capable of achieving greater
reductions in CO2 emissions from affected sources than
either building block in isolation.
    While achieving substantially greater emission reductions than
building block 1 alone, by reducing overall generation from coal-fired
EGUs the combination of building blocks 1 and 2 also has the potential
to raise the cost of the portion of the overall emission reductions
achievable through heat rate improvements relative to the cost of those
reductions if building block 1 were implemented in isolation.\218\
However, the EPA believes that the cost of emission reductions achieved
through heat rate improvements would remain reasonable for two reasons.
First, as discussed in Section VI.C.1 above, the cost of CO2
emission reductions achievable through heat rate improvements is quite
low, and that cost would remain reasonable even if it was substantially
increased. Second, although under the combination of building blocks 1
and 2 the volume of coal-fired generation would decrease, that decrease
is unlikely to be spread uniformly among all coal-fired EGUs. It is
more likely that some coal-fired EGUs would decrease their generation
slightly while others would decrease their generation by larger
percentages or cease operations altogether. We would expect EGU owners
to take these changes in EGU operating patterns into account when
considering where to invest in heat rate improvements, with the result
that there would be a tendency for such investments to be concentrated
in EGUs whose generation output was expected to decrease the

least. This enlightened bias in spending on heat rate improvements--
that is, focusing investments on EGUs where such improvements would
have the largest impacts and produce the highest returns, given
consideration of projected changes in dispatch patterns--would tend to
mitigate any deterioration in the cost of CO2 emission
reductions achievable through heat rate improvements.
---------------------------------------------------------------------------

    \218\ If an EGU produces less generation output, then an
improvement in that EGU's heat rate and rate of CO2
emissions per unit of generation produces a smaller reduction in
CO2 emissions. If the investment required to achieve the
improvement in heat rate and emission rate is the same regardless of
the EGU's generation output, then the cost per unit of
CO2 emission reduction will be higher when the EGU's
generation output is lower.
---------------------------------------------------------------------------

    As noted above, the EPA invites comment on a potential BSER
comprising building blocks 1 and 2, in light of the considerations that
could support this approach.
b. Combination of All Four Building Blocks
    The EPA's proposed BSER is a combination of all four building
blocks. For the reasons described below, and similar to each of the
building blocks, the combination must be considered a ``system of
emission reduction.'' Moreover, as also discussed below, the
combination qualifies as the ``best'' system that is ``adequately
demonstrated.'' The combination is technically feasible; it is capable
of achieving meaningful reductions in CO2 emissions from
affected EGUs at a reasonable cost; it satisfies the other BSER
criteria as well; and its components are well-established. The
combination of all four building blocks would achieve greater
CO2 emission reductions at a lower cost than the combination
of building blocks 1 and 2 described above, and would also perform
better against other BSER criteria. We therefore propose to find the
combination of all four building blocks to be the ``best system of
emission reduction . . . adequately demonstrated'' for reducing CO
emissions at affected EGUs.\219\
---------------------------------------------------------------------------

    \219\ The analysis of the interactions among building blocks
provided above for the combination of building blocks 1 and 2,
indicating that the addition of building block 2 would mitigate the
potential concern about a ``rebound effect'' if building block 1
were implemented in isolation, applies to the combination of all
four building blocks as well; in fact, the addition of building
blocks 3 and 4 would further mitigate that concern. The EPA believes
that if implemented in combination, each of the four building blocks
would achieve substantial reductions in CO2 emissions
from affected EGUs at a reasonable cost.
---------------------------------------------------------------------------

    The assessments of the individual building blocks against the BSER
criteria would generally apply in the same way to those building blocks
when implemented as the combination of all four building blocks, with
the same exceptions as discussed above with respect to the combination
of building blocks 1 and 2 as well. However, the combination of all
four building blocks would improve upon the combination of building
blocks 1 and 2 in several respects. First, because of the potential of
building blocks 3 and 4 to achieve additional CO2 reductions
at reasonable costs, the broader combination would achieve greater
CO2 emission reductions at a lower average cost. Second, by
encompassing the increased low-and zero-carbon generation in building
block 3, the broader combination would reduce reliance on fossil fuels
and improve fuel diversity. Third, by encompassing the increased
demand-side energy efficiency in building block 4, the broader
combination would reduce the amount of electricity that would need to
be delivered over the electric grid, generally reducing pressure on the
grid and thereby improving electricity system reliability. These
considerations all support basing the BSER on the combination of all
four building blocks. They also support basing the BSER, in the
alternative, on the combination of building block 1 and reduced
generation in the amounts facilitated by the remaining building blocks.
    As has been discussed in earlier portions of the preamble, the
costs and energy impacts of each of the four building blocks
individually are reasonable when viewed either at the individual source
level or through the lens of the electricity system as a whole, a
conclusion that holds for the combination of the building blocks as
well. Moreover, the flexibility available to states and regulated
entities to rely more extensively in their plans and strategies on
whichever measures best suit their particular circumstances will
further improve cost effectiveness. The analysis the EPA performed to
assess the costs, benefits, and other impacts of the proposed goals
reflects this compliance flexibility, along with transmission and
pipeline capabilities and constraints, fuel market and electricity
dispatch dynamics, and seasonal electricity load requirements. As
described below in Section X, the results indicate that the proposed
state goals (discussed in Section VII) are readily achievable with no
adverse impacts on electricity system reliability, and that impacts on
retail electricity prices are modest and fall within the range of price
variability seen historically in response to changes in factors such as
weather and fuel supply. Further, the costs tend to decline over time
as states and regulated entities take advantage of the available
flexibility and expand deployment of more cost-effective measures
(notably demand-side energy efficiency). The EPA considers this
analysis strong confirmation of the reasonableness of the costs of the
measures in the four building blocks in combination as the best system
of emission reduction.
6. Additional Considerations Related to Inclusion of Building Blocks 2,
3, and 4 as Part of the Basis Supporting the BSER
    In this section, we discuss additional reasons why the measures in
building blocks 2, 3, and 4, individually and in combination, meet the
requirements to be components of the BSER. In particular, we discuss
why they meet the definition of a ``system of emission reduction,'' and
we provide additional reasons why they are the ``best'' that is
``adequately demonstrated.'' The interconnected nature of the electric
system is an important part of our reasoning.
a. ``System of Emission Reduction''
    For the convenience of the reader, it is useful to reiterate the
key CAA section 111 requirements: Section 111(d)(1) requires that each
state's plan ``establish[] standards of performance for any existing
source'' for certain types of air pollutants; and section 111(a)(1)
defines a ``standard of performance'' as ``a standard for emissions . .
. which reflects the degree of emission limitation achievable through
the application of the best system of emission reduction . . .
adequately demonstrated.'' These provisions require that, in this
rulemaking, the affected sources must be subject to emissions
standards, but the basis for those standards--the ``system of emission
reduction''--may be any method that reduces the affected sources'
emissions, as long as that method is a ``system'' that meets the
criteria for being the ``best'' that is ``adequately demonstrated.''
    As discussed in the Legal Memorandum, the EPA is justified in
adopting this interpretation under the first step of the framework for
administrative agencies to construe statutes that the U.S. Supreme
Court established in Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 842-844
(1984) (Chevron), which we refer to as Chevron step 1.
    Specifically, the term ``system,'' which is not defined in the CAA,
is broad: ``A set of things working together as parts of a mechanism or
interconnecting network.'' \220\ The

remaining provisions of the definition of ``standard of performance''
do not include any constraints on the ``set of things'' that may
constitute a ``system of emission reduction.'' Nor does the context in
which ``standard of performance'' is found--the provisions of section
111(d)(1)--add constraints on the things that may constitute such a
system. Rather, it is clear from these CAA provisions that anything
that reduces the emissions of affected sources may be considered a
``system of emission reduction'' for those sources. For this reason,
the measures in building blocks 2, 3, and 4 must be considered
components of such a system.
---------------------------------------------------------------------------

