Wilson Peition to Ct of Appls CSAPR

8/3/2019 Wilson Peition to Ct of Appls CSAPR

1/78

ORAL ARGUMENT NOT YET SCHEDULED

Case No. 11-1302 (Consolidated with Nos. 11-1315, 11-1323)________________________________

IN THE UNITED STATES COURT OF APPEALSFOR THE DISTRICT OF COLUMBIA CIRCUIT

________________________________

EME HOMER CITY GENERATION, L.P.,

Petitioner,

v.

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY ANDLISA P. JACKSON, ADMINISTRATOR,

Respondents.________________________________

On Petition for Review from a Final Order of theU.S. Environmental Protection Agency

________________________________

PETITIONERS REPLY IN SUPPORT OF ITS MOTION FOR A STAYOR, IN THE ALTERNATIVE, EXPEDITED REVIEW

_______________________________

September 16, 2011

Gregory G. GarreClaudia M. OBrienLori Alvino McGillJessica E. PhillipsKatherine TwomeyLATHAM & WATKINS LLP555 Eleventh Street, NWSuite 1000Washington, D.C. 20004Telephone: (202) 637-2200Facsimile: (202) 637-2201Counsel for Petitioner

USCA Case #11-1315 Document #1330156 Filed: 09/16/2011 Page 1 of 25

(Page 1 of Tot


2/78

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES.................................................................................................. i

INTRODUCTION ..................................................................................................................1

ARGUMENT............................................................................................................................3

I. PETITIONER IS LIKELY TO PREVAIL ON THE MERITS.........................3

A. The Transport Rule Violates The Core Cooperative FederalismPrinciple Of The CAA ......................................................................................3

B. The Transport Rule Is Arbitrary And Capricious.........................................9

II. PETITIONER HAS DEMONSTRATED THAT IT WILL SUFFERIRREPARABLE HARM IN THE ABSENCE OF A STAY .............................10

III. A STAY WILL NOT HARM THE PUBLIC INTEREST.................................14

A. The Projected Attainment Levels Under CAIR And TheTransport Rule Are The Same .......................................................................14

B. Emissions Reductions Are The Same Under CAIR And TheTransport Rule..................................................................................................16

C. No Other Party Will Be Harmed By A Stay, But The Public WillBe Harmed If The Transport Rule Takes Immediate Effect....................17

CONCLUSION ......................................................................................................................20


(Page 2 of Tot


3/78

TABLE OF AUTHORITIES

Page(s)CASES

Michigan v. EPA,213 F.3d 663 (D.C. Cir. 2000) .....................................................................................9

Michigan v. EPA,No. 98-1497, 1999 U.S. App. LEXIS 38833 (D.C. Cir. May 25, 1999) ..............13

North Carolina v. EPA,531 F.3d 896 (D.C. Cir. 2008) ...................................................................................10

North Carolina v. EPA,550 F.3d 1176 (D.C. Cir. 2008) ...............................................................................1, 5

Virginia Petroleum Jobbers Association v. Federal Power Commission,259 F.2d 921 (D.C. Cir. 1958) ...................................................................................13

Virginia v. EPA,108 F.3d 1397 (D.C. Cir. 1997) ...................................................................................3

STATUTES AND REGULATIONS

42 U.S.C. 7401(a)(3) ................................................................................................................3

42 U.S.C. 7407(a) .....................................................................................................................3

42 U.S.C. 7409(b)(1).............................................................................................................14

42 U.S.C. 7410(a)(1) ................................................................................................................3

42 U.S.C. 7410(a)(2)(D)(i)(I) ..................................................................................................7

42 U.S.C. 7410(c)(1) ................................................................................................................4

42 U.S.C. 7410(k)(5) ....................................................................................................... 4, 6, 7

42 U.S.C. 7506a(c) ...................................................................................................................4


(Page 3 of Tot


4/78

ii

Page(s)

63 Fed. Reg. 57,356 (Oct. 27, 1998) .......................................................................................8

70 Fed. Reg. 21,147 (Apr. 25, 2005) .......................................................................................5

70 Fed. Reg. 25,162 (May 12, 2005) ................................................................................ 8, 14

71 Fed. Reg. 25,328 (Apr. 28, 2006) .......................................................................................9

74 Fed. Reg. 65,446 (Dec. 10, 2009).......................................................................................6

76 Fed. Reg. 43,128 (July 20, 2011) ....................................................................................6, 7

76 Fed Reg. 48,208 (Aug. 8, 2011).................................................................... 10, 12, 14, 17

40 C.F.R. 97.611(a)(2)..........................................................................................................19


(Page 4 of Tot


5/78

INTRODUCTION

The Rule at issue in this case unilaterally imposes a radical new regulatory

regime on States and regulated entities in complete derogation of the cooperative

federalism structure on which the CAA is built. EPA has usurped the States primary

role for determining, through the SIP process, how best to meet air quality standards

at the local level. In its response, EPA completely ignores the cooperative federalism

structure of the CAA, perhaps hoping this Court will too. Moreover, EPA

disingenuously refuses to acknowledge that, in seeking reconsideration of this Courts

decision to vacatethe CAIR Rule inNorth Carolina v. EPA, 550 F.3d 1176, 1178 (D.C.

