Under the proposed rule, Mirant would be at a significant disadvantage because of EPA's decision to reward units that have not installed scrubbers. In Maryland, Mirant has installed scrubbers on all its coal units (Dickerson units 1, 2, and 3, Morgantown 1 and 2, and Chalk 1 and 2), while coal units at CP Crane and Herbert A. Wagner (both of which are owned by Constellation) are not scrubbed. These scrubbed Mirant units would receive substantially fewer allowances than Crane and Wagner on a MW basis. [EPA-HQ-OAR-2009-0491-2843.1, p.3]
To avoid penalizing companies that install expensive control technology and to ensure that pollution control costs are shared equitably, allowances should be allocated based on heat input. This is the approach that the Agency used in both the NOx SIP Call and CAIR, and that EPA should use again in the Transport Rule. [EPA-HQ-OAR-2009-0491-2843.1, p.3]
Over the last few years, a number of plants have been shut down temporarily in order to complete the installation of new scrubbers and SCR units. Again, to avoid penalizing these units, EPA should determine the proper baseline heat input for each unit by looking back over the last 5 years  -  perhaps using the average of the highest 3 years over the last 5 year period. [EPA-HQ-OAR-2009-0491-2843.1, p.3]
II. Allowance Allocations for Units Located in Maryland Should be Consistent with the Maryland Healthy Air Act
The Clean Air Act (CAA) is very clear in assigning different roles and responsibilities to EPA, on the one hand, and the States on the other. In particular, the Act preserves for each State 'the primary responsibility for assuring air quality within the entire geographic area comprised in such State' by regulating sources within the State while relegating EPA 'to a secondary role' of determining whether a State's regulations are sufficient to meet Clean Air Act requirements. Train, 421 U.S. at 64, 79. In interpreting the CAA, the Supreme Court has stated:
Congress plainly left with the States, so long as the national standards were met, the power to determine which sources would be burdened by regulation and to what extent.
Union Electric Company v. EPA, 427 U.S. 246, 269 (1976) (emphasis added). [EPA-HQ-OAR-2009-0491-2843.1, p.4]
When it enacted the Health Air Act (HAA) in 2006, the Maryland State Legislature specifically addressed the issue of "which [Maryland EGUs] would be burdened by regulation and to what extent." In the Transport Rule, EPA has proposed to find that Maryland, even with the HAA, has not done quite enough to meet the requirements of section 110(a)(2)(D) of the CAA. Even if this finding is finalized, however, it does not mean that EPA can fundamentally change the State's recent decision as to how Maryland companies should share the burden of reducing total EGU emissions in the State  -  especially when there is no rational basis for EPA's approach. [EPA-HQ-OAR-2009-0491-2843.1, p.4]
The HAA established unit-specific emission allocations that are essentially the same as allowances under the proposed Transport Rule, except that the HHA 'allowances' can only be traded within a particular company. See COMAR <IP_ADDRESS>(e) (System-Wide Compliance Determinations) and <IP_ADDRESS>(B)(3) (defining system as 2 or more EGUs owned or operated by the same person). [EPA-HQ-OAR-2009-0491-2843.1, p.4]
The problems with EPA's proposed approach are apparent from the following charts, which show the 'allowances' that have been issued under the HAA compared to the allowances that would be allocated to those same EGUs under the Proposed Transport Rule. There are three charts: (1) Annual SO2; (2) Annual NOx; and (3) Ozone Season NOx. The colors on the charts are important because, as noted above, the HAA imposes company-wide mass limits on the three major power producers that operate EGUs in the State. In essence, Mirant units may trade allowances with other Mirant units, but they cannot meet their compliance obligations by acquiring allowances from units owned by either Constellation or Allegheny  -  the other two companies covered under the HAA. Nor can Mirant sell any of its excess allowances to Constellation or Allegheny. [EPA-HQ-OAR-2009-0491-2843.1, pp.4-5]
[For additional comments pertaining to the Maryland Healthy Air Act (HAA) and Annual SO2 and NOx charts, see pages 5-8 of this comment.]
Mirant recognizes that the proposed transport rule covers certain units that are not included in the HAA, but these are very small units  -  as indicated by the fact that only one of them that would receive any allowances under the proposed Transport Rule (AES Warrior Run) and would be given just 464 SO2 allowances. Note that the 2012 state-wide "cap" under the proposed rule is essentially the same as the 2013 HAA cap, but the number of allowances given to each company under the two programs is very different. The Allegheny plant, for example, will only be allowed to emit 768 tons of SO2 under the HAA. This is a hard cap that prohibits the plant from emitting more than 768 tons per year, but the plant would nevertheless receive 5124 SO2 allowances under the proposed Transport Rule. [EPA-HQ-OAR-2009-0491-2843.1, p.6]
Even so, there is no reason for EPA to base allowance allocations on modeling predictions when the Agency can easily use the method that the Maryland Legislature has chosen to allocate the burden of reducing EGU emissions in the State. To the extent that EPA believes that either the timing or the levels in the HAA are insufficient to meet the requirements of Section 110(a)(2)(D), the Agency can easily adapt the HAA approach to meet those objectives. To take a simple example, if EPA believes that an additional 5% reduction is needed, it can simply reduce each unit's HAA allocation by 5%. [EPA-HQ-OAR-2009-0491-2843.1, p.8]
Mississippi Department of Environmental Quality
For Mississippi (and other states) the allocations are based on the Integrated Planning Model (IPM) projections. These projections resulted in a number of currently operating facilities receiving no allocations under this rule. We understand that this is because the model determined what controls facilities would have in the future and that some would not even be operating in the future. We do not believe it is appropriate to use a modeling tool to make decisions about shutting down facilities or what level of control particular facilities might have in the future. [EPA-HQ-OAR-2009-0491-2634.1, p.1]
MS DEQ supports assigning the allocations based on historical heat input data that takes several years worth of data into account. We realize that using heat input data may assign more allowances to some sources than are allowed by their permits. In such cases, the allowances could be limited to be no more than their permit would allow and the remaining emissions be redistributed to the other facilities. The States should also have a period to review and approve the proposed allowances before they are made final. [EPA-HQ-OAR-2009-0491-2634.1, p.1]
National Grid
National Grid does not support the current allowance allocation methodology that relies on projected data. As noted above, we have serious concerns with the ability of the model to accurately reflect the unit by unit operation and feel that it is inappropriate for the EPA to use these results to allocate allowances. We support an allocation based on historical data, preferably historic heat input or output. National Grid would oppose an allocation based on historic emissions since this approach would unfairly penalize units that have already made significant emissions reductions. [EPA-HQ-OAR-2009-0491-2583.1, pp.3-4]
National Rural Electric Cooperative Association (NRECA)
Continuing allocations to "non-operating" units is too generous. Allocations to new units should be sufficient to cover emissions considering the prospective application of best available control technology (BACT). At least a portion of unused Clean Air Interstate Rule (CAIR) allowances should be available to assist in covering new unit needs. [EPA-HQ-OAR-2009-0491-2723.1, p.1]
The allowance allocation methodology radically departs from previous regulatory allocation methods and creates numerous inequities and other poor policies without rational justifications. The proposed allocation formulas punish cleaner emissions units and electric consumers who purchase power from them at higher costs. Most of the problems inherent in the proposal's methodology could be resolved if states budgeted allowances were distributed to each unit within the state based pro-rata on the unit's portion of the state historic heat rate updated periodically to include new units. Such distribution should sub-categorize between coal, gas, and oil. [EPA-HQ-OAR-2009-0491-2723.1, p.1]
The preferred remedy option allowing unlimited emissions trading during the initial 2012 compliance period and limited interstate trading in the second compliance period recognizes the economic benefits of trading and should be retained. The auctioning of allowances would drive up program compliance costs and, therefore, is justifiably excluded from the preferred remedy and proposed intrastate option.  [EPA-HQ-OAR-2009-0491-2723.1, p.1]
While it is possible to dig through the annuals of EPA's technical supporting documentation within the rulemaking docket to ferret out proposed individual unit emission allowances, in many cases it is not possible to ascertain how or why EPA's modeling generated a given specific unit allocation. Thus, the proposed rule and underlying documentation present something like a "black box" for affected parties to comment. It fails to present adequate information so as to allow full comment on unit emissions allocations and other issues important to affected electric utilities. [EPA-HQ-OAR-2009-0491-2723.1, p.3]
EPA, by postponing implementation of the Transport Rule until at least 2014, will provide many benefits. This postponement will allow EPA the time which is needed in order to incorporate the new Ozone NAAQS. It will also give regulated CAIR I entities time to utilize their banked allowances, and will help avoid any Constitutional "Takings" arguments made by utilities which have experienced an economic loss by means of the Transport Rule. This additional time will also allow for additional review and comment periods by regulated industry to assist EPA in developing a more accurate regulation. As EPA is aware, EPA is not under any court order to finalize a rule by 2012, and so Lakeland Electric finds this time extension proposal a logical appeal. Therefore, EPA should postpone any compliance measures required under the Transport Rule until 2014. [EPA-HQ-OAR-2009-0491-2630.1,pp.5-6]
The proposed CATR would significantly restrict emissions within the 32 state trading areas and therefore allowance allocations. EPA has offered scant explanation to explain the proposal's continuing allocating of allowances to retired or non-operating units for a full six years after operation ceases at full allocation rates under original existing unit formulas, except to surmise it would discourage older units from operating. Not discussed in the proposal, however, is the fact that older units will be discouraged from retiring. Further, no data or documentation is offered to explain the six-year time period and full allocation after non-operation rationale. Since, as previously mentioned, EPA's analysis shows that CATR would mandate one million tons of SO2 reductions more than that of CAIR, EPA's wisdom of granting an allowance windfall to the oldest and most inefficient generating units is not equitable or otherwise justified. A certain fact here is non-operating units would receive allowances not needed for compliance; a proposed windfall established exclusively by EPA rulemaking.  [EPA-HQ-OAR-2009-0491-2723.1, p.10]
On the other hand, EPA proposes a 3 percent set-aside from state allowance budgets for new units, but no allowances for the initial control periods when the new units come on line. In the event of insufficient allowances in the set-aside, available allowances are distributed pro-rata to new units. So under EPA's proposal, older units receive un-needed allowances and new units may well end up with a fraction on what is needed and none for the first year of operation. It is quite plausible that without certainty that a stream of allowances would be available to cover new unit operation, no new units would be built. This is indeed a strange policy for EPA to conjure up under the CAA where old units can hoard allowances while new units get none at all, at least initially. [EPA-HQ-OAR-2009-0491-2723.1, p.10]
EPA's proposed old and new unit allowance policies are off the cuff and exemplify the importance of letting states determine these types of policies based on local considerations and needs. In this context, it is a mistake for EPA to short circuit the SIP process, as the proposal does, as NRECA has commented above. The CATR allowance allocation methodology should ensure new units equipped with best technologies and techniques to minimize emissions receive 100 percent of allowances needed for commercial operation, including initial year requirements.  [EPA-HQ-OAR-2009-0491-2723.1, p.11]
There are several ways the proposed CATR could be changed to accommodate new unit allowance allocations. First, to the extent that the new unit set-aside allowances are not available, allowances given to retired units could be siphoned off on a pro-rata basis as needed and reallocated at no charge to new units. As EPA points out in the proposal, retired units do not need them. Second, instead of eliminating unused CAIR allowances, at least a portion of them could be set-aside for new unit utilization in the event of a shortfall in the state's new unit set-asides. [EPA-HQ-OAR-2009-0491-2723.1, p.11]
The proposed CATR allowance allocation scheme is flawed for numerous reasons. It is based on EPA computer model projections of both future individual unit utilizations and emission reduction capabilities at specified marginal costs levels of emissions reductions. [EPA-HQ-OAR-2009-0491-2723.1, p.12]
The model attempts to predict the future of literally thousands of electric utility fossil fuel units located within the proposed CATR 32 state trading areas. Regardless of the purported sophistication of EPA's models, they do not and cannot accurately forecast how each and every fossil fuel unit among thousands will be utilized. For example, the models cannot account for the presence or ramifications of short and long term wholesale power agreements under which unit owner obligations include future system and individual unit power demands. The models cannot account for future business decisions, the necessities of which are not yet presently known or anticipated, but nonetheless may need to be made that would significantly affect individual unit utilization within a given utility system. There are literally thousands of significant factors that affect future unit utilization of which the models do not and cannot take into account. [EPA-HQ-OAR-2009-0491-2723.1, p.13]
The models do not and cannot accurately forecast for each and every fossil fuel unit within the 32 state trading regions the actual future costs of meeting the emission reduction obligations dictated by the models. For example, the models cannot account for on a unit basis costs associated with contract breaches associated with early termination of coal and associated transportation contracts necessitated by the models to switch coals. The models cannot account for costs associated with obtaining new contracts for new coal deliveries especially when potential contracting parties for supply are aware of reduction obligations dictated by EPA's models and the essence of time. The models assume "just in time" expanded natural gas transportation capabilities to meet the aggregate demand the models' emission reduction mandates place on affected units within a geographic area. Likewise, there are literally hundreds of significant factors that affect future costs of emissions controls of which the models cannot take into account. [EPA-HQ-OAR-2009-0491-2723.1, p.13]
In short, EPA's models put real life units within a virtual world and would dictate unit utilization and emissions reduction destinies based on this fantasy. EPA may argue that emissions trading allowed under its remedy and preferred options would wrong all the deficiencies inherent in this entire scheme.  As EPA is well aware, however, trading is necessarily limited by the North Carolina decisions and is even entirely prohibited by at least one option in the proposed CATR, so it is unlikely trading would save the day. [EPA-HQ-OAR-2009-0491-2723.1, pp.13-14]