    \220\ Oxford Dictionary of English (3rd ed.) (published 2010,
online version 2013), http://www.oxfordreference.com.mutex.gmu.edu/view/10.1093/acref/9780199571123.001.0001/acref-9780199571123.
---------------------------------------------------------------------------

    Even if these CAA provisions leave room for interpretation as to
whether those measures must be considered components of such a system,
the EPA's interpretation that they do is reasonable. As discussed in
the Legal Memorandum, the EPA is justified in adopting this
interpretation under the second step of the Chevron framework, which we
refer to as Chevron step 2. There are several reasons. In enacting the
CAA, Congress established ``pollution prevention'' as a ``primary
goal'' of the Act, and described it as ``the reduction or elimination,
through any measures, of the amount of pollutants produced or created
at the source.'' \221\ Building blocks 2, 3, and 4 are pollution
prevention measures, and, in light of the importance of pollution
prevention in the CAA, it is reasonable to interpret ``system of
emission reduction'' in section 111 to incorporate those measures. In
addition, the breadth of ``system of emission reduction'' is confirmed
by contrasting it with other provisions in the CAA that prescribe
specific types of controls as the basis for emission limits.\222\
Further support is found in Title IV of the CAA, in which Congress
established the program that regulates fossil fuel-fired power plants
to reduce their emissions of SO2 and NOX, the
precursors to acid deposition. In designing Title IV, Congress
recognized the integrated nature of the electricity sector and how that
integration could be harnessed to reduce air pollutant emissions. In
fact, Congress included provisions to encourage re-dispatch to lower-
emitting sources, renewable energy, and demand-side energy efficiency,
all of which are measures in those building blocks.\223\ All this
supports the reasonableness of interpreting ``system of emission
reduction'' in CAA section 111 to incorporate those measures. It should
also be noted that a number of commentators in the private sector and
academia have indicated support for interpreting the term, ``system of
emission reduction'' to base the CAA section 111(d) standards of
performance on measures such as re-dispatch, renewable energy, and
demand-side energy efficiency.\224\ Some stakeholders have as
well.\225\
---------------------------------------------------------------------------

    \221\ CAA Sec.  101(a)(3), (c).
    \222\ For example, as discussed in the Legal Memorandum, CAA
Sec.  407(b)(2) requires the EPA to base the nitrogen oxides
(NOX) emission limits for certain types of boilers ``on
the degree of reduction achievable through the retrofit application
of the best system of continuous emission reduction . . . ;'' and
further requires the EPA to revise previously promulgated emission
limits for certain types of boilers ``to be more stringent if the
[EPA] determines that more effective low NOX burner
technology is available.'' (Emphasis added.)
    \223\ CAA Sec.  401(b), 404(f)-(g).
    \224\ See Nordhaus R., Gutherz I., ``Regulation of
CO2 Emissions from Existing Power Plants Under Sec.
111(d) of the Clean Air Act: Program Design and Statutory
Authority,'' Environmental Law Reporter, 44: 10366, 10384 (May 2014)
(``strong arguments for'' interpreting ``system'' to include
measures such as the addition of new zero-carbon generating capacity
and increases in end-user energy efficiency); Sussman R., ``Power
Plant Regulation Under the Clean Air Act: A Breakthrough Moment for
U.S. Climate Policy?'' Virginia Environment Law Journal, 32:97, 119
(2014) (``EPA would seem to have discretion to define `system' to
include any mix of strategies effective in reducing emissions.'');
Konschnik K., Peskoe A., ``Efficiency Rules: The Case for End-Use
Energy Efficiency Programs in the Section 111(d) Rule for Existing
Power Plants,'' Harvard Law School Environmental Law Program--Policy
Initiative 4 (March 3, 2014) (EPA is authorized to ``consider[ ] . .
. the entire [electricity grid] system when setting performance
standards.''); Monast J., Profeta T., Pearson B., Doyle J.,
``Regulating Greenhouse Gas Emissions From Existing Sources: Section
111(d) and State Equivalency,'' Environmental Law Reporter, 42:
10206, 10209 (March 2012) (``Demand-side energy-efficiency programs
and renewable energy generation may fit within the Sec.  111
framework, however, because both reduce the utilization of power
plant. . . . According to this reasoning, emission reductions are
occurring within the source category, because of changes in
generation at the power plant.'').
    \225\ Ceronsky M., Carbonell T., ``Section 111(d) of the Clean
Air Act: The Legal Foundation for Strong, Flexible & Cost-Effective
Carbon Pollution Standards for Existing Power Plants,''
Environmental Defense Fund, at 9 (Oct. 2013), available at http://www.edf.org/sites/default/files/111-clean_air_act-strong_flexible_cost-effective_carbon_pollution_standards_for_existing_power_plants.pdf; Doniger D., ``Questions and Answers on
the EPA's Legal Authority to Set `System Based' Carbon Pollution
Standards for Existing Power Plants under Clean Air Act Section
111(d),'' NRDC [Natural Resources Defense Council] Issue Brief (Oct.
2013); ``Comments of the Attorneys General of New York, California,
Massachusetts, Connecticut, Delaware, Maine, Maryland, New Mexico,
Oregon, Rhode Island, Vermont, Washington, and the District of
Columbia on the Design of a Program to Reduce Carbon Pollution from
Existing Power Plants'' (Dec. 16, 2013).
---------------------------------------------------------------------------