Cir. 2008), EPA itself advised this Court that it planned to give States an opportunity

to enact SIPs before any new rule was imposed on them, as the Act requires. Instead,

EPA treats this Courts decision and remand order inNorth Carolinaas a blank check

to override the Acts cooperative federalism scheme and simply impose a FIP on the

States. EPA likewise disowns its prior statementsused to justify its initial intrusion

on State authority in the NOx SIP Callthat setting statewide standards to achieve

the compliance with 110(a)(2)(D)(i) is analogous to setting the NAAQS. But if they

are not analogous, then the Transport Rule is doubly flawed, because the CAA

entrusts the States with the primary responsibility for developing a SIP that will

ensure compliance with the good-neighbor provisions of the Act. Either way, the

Transport Rule grossly exceeds EPAs authority under the CAA.

EPAs arguments as to the remaining stay factors are equally unavailing. EPA


(Page 5 of Tot


6/78

2

does not even address the obvious irreparable harm to the States, who have been

deprived of an opportunity to enact SIPs before a FIP is unilaterally imposed on them

by EPA, or regulated entities who have a statutory right to participate in that process.

Nor does EPA deny that the Rule will force petitioner and other companies either to

reduce electricity generation or purchase allowances to enable them to continue

generating electricity at current levels, thereby making massive unrecoverablepayments

(hundreds of millions of dollars) to their competitors. EPA instead argues that this

irreparable harmbeing forced to shoulder the unrecoverable consequences of the

Transport Rules massive redistribution schemeshould be ignored because it is, in

EPAs view, self-inflicted. But EPA is flatly wrong about that. Petitioner

purchased allowances and thereby subsidized other scrubbers, instead of installing its

own, at a time when it was entirely lawful to do so under EPAs own regulations.

EPA cannot negate the existence of irreparable harm by claiming that petitioner

should not have followed EPAs own Rule, particularly when EPA went out of its way

to ensure that the CAIR Rule remained in effect afterNorth Carolina.

Finally, EPA and proposed intervenors wrongly suggest that the public will be

harmed by a stay. Quite the contrary. The number of States that attain the NAAQS

would not increase under the Transport Rule (as compared to CAIR, which, as the

agency has conceded, would remain in place if a stay were granted). If the Transport

Rule goes into effect, however, the public will bear the brunt of the harm, including a

significant increase in the price of electricity with no corresponding environmental


(Page 6 of Tot


7/78

3

benefit at least during the time a stay would be in effect. In short, all the traditional

factors point in favor of a stay in this case.

ARGUMENT

I. PETITIONER IS LIKELY TO PREVAIL ON THE MERITSPetitioner is likely to prevail on the merits because the Transport Rule is both

inconsistent with the CAA and arbitrary and capricious.

A. The Transport Rule Violates The Core Cooperative FederalismPrinciple Of The CAA

Not once in its entire opposition does EPA even acknowledge the governing

principle and key structural component of the CAA: cooperative federalism. As the

statute plainly states and this Court itself has uniformly recognized, Congress assigned

EPA the task of setting the air quality standards and the States the primary

responsibility of determining how to achieve them at the local level. 42 U.S.C.

7401(a)(3), 7407(a); see also, e.g., Virginia v. EPA, 108 F.3d 1397, 1408 (D.C. Cir.

1997) (EPA determines the endsthe standards of air qualitybut Congress has

given the States the initiative and a broad responsibility regarding [the] means to

achieve those ends through state implementation plans .) (citation omitted)).