Additionally, EPA's proposed allowance allocation trading scheme fails to reward cleaner emissions units and the electric consumers who have borne higher electricity costs because they must pay for existing, expensive emission controls. The model metrics do not consider existing unit generation costs, and as such some of the most costly fossil fuel generation affected by the proposal would have to incur even higher costs as compared to CATR compliance costs associated with more polluting and less efficient affected units. If EPA has the discretionary authority under the CAA to effectively reward more polluting units to the detriment of cleaner ones; and it may not, it represents poor policy judgment nonetheless. [EPA-HQ-OAR-2009-0491-2723.1, p.14]
NRECA, however, commends EPA for willingly opening up its proposed allocation methodology for comment on alternative methods that still link unit allowances directly to the way state budgets were developed. NRECA construes this EPA stated limitation on alternatives to mean that so long as the aggregate allowable emissions within individual state budgets are not affected or altered by the unit allowance allocation methodologies, EPA would deem it within its regulatory discretion. EPA's limitation here appears to be based on the North Carolina decisions that appear to limit EPA's discretion in allocating allowances for Section 110(a)(2)(D)(i) purposes to the extent that the distribution cannot in effect determine or partially determine states' emissions budgets. NRECA believes North Carolina decisions do in fact impose this limitation, but they do not prohibit allocations methods under state budgets already determined based on the need to address interstate air pollution. [EPA-HQ-OAR-2009-0491-2723.1, pp.14-15]
NRECA believes many of the troublesome aspects of the proposed CATR could be addressed if the allocation methodology was structured in a manner similar to that contained in CAIR for annual NOx allocations as a SIP (or FIP option as the case may be) for all the CATR trading programs. Specifically the salient features of this methodology include allocating allowances to existing units based on historic heat in-put using the three highest heat in-puts of the past five years to derive annual averages (seasonal for ozone), and allocating allowances to new units based on a set aside and folding new units into existing unit category after five years of operation. [EPA-HQ-OAR-2009-0491-2723.1, p.15]
EPA mentions an option for allowance distribution to units placed into various subcategories of units that have similar characteristics. In this light, NRECA advocates that coal, gas, and oil units be divided into three categories and that allowances be distributed pro rata to units in each category based on unit heat in-puts as a percentage categorical heat in-puts. NRECA believes that this methodology is rationale and well within the bounds of the in North Carolina decisions. Additionally, this allocation rewards, not punishes, electric consumers that have already incurred high costs of emissions controls. [EPA-HQ-OAR-2009-0491-2723.1, p.15]
As with the CAIR approach, this methodology could provide options for each state to consider whether new units should receive allowances from set-asides during their initial year of operation and whether retired units should continue to receive allowances and if so, how long or at a diminished allocation. [EPA-HQ-OAR-2009-0491-2723.1, pp.15-16]
Also, as a fundamental matter, the NODA additions to the CATR do not appear to alter the inequitable methodology utilized to allocate unit allowances. The proposed allocation methodology fails to equitably reward cleaner units with existing emissions controls and with associated higher generation costs that are passed onto cooperative consumers. The proposal also fails to provide reasonable methods of allocating allowances to new, to be constructed units. As NRECA advocated in its CATR comments, allocations based on historic heat in put to existing units with a reasonable set-aside for new units is a previously demonstrated and fair method. This methodology should be utilized here. [EPA-HQ-OAR-2009-0491-3756.1_NODA, pp.1-2]
It is impossible to comprehensively comment on the NODA. Under the proposed CATR framework, EPA through modeling would determine state by state emissions budgets it deems necessary for states to meet their Clean Air Act Section 110 (a)(2)(D) obligations to address interstate air pollution. Affected unit emissions allocations within each state in the aggregate would equal the state's budget.2 Thus two metrics within the proposed CATR are vital and necessary to properly evaluate the allocations to each affected unit: the emissions budget for the state in which a unit resides and the unit's emissions allocations. The NODA does not provide necessary information to allow comment on unit allocations that may result from it and deviate from those proposed earlier in the CATR. [EPA-HQ-OAR-2009-0491-3756.1_NODA, p.2]
The NODA leaves commenters in the dark insofar as the ability to evaluate potential changes in unit allocations relative to those in the proposed CATR. As evidenced in the NODA, EPA does not even know itself how it might use the additional NODA information to change the already proposed unit allocations. At the very least the following questions are raised by the NODA that must be answered to allow meaningful comment on it and on the proposed CATR generally: (1) Will state emissions budgets be adjusted based on new NODA modeling? (2) What natural gas resource assumptions will be used? (3) How can unit allowances be determined when, as stated, EPA will modify the modeling to reflect comments not yet evaluated, possible changes in cost and emission projections used in the multi-factor test to determine significant contribution, updated NOx rates, updated information on new units, updated information on pollution controls, and updated information on unit retirements? [EPA-HQ-OAR-2009-0491-3756.1_NODA, pp.2-3]

2 This presumption ignores the proposed state variability limits which NRECA supports. See the proposed CATR at 75 Fed. Reg. 45,210 at 45,292. [EPA-HQ-OAR-2009-0491-3756.1_NODA, p.2]
New Jersey Department of Environmental Protection (NJDEP)
The proposed allocation of allowances results in rewarding dirty units, while penalizing clean units. New Jersey urges the USEPA to revise their allocation method to be based on recent energy output with rolling updates, not historical fixed emission levels. Under the USEPA's proposal, clean units that currently meet the Phase 1 CAIR emission rate of 0.15 lbs/MMBtu account for 59 percent of the affected units, but only get 16 percent of the total Transport Rule ozone season NOx allowance. In tum, units that are dirtier than 0.15 lbs/MMBtu account for 41 percent of the affected units, but get 84 percent of the allowances. This provides disincentive for dirty units to control their emissions, while under allocates to clean units that have less ability to reduce emissions.
For example, the Bergen Generating Station has combined-cycle gas-fired units with emission rates below 0.10 lbs/MMBtu and emit about 200 tons of NOx each ozone season. The Transport Rule only allocates 41 allowances to this source. Conversely, the Transport Rule allocates 1,798 allowances to BL England, which more than covers the facility's current high NOx emissions and provides excess to sell to under allocated gas-fired facilities. This disparity is compounded because BL England has an enforcement agreement which, in conjunction with aNew Jersey rule approved by the USEP A, sets emission limits which require selective catalytic reduction (SCR) in 2012 and 2013. This will result in NOx emissions of about 600 tons per ozone season. It Inakes little sense to allocate excessive NOx allowances to poorly controlled or uncontrolled coal-fired power plants, which have the greatest potential for emissions reduction, while under allocating much cleaner gas fired units.
The USEP A should revise the allocation method to provide for fair allocation of allowances that provides incentive to reduce emissions and not reward poorly controlled or uncontrolled units. Also, the USEP A should allow the states to allocate the allowances in a more appropriate manner. The USEPA provided flexibility for states to allocate allowances under CAIR, and New Jersey did this. Our NOx allocation method is based on rolling 3 year electric output, which encourages energy efficiency. It was supported by our power companies, approved by the USEP A, and is being successfully implemented. We would not want to regress to the less fair and less environmentally sustainable method that has been proposed in this transport rule.   [EPA-HQ-OAR-2009-0491-2684.1 p.3]
New York Power Authority
While this IPM based allocation methodology might serve the purpose of establishing required reductions in emissions to satisfy Clean Air Act Section 110(a)(2)(D)(i)(1), it is based entirely on economic inputs and does not account for critical local factors such as reliability related issues like the New York State Reliability Council's 'Minimum oil burn' rule or individual contractual agreements. The IPM model is not considered historical inputs of individual units or actual permitted emissions of SO2 and NOx. Applying the IPM results to individual units would severely restrict the operation of otherwise clean power plants and thus could jeopardize reliability as described below. [EPA-HQ-OAR-2009-0491-3820, p.1]
NYPA believes the EPA should reconsider the unit allocations taking into consideration historical heat inputs or historical emission values and the facilities permit conditions.[EPA-HQ-OAR-2009-0491-3820, p.2]
New York State Department of Environmental Conservation
Under the current proposal, states' flexibility in administering a trading program would be limited under a FIP. In the proposal's discussion on how well state market trading programs have worked, several state programs are discussed. As the elements of the preferred trading program are finalized, it is worth considering New York's administration of its trading rules, including the federal CAIR program, which includes provisions to ensure that power plants in each state control their own emissions rather than buy out-of- state allowances. Allocations are [EPA-HQ-OAR-2009-0491-2730.1, p.6] based on historical heat input and provide a five percent set-aside for new sources. New York's program additionally provides for a 10 percent set-aside for energy efficiency improvement projects. New York's flexible trading program enables the effective management of allowances and emission reductions allowable under a state-specific SIP. To this end, EPA should provide states with the ability to develop its own allocation schemes to be used in concert with the FIP. [EPA-HQ-OAR-2009-0491-2730.1, p.7]
Budget Allocations under the FIP
EPA proposes that, for 2012, each existing unit in a given state receives allowances commensurate with the unit's emissions reflected in whichever total emissions amount is lower for the state, 2009 emissions or 2012 base case emissions projections. In any case, the allocation is adjusted downward if the unit has additional pollution controls projected to be online by 2012. This approach seems to 'punish' those states and units that have controlled and 'reward' those that have not controlled. EPA should base emission budgets and allowance allocations at the level needed to eliminate SC/IM, and develop an equitable formula for allocation. EPA should not use a permanent allocation approach, but rather use an approach that is able to adjust to market conditions and/or generation characteristics. [EPA-HQ-OAR-2009-0491-2730.1, p.8]
The Department suggests a historic heat-input or net energy output based methodology for determining allocations to existing units. This would allow for variations and adjustments from recent years of operation to provide more accurate allocations to affected units within the program. The number of allowances to be allocated to each unit would incorporate the heat input experienced by the unit for any single control period among the three most recent control periods, for which data is available. Units are capped at their potential to emit or any limiting permit condition. [EPA-HQ-OAR-2009-0491-2730.1, p.8]
Use of the IPM Model
The use of IPM is inappropriate for determining allowance allocations. EPA's analysis does not accurately reflect local transmission constraints and reliability rules. This results in some units being removed or shut off by IPM as uneconomic. However, these units are required to meet local demand for local reliability concerns and should be allocated based on historic generation. [EPA-HQ-OAR-2009-0491-2730.1, p.9]
In the proposal, each unit was allocated based on the lowest of either the 2014 base case (IPM run with no controls - $0 per ton) or 2009 emissions. Since New York's statewide budget is much closer to the 2009 emission level than it is to the 2014 base case level, it seems that many units in New York were allocated based upon 2009 emissions. 2009 was a cool summer in the Northeast, and a quick review of EPA's Clean Air Markets Division (CAMD) data shows New York State facilities consumed about 18% less fuel (based upon heat input) in 2009 than in 2008 (also a cool summer and the next lowest fuel consumption year). During a cool ozone season, many facilities operate at a significantly reduced rate, so to base allocations on an extreme year is not appropriate. [EPA-HQ-OAR-2009-0491-2730.1, p.13]
This inappropriate allocation methodology could produce a scenario where, in a warmer year when demand for electricity is higher in New York, facilities in New York would be unable to comply with the rule as proposed. For example, if New York's emissions increase 18% (essentially just returning to 2008 fuel usage rates), New York would exceed its proposed budget. If New York EGU sources were to return to 2008 emissions (which were very low, at a rate of less than 0.1 lbs 1 MMBtu), these sources would exceed the budget plus the 3-year variability and would only fall short of the allocation plus the 1-year variability by 115 tons. Since 2008 and 2009 were the lowest fuel consumption years since Title IV began, EPA should not use these years as a basis for allocation. [EPA-HQ-OAR-2009-0491-2730.1, p.13]
Additionally, many states prefer to allocate their own emissions allowances to in-state sources rather following EPA procedures. This should not pose a problem since the distribution of allowances within the state does not affect the overall emissions in the state. The proposal, however, does not provide guidance on a mechanism that EPA would consider an acceptable allowance mechanism. Additionally. guidance on what criteria state SIPs would need to meet in order for a state's sources to be able to participate in the interstate trading program must be provided. While we understand and agree that a FIP is necessary for this instance to obtain the emissions reductions in the most expeditious manner, EPA should indicate that it will quickly move to approve a state SIP that incorporates the Transport Rule FIP elements and only differs significantly from the FIP with respect to the allowance allocation scheme. [EPA-HQ-OAR-2009-0491-2730.1, p.5]
Proposed 'Remedy Options'
In developing approaches to eliminate emissions identified as contributing to all or part of a state's SC/IM, EPA proposed a remedy option and requested comment on two alternatives. The proposed remedy option is a combination approach that incorporates limited interstate trading with other requirements and would regulate S02 and NOx emissions from EGUs through FIPs in the covered states. New York supports the proposed remedy option. However, all elements of the interstate option must incorporate the necessary limitations to prevent emissions from exceeding the level needed to eliminate transport. Total emissions in any state in any year should not exceed the level that EPA has determined is needed to eliminate SC/IM. [EPA-HQ-OAR-2009-0491-2730.1, p.6]
The Department agrees with a new unit set-aside of 3 to 5 percent for each transport rule program with any unused allowances flowing back to the existing unit pool for redistribution to those units. The Department also agrees with the approach of proportionally reducing the number of allowances when the new unit set-aside is insufficient to provide allocations for all new units requesting allowances. [EPA-HQ-OAR-2009-0491-2730.1, p.8]
Budget Set-Asides
EPA proposes new unit set-asides that are 3 percent of the state emissions budgets. The size of the new unit set-aside would be 3 percent for the S02 group 1, S02 group 2, NOx annual, and NOx ozone season trading programs, as appropriate, for each state. EPA based the size of the proposed new unit set-asides on a comparison of projected emissions from new units to projected emissions from existing units for all covered states under the proposed State Budgets/Limited Trading remedy. For each control period, if the size of the new unit set-aside were insufficient to provide allocations for all new units requesting allowances, then allocations to all new units would be proportionally reduced.