b. ``Best'' System That Is ``Adequately Demonstrated
    As described earlier with respect to the individual building
blocks, the measures in each of building blocks 2, 3, and 4 meet the
criteria for the ``best'' system of emission reduction, and, generally
for the same reasons, the three in combination do as well.
    In addition, the measures in building blocks 2, 3, and 4,
individually and in combination, are ``adequately demonstrated.'' As
discussed earlier, thanks to the integrated nature of the electricity
system, they have long been relied on to reduce costs in general,
assure reliability, and implement pre-existing pollution control
requirements in the least-cost manner. As also noted elsewhere in the
preamble, and discussed in more detail in the following subsections,
some utilities, states and regions are already relying on these
measures for the specific purpose of reducing CO2 emissions
from EGUs.
(i) Actions by Affected EGUs
    Measures in building blocks 2, 3, and 4 may be undertaken or
invested in by the affected EGUs themselves, which supports that these
measures are ``adequately demonstrated.'' More specifically, the EPA
believes that owners of units operating across a wide range of
corporate, institutional and market structures (e.g., vertically
integrated utilities in regulated markets, independent power producers,
municipal utilities, and rural cooperatives) can take advantage of a
broad range of reduction opportunities included in the building blocks.
Because of the proposed lengthy planning period, owners can consider
longer-term options such as implementing energy efficiency programs or
replacement of older generating resources with more modern types of
generation, as well as shorter-term options such as heat rate
improvements and re-dispatch. Many companies, for example, already
factor a carbon cost adder into their long-term planning decisions.
    Large vertically integrated utilities generally have options within
all four building blocks. They tend to have large and, as a general
matter, at least somewhat diverse generation fleets. For their higher-
emitting units, they have opportunities to use measures that reduce the
units' CO2 emission rates, such as heat rate improvements,
co-firing, or fuel switching. While this proposal preserves fuel
diversity, with over 30 percent of projected 2030 generation coming
from coal and over 30 percent from natural gas, even companies that
have traditionally depended upon coal to supply the majority of their
generation are diversifying their fleets, increasing their

opportunities for re-dispatch.\226\ Within the 5-to-15-year planning
horizon established in this proposal to begin in June 2015, most of
these companies are likely to be investing in new generation and can
consider options such as increased reliance on new renewable generating
capacity. They also run energy efficiency programs for their customers.
---------------------------------------------------------------------------

    \226\ http://online.wsj.com/article/PR-;CO-20140508-
;915605.html.
---------------------------------------------------------------------------

    Municipal utilities and rural cooperatives that own generating
asset portfolios also have multiple options for reducing CO2
emissions, particularly generation and transmission cooperatives and
larger municipal utilities. They can implement unit-specific
improvements, re-dispatch to lower emitting resources, employ energy
efficiency and renewable energy strategies, and explore longer-term
capacity planning strategies. For cooperatives and municipal utilities
with smaller fleets, re-dispatching among their own units may not
provide as many opportunities, particularly in the short term. But
because of the timing flexibility in the guidelines, these owners can
use both short-term dispatch strategies and longer-term capacity
planning strategies to reduce GHG emissions, and in many cases
financing is available at tax-advantaged or subsidized rates. At the
same time, in formulating their plans, states will be in a position to
recognize the distinctive attributes of smaller utilities--and, of
course, may consider participating in integrated multi-state compliance
strategies to increase the flexibility and cost-saving opportunities
that would be available to the covered EGUs.
    Some stakeholders have expressed concerns that municipal utilities
and rural cooperatives can face other challenges as well. According to
these stakeholders, in deregulated areas, even though these utilities
may be fully vertically integrated entities, they may not have as much
flexibility to control dispatch because they are operating in a
competitive market, where they can be in a position in which they need
to operate if called upon. Even in this case, the timing flexibility of
the rule allows them to consider longer-term capacity planning
strategies. These can include building or contracting for electric
supply from lower-emitting sources, use of distributed renewable
technologies, and use of demand-side energy efficiency measures. There
are a number of municipal utilities and rural cooperatives that are
already aggressively pursuing such strategies.\227\ Nevertheless, in
recognition of stakeholders' expressed concerns, we invite comment on
whether there are special considerations affecting small rural
cooperative or municipal utilities that might merit adjustments to this
proposal, and if so, possible adjustments that should be considered.
---------------------------------------------------------------------------

    \227\ For examples, see Large Public Power Council, Energy
Efficiency Working Group, Second Annual Energy Efficiency
Benchmarking Report (2013); https://www.nreca.coop/nreca-on-the-issues/energy-operations/energy-efficiency/.
---------------------------------------------------------------------------

    Independent power producers (IPPs) may also face unique challenges
but nevertheless have options. Companies with coal-fired EGUs can
implement efficiency improvements as well as other unit-level
compliance options such as co-firing or fuel switching. While these
types of companies do not use the integrated resource planning process
that many vertically integrated utilities use, they still undertake
long-term business planning and as a result are in a position to
consider different long-term strategies related to their generating
assets. Many IPPs are actively developing renewable generating capacity
and natural gas-fired generating capacity. IPP owners could also fund
demand-side energy efficiency programs and document the resulting
electricity savings.
(ii) Actions by States
    Another reason why the measures in building blocks 2, 3, and 4 are
``adequately demonstrated'' is that states may adopt them and, in fact,
many states have already adopted many of them.
    For example, several states have already adopted renewable energy
(RE) and demand-side energy efficiency (EE) measures in their CAA
section 110 state implementation plans (SIPs) for attaining and
maintaining the national ambient air quality standards (NAAQS). The EPA
has provided initial guidance for states to do so.\228\ Some state air
agencies did so for their 1997 8-hour ozone NAAQS SIPs that were due in
2007; for example, Washington, DC, included the purchase of wind power
and the installation of LED traffic lights \229\; Dallas, Texas
included efficiency measures from the Texas Emissions Reduction Program
(TERP) \230\; and Connecticut included projects such as high efficiency
air conditioners, compact fluorescent lighting, combined heat and power
(CHP), and solar photovoltaic installations.\231\ Since that time, many
states have adopted legislative mandates for energy efficiency or
renewable energy, and states have expressed interest in including EE/RE
policies and programs in upcoming NAAQS SIPs. The EPA has provided
additional guidance \232\ and has partnered with the Northeast States
for Coordinated Air Use Management (NESCAUM) and three states
(Maryland, Massachusetts, and New York) to identify opportunities for
including EE/RE in a NAAQS SIP and to provide real-world examples and
lessons learned through those states' case studies.\233\
---------------------------------------------------------------------------

    \228\ See, e.g., Guidance on SIP Credits for Emission Reductions
from Electric-Sector Energy Efficiency and Renewable Energy Measures
(Aug. 2004), http://www.epa.gov/ttn/oarpg/t1/memoranda/ereseerem_gd.pdf; Incorporating Emerging and Voluntary Measures in a State
Implementation Plan (SIP) (Sept. 2004), http://www.epa.gov/ttn/oarpg/t1/memoranda/evm_ievm_g.pdf.
    \229\ DC Region 8-hour ozone SIP at 126, http://www.mwcog.org/uploads/pub-documents/9FhcXg20070525084306.pdf.
    \230\ Dallas/Ft. Worth, Texas 8-hour ozone SIP, http://www.gpo.gov/fdsys/pkg/FR-2008-08-15/pdf/E8-18835.pdf.
    \231\ CT 1997 8-hour ozone SIP Web site, http://www.ct.gov/deep/cwp/view.asp?a=2684&q=385886&depNav_GID=1619 (see Attainment
Demonstration TSD, Chapter 8 at 31, http://www.ct.gov/deep/lib/deep/air/regulations/proposed_and_reports/section_8.pdf).
    \232\ Roadmap for Incorporating EE/RE Policies and Programs into
SIPs/TIPs (July 2012), http://epa.gov/airquality/eere/manual.html.
    \233\ States' Perspectives on EPA's Roadmap to Incorporate
Energy Efficiency/Renewable Energy in NAAQS State Implementation
Plans: Three Case Studies, Final Report to the U.S. Environmental
Protection Agency (Dec. 2013), http://www.nescaum.org/documents/nescaum-final-rept-to-epa-ee-in-naaqs-sip-roadmap-case-studies-20140522.pdf.
---------------------------------------------------------------------------