At every turn in the CAA, Congress gave the States the first opportunity and

primary responsibility to comply with newly defined requirements. When EPA

promulgates or revises a NAAQS, States have three years to submit SIPs to achieve

the new standard. 42 U.S.C. 7410(a)(1). When EPA determines that an


(Page 7 of Tot


8/78

4

implementation plan is substantially inadequate to meet the NAAQS, to mitigate

interstate transport, or to comply with any other requirement of the CAA, EPA must

act through a SIP call, notifying the State of the inadequacy and giving the State an

opportunity to submit a revised SIP within a reasonable deadline[] to correct the

inadequacy. Id. 7410(k)(5). And when EPA establishes an interstate transport

region, the transport commission in charge of that region can act on a finding that

the implementation plan for one or more of the States in the transport region is

substantially inadequate to meet the requirements of 110(a)(2)(D)(i), onlyby

requesting that EPA issue a SIP callagain giving the State the first opportunity to

revise its SIP. Id. 7506a(c). Consistent with this structure, when EPA establishes

statewide standards for interstate transport, States must have an opportunity to

implement those new standards.

As a backstop, Congress gave EPA limited authority to impose a FIP if a State

defaults on its primary obligation to adopt a SIP. See42 U.S.C. 7410(c)(1). Even

then, however, Congress recognized an opportunity for States to correct[] the

deficiency to avoid imposition of a FIP. Id. The Transport Rule turns the structure

of the Act on its head, invoking this last-resortfederal authority as a means of

unilaterally imposing a FIP on the States without first offering them an opportunity to

address the new standards through adoption of a SIP.

EPAs reliance on 110(c)(1) to justify its actions is misplaced. For the 1997

NAAQS, EPA claims that its 2005 findings that States failed to submit SIPs


(Page 8 of Tot


9/78

5

addressing 110(a)(2)(D)(i) triggered its FIP authority, which EPA alleges did not

expire. EPA concedes that it approved the relevant SIPs, but argues that its FIP

authority nevertheless continues because this Courts decision inNorth Carolinameans

that the requirements of section 110(c)(1) have not fully been met, i.e., that although

EPA approved those SIPs, the SIPs had not corrected the deficiency. EPA Br.

at 7-9.

That argument fails. Thedeficiency that triggered EPAs FIP authority for

CAIR was EPAs finding that States had failed to make a required submission

under 110(c)(1)(A). 70 Fed. Reg. 21,147, 21,148 (Apr. 25, 2005). The deficiency

EPA had identified, therefore, wascorrected when the States submitted SIPs

addressing the interstate transport provision. North Carolinaplainly does not change

the fact that the States submitted those SIPs. EPA tries to recast the deficiency as

the failure to adequatelyaddress emissions within the State that have prohibited

impacts on other States, EPA Br. at 7 (emphasis added). That would have been a

proper basis for EPA to disapprovethe SIPs once submitted (if it were true), but it is

not the deficiency EPA identified in its 2005 order.

EPAs argument also conveniently ignores the fact that CAIR remains the

operative legal standard for determining the States 110(a)(2)(D)(i) obligations for the

1997 NAAQS. At EPAs insistence, and due to the acknowledged environmental

benefits associated with CAIR, this Court allowed CAIR to remain in effect until it is

replaced by a rule consistent with [the courts] opinion. North Carolina, 550 F.3d at


(Page 9 of Tot


10/78

6

1178. EPA approved numerous SIPs based on CAIR1 and explained that the

remand left CAIR in place and states and sources were required to continue to

comply with it. 2 EPA now seeks to ignore the legal effect of this Courts decision

on rehearing to accommodate EPAs own request to leave CAIR in placeand fully

operative as lawuntil a new rule was adopted.

For the 1997 NAAQS, EPA also continues to rely on its alleged correction of

the CAIR SIP approvals pursuant to 110(k)(6). As petitioner has explained (Br. at

12), EPA cannot simply disapprove a SIP it has already approved; if EPA believes

that an approved SIP must be revised, it must issue a SIP call.3 42 U.S.C. 7410(k)(5).

The agency responds that it is not disapproving those SIPs, but merely rescinding

its prior statements that the SIPs satisfy 110(a)(2)(D)(i). EPA Br. at 9. However

EPA characterizes its action, it is functionally a disapproval. If EPA is not

disapproving the SIPs, then they remain in place. And EPA offers no response to the

CAAs directive that if EPA finds that an applicable implementation plan is

1See, e.g., Approval and Promulgation of Air Quality Implementation Plans;Pennsylvania; Clean Air Interstate Rule; NOx SIP Call Rule; Amendments to NOxControl Rules, 74 Fed. Reg. 65,446, 65,447 (Dec. 10, 2009).

2 Alabama; Disapproval of Interstate Transport Submission for the 2006 24-HourPM2.5 Standards, 76 Fed. Reg. 43,128, 43,133 (July 20, 2011).3 EPA claims that the SIP call process requires a significant delay in the effectivedate of the rule, which would allegedly be inconsistent with this Courts remand inNorth Carolina. But the real significant delay was caused by EPA, which took threeyears to promulgate the Rule after the Courts initial decision. EPA cannot use itsdelay to justify depriving the States and regulated parties of their statutory rights toparticipate in the SIP process.