[EPA-HQ-OAR-2009-0491-2730.1, p.8]
The Department has incorporated a new unit set-aside for a number of years under New York's NOx Budget program, Acid Deposition Reduction Program, and CAIR. The set-aside provides a sufficient amount of allowances for new units to use and can be given back to the affected existing units if not needed/used by new units coming into the program for any given year/season. [EPA-HQ-OAR-2009-0491-2730.1, p.8]
New York University School of Law, Institute for Policy Integrity
:: EPA's preferred alternative should be modified to create a distinct intrastate assurance allowance trading mechanism to improve compliance with the statutory mandate while increasing flexibility, predictability, and cost-effectiveness; [EPA-HQ-OAR-2009-0491-2691.1, p.1]
:: An auction-based methodology should be used to allocate emissions allowances; [EPA-HQ-OAR-2009-0491-2691.1, p.1]
4. Auction-Based Method of Allocation of Emissions Allowances
EPA should use an auction-based method to allocate allowances to sources within each state. Under its preferred approach, EPA proposes to base allocations to existing sources on projected emissions, after elimination of some or all significant contribution to nonattainment or interference with maintenance. The allocations would be permanent, because original allocations would not be updated. Instead, EPA would allocate allowances for several years at once, in order to support trading programs. EPA would also set aside allowances to cover new sources within a state. If a source does not operate for three years, EPA would cease allocating allowances to that source. However, under its first alternative approach, EPA would withhold a small portion of emissions allowances for purchase, in an annual auction, by sources with a smaller share of the generation market within the state. EPA's purpose in relying on an auction for allocation is to limit direct purchase from larger generators -- in essence, trading -- which EPA finds may lead to market price manipulation. [EPA-HQ-OAR-2009-0491-2691.1, pp.11-12]
Auctioning all allowances would lead to the most efficient and equitable method of allocation. Under EPA's preferred approach, significant market inefficiencies would likely occur without an auction, due to inevitable inaccuracies in the initial allowance allocation. The initial allocation is based on projected emissions, which will not be updated to reflect true annual emissions. Such an allocation method is inherently error-prone, and consequently trading would be necessary to remedy the defects in the initial allocation, as some sources will exceed their initial share of the budget. Unfortunately, trading is restricted under the preferred approach's assurance provisions. As explained above (pages 6-7), allocating allowances instead of auctioning them magnifies the inefficiencies and uncertainties created by the current assurance provisions. By contrast, under an annual auction, sources would start each year with a number of permits much closer to the number they will actually need. Instead of relying on trades as a corrective measure for initial misallocations, post-auction trading would mostly just respond to unexpected variability, thus serving the intended purpose of the preferred approach's variability limits: "inherent variability in power system operations." [EPA-HQ-OAR-2009-0491-2691.1, p.12]
Under any regulatory alternative -- EPA's preferred approach, the modifications suggested in these comments, or some other trading system -- an auction is essential to prevent unfair windfalls. As soon as an emissions allowance cap is put in place, the cost of electricity and energy-intensive goods will rise, creating a price signal across the economy to save energy and reduce emissions. This effect will take place regardless of how permits are distributed, because utility companies will account for the market value of the permits, not the purchase price. Whether allowances are freely given away or auctioned off, firms will weigh the costs of reducing emissions against the revenue from selling extra allowances. The only difference is, when firms are given the valuable allowances for free, they are much more likely to pass on the windfall profits from trading to their shareholders than to their consumers, even as consumers see prices go up. 61 By contrast, when allowances are auctioned, the revenue generated can be directed back to consumers or the general public welfare. 62 A state can direct auction funds to benefit consumers, support energy efficiency projects, or otherwise aid the state in energy investments. While EPA notes its concerns about the use of revenues generated by an EPA-run auction, 64 EPA should consider the creation of incentives to encourage states to adopt auction-based methods to allocate allowances. [EPA-HQ-OAR-2009-0491-2691.1, pp.12-13]

61. The exception to this case is under regulated utilities, where consumers would have to rely on regulators to protect their interests by setting price ceilings. [EPA-HQ-OAR-2009-0491-2691.1, p.12]
62 There is broad support for allocating emissions allowances by auction within the economics and public policy communities, which recognize the cost-effectiveness and efficiency outcomes created by the auctioning of allowances. "[T]here are compelling arguments for the superiority of auctioned permits. First, auctions are more cost-effective in the presence of certain kinds of transactions costs. Second, the revenue raised by an auction mechanism can be used to finance a reduction in some distortionary tax . . . . Third, auctions provide greater incentives for firms to develop substitutes for regulated products, by requiring firms to pay for permits rather than giving them rents. Fourth, the revenue raised by auctions may provide administrative agencies with an incentive to monitor compliance." Nathaniel O. Keohane, Richard L. Revesz & Robert N. Stavins, The Choice of Regulatory Instruments in Environmental Policy, 22 HARV. ENVT'L L.REV. 313, 316 n.19 (1998) (internal citations omitted). See also Michael Abramowicz, The Law-and-Markets Movement, 49 AM. U. L. REV. 327, 353 n.112 (1999) ("[A]uctions may be both a fairer and an economically more efficient means of distributing pollution entitlements than preservation of the status quo."). [EPA-HQ-OAR-2009-0491-2691.1, p.13]
64. Transport Rule at 45,353 (noting that it did not propose using auction revenues to support energy efficiency projects because the requirements of the Transport Rule would be implemented through a Federal Implementation Plan (FIP), rather than a State Implementation Plan (SIP), and that under a FIP, EPA would allocate allowances according to the rule's requirements, whereas under a SIP, states would have flexibility to allocate or auction allowances in their budget and use revenues to support energy efficiency projects). [EPA-HQ-OAR-2009-0491-2691.1, p.13]
NextEra Energy, Inc.
EPA should abandon its proposed allowance allocation methodology based on the lower of projected 2012 emissions or actual 2009 emissions and adopt either a historic generation output-based allocation approach or a historic heat input-based approach
EPA proposes to distribute, to sources in each state covered under the proposed Transport Rule, a number of emissions allowances equal to the SO2, annual NOx, and ozone-season emissions budgets for that state, without variability, minus a three percent set-aside of allowances for new units. EPA would distribute four discrete types of emissions allowances for four separate cap and trade programs: SO2 group 1 allowances, SO2 group 2 allowances, NOx annual allowances, and NOx ozone season allowances. [EPA-HQ-OAR-2009-0491-2718.1, p.3]
EPA proposes that, for 2012, each existing unit in a given state receive allowances commensurate with the unit's emissions reflected in whichever total emissions amount is lower for the state, 2009 actual emissions or 2012 base case emissions projections. In either case, the allocation is adjusted downward, if the unit has additional pollution controls projected to be on-line by 2012. EPA proposes to use this same method to allocate allowances for each of the four trading programs (SO2 group 1, SO2 group 2, NOx annual, and NOx ozone season). [EPA-HQ-OAR-2009-0491-2718.1, p.3]
For states with lower SO, budgets in 2014 (SO2 group 1 states), each unit's allocation for 2014 and later would be determined in proportion to its share of the 2014 state budget, as projected by IPM. [EPA-HQ-OAR-2009-0491-2718.1, p.3]
EPA's proposed approach for allocating allowances under the Transport Rule is different than the NOx allowance allocation methodology adopted for existing units in CAIR, which was based on a unit's baseline heat input, adjusted for fuel type (with proportionately more allowances provided to unit's burning higher-emitting coal and proportionately fewer allowances allocated to units burning lower emitting oil and natural gas). In its July 2008 decision temporarily vacating CAIR, the D.C. Circuit Court determined the NOx allowance allocation methodology reflected in the rule to be arbitrary and capricious '[b]ecause the fuel adjustment factors shifted the burden of emission reductions solely in pursuit of equity among upwind states-an improper reason ... ' The court explained that EPA's [CAIR] rule essentially allocated more allowances to states having mostly coal-fired electric generating units because states that use more gas and oil can control emissions more cheaply. The court agreed with petitioners that fairness had nothing to do with the state's obligation to prohibit significant contributions to downwind nonattainment. [EPA-HQ-OAR-2009-0491-2718.1, p.3]
While EPA's proposed allowance allocation methodology in the Transport Rule does not rely on baseline heat input or fuel adjustment factors, NextEra Energy believes that the practical effect of the proposed methodology is very similar to the effect of the fuel-adjusted, heat input-based methodology rejected by the DC Circuit in the CAIR litigation because the methodology awards proportionately greater allowances to electric generating units (EGUs) burning inherently higher-emitting fuels (e.g., coal) and proportionately fewer allowances to EGUs burning inherently lower-emitting fuels (e.g., oil and natural gas). [EPA-HQ-OAR-2009-0491-2718.1, p.3]
Moreover, NextEra Energy believes that EPA's proposed allowance allocation methodology discriminates against companies that will have substantially reduced their emissions by 2012 by installing pollution control technologies, compared to companies that have done little or nothing to control their emissions in that timeframe, regardless of the fuel they burn. [EPA-HQ-OAR-2009-0491-2718.1, p.3]
While the proposed allowance allocation methodology in the Transport Rule mayor may not pass legal muster since it does not explicitly rely on fuel-adjusted heat input values, NextEra Energy strongly believes it is a poor public policy choice since it sends the wrong messages to companies contemplating taking early steps to reduce emissions from their electric generation fleet and will likely discourage such actions in the future. The proposed allowance allocation methodology rewards companies that have continued to burn higher emitting fuels and/or have not installed emission control technology (by 2012) with proportionately greater allowance allocations. Conversely, companies that have (1) installed new EGUs designed to burn cleaner fuels, (2) converted existing units to burn cleaner fuels and/or (3) taken steps to install advanced emission control technologies on their units would be allocated proportionately fewer allowance allocations. For example, under EPA's proposed allowance allocation methodology, a company that continued to operate an old, inefficient coal or oil/gas-fired steam unit would receive substantially greater SO2 and NOx allowances than a company that voluntarily repowered the unit with state-of-the art gas combined-cycle technology prior to 2012. Similarly, an existing coal-fired unit that installed advanced flue gas desulfurization equipment for SO, emissions control and selective catalytic oxidation for NOx emissions control prior to 2012 would receive substantially fewer SO2 and NOx allowances than the same unit that did nothing to control emissions prior to 2012. NextEra Energy believes that this sends the wrong messages to companies contemplating taking early steps to reduce emissions from their electric generation fleet and will discourage such actions in the future. NextEra Energy believes that basing allowance allocations on source emissions (future projected or historic emissions) is the worst approach for allocating allowances, from a public policy perspective, because it sends the wrong message to companies that want to do the right thing and violates the "polluter pays' principle. [EPA-HQ-OAR-2009-0491-2718.1, pp.3-4]
Proponents of EPA's proposed allowance allocation methodology are likely to use the argument that units with higher emission rates (e.g., coal versus natural gas, or uncontrolled coal units versus controlled coal units) need a proportionately greater share of allowances because they bear a greater cost burden to control emissions. This is exactly the same argument that EPA used in CAIR in support of the fuel-adjusted heat input NOx allowance allocation contained in the Model Rule that was determined to be illegal by the D.C. Circuit '[b]ecause the fuel-adjustment factors shifted the burden of emission reductions solely in pursuit of equity among upwind states-an improper reason ...' . As indicated above, this argument is not only flawed from a legal perspective but is misplaced from a public policy standpoint. What this argument is saying is that owners that continue to operate plants with higher emitting fuels and without emission controls are somehow entitled to a proportionately greater share of allowances (to help defray the costs they now face to comply with the Transport Rule) than companies that have already invested in clean energy technologies and pollution control technologies. In NextEra Energy's view, it is not in the public interest to reward companies that have done little or nothing to reduce their emissions prior to implementation of the rule in 2012 at the expense of companies like NextEra Energy that have taken early action to replace old, inefficient, high-emitting units with clean and efficient energy technologies such as natural gas combined-cycle units 01' to install emission control technologies. [EPA-HQ-OAR-2009-0491-2718.1, p.4]