    It should be recognized that each state's electric utility sector
operates under distinctive conditions and circumstances. The EPA's
proposal ensures that states retain flexibility to craft standards of
performance that can accommodate characteristics including fuel
sources, types of EGU owners within a state (e.g., investor-owned,
municipal, and cooperative utilities, and independent power producers),
and regulatory structure (e.g., regulated or restructured). States can
tailor their regulatory mechanisms to recognize differences, for
example by creating budgets on a company-wide basis or using market-
based mechanisms such as mass-based trading systems, to ensure that
requirements are achievable.
    The proposal also recognizes that states have different resource
bases and energy policies in place, and these differences are taken
into account in the state goal-setting and computation process. For
instance, while the EPA's BSER assumptions consider re-dispatch to NGCC
units, they do not consider re-dispatch beyond the NGCC capacity
already existing in a state. In that way, the proposal does not presume
that

states with limited natural gas generation or infrastructure will have
to develop those resources.
    Furthermore, while the BSER reflects best practices for both
renewables and energy efficiency, it also recognizes that some states
have made more progress than others in these areas. The BSER allows
time for states to ramp up to greater levels of energy efficiency and
use and development of renewable energy resources, should they choose
those approaches. With respect to renewable energy, the proposal also
recognizes that different areas of the country have different resource
bases and does not presume that a uniform level of penetration of
renewable generation is appropriate for every state.
    The features provided in this proposal to ensure policy flexibility
can be used by all states to address their unique circumstances. In a
regulated state, if a company's compliance strategies included reducing
generation at higher-emitting EGUs, it would work through its state's
integrated planning process to ensure that adequate generation was
available through a combination of all four building blocks. Cost
recovery, and cost oversight, can be achieved through rate cases before
state regulators. In a restructured state, even if affected companies
responded to the guidelines by reducing generation without themselves
replacing that generation, the electricity markets that have developed
would react to ensure the availability of replacement generation. Other
companies would see opportunities to build or ramp up existing lower-
emitting generation, and in some markets that treat demand-side
resources on par with supply side resources, energy service companies
would likely see opportunities. Further, state regulators can continue
to play an important role in restructured states as well, authorizing
or reviewing both renewable energy procurement and demand-side energy
efficiency programs. In all types of market structures, large energy
users might independently see additional energy efficiency
opportunities or opportunities for self-generation using options such
as combined heat and power, solar, or power purchase agreements, and
states can structure their plans to allow the CO2 reductions
achieved at affected EGUs through such actions to assist in reaching
compliance. As discussed in earlier portions of this section and
elsewhere in the preamble, each of the building blocks is already being
widely implemented, is consistent with industry trends, and consists of
CO2 reduction methods already widely accepted in the eyes of
various stakeholders, as was clear from views expressed in our outreach
process.
    Moreover, there are mechanisms through which states could require
measures from any of the building blocks in state plans. In fact, the
state plan formulation process through which CAA section 111(d) is
implemented reinforces the determination that these measures are
components of the BSER. For example, states would have authority to
impose measures such as best practices for operation and maintenance of
EGUs, dispatch limits, renewable energy resource requirements, and
demand-side energy efficiency requirements. States also would have
authority to establish requirements that change the relative costs of
generation from more carbon-intensive and less carbon-intensive EGUs,
for example by creating emission allowance systems that cause market
participants and system operators to take account of CO2
emission rates as an element of variable operating costs. Such an
approach can encourage measures from all of the building blocks
simultaneously. As noted elsewhere in the preamble, many states have
already pursued one or more of these approaches.\234\
---------------------------------------------------------------------------

    \234\ See the discussions of California California Global
Warming Solutions Act and RGGI above in this section and elsewhere
in the preamble.
---------------------------------------------------------------------------

    It also should be noted that during the public outreach sessions,
stakeholders generally recommended that state plans be authorized to
rely on, and that affected sources be authorized to implement, re-
dispatch, renewable energy measures, and demand-side energy efficiency
measures in order to meet states' and sources' emission reduction
obligations. The EPA agrees that state plans may include these
measures, at least under certain circumstances, as discussed in Section
VIII, and that sources may rely on them to achieve required reductions.
It is clear that these types of measures are well-accepted by the
stakeholders as means to reduce emissions from affected sources. The
fact that state plans and sources would be expected to use these types
of measures to reduce emissions supports the view that these measures
are part of a ``system of emission reduction'' for those sources that
the EPA may evaluate against the appropriate criteria to determine
whether they comprise the ``best system of emission reduction . . .
adequately demonstrated.''
(iii) Regional Organizations
    Another reason why the measures in building blocks 2, 3, and 4 are
``adequately demonstrated'' is that they can be accommodated through
the existing regional components of the electricity system.
    On the regional level, ISO/RTOs control dispatch and are
responsible for reliable operation of the bulk power system.\235\ They
can seek solutions, such as capacity markets and transmission upgrades,
to preserve resource adequacy and ensure the continued reliable
operation of the grid. For this proposal, the ISO/RTO Council has
already submitted a set of recommendations they believe can help
balance the needs of lower emissions, economic dispatch, and
reliability, which is discussed in greater detail in Section VIII.F.7
of this proposal.\236\ For areas of the country that are not covered by
an ISO/RTO, there are regional groups, such as ColumbiaGrid, Northern
Tier Transmission Group and WestConnect in the west, and system
operators such as Southern Company in the southeast, that can provide
these functions. In shifting to lower-emitting units, grid operators
across the country factor environmental costs into their economic
dispatch through a variety of mechanisms, including allowance costs,
variable costs associated with operating environmental controls, and
operating limits for high-emitting units.
---------------------------------------------------------------------------

    \235\ Across all markets, at the federal level, FERC and NERC
create and oversee standards for reliability. NERC works with
electric reliability councils and control areas that comprise all
types of utilities and system operators to ensure that adequate
generation is available.
    \236\ http://www.isorto.org/Documents/Report/20140128_IRCProposal-ReliabilitySafetyValve-RegionalComplianceMeasurement_EPA-C02Rule.pdf.
---------------------------------------------------------------------------

(iv) Concerns From Stakeholders; Solicitation of Comment
    We note that some stakeholders have argued that CAA section
111(a)(1) does not authorize the EPA to identify re-dispatch, low- or
zero-emitting generation, or demand-side energy efficiency measures
(building blocks 2, 3, and 4) as components of the ``best system of
emission reduction . . . adequately demonstrated.'' According to these
stakeholders, as a legal matter, the BSER is limited to measures that
may be undertaken at the affected units, and not measures that are
beyond the affected units; the measures in building blocks 2, 3, and 4
are ``beyond-the-unit'' or ``beyond-the-fenceline'' measures because
they are implemented outside of the affected units and outside their
control; and as a result, those measures cannot be considered
components of the BSER.
    We welcome comment on this issue. As discussed above, we propose
that the

provisions of CAA section 111 do not by their terms preclude the BSER
from including those types of measures. In addition, as noted above,
under our proposed approach, affected sources may themselves implement
the measures included in building blocks 2, 3, and 4, so that those
measures are within their control with the result of their application
being emissions reductions at affected EGUs. Moreover, under our
alternative approach, the ``system of emission reduction'' includes
reductions in utilization at the affected sources themselves.\237\ It
should also be noted that, as discussed above, the re-dispatch measures
in building block 2 are limited to affected sources. Thus, the proposed
approach and alternative described above respond to these stakeholder
concerns.
---------------------------------------------------------------------------