(Page 10 of Tot


11/78

7

substantially inadequate, it shall require the State to revise its plan by issuing a SIP

call. 42. U.S.C. 7410(k)(5). 4 Nor does EPA have any response to petitioners

argument (Mot. at 12 n.10) that EPA failed to correct any errors in the same

manner as the approval (i.e., through notice and comment), as required by 110(k)(6).

For the 2006 NAAQS, EPA contends that it has an obligation to promulgate

FIPs under 110(c)(1) because it found that the States either failed to submit, or EPA

disapproved, SIPs addressing the interstate transport provision. EPA Br. at 9-11.

EPA oddly asserts that EPAs authority to promulgate the FIPs is not based on

States failure to implement the requirements of the Transport Rule, even though

that was transparently the basis for EPAs disapproval of SIPs addressing the 2006

NAAQS. Just one week before releasing the Transport Rule, EPA disapproved those

pending SIP submissions because it found that the Statescontribute significantly to

nonattainment of the 2006 NAAQS based onEPAs modeling for the Transport Rule.

See, e.g., 76 Fed. Reg. at 43,129-30. EPA cannot disapprove SIPs and impose a FIP on

the ground that the States did not anticipate a rule that had not yet been adopted. See

Mot. at 14.

Under 110(a), the States are responsible for addressing interstate transport in

their SIPs. See42 U.S.C. 7410(a)(2)(D)(i)(I). EPA claimed that role for itself in the

4 Indeed, EPAs theory would completely eviscerate 110(k)(5)the SIP callprovision. If EPA is right, it can issue a FIP at any time to supersede an already-approved SIP, simply by concluding that some alleged deficiency has not beencorrected. That is not cooperative federalism.


(Page 11 of Tot


12/78

8

NOXSIP Call, on the rationale that [d]etermining the overall level of air pollutants

allowed to be emitted in a State is comparable to determining overall standards of air quality,

which the courts have recognized as EPAs responsibility. 63 Fed. Reg. 57,356,

57,369 (Oct. 27, 1998) (emphasis added); see also id. (Determining this overall level of

reductions for the upwind State is analogous to determining overall air quality

standards, and, thus, should be the responsibility of EPA.). EPA now characterizes

that rationale as nonsensical (at 10), yet it seeks to continue exercising that power

andto further erode the Acts cooperative federalism mandate by telling the States

how they must achieve transport standards, on a source-by-source basis. EPA cannot

have it both ways. If setting the interstate transport standards is the functional

equivalent of setting or revising a NAAQS, EPA must give the States an opportunity

to implement those new standards. If it is not, then the Transport Rule is doubly

flawed, because there is no doubt that States have the statutory authority to address

interstate transport in the first instance.

EPA also inaccurately contends that EPAs approach in this rule is the same

as it took in CAIR because EPA promulgated immediately effective FIPs before any

States had submitted SIPs to implement CAIR. EPA Br. at 11. EPA promulgated

CAIR on May 12, 2005, and the first compliance deadline was in 2009.5 EPA did not

5Rule to Reduce Interstate Transport of Fine Particulate Matter and Ozone (Clean

Air Interstate Rule); Revisions to Acid Rain Program; Revisions to the NOx SIP Call,70 Fed. Reg. 25,162, 25,167 (May 12, 2005).


(Page 12 of Tot


13/78

9

issue the CAIR FIP until a year after CAIR, and stated that its action in no way

precludes a State from developing its own SIP and that it had considered the timing

of each element of the FIP process to make sure to preserve each States freedom to

develop and implement SIPs.6 EPA explained that [b]y finalizing the FIP well before

the deadlinefor States to submit their CAIR SIPs, EPA is providing States an additional

option for complying with the requirements of CAIR. Id. at 25,339 (emphasis

added). EPA clearly has notdone the same thing here. EPA Br. at 11.

Finally, EPA argues that neither VirginianorMichigan v. EPA, 213 F.3d 663

(D.C. Cir. 2000), supports petitioners view of the Acts cooperative federalism

requirements because neither case involved EPAs FIP authority. EPA Br. at 12. But

both cases reaffirm that EPA cannot unilaterally require States to adopt particular

control measures in the first instance. Here, EPA unlawfully seeks to circumvent this

clear limit on federal power by skipping the SIP process altogether, further intruding

on the States authority by immediately imposing a FIP.