EPA states in the preamble of the proposed Transport Rule that it believes that it is appropriate to allocate individual unit allowances consistent with the approach used in the development of the state budgets but acknowledges that there are many ways of linking unit allowance allocations directly to the way the state budgets were developed and, thus, significant contribution was defined. Aside from linking individual unit allowance allocations to the state budgets that EPA has established based on its analysis of significant contribution, then, (which EPA acknowledges can be accomplished with alternative allocation approaches) there is no apparent reason for EPA proposing that units receive allowances equal to the lower of 2009 actual emissions or 2012 projected emissions other than an equity rationale, something the DC Circuit found to be an 'improper reason' in North Carolina v. EPA. [EPA-HQ-OAR-2009-0491-2718.1, p.4]
As indicated above, NextEra Energy supports the derivation of state emission budgets based on analyses of significant contribution and the cost-effectiveness of emission reduction opportunities, as proposed in the rule. However', once these state emission budgets ate established, NextEra Energy recommends that all units within a state be treated as a single group and the state emission budgets be allocated to affected EGUs in 2012, 2014 and future re-calculations based on each source's proportional share of total baseline state generation output. NextEra Energy suggests that each unit's share of total state generation output should be determined on the basis of the average of each affected unit's annual generation output during the latest three calendar years of operation (e.g., 2007-2009). [EPA-HQ-OAR-2009-0491-2718.1, p.4]
The goal of output-based environmental regulations is to encourage the use of fuel conversion efficiency and clean energy as air pollution control measures. Output-based regulations can be an important tool for promoting an array of innovative energy technologies that will help achieve national environmental and energy goals by reducing fuel use. Output-based emission limits do not favor any particular technology and do not increase emissions. Output-based regulations simply level the playing field by establishing performance criteria and allowing energy efficiency and clean energy sources to compete on an equal footing with any other method of reducing emissions (e.g., combustion controls and add-on controls). [EPA-HQ-OAR-2009-0491-2718.1, p.5]
If EPA decides, for whatever reason, to reject the option of allocating allowances on the basis of generation output, NextEra Energy recommends that the Agency adopt a modified version of the alternative allowance allocation methodology discussed in the preamble of the proposed Transport Rule, which is to treat all units within a state as a single group and distribute allowances equal to a state's emissions budget, without variability, to each covered source in the state (in effect, distributing the responsibility for eliminating significant contribution and interference with maintenance) based on each source's proportional share of total state heat input. But rather than basing allocations on each units share of projected state heat input for the initial year of the program, NextEra Energy strongly recommends that the allocation be based on each unit's share of baseline state heat input. Baseline heat input would be determined based on the average of each affected unit's heat input during the latest three years of operation (e.g., 2007-2009). 1 [EPA-HQ-OAR-2009-0491-2718.1, p.5]
The IPM model is an excellent planning tool for analyzing the potential cost and energy impacts associated with various policy initiatives. However, NextEra Energy does not believe that this model was ever intended for, nor is capable of, providing projections that are anywhere near accurate enough (particularly for individual units) for basing something as important as allowance allocations on. Similar to other predictive models, IPM relies on a multitude of economic, energy-related and other assumptions that are subject to various degrees of uncertainty. The additive effect of this uncertainty is greater than the uncertainty associated with the individual assumptions. [EPA-HQ-OAR-2009-0491-2718.1, p.5]
Power plant owners, transmission system owners, and power system operators plan and operate their systems according to numerous federal, state and local regulations, policies and protocols, applying planning requirements designed to ensure electricity suppliers have adequate resources to meet current and future demand, and operational standards to ensure power is available when consumers turn on the lights. The IPM model appropriately determines how much a particular unit will operate in the future on an economic dispatch basis. However, the model does not consider a range of non-economic factors that influence a company's decision to operate a particular EGU such as grid stability considerations (e.g., voltage support), contractual generation commitments, reliability must-run requirements and fuel availability constraints. As a result, using the IPM model to project unit operations can create unrealistic scenarios such as running natural gas combined- cycle units at higher utilization than can be accommodated by the available natural gas pipeline network or not running oil-fired units that are required to operate to meet capacity requirements. These distortions of the electricity market may be masked when data are aggregated at the regional level or state level for setting state emission budgets, but can result in erroneous projections when used at the unit level to allocate allowances to individual units. Specific examples of these erroneous projections for a single electric generating fleet (NextEra Energy's) are presented in Appendix A of NextEra Energy's comments. [EPA-HQ-OAR-2009-0491-2718.1, p.5]
Not only docs basing allowance allocations based on IPM model projections raise potentially serious technical and policy issues, but NextEra Energy believes that this approach will subject the proposed Transport Rule to a much higher degree of risk from a legal perspective. NextEra Energy believes it is important for EPA to propose a rule that withstands, and preferably forestalls, litigation and that can be implemented as quickly and smoothly as practicable. We believe that using modeled projections as the basis for allocating allowances to affected EGUs has the potential for significant flaws that could cause the program to be deemed arbitrary and capricious. Accordingly, NextEra believes that the methodology for establishing allowance allocations should be based on actual (i.e., historic) data that has been verified by EPA. [EPA-HQ-OAR-2009-0491-2718.1, p.6]
As noted above, there are no legal or policy reasons that the methodology for determining state budgets and the methodology for distributing allowances to affected EGUs need to be the same. The historic generation output and heat-input allowance allocation approaches advocated by NextEra Energy are consistent with the D.C. Circuit's decision on CAIR because they do not alter the state budgets, which are based on each state's significant contribution. In addition. these allowance allocation approaches are fuel neutral and would not raise concerns similar to those identified by the D.C. Circuit regarding CAIR's use of fuel adjustment factors. The court rejected the fuel adjustment factors because they placed a disproportionate burden on downwind sources compared to the upwind sources contributing to the nonattainment problems. In NextEra Energy's view, adoption of a historic generation output- or heat input-based allowance allocation approach would provide greater insulation for the rule against litigation that could threaten implementation of the rule beginning January 1, 2012. [EPA-HQ-OAR-2009-0491-2718.1, p.6]
An historic generation output- or heat-input-based allowance allocation methodology would also address NextEra Energy's public policy concerns with EPA's preferred approach. Most significantly, it would not be based on modeled future emissions with its known inaccuracies but, rather, on verified data EPA already has obtained from companies. Additionally, it would correct the proposed methodology's disadvantages for early actors that EPA acknowledges in the preamble to the proposed rule. It would put all EGUs on equal footing and take the timing aspect of when emission reductions are achieved (i.e., prior to or after 2012) out of the allowance allocation equation. [EPA-HQ-OAR-2009-0491-2718.1, p.6]
EPA should establish a small auction under EPA's preferred limited trading option
Under EPA's preferred, limited trading option, NextEra Energy recommends that EPA establish a small auction of allowances that is similar in size to the proposed new unit set aside of three percent. Similar to the small auction in the Acid Rain Program, the auction would help for price discovery and liquidity purposes. Although NextEra Energy believes that market manipulation would be a greater risk under EPJ\'s proposed Alternative 1 (intra-state trading only), we are also concerned that limited trading under the preferred option could result in market manipulation in isolated areas. [EPA-HQ-OAR-2009-0491-0298.1 p.11]
EPA should use freed up allowances from retired units to increase the auction pool over time
NextEra Energy supports EPA's proposal to continue to allocate allowances to retired units for six years after ceasing operations. The six-year period ensures that companies make the retirement decisions independent of any allocation and allowance value, However, rather than placing these allowances in the new unit pool or redistributing these allowances at the end of the six-year period, NextEra Energy recommends that EPA use these allowances to increase the auction pool recommended above over time. [EPA-HQ-OAR-2009-0491-0298.1 p.11]

1. While NextEra Energy could support EPA adoption of an historic heat-input based allowance allocation methodology for SO2 and NOx in the Transport Rule, this docs not mean or imply that the Company could support such a methodology in future air quality control programs. For example, if CO2 emissions from EGUs arc regulated in the future under a market-based cap-and-trade program, it would be important to design the program to incentivize the adoption of energy efficiency measures as a cost-effective control option. A heat-input based allowance allocation approach does not provide the proper incentives to encourage the adoption of energy efficiency measures. Therefore, in this case, NextEra Energy would strongly support a generation output-based allowance allocation methodology. [EPA-HQ-OAR-2009-0491-2718.1, p.5]
Northeast States for Coordinated Air Use Management (NESCAUM)
The Transport Rule does not guarantee that the actual SO2 emissions from Portland will be reduced since there is the option to purchase allowances to cover the Portland Plant's emissions. Therefore, it is necessary to implement performance standards similar to those adopted by New Jersey (and approved by USEPA)i to fully address air pollution from electric generating units.  [EPA-HQ-OAR-2009-0491-2684.1 p.2]
We have concerns about the methodology used to develop the proposed remedy. It has been very difficult to ascertain the specific methodology employed. EPA has relied upon a proprietary model, the Integrated Planning Model (IPM), in developing its remedy. Notwithstanding our careful scrutiny, it has been extremely difficult for states to examine the underlying assumptions and processes used, and replicate EPA's budgets. If EPA chooses to continue using this model, it should purchase it and place it in the public domain, so that all data and cost algorithms used can be reviewed. As public agencies that must implement this program, we need more transparency and access. Moreover, the high cost of running IPM hinders our ability to conduct our own comparative analyses.
Without detailed explanation from EPA, we are not able determine which data sets were used to set the budgets for each state. State budgets were apparently established using different data sets (i.e., using either data from IPM or historical data, whichever were lower). This is troubling to us for several reasons. First, such an approach does not result in an equitable distribution of the allowance budgets from state to state. Second, the quality of the data used by EPA to set budgets may not accurately reflect the current and planned/committed controls on existing units. Third, it appears that the results allow existing uncontrolled units to be allocated more allowances than existing controlled units, thus discouraging uncontrolled units from installing controls. We recommend that EPA employ a methodology that relies on the same data set for all state budgets, and establish a single, quality-assured data set for this purpose. Furthermore, states should be allowed an opportunity to review and comment on the accuracy of that data set.
While EPA's use of this model is appropriate in some analytical situations, we have serious concerns with the manner in which IPM has been employed in this regulatory context (i.e., to set state budgets and allocations). Over the years, we have repeatedly observed IPM predictions that do not reflect real world conditions because transmission constraints and reliability rules for our region are not always fully reflected in the model. The IPM future case scenarios run by EPA often do not accurately reflect operations of the electrical generation system in the Northeast. For example, IPM future case outputs predict the economic shutdown of many New York City oil/gas steam generators, even though these units are required to run due to transmission constraints and local reliability rules, and are not scheduled to be replaced. It appears that certain assumptions built into the IPM analysis are contributing to an SO2 allowance allocation bias. Due to such issues, IPM is therefore not our preferred model for use in establishing state budgets and allocations. We urge EPA to use methodologies for this and future transport rules that are can be verified by the public and have the requisite resolution to more accurately predict operations of the electrical generating sector. Furthermore, when setting budgets, EPA should more closely review recent trends in the capacity factors and dispatch trends of regional transmission organizations for certain plant types, particularly oil/gas steam units and gas/oil combined cycle units.