    \237\ Commenters have critiqued this ``at-the-unit'' and
``beyond-the-unit'' distinction as follows:
    There is an argument that the at-the-unit/beyond-the-unit
distinction is not a meaningful one. Specifically, it could be
argued that the distinction between at-the-unit and beyond-the-unit
measures is largely artificial, because all of the emission
reductions under consideration--whether from at-the-unit measures
(e.g., fuel-switching or efficiency upgrades) or from beyond-the-
unit measures--are, in fact, emission reductions at or from electric
generating units on the interconnected electric grid. For example,
neither the addition of renewable generation nor the reduction of
end-user demand directly reduces atmospheric emission of
CO2; rather these measures permit fossil EGUs to reduce
their own output and emissions. It can be argued that all of the
systems of emission reduction here contemplated--whether they
involve end-use energy efficiency, displacing high-emission
generation with lower emission generation, fuel-switching, heat-rate
improvements, etc.--are effectively at-the-unit measures that
ultimately reduce emissions solely from regulated EGUs. If energy-
efficiency programs, added renewable energy, and redispatch from
higher emitting facilities to lower emitting facilities are viewed
as at-the-unit systems of emission reduction, the at-the-unit/
beyond-the-unit distinction arguably becomes irrelevant--at least
from a legal perspective. Rather, the real issue may come down to
whether Sec.  111(d) authorizes the EPA to require EGUs to curtail
their output of electricity as a means of complying with the rule.
    Nordhaus R., Gutherz I., ``Regulation of CO2
Emissions from Existing Power Plants Under Sec.  111(d) of the Clean
Air Act: Program Design and Statutory Authority,'' Environmental Law
Reporter, 44: 10366, 10383 n. 133 (May 2014).
---------------------------------------------------------------------------

7. Alternate Approach to the Best System of Emission Reduction
    As an alternative to the approach described above for determining
the ``best system of emission reduction . . . adequately
demonstrated,'' the ``system of emission reduction'' may be identified
as including, in addition to building block 1, the reduction of
affected fossil fuel-fired EGUs' mass emissions achievable through
reductions in generation of specified amounts from those EGUs. Under
this approach, the measures in building blocks 2, 3, and 4 would not be
components of the system of emission reduction but instead would serve
as bases for quantifying the reduced generation (and therefore
emissions) at affected EGUs, and assuring that the amount of reduced
generation meets the criteria for the ``best'' system that is
``adequately demonstrated'' because, among other things, the reduced
generation can be achieved while the demand for electricity services
can continue to be met in a reliable and affordable manner.
Specifically, the amount of generation from the increased utilization
of NGCC units would determine a portion of the amount of the generation
reduction component of the BSER for affected fossil fuel-fired steam
EGUs, and the amount of generation from the use of expanded low- and
zero-carbon generating capacity that could be provided, along with the
amount of generation from fossil fuel-fired EGUs that could be avoided
through the promotion of demand-side energy efficiency, would determine
a portion of the amount of the generation reduction component of the
BSER for all affected EGUs.
    Reduced generation is encompassed by the terms of the phrase
``system of emission reduction'' in CAA section 111(a)(1), as a matter
of Chevron step 1, because, in accordance with the above-discussed
definition of ``system,'' reduced generation is a ``set of things''--
which include reduced use of generating equipment and therefore reduced
fuel input--that the affected source may take to reduce its
CO2 emissions.\238\ If that phrase is not considered clear
by its terms, then, under Chevron step 2, it may reasonably be
interpreted to include reduced generation.\239\ As discussed in the
Legal Memorandum, the legislative history of the 1970 CAA Amendments
indicates that Congress recognized that emitting sources could comply
with pollution control requirements by reducing production, including
retiring.\240\ As also noted in the Legal Memorandum, examples of
reduced utilization as a means of reducing emissions are found in
settlement agreements between the EPA and fossil fuel-fired EGUs to
resolve alleged violations of the CAA new source review (NSR)
requirements.\241\
---------------------------------------------------------------------------

    \238\ For this reason, under a Chevron step 1 interpretation,
``system of emission reduction'' includes reduced generation.
    \239\ For these reasons, under a Chevron step 2 interpretation,
``system of emission reduction'' includes reduced generation.
    \240\ See CAA section 110(g) (authorizing temporary emergency
suspensions of SIP revisions if needed to prevent the closing of a
source of air pollution), enacted as CAA section 110(f) in the 1970
CAA Amendments; 116 Cong. Rec. 42384 (Dec. 18, 1970), reprinted in
Congressional Research Service, A Legislative History of the Clean
Air Act Amendments of 1970, vol. 1, at 132-33 (1974) (statement of
Sen. Muskie) (discussing criteria for sources to receive compliance
date extensions). Sen. Muskie added that the emission standards set
by the EPA for hazardous air pollutants ``could include emission
standards which allowed for no measureable emissions,'' id., which
further suggests that, as a practical matter, the standards could
result in reduced production.
    \241\ See, e.g., Consent Decree at 18, United States v. Wis.
Power & Light Co., No. 13-cv-266 (W.D. Wis. filed Apr. 22, 2013),
available at http://www2.epa.gov/sites/production/files/documents/wisconsinpower-cd.pdf.
---------------------------------------------------------------------------

    Reduction of, or limitation on, the amount of generation is already
a well-established means of reducing emissions of pollutants in the
electric sector, notwithstanding the fact that as a practical matter,
some facilities may have to operate, or remain available, to ensure
system reliability. For example, reduced generation by higher-emitting
sources is one of the compliance options available to, and used by,
EGUs to comply with the Clean Air Act acid rain program in CAA title
IV, as well as the transport rules that we refer to as the
NOX SIP Call \242\ and the Clean Air Interstate Rule
(CAIR).\243\ Reduction in generation is also a possible means by which
an EGU can achieve compliance with its requirements under RGGI.
---------------------------------------------------------------------------

    \242\ 63 FR 57356 (Oct. 27, 1998).
    \243\ 70 FR 25162 (May 12, 2005).
---------------------------------------------------------------------------

    Reduced generation in specified amounts is part of the ``best''
system of emission reduction that is ``adequately demonstrated.''
Reduced generation is technically feasible because of a source's
ability to limit its own operations. In addition, the amounts of
generation and emission reductions may be determined with precision
through the application of building block 2, 3, and 4 measures for
increased generation from low- or zero-emitting sources and increased
demand-side energy efficiency, which, in turn, ensure the reliability
of the electricity grid and the affordability of electricity to
businesses and consumers.
    Because of the availability of the measures in building blocks 2,
3, and 4, the proposed levels of reduced generation are of reasonable
cost for the affected source category and the nationwide electricity
system, do not jeopardize reliability, result in an important amount of
emission reductions, are consistent with current trends in the
electricity sector, and promote the development and implementation of
technology that is important for continued emissions reductions. All
these results come about because the operation of the electrical

grid through integrated generation, transmission, and distribution
networks creates fungibility for electricity and electricity services,
which allows decreases in generation at affected fossil fuel-fired
steam EGUs to be replaced by increases in generation at affected NGCC
units (building block 2) and allows decreases in generation at all
affected EGUs to be replaced by increased generation at low- or zero-
carbon EGUs (building block 3) or by decreased demand (building block
4). Further, this fungibility increases over longer timeframes with the
opportunity to invest in infrastructure improvements, and as noted
elsewhere, this proposal provides an extended state plan and source
compliance horizon. These characteristics of the integrated electricity
system assure that reduced generation in specified amounts meets the
criteria to qualify as part of the ``best'' system of emission
reduction.
    Reduced generation in those amounts is also ``adequately
demonstrated.'' As noted above, the measures in building blocks 2, 3,
and 4 are already in widespread use in the industry. At the levels
proposed, they have the technical capability to substitute for reduced
generation at some or all affected EGUs at reasonable cost. The NGCC
capacity necessary to accomplish the levels of generation reduction
proposed for building block 2 is already in operation or under
construction. Moreover, it is reasonable to expect that the incremental
resources reflected in building blocks 3 and 4 will develop at the
levels requisite to ensure an adequate and reliable supply of
electricity at the same time that affected EGUs may choose or be
required to reduce their CO2 emissions by means of reducing
their utilization. There are several reasons for this. First, the
affected sources themselves could invest in new renewable energy
resources and demand-side energy efficiency, as discussed above.\244\
Second, the states, as part of their plans, have mechanisms available
to put these substitutes in place: They could establish requirements or
incentives that would result in new renewable energy and demand-side
energy efficiency programs, as also discussed above.\245\ Third, as
also discussed above, regional entities in the electricity system can
accommodate these substitutes.
---------------------------------------------------------------------------

    \244\ It should be noted that in light of the low current and
projected near term prices for natural gas, market forces may lead
investors to choose to build new NGCC units, rather than new
renewable resources. This result would not call into question the
technical feasibility of a BSER that included reductions in fossil
fuel-fired generation by the amount of a specified amount of new
renewable resources. This is because under these circumstances, the
fossil fuel-fired generators could still reduce their generation
without causing reliability or other problems in the electric power
system.
    \245\ The nuclear generating capacity reflected in building
block 3 is already in operation or under construction.
---------------------------------------------------------------------------

    Most broadly, with respect to the measures in building blocks 2, 3,
and 4, provided there is sufficient lead time for planning, mechanisms
are in place in both regulated and deregulated electricity markets to
assure that substitute generation will become available and/or steps to
reduce demand will be taken to compensate for reduced generation by
affected EGUs. These mechanisms are based on, among other things, the
integrated nature of the electricity system coupled with the
availability of capacity in existing NGCC units, the growing
institutional capacity of entities that develop renewable energy and
demand-side energy efficiency resources, and the ability of system
operators and state regulators to incentivize further development of
those resources.
    The EPA solicits comment on whether measures in addition to those
in building blocks 2, 3, and 4 could support the showing that reduced
utilization is ``adequately demonstrated,'' including additional NGCC
capacity that may be built in the future, as discussed in Section
VI.C.5.c above.
8. The EPA's Discretion in Applying the Criteria for the Best System of
Emission Reduction
    As discussed above, each of the approaches to determining the
``best system of emission reduction . . . adequately demonstrated''
entails applying the criteria described in the D.C. Circuit case law
for evaluating the BSER. It should be emphasized that under the case
law, the EPA has significant discretion in weighing the different
criteria, and may weigh them differently in different rulemakings.
    For the present proposal, the EPA is heavily weighting three
criteria in particular: The amount of emission reductions, the cost of
achieving those reductions, and the promotion of technology
implementation--while also noting that the proposed BSER determination
readily meets the other criteria as well. The EPA considers it
especially important in this rulemaking, while ensuring that
electricity system reliability is preserved and that costs are not
unreasonable, to achieve a significant amount of emissions reductions
in response to the urgency and the magnitude of the need to mitigate
climate change. The EPA discusses this above in the sections concerning
the scientific background for this rulemaking. The EPA also considers
it especially important for the present proposal that the overall costs
of achieving the emission reductions should be reasonable. Costs can be
minimized through the flexibility to choose from a broad range of
CO2 emission reduction measures, as is provided in the
portion of this proposal addressing state plans, and a similarly broad
range of emission reduction measures, represented by the four building
blocks discussed above, should serve as the basis supporting the BSER.
Finally, the EPA also considers it especially important for the present
proposal to promote technological innovation and development of, in
particular, the measures in building blocks 3 and 4 (to reiterate, low-
or zero-carbon electricity generation and demand-side energy
efficiency, respectively). Promoting innovation in, and market
penetration of, these technologies and practices is critical to making
the substantial reductions in emissions that will be required during
the next few decades to reduce the risks to public health and welfare
and our economic well-being of dangerous climate change.
    In addition, in this rulemaking, the EPA is determining the BSER in
a manner that is consistent with, and that provides further impetus
for, current trends in the nation's electricity system that offer
promise to reduce the carbon intensity of the system over the near- and
long-term, while maintaining reliability and affordability. This
approach is consistent with the case law, which authorizes the EPA to
determine BSER by ``balanc[ing] long-term national and regional
impacts,'' and by ``using a long-term lens with a broad focus on future
costs, environmental and energy effects of different technological
systems. . . .'' \246\
---------------------------------------------------------------------------

    \246\ Sierra Club v. Costle, 657 F.2d 298, 331 (D.C. Cir. 1981).
---------------------------------------------------------------------------

9. State-Wide Application of the BSER; Appropriateness of Standards of
Performance
    An important aspect of the BSER for affected EGUs is that the EPA
is proposing to apply it on a statewide basis. The statewide approach
also underlies the required emission performance level, which is based
on the application of the BSER to a state's affected EGUs, and which
the suite of measures in the state plan, including the emission
standards for the affected