The Northeast states, along with states in other regions, are seriously considering moving away from using IPM in future regional SIP modeling. We have been working with the Eastern Regional Technical Advisory Committee (ERTAC) on alternative modeling, which will be available for review in late Spring 2011 We urge EPA to examine this approach, participate in the ERTAC process, and consider its merits for use in future transport rules. [EPA-HQ-OAR-2009-0491-2694.1, pp.5-6]
NESCAUM states recommend that EPA use the most recent three-year average of unit specific data to establish the input/output rates for calculating NOx allocations for each unit, multiplied by the unit specific NOx emission rate, and then sum the resultant allocations for all units in a state to determine the amount of NOx allowances to be allocated to that state. The same procedure could also be used with unit-specific SO2 emission rates to determine the amount of SO2 allowances to be allocated to each state.
It should be noted that, under the proposed rule, most of the Northeast states have allocated budgets well below those of upwind states. Moreover, our cost of compliance appears to be far greater than the $500 cost per ton threshold that EPA appears to be using. This is not equitable. EPA must explain why the costs for reducing emissions are set higher in the Northeast. In addition, the location of emissions matters. Sources located near downwind borders contribute to out-of-state transport more than sources located farther from the border. The proposed rule does not guarantee that emissions from a specific source located in an upwind area that has a significant impact on a downwind area will be adequately controlled. These dynamics should be considered in how allowances are allowed to be distributed within a state, and EPA should ensure mechanisms are in place to address such emissions (e.g., employ performance standards as appropriate and/or allow states to allocate/control allowances).
Moreover, in order to achieve maximum public health protection, this allowance program should not link to past allowance programs. Neither the NOx SIP Call nor CAIR allowances should be allowed to be used in this program. We assume that Title IV Acid Rain SO2 allowances are precluded from use in this program, as per the court decision in North Carolina v. EPA. [EPA-HQ-OAR-2009-0491-2694.1 pp.7-8]
Northern Indiana Public Service Company (NIPSCO)
NIPSCO has concerns about the approach that EPA is using to determine an allocation of emission allowances derived from the state budgets and provided to individual units. First, NIPSCO believes the allocation methodology is a task that the individual states, in NIPSCO's case Indiana, would be in a much better position to fulfill. The individual states are more familiar with the sources within their state and, with input provided from the sources, could work to develop a much fairer and more equitable allowance allocation method more reflective of the needs of the state. States should weigh in on any unit-specific allocations to sources within their state.  [EPA-HQ-OAR-2009-0491-2747.1 p.3]
NIPSCO does not agree with the use of projected emissions for Indiana units as a basis for allocating allowances to individual units. NIPSCO finds a number of issues with the allowance allocation program as proposed in the Transport Rule. The proposed method appears to base unit allocations for 2012 on a methodology that attempts to match emission allowance allocations with the actual historical or IPM projected emissions for individual units. EPA's allocation methodology leads to a requirement for an owner to operate already installed or planned pollution control technologies at or beyond the maximum emission control rates capable of being achieved on a long-term basis. However, this approach allows other units without controls to be allocated enough emission allowances to comply without any significant additional reductions. With this approach, EPA penalizes companies that have made the capital investments needed to control emissions on units by providing fewer allowances to these companies while rewarding companies that are not controlling emissions by supplying additional allowances. Emission allowance allocation methodologies should not reward inaction on installation of emission control measures by sources nor should the allocation methodology disadvantage those companies or facilities that have decided to install emission controls to meet their emission reduction obligation. Further, the IPM model input needs simplifying assumptions in order to limit the number of choices for the application of emission controls and capability of those emission controls. While using assumptions such as these may be acceptable in IPM modeling in an attempt to characterize overall emission reductions across the entire United States, it is not a good method to predict with great accuracy applications of emission controls and resulting emissions for individual units. NIPSCO will later offer a recommendation on a different approach and also provide some unit-specific examples of the problems mentioned above. [EPA-HQ-OAR-2009-0491-2747.1 p.4]
Nevertheless, EPA, with use of the IPM model to allocate emission allowances, presumes an unreasonable level of emission control. This problem is further exacerbated when applied to an emission baseline that may be low in the first place. This results in applying removal efficiencies and final nitrogen oxide ('NOx') rates for Units on the NIPSCO system that have not been achieved in practice. The predictions are unrealistic and unachievable. The outcome is an unreasonably small number of NOx allowance allocations for units that already have installed and are operating stateof- the-art pollution controls. [EPA-HQ-OAR-2009-0491-2747.1 p.4]
Northern Star Generation LLC
Rather than re-state the comments provided by ARIPPA, Northern Star would like to focus our comments on one particular aspect of the proposed rulemaking, the allocation of NOx and S02 allowances at the unit level. EPA has apparently chosen to apply an economic model to predict the future dispatch of power plant units affected by this proposed rule and has used this prediction to allocate allowances. We strongly disagree with this approach for both philosophical and technical reasons. [EPA-HQ-OAR-2009-0491-2814.1, p.1]
EPA has successfully utilized cap and trade programs for air pollution control programs (e.g., Title IV Acid Rain, NOx Budget Program). The benefits of cap and trade have been touted by EPA in the past as providing for more a cost effective and flexible means of reducing emissions as compared to 'command and control' types of regulations. In other words, cap and trade allows the market and market participants to identify the lowest cost means of compliance. Emission allowances have been allocated in proportion to historic usage of units (i.e., heat input) and market participants have made economic decisions to either control (or even over-control emissions) versus the purchase and use of emission allowances. [EPA-HQ-OAR-2009-0491-2814.1, p.1]
In the proposed regulations, EPA has apparently decided to deviate from past allowance allocation practices and instead pick 'winners' and 'losers' by deciding how much each emission unit should operate in the future. Given the very strict S02 cap that will be in place by 2014 and the restrictions on interstate trading in many states, it is quite possible that S02 allowances will simply not be available at any price. Northern Star's CFB waste coal plants already have extensive emission controls for S02 and have few if any economic opportunities for further emission reductions. EPA has projected in its modeling that orthern Star's waste coal plants will experience significant reductions in operations post 2012 and has allocated S02 allowances on that basis. This may well prove to be a self-fulfilling prophecy if the S02 allowance market is not sufficiently liquid to allow purchase of allowances at any price. [EPA-HQ-OAR-2009-0491-2814.1, pp.1-2]
In the allocation of NOx allowances EPA's approach under the proposed rule will produce absurd results. As outlined in the ARIPPA comment letter, the allocation of NOx allowances in Pennsylvania greatly favors the highest emitting NOx sources. Low emitting NOx sources such as Northern Star's waste coal plants would receive considerably fewer NOx emission allowances under the Transport Rule than they would under the CAIR rule, even though the Pennsylvania cap under the Transport Rule is larger than the cap under CAIR. Several utility coal plants in Pennsylvania, with emission factors more than 5 times larger than our waste coal plants, would receive considerably more allowances under this rule than under the existing CAIR program. In fact, some of these plants would receive considerably more allowances than their historic emissions of NOx. The proposed EPA allowance allocation would produce a situation in which low-emitting sources would be forced to either try to reduce their emissions even further at great cost or purchase allowances from the windfall amounts awarded to high emitting sources. This makes absolutely no sense, particularly since the higher emitting sources have much greater potential for cost effective controls. [EPA-HQ-OAR-2009-0491-2814.1, p.2]
As a result of these considerations, Northern Star strongly recommends that EPA adopt the previously utilized method of unit allowance allocation; that is, by historic unit heat input. We also recommend that in order to avoid awarding windfall amounts of allowances to any source, that the allocations for both S02 and NOx be no more than the historic actual emissions of those pollutants over the past five years. [EPA-HQ-OAR-2009-0491-2814.1, p.2]
Even with the correction of inaccurate assumptions in the model, Northern Star has little confidence in the ability of EPA's model to accurately simulate power plant dispatch. It is highly unlikely that EPA has or will take into account unique factors that could affect dispatch beyond the calculation of demand and the cost of producing power based on fuel costs. One factor that can dramatically change a unit's dispatch profile is the presence of a contractual agreement, such as a power purchase agreement, that obligates the unit to run. Another major factor that is not incorporated in EPA's model, but could strongly affect the amount of dispatch, is the level of debt service present on individual units. Based on these technical considerations as well as the factors mentioned earlier in this letter, we strongly urge EPA to abandon this attempt to predict future events and return to the practice of allowance allocation by historic heat input. [EPA-HQ-OAR-2009-0491-2814.1, p.3]
Oglethorpe Power
Instead of making permanent allocations based on unrealistic models and abbreviated historical operations, EPA should follow more closely its approach taken in the final CAIR NOx allocation program, where allocations to all existing units were based on the average of the three highest amounts of the unit's control period heat input over a historical five year period, so as to even out the inevitable 'peaks and valleys' in individual unit (or source or utility system) operations. An approach (like that taken in CAIR) which constantly updates allowance allocations, by basing the calculation on a rolling five year lookback of operational history, appears to be much more equitable and fair to all EGUs and EGU owners/operators. It has the desirable effect of smoothing out short-term variations at the unit level, ensuring that any short-term inequity created by a specific unit's fact pattern (like a substantial outage in the baseline period) is rectified over the long term, through this continuous check or 'true-up' using the recent operational history of the covered unit. As long as state budgets remain the same, a core precept of the Transport Rule, then the CAA tests of §110(a)(2)(D) would still be met, i.e., the substantial contribution and interference with maintenance tests will be satisfied. EPA attempts to justify its approach on the basis that permanent allocations are needed to develop the allowance trading market. An approach where allowances are periodically being reallocated in the near future will not, however, unduly influence any market for allowances (and was, in fact the approach used in CAIR, where EPA must have concluded that this type of approach would not unduly chill allowance markets). Should the proposed remedy option be implemented, trading will be much more constrained by EPA's proposed variability provisions, than by an approach that periodically reallocates allowances. The justification also rings hollow when one considers that EPA will not, as was done in the Acid Rain Program, be distributing a 30-year stream of allowances to covered units at the commencement of the program, but instead will be distributing only an initial 3-year stream, followed by subsequent yearly allocations tor that control period 3 years out. Units in the Transport Rule as proposed, therefore, will never have more than 3 veal's worth of allowances on hand - virtually the same as in CAIR - with which to make a market. Periodic reallocations can be structured to maintain a similar stream of allowances for Transport Rule units, which is more equitable than the one-time, 'pot-luck' method proposed as the basis for making unit allocations in the current rule. [EPA-HQ-OAR-2009-0491-2732.1, p.8]
This approach would also resolve more fairly the issue of retired units - those that become nonoperational. Once the Transport Rule allocation programs begin. an approach that recalculates the upcoming stream of allocations periodically will automatically 'phase-out' units that reduce or cease operations over time. There will be no need to 'grandfather' such units in the allocation system for any length of time, as their actual operations in the recent past will dictate whether they continue to receive any allowances. If new units can become existing units over time again the approach taken in the CAIR - then those allowances realized from the shutdown (or reduced operation) of a unit will simply flow back into the state budgets over time, to be reallocated to units that continue to operate in the ensuing control periods. [EPA-HQ-OAR-2009-0491-2732.1, pp.8-9]
V. New Source Set-Asides
EPA seeks comment on the approach used in the rule f()r new source set-asides. Again. Oglethorpe Power believes that the Agency should follow the approach used in the CAIR NOx program, where new units would become existing units over time and thus gain access to the allocations made from the state budgets. EPA should also address the situation where a new unit comes on line late in the first year. No allocation will be made for that first year's operations, and any distribution tram the new source set-aside for the next control period (the next year) will also be severely depressed, due to limited operations that began so late in the initial year. EPA should consider an approach that allows for a reasonable projection of emissions for these first two control periods to ease the burden that will fall on new sources, especially those that begin operations late in a calendar year. [EPA-HQ-OAR-2009-0491-2732.1, pp.10-11]
VIII. Preferred Option
Oglethorpe Power supports the ability of sources to use banked allowances for compliance with the Transport Rule. EPA properly recognizes the important environmental and economic benefits of allowance banking, which was an aspect of CAIR that went unchallenged in that rule's subsequent litigation. The ability of sources to use banked allowances for compliance with the Rule program encourages early emission reductions. [EPA-HQ-OAR-2009-0491-2732.1, p.13]
Oglethorpe Power also supports EPA's proposal not to include auctions of allowances under its proposed remedy option. No environmental need or other valid reason exists to use allowance auctions to implement the emission reduction requirements in the Transport Rule. Moreover, Oglethorpe Power does not support the use of auctions in any other alternative control program EPA might adopt to implement the Transport Rule. Government auctioning of allowances which will provide no environmental benefit - is contrary to the principle that regulated sources are not subject to any obligation to emit below their allowance allocation levels established by an emissions control cap-and-trade program. [EPA-HQ-OAR-2009-0491-2732.1, p.13]
Oklahoma Department of Environmental Quality
First, EPA has not provided sufficient time for the States to fully review and understand the allocation method and the modeling on which the allocations are based. Ideally, EPA should have provided at least three months for each year that EPA conducted modeling. The IPM modeling method is quite complex, and sixty days was not enough time to review and provide considered and detailed comments. [EPA-HQ-OAR-2009-0491-2662.1, p. 1]
Piney Creek LP
B. EPA does not propose through the Proposed Rule to establish allowance allocations based upon heat input, but rather projected emission rates.