EGUs, must achieve overall. The state has flexibility in assigning the
emission performance obligations to its affected EGUs, in the form of
standards of performance--and, for the portfolio approach, in imposing
requirements on other entities--as long as, again, the required
emission performance level is met.
    This state-wide approach both harnesses the efficiencies of
emission reduction opportunities in the interconnected electricity
system and is fully consistent with the principles of federalism that
underlie the Clean Air Act generally and CAA section 111(d)
particularly. That is, this provision achieves the emission performance
requirements through the vehicle of a state plan, and provides each
state significant flexibility to take local circumstances and state
policy goals into account in determining how to reduce emissions from
its affected sources, as long as the plan meets minimum federal
requirements.
    In this subsection, we describe how this approach, and the
standards of performance for the affected EGUs that the states will
establish through the process we describe, are consistent with the CAA
section 111(d)(1) and (a)(1) provisions.
    For convenience, we set out the requirements of CAA section
111(d)(1) and (a)(1) here: Under CAA section 111(d)(1), the state must
adopt a plan that ``establishes standards of performance for any
existing source.'' Under CAA section 111(a)(1), a ``standard of
performance'' is a ``standard for emissions . . . which reflects the
degree of emission limitation achievable through the application of the
best system of emission reduction . . . adequately demonstrated.'' The
EPA proposes to interpret these provisions as set forth in this sub-
section.
    The first step is for the EPA to determine the ``best system of
emission reduction . . . adequately demonstrated.'' As discussed at
length elsewhere, the EPA is proposing two alternative BSER. The first
is the measures in building blocks 1 through 4 combined. This includes
operational improvements and equipment upgrades that the coal-fired
steam EGUs in the state may undertake to improve their heat rate by, on
average, six percent and increases in, or retention of, zero- or low-
emitting generation, as well as measures to reduce demand for
generation, all of which, taken together, displace, or avoid the need
for, generation from the affected EGUs. This BSER is a set of measures
that impacts affected EGUs as a group. The alternative approach to BSER
is building block 1 combined with reduced utilization from the affected
EGUs in the state as a group, in the amounts that can be replaced by an
increase in, or retention of, zero- or low-emitting generation, as well
as reduced demand for generation.
    After determining the BSER, the EPA then applies the BSER to each
state's affected EGUs, on a state-wide basis. Building block 1 is
applied to the coal-fired steam EGUs on a statewide basis; building
block 2 is applied to increase the generation of the NGCC units in the
state up to certain amounts, and decrease the amount of generation from
steam EGUs accordingly; and the measures in building blocks 3 and 4 are
applied to reduce, or avoid, generation from all affected EGUs on a
state-wide basis. Under the alternative formulation of the BSER, the
total amount of reduced generation from the affected EGUs in the state,
associated with the measures in building blocks 2, 3, and 4, is
determined on the basis of each state's affected EGUs as a group.
    This statewide approach to applying the BSER is consistent with the
CAA section 111(a)(1) definition of ``standard of performance,'' which,
as quoted above, refers to ``the application of the [BSER],'' for the
purpose of determining ``the degree of emission limitation
achievable,'' but does not otherwise constrain how the BSER is to be
applied.
    As a result, the EPA may apply the BSER to all of the affected EGUs
in the state as a group. Similarly, the implementing regulations give
the EPA broad discretion to identify the group of sources to which the
BSER is applied. The regulations provide that the EPA ``will specify
different emission guidelines or compliance times or both for different
sizes, types, and classes of designated facilities when costs of
control, physical limitations, geographical location, or similar
factors make subcategorization appropriate.'' Applying the BSER to the
affected EGUs in each state as a group is appropriate, and therefore is
consistent with these regulations.
    As part of applying the BSER, the EPA, to return to provisions of
CAA section 111(a)(1), calculates the ``emission limitation achievable
through the application of the [BSER].'' In this rulemaking, we refer
to this amount as the state goal. As noted, the EPA expresses the state
goal in the emission guidelines as an emission rate.
    The state must develop a state plan that achieves the state goal,
either in the form of an emission rate, as specified for the state in
the emission guidelines, or a translated mass-based version of the
rate-based goal. We refer to the state goal, in the form used by the
state as the foundation of its plan, as the required emission
performance level.
    As part of its state plan, the state must establish ``standards of
performance'' for its affected EGUs. To do so, the state may consider
the measures the EPA identified as part of the BSER or other measures
that reduce emissions from the affected EGUs. Moreover, the state has
the flexibility to establish emission standards in the degree of
stringency that the state considers appropriate. The primary limitation
on the state's flexibility is that the emission standards applied to
all of the state's affected EGUs--and, in the case of states that adopt
the portfolio approach, the requirements imposed on other affected
entities--taken as a whole, must be demonstrated to achieve the
required emission performance level. In addition, the state may make
the emission standards for any of its affected EGUs sufficiently
stringent, so that the standards and any requirements imposed on other
affected entities (if relevant), taken as a whole, achieve a level of
emission performance that is better than the required emission
performance level. See CAA section 116, 40 CFR 60.24(g).
    Under these circumstances--that the emission standards that the
state establishes for its affected EGUs and any other requirements for
the other affected entities, as relevant, taken together, are at least
as stringent as necessary to achieve the required emission performance
level for the state's affected EGUs--each emission standard that the
state adopts for each of its affected EGUs will meet the definition of
a ``standard of performance'' under CAA section 111(a)(1).
Specifically, the ``standard of performance'' for each source will
constitute, to return to the provisions of CAA section 111(a)(1), ``a
standard for emissions which reflects [that is, embodies, or
represents] \247\ the degree [that is, the portion] of emission
limitation achievable through the application of the [BSER]'' [that is,
as noted above, the required emission performance level for all
affected sources in a state]. That ``degree'' or portion of the
required emission performance level is, in effect, the portion of the
state's obligation to limit its affected sources' emissions that the
state has assigned to each particular affected source. An emission
standard

meets this definition of the term ``standard of performance''
regardless of whether it is part of a plan that adopts the portfolio
approach (in which case, the standard will reflect a relatively smaller
part of the emission performance level) or one that imposes the plan's
emission limitation obligations entirely on the affected EGUs (in which
case, the standard will reflect a relatively larger part of the
emission performance level).
---------------------------------------------------------------------------

    \247\ See Oxford Dictionary of English (3rd ed. 2010 (online
version 2013)) (defining ``reflect'' as, among other things,
``embody or represent (something) in a faithful or appropriate
way'').
---------------------------------------------------------------------------

    These proposed interpretations of the provisions of CAA sections
111(d)(1) and (a)(1) are fully consistent with the EPA's overall
approach in this rulemaking to determining and applying the BSER and
identifying the appropriate level of emission performance for the
affected EGUs. As noted, this approach entails applying the BSER on a
state-wide basis and, based on the BSER, identifying the emission
performance level for each state's affected EGUs that each state must
achieve, so that each state may then assign the emission limitation
obligations among its sources. As noted, this approach is fully
consistent with the interconnected nature of the electricity system and
with the principles of federalism that underlie CAA section 111(d).
    It should be emphasized that each state has many options for
assigning the emission limitation obligations among its affected
sources. For example, the state could impose emission standards that
are consistent with the BSER. Under these circumstances, the state may
assign to different affected sources emission standards with different
levels of stringency because the state will have determined that those
standards are consistent with the nature of each source's participation
in the state's electricity system. In addition, the state could
authorize emission trading as part of the emission standards for
affected sources. Under these circumstances, if an affected source's
emission level was higher than the standard the state established for
it, the source could achieve the standard by purchasing additional
emission rights through the trading program.
    Finally, it should be noted that states retain authority under CAA
section 116 and 40 CFR 60.24(g) to impose standards of performance
that, cumulatively, are more stringent than the emission performance
level.\248\
---------------------------------------------------------------------------