The Proposed Rule's reliance on fuel cost as the primary basis for projecting future generating rates fails to adequately account for numerous other factors affecting generating rates. For example, in Pennsylvania, electricity distribution facilities and suppliers are required to supply a certain percentage of energy from Tier I or Tier II renewable energy sources, irrespective of electricity prices. Therefore, distribution of the generation of electricity will not strictly adhere to lowest cost of generation, as other operative criteria dictate distribution. Because waste coal-generated electricity qualifies as a renewable energy source, waste coal-fired sources such as Piney Creek will operate at a higher generating rate than cost alone would suggest. [EPA-HQ-OAR-2009-0491-2849.1 p.2] [EPA-HQ-OAR-2009-0491-3809.1_NODA, p.2]
Piney Creek recommends that allowance allocations be determined based on previously established heat input rates, as reflected in historical data reported by each source. This approach would be consistent with the objectives of the Clean Air Act, as well as the directives of the Court in North Carolina, by ensuring that the Transport Rule targets emission reductions from those sources most likely contributing significantly to downwind nonattainment, rather than lower emitting units projected by EPA (based on limited criteria) to reduce rates of generation. [EPA-HQ-OAR-2009-0491-2849.1 p.2] [EPA-HQ-OAR-2009-0491-3809.1_NODA, p.2]
C. EPA inaccurately predicts that the emission control options identified for traditional EGUs under the Proposed Rule would likewise apply to the CFB sources such as Piney Creek.
CFB technology is fundamentally different from traditional EGUs in ways that distinguish Piney Creek from other EGUs. CFB technology is inherently cleaner-burning and, therefore, more environmentally friendly, than traditional coal combustion technology. Characteristically, for CFB units, emission controls are primarily achieved in the combustion zone, not through back-end control equipment. Specifically, the introduction of limestone into the circulating fluidized bed allows for the absorption of SO2 and significant reductions in SO2 emissions. With respect to NOx, strict management of combustion zone characteristics limit the formation of NOx. In both cases, the CFB technology emits substantially lower SO2 and NOx emissions  -  per ton of fuel, per MMBtu/hr of heat input and per MW/hr energy output  -  than conventional coal-fired EGUs. [EPA-HQ-OAR-2009-0491-2849.1 p.2] [EPA-HQ-OAR-2009-0491-3809.1_NODA, pp.2-3]
Moreover, because emission controls are achieved through careful management of the combustion zone, CFB operators must maintain careful control over combustion zone characteristics in order to prevent a shift in concentration of other pollutants. For example, to the extent a CFB operator increases limestone addition rates to attempt to achieve further SO2 emission reductions, such adjustments can affect characteristics in the combustion zone in a way that influences NOx formation, as well as particulate and carbon monoxide emission rates. Further, these control techniques face asymptotic limitations in effectiveness. At a critical point, the facility must add significantly greater quantities of limestone to achieve modest incremental reductions in SO2 emissions; for the reasons discussed above, such increases would also likely increase NOx and particulate emissions. Moreover, for certain CFB plants such as Piney Creek, it is not even possible to add sufficient quantities of limestone to achieve the SO2 emission reduction requirements in the Proposed Rule, due to design characteristics, heat transfer limits, and permit restrictions. [EPA-HQ-OAR-2009-0491-2849.1 p.3] [EPA-HQ-OAR-2009-0491-3809.1_NODA, p.3]
Similarly, attempts to maximize NOx emission reductions without regard to other combustion chemistry will result in increases in CO emissions, and perhaps other constituents. Further, the ability Piney Creek to reduce NOx emissions is directly limited by permitting requirements restricting ammonia slip. [EPA-HQ-OAR-2009-0491-2849.1 p.3] [EPA-HQ-OAR-2009-0491-3809.1_NODA, p.3]
Piney Creek LP feels the EPA's stated basis for determining unit-specific allowance allocations under the Proposed Rule is inappropriate and inequitable as applied to Piney Creek and other CFB plants. Also, emission control technologies considered by EPA for application to EGUs under the Proposed Rule do not readily extend to Piney Creek's CFB technology, in the same manner and extent as applied to traditional coal-fired units. [EPA-HQ-OAR-2009-0491-2849.1 p.3] [EPA-HQ-OAR-2009-0491-3809.1_NODA, p.3]
Potomac Power Resources
First, it seems the methodology proposed for emissions allocations does not work for a facility like Benning Road, which operates under peaking conditions. The methodology indicates it uses the last four quarters of data as a basis to calculate allocations. If a quarter does not have emissions data (does not operate), then how does the algorithm make adjustments for the allocations? Specific to your matrix, Unit ID 15 data reflects this discrepancy. The algorithm is using a quarter with missing data (no data since the unit did not operate) and thus seems to give incorrect allocations for NOX and SO2. (Annual NOx Mass, tons (most recent 4 Qs), Annual SO2 Mass, tons (most recent 4 Qs), Annual Heat Input, mmBtu (most recent 4 Qs) for Unit ID 15 are all blank). The methodology should therefore indicate it will use the last four quarters with operating data and not just the most recent four quarters to calculate allocations. [EPA-HQ-OAR-2009-0491-3017, p.1]
PowerSouth Energy Cooperative
The Proposal's allowance allocation methodology is unfair and punitive to PowerSouth and other utilities that made significant capital improvements to comply with CAIR and should be abandoned.  PowerSouth responded to CAIR by undertaking a multi-pollutant assessment, which included a myriad of control options, including the purchase of allowances.  PowerSouth's decision to retrofit the Lowman Plant in 2007 with an additional SO2 scrubber to allow 100% scrubbing of all three units and selective catalytic reduction (SCR) equipment for NOx emission reductions on two units in 2007 and 2008 at a cost of $300 million was based solely on compliance with CAIR and the economics of creating excess allowances to offset capital expenditures.  Allowance allocations to the Lowman Plant assigned in the Proposal  invalidate the rationale that led to the retrofits by only allocating enough allowances to meet compliance obligations at the manufacturer's guarantee level with no margin.  In fact, it will be very difficult to operate the control equipment continuously at the SO2 and NOx removal rates contemplated by the Proposal.  The cost of the capital project is not recoverable, PowerSouth has lost the opportunity to evaluate strategy based on true compliance options, and our flagship power plant is burdened with additional operational and cost constraints.   EPA should not now punish PowerSouth for investing capital to comply with CAIR.  [EPA-HQ-OAR-2009-0491-2693.1,p.3]
The Proposal as written penalizes early movers and encourages utilities to resist and delay investing capital in environmental improvements.  The drastic changes in the compliance "playing field" from CAIR to the Proposal teaches regulated entities to be recalcitrant and rewards utilities for not making capital investment to comply with EPA's rules.  The Proposal's allowance allocations and regulatory schemes incentivize regulated parties to resist capital improvements that benefit the environment and delay decisions as long as possible to see if regulatory conditions change.  The Proposal should be modified to recognize and reward regulated entities that have retrofitted units in a good faith effort to comply with CAIR, or, at the very least, not punish them.  [EPA-HQ-OAR-2009-0491-2693.1,pp.3-4]
Similarly situated facilities are disparately treated under the Proposal.  A look at various coal-fired units and their relative compliance position for SO2 in the Proposal illustrates how taking no action is the best compliance option to environmental regulations.   Those units, who chose to "do nothing" under CAIR are in many cases in a much better position than utilities like PowerSouth who invested capital dollars in expensive control equipment.  For instance, coal-fired units in Mississippi within one hundred miles of our Alabama plant chose not to make any capital improvements in response to CAIR and now are entirely omitted from SO2 compliance requirements under the current Proposal.   Arbitrary state lines should not be the determining factor in setting compliance requirements. [EPA-HQ-OAR-2009-0491-2693.1,p.4]
The Proposal's allowance methodology is unconscionable in that EPA rewards plants for being "dirty."   Units with no SO2 controls have been assigned allowances equivalent to their un-scrubbed emission rates in the Proposal.  In fact, some units in Alabama were assigned equivalent SO2 emission rates over 2.50 lb/MMBTU in the Proposal (for example, Alabama Power Company's Gorgas and Gaston units).  PowerSouth's Lowman Unit 1 flue gas can be directed through an uncontrolled by-pass yielding an emission rate of over 3 lb/MMBTU per hour.  In 2008-2009, the period EPA chose to use as the basis for allocations under the Proposal without our knowledge or input, PowerSouth was voluntarily directing flue gas from Unit 1 through a new scrubber for a portion of the period and therefore was assigned an equivalent SO2 emission rate of 0.478 lb/MMBTU.  Based on EPA's methodology, PowerSouth should not have built and operated the scrubbers or should have bypassed the scrubber on Unit 1.  PowerSouth emitting more would have resulted in a much more favorable compliance picture under the current Proposal.  PowerSouth is being penalized for voluntarily controlling its emissions.  It is unfathomable that utilities that responded proactively to EPA rules and installed and operated control equipment are disadvantaged and mistreated this way.  The Proposal's allocation methodology is not equitable, preferable, nor defensible. [EPA-HQ-OAR-2009-0491-2693.1,p.4]
Using the equipment manufacturer's emissions removal rates without regard to ambient conditions, fuel parameters, and the plant's operating mode (startup, shutdown, load change, upset, etc.) is unrealistic.  Controlled emission rates assumed in IPM modeling and the resulting state budgets and unit-level allocations need to include realistic estimates for control device performance.  EPA's emission rate assumptions for units with existing FGD or SCR control are based on removal rates that are equivalent to continuous operation at manufacturer's guaranteed removal rates.  This tact is unfair and punitive as noted previously.  Further, it is unrealistic.  No pollution control device can be operated continuously to such low levels.  Such guarantees are typically established for specific operating conditions (such as steady state load conditions) or are specified for certain ambient conditions or specific fuel parameters.  In actual operating practice, units typically experience a range of load points, ambient conditions change dramatically from season to season, and coal sources change over time.  PowerSouth has been operating FGDs at Lowman since 1979 and knows from experience that this equipment will malfunction during the course of normal operation despite a utility's best efforts.  PowerSouth's recent experience with forced outages due to air heater plugging problems after installation of SCRs further illustrates that guarantee levels should not be used to model expected emissions or set allocations.  EPA should recognize that operating conditions on air quality control equipment will necessitate certain understandings about reasonable ranges of operation and adjust the Proposal accordingly.  [EPA-HQ-OAR-2009-0491-2693.1,pp.4-5]
The Proposal arbitrarily "cherry picks" data to allocate emissions.   There is no rational basis for assigning emission rates based solely on four quarters of data.  Further, the methodology used in the Proposal to determine which four quarters to use is not adequately explained and documented.  Adding or deleting a single quarter to the data set can change the resulting emission rate dramatically.  PowerSouth's review of the SO2 allocations to the Lowman Plant illustrates that the methodology used is arbitrary, unfair, and results in highly variable emission rates.  The Proposal as written indicates that for all three Lowman units, 3Q2009, 2Q2009, 1Q2009, and 4Q2008 should have been used.  Instead, EPA used what appears to be a "cherry picking" method, resulting in lower assigned SO2 allowance allocations.  For example, compare PowerSouth's equivalent SO2 emission rates from the EPA database.  In the Proposal, Unit 1 calculations are based on data from 1Q2009, 4Q2008, 3Q2008, and 2Q2008, passing over two more recent valid operating quarters.  Similarly, Lowman Unit 2 was assigned an equivalent SO2 emission rate in the Proposal based on data from 1Q2009, 4Q2008, 3Q2008, and 2Q2008, again passing over two quarters of more recent data.  The resulting equivalent emission rates are dramatically different as shown in the table below.  The method appears to have been applied, as written in the Proposal, to Unit 3.  Interestingly, if the same four quarters of data had been applied to Unit 3 as were applied to the other two Lowman units, the equivalent SO2 emission rate for Unit 3 would have been 0.321 lb/MMBTU!  [EPA-HQ-OAR-2009-0491-2693.1,p.5]
Allocations should be based on heat input and fuel type irrespective of controls currently in place.  An alternative method of allowance allocation should be developed that is not based on the controls currently installed.  A reasonable method for allocating allowances is one based on heat input and fuel type.   Distinction based on fuel type would avoid assigning too many SO2 allowances to gas-fired units. [EPA-HQ-OAR-2009-0491-2693.1, p.6]
PPL Corporation
A major concern of PPL is EPA's proposed, preferred approach for allocating allowances to individual generating units within each state. The approach assigns unit-specific allocations that are closely tied to unit-specific emission rates that EPA's Integrated Planning Model (IPM) forecasts are attainable in 2012 (nitrogen oxides and sulfur dioxide) and 2014 (sulfur dioxide in Group I states) at threshold control costs. This is an unfair approach because it allocates more allowances to units that have not invested in controls or that IPM projects will not attain emission rates as low as those of cleaner units. This is not only inequitable but also is inconsistent with a market-based approach that is intended to encourage dispatch of cleaner units by requiring dirtier units to purchase allowances to offset their higher emissions levels. [EPA-HQ-OAR-2009-0491-2739.1, p.1]
1. EPA's Approach for Allocating Allowances to Individual Units Within a State
Under the proposed rule, the 2012 NOx state budgets were created based on EGU emission reductions that EPA believes could be achieved for $500/ton or less and the 2014 SO2 state budgets for Group I states were created based on EGU emissions reductions that EPA believes could be achieved for $2000/ton or less. The 2012  SO2 state budgets were created based on increased operation of existing (or planned) FGD systems and/or the use of lower sulfur coal. Under EPA's proposed approach, individual units are allocated allowances the same way. That is, based on future unit-specific projections of their emissions. This results in higher emitting units receiving more allowances than lower emitting units. [EPA-HQ-OAR-2009-0491-2739.1, p.2]
PPL believes that this is not a fair way to allocate allowances to individual units. PPL invested $1.3 billion on control technologies at its units on the understanding that it could then sell allowances to those that did not, thereby spreading the control costs to EGUs that chose not to install controls. This is the fundamental reason to have a cap-and-trade program rather than a command-and-control approach. EPA's proposal turns this on its head, taking effectively a command-and-control approach under which no unit can have any allowances to sell because those units that have control technologies will be allocated fewer allowances. This effectively penalizes owners of units that have already invested in pollution control equipment and rewards those who have not made the investment. [EPA-HQ-OAR-2009-0491-2739.1, p.2]
An additional inequity that PPL observes in the allocation of each unit's portion of the state budget is that, for both the 2012 and 2014 budgets, coal-fired units are not allocated allowances at the same assumed emission rates, even though in many cases they are projected to have the same control technology installed. [EPA-HQ-OAR-2009-0491-2739.1, p.2]
PPL believes that the only rational and equitable way to allocate allowances to individual units is that all units should receive allowances based on the same assumed emission rate per million Btu heat input. This treats all units the same and does not reward those who have not invested in control technologies and does not arbitrarily award fewer allowances to some units than to others. Changes in utilization of units should be accounted for by reallocating allowances based on the past three years of utilization as was done under the NOx SIP call, rather than by using the IPM model that is clearly not robust enough for this purpose. [EPA-HQ-OAR-2009-0491-2739.1, p.3]
Fewer Allocations in 2012 for Units With Controls
The table provided at the end of these comments lists the emission rates that are assumed for individual bituminous coal-fired EGUs over 75 MW in Pennsylvania's 2012 and 2014 annual  SO2 budgets. This table demonstrates PPL's concern. It shows that units with FGD systems installed by 2012 are penalized with fewer allocated allowances than units that will not have FGD systems. [[EPA-HQ-OAR-2009-0491-2739.1, p.3] [See page 11 of this comment for the table.]]