    \248\ The EPA's approach may also be characterized as (i)
determining the BSER for the affected EGUs, (ii) establishing as the
emission guideline the standard for emissions that the affected EGUs
in the state can achieve on average through the application of the
BSER, and (iii) as part of the emission guideline, authorizing each
state to establish as the applicable standard for each affected EGU,
the standard that the state considers appropriate and that when
totaled with the standards established for the other EGUs (and as
may be adjusted to account for the portfolio approach, if that
approach is adopted by the state) is at least as stringent as the
average standard in the emission guideline. As noted in the
accompanying text, a state has many ways to establish standards that
meet the CAA requirements, including, for example, following the
BSER or authorizing emission rate averaging or trading.
---------------------------------------------------------------------------

10. Combined Categories
    As discussed above, the EPA is soliciting comment on combining the
category of steam EGUs and the category of combustion turbines (which
include NGCC units) into a single category for fossil fuel-fired EGUs,
for purposes of promulgating emission guidelines for CO2
emissions. The EPA solicits comment on whether combining the categories
is, as a legal matter, a prerequisite for (i) identifying as a
component of the BSER re-dispatch between sources in the two categories
(i.e., re-dispatch between steam EGUs and NGCC units), or (ii)
facilitating averaging or trading systems that include sources in both
categories, which states may wish to adopt.
11. Severability
    We consider our proposed findings of the BSER with respect to the
various building blocks to be severable, such that in the event a court
were to invalidate our finding with respect to any particular building
block, we would find that the BSER consists of the remaining building
blocks. The state goals that would result from any combination of the
building blocks can be computed from data included in the Goal
Computation TSD and its appendices using the methodology described in
the preamble and that TSD.
12. Solicitation of Comment
    We invite comment on all aspects of our proposed interpretation and
alternate interpretation of the BSER for CO2 emissions from
existing fossil fuel-fired EGUs, both as identified above and as
further discussed in the Legal Memorandum in the docket.\249\ In
particular, we invite comment on our analysis of the four building
blocks as components of the BSER, whether any other potential measures
should be considered, our analysis of the combinations of building
blocks 1 and 2 and of all four building blocks, and the legal,
technical, and economic bases of our conclusions. With regard to
comments received during the stakeholder meetings, some commenters
noted that trading programs like RGGI have been successful at reducing
GHGs, and other commenters provided specific BSER proposals based on
trading and/or emissions averaging approaches. We specifically request
comment on whether any of these approaches should be considered as the
BSER. We also specifically invite comment on the question, raised by
some stakeholders, as to whether if measures may be relied on in the
state plan to achieve emissions reductions, they cannot be excluded
from the scope of the BSER solely because they involve actions by
entities or at locations other than affected sources.
---------------------------------------------------------------------------

    \249\ However, as noted, we are not soliciting comment on issues
that were resolved by the implementing regulations.
---------------------------------------------------------------------------

VII. State Goals

A. Overview

    In this section, the EPA sets out proposed state-specific
CO2 emission performance goals to guide states in
development of their state plans. The proposed goals reflect the EPA's
quantification of each state's average emission rate from affected EGUs
that could be achieved by 2030 and sustained thereafter, with interim
goals that would apply over a 2020-2029 phase-in period, through
reasonable implementation, considering the unique circumstances of each
individual state, of the best system of emission reduction adequately
demonstrated (based on all four building blocks) described above. In
addition, we are taking comment on a second set of state-specific goals
that would reflect less stringent application of the same BSER, in this
case by 2025, with interim goals that would apply over a 2020-2024
phase-in period. As promulgated in the final rule following
consideration of comments received, the interim and final goals will be
binding emission guidelines for state plans.
    The proposed goals are expressed in the form of state-specific,
adjusted \250\ output-weighted-average CO2 emission rates
for affected EGUs. However, states are authorized to translate the form
of the goal to a mass-based form, as long as the translated goal
achieves the same degree of emission limitation.\251\
---------------------------------------------------------------------------

    \250\ As described below, the emission rate goals include
adjustments to incorporate the potential effects of emission
reduction measures that address power sector CO2
emissions primarily by reducing the amount of electricity produced
at a state's affected EGUs (associated with, for example, increasing
the amount of new low- or zero-carbon generating capacity or
increasing demand-side energy efficiency) rather than by reducing
their CO2 emission rates per unit of energy output
produced.
    \251\ A method for translating from a rate-based goal to a mass-
based goal is discussed in the Projecting CO2 Emission
Performance in State Plans TSD.
---------------------------------------------------------------------------

    The EPA is also proposing that measures taken by a state or its
sources

after the date of this proposal, or programs already in place, and
which result in CO2 emission reductions at affected EGUs
during the 2020-2030 period, would apply toward achievement of the
state's CO2 goal. Thus, states with currently existing
programs and policies, and states that put in place new programs and
policies early, will be better positioned to achieve the goals.
    The EPA is proposing to finalize the goal for each state as
proposed, and adjusted as may be appropriate based on comments. A state
may demonstrate during the comment period that application of one of
the building blocks to that state would not be expected to produce the
level of emission reduction quantified by the EPA because
implementation of the building block at the levels envisioned by the
EPA was technically infeasible, or because the costs of doing so were
significantly higher than projected by the EPA. While the EPA would
consider this in setting final state goals, the EPA would also consider
(and would expect commenters to address) whether a similar overall
state goal could still be achieved through more aggressive
implementation of one or more of the measures encompassed in the other
building blocks or through other, comparable measures. For example, if
a state demonstrates during the public comment period that the state's
coal-fired steam EGUs could only achieve an average four percent heat
rate improvement, instead of the six percent that the EPA is proposing
to determine is achievable from application of building block 1, the
EPA would not adjust the state's goal to reflect that change unless the
state also demonstrates that it could not get additional reductions
from application of building blocks 2, 3 or 4, or in related,
comparable measures.
    Each of the building blocks establishes a reasonable level of
reductions, but not necessarily the maximum amount that could be
achieved if that building block, and no other, were the basis
supporting the BSER. Together the building blocks establish a
reasonable overall level of reductions and effort that the EPA
considers appropriate at this time. This amount of emission reductions
is significant and will require effort and adjustments throughout the
electricity sector. In light of the overall effort to achieve the state
goals based on a combination of all four building blocks at the levels
specified, the EPA is not proposing a higher level of reductions at
this time, even though the measures in the building blocks could be
implemented more stringently to achieve greater emission reductions.
    Because the building blocks each establish a reasonable level of
emission reduction rather than the maximum possible level of reduction,
the EPA expects that, for any particular state, even if the application
of the measures in one building block to that state would not produce
the level of emission reductions reflected in the EPA's quantification
for that state, the state will be able to reasonably implement measures
in other of the building blocks more stringently, so that the state
would still be able to achieve the proposed goal. Accordingly, the EPA
proposes that even if a state demonstrates during the comment period
that application of a building block to that state would not result in
the level of emission reductions reflected in the EPA's quantification
for that state, then the state should also explain why the application
of the other building blocks would not result in greater emission
reductions than are reflected in the EPA's quantification for that
state. In light of the fact that the building blocks are based on a
reasonable level of stringency and not the most stringent possible