The table shows that Pennsylvania units in 2012 without FGD systems would be allocated allowances based on emission rates of over 2 lb/MMBtu, whereas the units for which the owners have invested in and operate FGD systems would receive allowances based on dramatically lower emission rates. In the case of the Montour and Brunner Island units owned and operated by PPL, as a result of an investment of $1.3 billion to install and start operating the FGD systems in 2008 and 2009, PPL would receive allowances based on an emission rate of only 0.123 lb/MMBtu. It is not clear to PPL that such an emission rate would even be achievable on a sustained basis. Emissions from those units are currently at about 0.45 lb/MMBtu. With allowances based on an emission rate of 0.123 lb/MMBtu, PPL (the one who invested in emissions controls) may be put in the position of having to buy allowances from others who did not -- with the likely prospect that none will be available. [EPA-HQ-OAR-2009-0491-2739.1, p.3]
Differing Emission Rates For Units With the Same Controls
For 2014, when apparently all units over 150 MW in Pennsylvania are assumed to have FGD systems, the emission rate varies between 0.105 lb/MMBtu and 0.301 lb/MMBtu. This is unreasonable and inequitable. This is analogous to the use of fuel factors under CAIR that provided coal-fired units with a larger allocations than gas-fired units. This approach was expressly disapproved by the D.C. Circuit Court of Appeals. Allocations should be fairly distributed to all units and if some units operate 'dirtier' than others, then they should be required to obtain additional allowances at costs to which the market would adjust and give preference to the operation of the 'cleaner' units. PPL believes that this is a basic concept that the Transport Rule should encourage. It is a fundamental principle of the Acid Rain Program and the NOx SIP Call. [EPA-HQ-OAR-2009-0491-2739.1, p.3]
4. Allocations for Shutdown Units
The Transport Rule specifies that units in the program that do not operate for three consecutive years would no longer receive an allocation. And it specifies that starting the seventh year after the first year of non-operation that their allocation be transferred to the state's set-aside pool for new units. PPL does not understand why there would be such a long delay and recommends that the allocation be transferred immediately after the third consecutive non-operating year. Additionally, PPL does not believe that all of the shutdown allowances should be transferred to the new unit set-aside pool. The generation no longer supplied by shutdown units would be supplied by both new units and existing units that would operate more frequently. PPL therefore recommends that the allocation to units that shutdown be divided between new and existing units - with 50 percent going to the new unit set-aside program and 50 percent divided among the existing units in the program based on proportional heat input. [EPA-HQ-OAR-2009-0491-2739.1, p.8]
5. Future Allocations
PPL believes that unit allocations should be periodically adjusted based on recent operation rather than assigned forever at the start of the program. It makes sense to base the distribution of allocations for the year on current rather than past conditions. Allowances to individual units under the NOx SIP Call were adjusted based on three-year average actual heat input. PPL believes that this is a reasonable approach and far superior to the approach proposed in the Transport Rule that would not make such periodic adjustments. [EPA-HQ-OAR-2009-0491-2739.1, p.8]
10. Banked Allowances Under the Proposed Rule
Under the proposed Transport Rule allowances would be bankable for future use. PPL supports this approach. Permitting allowances to be banked for future use both encourages early reductions and provides more options for sources to meet the rule's requirements most cost effectively. [EPA-HQ-OAR-2009-0491-2739.1, p.10]
PSEG Services Corporation
PSEG recommends that EPA modify the unit allocation methodology. [EPA-HQ-OAR-2009-0491-2726.1, p.2]
Based on the D.C. Circuit's decision, the Agency is not proposing an allocation methodology that would rely on existing Title IV allowances to comply with the Transport Rule. This creates an unfortunate dynamic whereby companies, such as PSEG, that have invested in pollution control equipment are essentially penalized as the value of their banked allowances is reduced by exclusion of Title IV allowances in the new trading program. Additionally, the allocation structure proposed in the Transport Rule fails to recognize these early investments. These early reductions are the ones that EPA and Congress should be encouraging, and we are concerned that an unintended consequence of the proposal will be to deter companies from taking proactive actions to reduce emissions in the future. As such, PSEG recommends that EPA allocate the new allowances in the Transport Rule in a manner that recognizes early investments to reduce emissions as opposed to what has been proposed, an approach that rewards sources that have not taken such action. [EPA-HQ-OAR-2009-0491-2726.1, pp.4-5]
Recognizing that EPA's authority to use the existing Title IV Acid Rain trading system and to create a more robust interstate trading system has been limited by the DC Circuit Court's decision, PSEG continues to support new federal legislation that appropriately addresses these limitations and at the same time assures environmental integrity in achieving timely air quality improvements throughout the transport region. While such legislation in our view is desirable, the passage of such legislation appears highly problematic. Given the realities of the legislative process, and given our belief that EPA has the authority to make certain allocation changes to better incentivize and reward early emission reduction action, we believe the trading system EPA has proposed is workable. We therefore encourage EPA to move forward quickly to finalize the rule and to get the trading system up and running. [EPA-HQ-OAR-2009-0491-2726.1, p.5]
Further, by basing unit allocations for 2012 on a methodology that requires an owner to operate installed or planned pollution control technologies at maximum emission control rates, EPA is penalizing companies who have made the capital investments needed to control emissions while rewarding companies who are not controlling emissions. As EPA states in the preamble to the proposed rule, "this means that a unit that installs control equipment receives fewer allowances than a similar unit that did not install control equipment." This is counter-productive to EPA's overarching responsibility to encourage maximum environmental performance. [EPA-HQ-OAR-2009-0491-2726.1, p.6]
Rewarding higher emitters also removes the fundamental incentive of a cap and trade program; namely, the use of a market based incentive for owners and operators of uncontrolled generating units to install pollution control technologies or retire ineffective units. Under a properly constructed cap and trade program, owners and operators of uncontrolled units receive less than what they emit. As a result, owners and operators of those units must make fundamental economic decisions to either buy more allowances to operate the unit, install technologies to operate the unit, curb operations of the unit, or for those units which are uneconomical, retire the unit. These economic decisions drive the trading market, and thus incentivizing decisions for those owning units to reduce emissions, either through control or retirement. By using a historic heat input approach to allocations, these incentives are created fairly because units that have already installed controls will get more allowances than needed for operations, while higher emissions units that have not installed controls will be required to purchase allowances in the marketplace. This is not only an inherently fairer and environmentally-directionally positive approach for units that have invested in back end controls, but this will also significantly increase the number of allowance transactions taking place in the market, thus increasing liquidity. Entities with excess allowances will be able to liquidate excess allowances, while entities in need of allowances will have the robust information needed to make decisions regarding installing controls, modifying operations or buying allowances. In contrast, under EPA's proposed allocation methodology, units will roughly get much of what they need to operate, resulting in relatively little trading. Thus, as proposed, PSEG believes that the Transport Rule will provide weak market based incentives and may lead to very little improvement in air quality. [EPA-HQ-OAR-2009-0491-2726.1, pp.7-8]
PSEG supports EPA's proposal to continue to allocate allowances to retired units for six years after ceasing operations. The six-year period ensures that companies make the retirement decisions independent of any allocation and allowance value. [EPA-HQ-OAR-2009-0491-2726.1, p.8]
If EPA agrees with PSEG's recommendation to change the unit allocation methodology to a historic basis while maintaining the existing methodology for setting the state budget, EPA will need to evaluate whether that requires a change to the assignment of responsibility for the assurance provisions to owners. PSEG recommends that EPA identify allowances related to each state with a serial number and vintage that indicates which state the allowance was initially issued. A unit's budget, for the purposes of compliance assurance would be the number of in-state allowances that it holds for the year and surrenders for that year. An owner could, therefore, assure that it will not be subject to the requirement to surrender extra allowances if the state exceeds its budget plus variability by ensuring that no more than ten percent (or state-specific limit) of the allowances it surrenders in a given year are from out-of-state allowances or allowances from other years (the three-year variability would be calculated as an average of 5.8 percent annually or ten percent divided by the square root of three). [EPA-HQ-OAR-2009-0491-2726.1, p.10]
This approach would allow some interstate trading, provide some incentive for banking, create stronger incentives for states to not exceed its budget, and create greater certainty for individual owners. Further, this assurance mechanism would allow EPA to easily revise the initial allowance allocation mechanism in a way that would make the rule less subject to legal challenge and more readily accommodate future reductions in the state emissions budget. PSEG supports this modification to the assignment of the assurance provisions because it provides benefits to owners while maintaining, and potentially strengthening, the health benefits of the proposed rule. The benefits include: [EPA-HQ-OAR-2009-0491-2726.1, p.11]
The methodology encourages more in-state emission reductions in states that may exceed their emission cap by increasing the value of in-state emission reductions. In-state allowances would provide a hedge against the assurance provision. As a result the value of in-state emission reductions would increase to somewhere between one and two "national" allowances. This increases the likelihood that the necessary reductions would occur in targeted states. [EPA-HQ-OAR-2009-0491-2726.1, p.11]
The methodology provides a safe harbor for owners who want to manage the risk of the two-for-one assurance provision. [EPA-HQ-OAR-2009-0491-2726.1, p.11]
If EPA does not agree with PSEG's recommendation and distributes allocations based on emissions, EPA should base the unit's variability and assurance provisions in consideration of the emissions performance of the unit. If a unit has minimal controls they should have little or no variability; however, if a unit has extensive controls, they should have increased variability. A possible method to assign variability in this manner is to make it a function of the average emission rate of the state; whereby, a unit that is higher than the average would progressively receive less variability than a unit having an emission rate less than the average and progressively more variability. [EPA-HQ-OAR-2009-0491-2726.1, p.11]
Reiss, J.
For each allocation method, this Comment uses a hypothetical group of sources in a hypothetical state to calculate the number of allowances each source would receive under the given allocation method and the resulting percentage reduction in emissions. The goal of the hypothetical is to demonstrate which sources must achieve the least emissions reductions under each allocation method, thereby "benefitting" from that allocation method. The hypothetical assumes a state-specific emissions cap of 160 tons of emissions, which amounts to two-thirds of the state's current emissions. The hypothetical assumes Sources A through H are the only affected sources in the state and have the statistics shown in Table 1. For simplicity's sake, each statistic is given either as a low (10) or high (50) value; but clearly, in reality, these statistics are not measured within the same orders of magnitude. [EPA-HQ-OAR-2009-0491-2648.1, p.5]
[Table 1 can be found on page 6 of this comment.]
Source G represents a highly efficient electricity generating unit. While generating a lot of electricity, Source G's heat input and emissions remain low. To compare the hypothetical with a real-world example, Source G is somewhat similar to the Liberty Electric Power Plant in Pennsylvania. While generating almost 3 million MWh of electricity in 2009, the Liberty facility used just over 21 million mmBtu of fuel. The Liberty facility emitted just under 16,000 tons of SO2 in 2008. Source B, on the other hand, represents a highly inefficient electricity generating unit. Source B's heat input and emissions are high, but it generates very little electricity. Again, to compare the hypothetical with a real-world example, Source B is somewhat similar to the E W Brown facility in Kentucky. The Brown facility generated only just over almost 2.6 million MWh of electricity in 2009 while using over 27 million mmBtu of fuel (400,000 less MWh and 6 million more mmBtu than the Liberty facility). The Brown facility emitted over 52,000 tons of SO2 in 2008 (36,000 more tons than the Liberty facility). Sources A and H represent essentially the same source on different scales. Between these sources are sources with varying degrees of efficiency and emission levels. [EPA-HQ-OAR-2009-0491-2648.1, p.6]
Recognizing that reality does not provide perfect examples of each source in the hypothetical, the hypothetical is still useful. By it, this Comment will demonstrate which types of sources benefit from each allocation method by bearing a lower emissions reduction requirement. Because EPA has flexibility in allocating allowances from the state-specific caps to the sources, EPA should use this demonstration to determine the most productive method of allocating allowances. [EPA-HQ-OAR-2009-0491-2648.1, pp.6-7]
A. Emission Based Allocation: Requires All Sources to Reduce Emissions Uniformly, Regardless of Efficiency at Converting Fuel into Electricity
In our hypothetical state, Sources A through H would receive the following quantities of allowances under an emission based allocation method: [EPA-HQ-OAR-2009-0491-2648.1, p.7]
[Table 2 can be found on page 7 of this comment.]
If EPA allocates allowances based on emissions, all sources must attain the same emissions reduction. Emission based allocation requires inefficient and efficient sources alike to reduce emissions uniformly. A source's efficiency at converting fuel into electricity is not considered in emission based allocation. By treating efficient and inefficient sources exactly the same, emission based allocation actually disfavors sources capable of generating a lot of electricity without emitting a lot of pollutants or using a lot of fossil fuel resources. [EPA-HQ-OAR-2009-0491-2648.1, pp.7-8]
Treating efficient and inefficient sources the same is not recommended for two reasons. First, it penalizes sources that already took responsible actions to reduce emissions. Sources that already reduced emissions will receive fewer allowances and will have to make further emissions reductions. A system that penalizes early actors does not encourage efficient energy generation. Second, by treating efficient and inefficient sources the same, emission based allocation grandfathers in sources that emit large quantities of pollutants. In this context, grandfathering means creating a system that maintains or encourages the status quo. Because emission based allocation gives larger quantities of allowances to sources that historically emitted larger quantities of emissions, it maintains the status quo of emission control capabilities in the power sector, thereby missing the opportunity presented by the Transport Rule to encourage efficient energy generation. [EPA-HQ-OAR-2009-0491-2648.1, p.8]
B. Heat Input Based Allocation: Favors Sources that Use Large Quantities of Fuel, Regardless of Efficiency at Converting that Fuel into Electricity
In the Transport Rule, EPA specifically declines to consider allocating allowances based on heat input. EPA seems to base this decision on North Carolina, in which the court struck down EPA's use of heat input in CAIR to develop the state-specific emission caps. In CAIR, EPA determined the region-wide NOx cap "by multiplying current heat input by emission rates" and "allocated this regionwide [sic] amount to the individual States in accordance with their average heat input," adjusted "for type of fuel used." Although definitions are much more complicated, for practical purposes, heat input means the amount of fuel fed into the source. 44 In North Carolina, the court said the Clean Air Act required EPA to base the state-specific caps on each individual state's significant contribution or interference, not on heat input. In the Transport Rule, this is what EPA proposes to do. [EPA-HQ-OAR-2009-0491-2648.1, pp.8-9]
In North Carolina, the court did not discuss the propriety of using heat input to allocate allowances from the state-specific cap to the sources within that state. Heat input based allocation would require only a simple calculation: divide each source's fuel use by the total state fuel use and convert the result to a percentage. Each source would receive the resulting percentage of the state-specific cap. Sources that historically used large quantities of fuel would receive a larger quantity of allowances. Sources that historically used small quantities of fuel would receive a smaller quantity of allowances. [EPA-HQ-OAR-2009-0491-2648.1, p.9]
In our hypothetical state, Sources A through H would receive the following quantities of allowances under a heat input based allocation method: [EPA-HQ-OAR-2009-0491-2648.1, p.9]
[Table 3 can be found on page 9 of this comment.]
Heat input based allocation would require the most efficient sources, Sources C and G, to reduce their emissions to the same extent or more than the least efficient sources, Sources B and F. Source B (least efficient) and Source G (most efficient) would be required to make the same emissions reductions: 33 percent. Also, Source B would receive the same number of allowances as Source E, which generates magnitudes more electricity while emitting a fraction of the pollutants. Sources E and F would not required to reduce emissions at all and would, instead, sell allowances for profit. [EPA-HQ-OAR-2009-0491-2648.1, pp.9-10]
Heat input based allocation favors sources that use large quantities of fuel, regardless of the sources' efficiency at converting that fuel into electricity. By allocating the same or more allowances to inefficient sources, heat input based allocation disfavors sources capable of generating a lot of electricity without using a lot of fossil fuel resources. By benefiting inefficient sources, heat input based allocation does not encourage efficient electricity generation. [EPA-HQ-OAR-2009-0491-2648.1, p.10]
C. Full Auction: Internalizes Emissions for All Sources, but is Impractical
In the Transport Rule, EPA discusses and dismisses allocating allowances by auction. The statutory requirement to reduce emissions within the state likely prevents EPA from allocating allowances by auction. Allocation by auction would require each source to purchase one allowance for each ton of pollutant emitted. This method would be the simplest way to internalize the cost of emitting the pollutants because no source could emit the pollutant without paying for it. This allocation method would involve no calculations because each source would simply purchase an allowance for each ton emitted. [EPA-HQ-OAR-2009-0491-2648.1, p.10]
However, as EPA points out, the statutory requirement to reduce emissions within the state would require EPA to hold separate auctions in each state and for each pollutant. "[T]his approach, if implemented, would result in 28 separate trading programs for NOx annual, 26 trading programs for NOx ozone season, and 28 trading programs for SO2 for a total of 82 new trading programs to be administered by EPA." The administrative burden EPA would face in holding so many auctions makes allocation by full auction a problematic option in this context. [EPA-HQ-OAR-2009-0491-2648.1, p.10]
V. Recommendation: Energy Output Based Allocation
A. Energy Output Based Allocation: Encourages Efficient Energy Generation
EPA specifically "requests comment on whether there are alternative allocation methods EPA should consider that are consistent with the Court decision [in North Carolina] and the statutory mandate of section 110(a)(2)(D)." This Comment recommends EPA allocate allowances based on an alternative method: energy output. Energy output means the amount of electricity delivered by the source. 53 Like the other allocation methods, energy output based allocation would require only a simple calculation: divide each source's electricity generation by the total state generation of electricity and convert the result to a percentage. Each source would receive the resulting percentage of the state-specific cap. Sources that historically generated large amounts of electricity would receive a larger quantity of allowances. Sources that historically generated small amounts of electricity would receive a smaller quantity of allowances. 54 [EPA-HQ-OAR-2009-0491-2648.1, pp.10-11]
In our hypothetical state, Sources A through H would receive the following quantities of allowances under an energy output based allocation method: [EPA-HQ-OAR-2009-0491-2648.1, p.11]
[Table 4 can be found on page 11 of this comment.]
As in inverse to heat input based allocation, energy output based allocation would require the least efficient sources, Sources C and G, to reduce their emissions to the same extent or more than the most efficient sources, Sources B and F. Source G, the most efficient source, is not required to reduce emissions at all and can, instead, sell allowances for profit. Source B, the least efficient source, must make significant reductions in emissions. [EPA-HQ-OAR-2009-0491-2648.1, p.11]
Energy output based allocation favors sources that generate a lot of electricity while emitting few pollutants. Energy output based allocation disfavors sources that emit large quantities of pollutants without generating significant amounts of electricity (Sources B and D above). To compare each allocation method in our hypothetical state, Sources A through H would receive the following quantities of allowances under each allocation method: [EPA-HQ-OAR-2009-0491-2648.1, p.12]
[Table 5 can be found on page 12 of this comment.]
Energy output based allocation promotes efficient electricity generation more than the other allocation methods. The reality becomes more apparent in a comparison of the least and most efficient sources. [EPA-HQ-OAR-2009-0491-2648.1, p.12]
Table 6 shows that in heat input based allocation, favor falls on inefficient sources and disfavor falls on efficient sources. In energy output based allocation, favor falls on efficient sources and disfavor falls on inefficient sources. The efficient sources receive proportionally more allowances if EPA allocates based on energy output instead of emissions or heat input. By allocating proportionally more allowances to efficient sources, EPA favors and benefits those sources, thereby encouraging efficient electricity generation. [EPA-HQ-OAR-2009-0491-2648.1, p.13]
B. EPA Should Encourage Efficient Energy Generation
In all the examples above, the hypothetical state would never exceed the state-specific cap of 160 tons, or two-thirds current emissions levels. Because EPA proposes, in the Transport Rule, to base state-specific caps on each individual state's significant contribution or interference, EPA would meet the statutory mandate of the Clean Air Act regardless of how EPA allocated allowances from the state-specific caps to the individual sources. As long as the allocation from the state-specific cap to the sources does not cause the state as a whole to exceed the state-specific cap, EPA has some flexibility in allocating those allowances. This Comment recommends EPA allocate allowances based on energy output because that method will encourage efficient energy generation, which, in turn, will increase the productive capacity of the nation's power sector and will have residual environmental, health, and safety benefits. The other allocations methods do not provide such advantages. [EPA-HQ-OAR-2009-0491-2648.1, p.13]
[Table 6 can be found on page 13 of this comment.]
One of the purposes of the NAAQS is "to protect and enhance the quality of the Nation's air resources so as to promote . . . the productive capacity of its population." The statute does not define "productive capacity" and definitions vary. Essentially, productive capacity means the maximum achievable output of a thing, in this case, the Nation or the power sector. Efficient electricity generation means generating more electricity using fewer natural resources (fuels) and emitting fewer pollutants. In this way, efficient electricity generation increases the Nation's maximum achievable output. In other words, productive capacity is how much you can do with what you have. Increasing efficiency at generating electricity is doing more with less. When the Nation increases its efficiency at generating electricity, it inherently increases its productive capacity. Because one of the purposes of the NAAQS is to promote the productive capacity of the Nation, EPA should promote efficient electricity generation in implementing the NAAQS through the Transport Rule. Energy output based allocation encourages efficient electricity generation by allocating proportionally more allowances to efficient sources than to inefficient sources. Therefore, EPA should allocate allowances based on energy output. [EPA-HQ-OAR-2009-0491-2648.1, p.14]
[For additional comments on "EPA Should Encourage Efficient Energy Generation," see pages 14-15 of this comment.]
VI. Conclusion: EPA Should Allocate Allowances Based on Energy Output in Order to Encourage Efficient Energy Generation
Allocation based on energy output will encourage efficient electricity generation by allocating proportionately more allowances to sources that generate a lot of electricity while emitting few pollutants. Encouraging efficient electricity generation promotes the productive capacity of the Nation by allowing the Nation to create more electricity with fewer natural resources and fewer emissions. Because the NAAQS purpose "to protect and enhance the quality of the Nation's air resources so as to promote . . . the productive capacity of its population," EPA should allocate allowances in a way that increases the productive capacity of the Nation. Encouraging efficient electricity generation through energy output based allocation increases productive capacity. Therefore, in the Transport Rule, EPA should allocate allowances from the state-specific caps to the sources based on energy output. [EPA-HQ-OAR-2009-0491-2648.1, p.16]