B. The Transport Rule Is Arbitrary And CapriciousEPA contends that its methodology for allocating emissions allowances is not

arbitrary and capricious because petitioners proposed alternative is inconsistent with

this Courts holding inNorth Carolinathat EPA cannot consider the relative cost of

control for different fuel types. EPA Br. at 12-13. That holding rejected EPAs

6Rulemaking on Section 126 Petition From North Carolina to Reduce Interstate

Transport of Fine Particulate Matter and Ozone, 71 Fed. Reg. 25,328, 25,339-40 (Apr.28, 2006).


(Page 13 of Tot


14/78

10

consideration of fuel type to determine Statebudgets, because EPA cannot make one

states significant contribution depend on another states cost of eliminating

emissions. North Carolina v. EPA, 531 F.3d 896, 919-20 (D.C. Cir. 2008). But it has

no bearing here, where the issue is EPAs distribution of allowances within the

State, Mot. at 15, not among the States. EPA has made clear that the methodology

used to allocate allowances to individual units in a particular state has no impact on that

states budget. . . [and] therefore has no impact on the rules ability to satisfy the statutory

mandate of CAA section 110(a)(2)(D)(i)(I). 76 Fed. Reg. 48,208, 48,212, 48,289 (Aug. 8,

2011) (emphasis added).

Proposed intervenors argument that EPAs authority to auction emission

rights renders anyallocation approach acceptable is similarly unavailing. Exelon Br. at

23. EPA still has to provide a reasoned explanation for its decision. The authority to

auction allowances is not authority to act arbitrarily with respect to allowances.7

II. PETITIONER HAS DEMONSTRATED THAT IT WILL SUFFERIRREPARABLE HARM IN THE ABSENCE OF A STAY

Absent a stay, petitioner will suffer irreparable harm. Indeed, EPA admits it is

impossible to install controls to meet the Rules deadline and petitioner therefore will

be forced to either reduce its electricity generation or purchase allowances from its

competitors at great expense with no means of recovering those costs if the Rule is

7 Proposed environmental intervenors similarly miss the mark in arguing that EPAsallocation methodology is acceptable here simply because it was adopted in priorrulemakings. Envtl. Group. Br. at 12. Those situations are fundamentally differentbecause theyprovided sources sufficient time to make reasoned compliance decisions.


(Page 14 of Tot


15/78

11

eventually invalidated. SeeMot. Tab 2 (Decl. of Douglas R. McFarlan 21). Those

unrecoverable compliance costs constitute irreparable harm. SeeMot. at 17-18.

EPA contends that these irreparable harms should be ignored because they are

self-inflicted, stemming from petitioners deliberate choice under CAIR to

purchase allowances from other facilities rather than install additional controls. EPA

Br. at 13. In fact, petitioner has spent over a quarter of a billiondollars in the past

decade on NOx and SO2 emission controls at Homer City, installing three SCRs for

NOx controls and one scrubber for SO2 control. SeeDeclaration of Scott Wilson 5,

attached hereto as Exhibit 1. And when petitioner exercised its right under CAIR to

purchase allowances from other facilities, it subsidized those facilities controls.

Contrary to proposed intervenors insinuations, Exelon Br. at 5-6; Envtl. Br. at 3-4,

between 2005 and 2008, petitioner purchased at peak prices over $ 285 million of SO2

allowancesan amount approximately equivalent to the cost of two scrubbers. In

subsidizing other scrubbers, petitioner was in full compliance with CAIR but, absent a

stay, the Transport Rule will irreparably harm petitioner for this lawful choice.8

EPA criticizes petitioner for not installing controls immediately after this

Courts decision inNorth Carolina, but does not explain how petitioner possible could

8 EPAs implicit suggestionthat petitioner opposes emission reductionsis simplynot true. Petitioner is one of very few in industry who actively supported CAIR andUtility MACT. EPAs allegations (at 13-14) that petitioner has the highest rate ofSO2emissions of any large coal-fired power plant in the United States are likewisewrong. Petitioner is not even in the top thirty power plants with regard to its rate ofSO2 emissions. Exhibit 1 6.


(Page 15 of Tot


16/78

12

have known what would be required under CAIRs replacement. Although EPA

alleges (at 15) that petitioner should have foreseen that CAIRs replacement would be

more stringent, this Court did not simply direct EPA to make CAIR more stringent.

Indeed, some states covered under CAIR are exempt from the Transport Rule. Half

of those that are covered under both rules received an increasein allowances under the

Transport Rule. See76 Fed. Reg. at 48,261-62. It is unreasonable to claim that

petitioner should have known Pennsylvanias budget would be reducedand the

Transport Rule timing more acceleratedand begun installing additional emissions

controls anticipatorily to avoid the irreparable harm it now faces.

Moreover, based on EPAs own arguments to this Court, petitioner reasonably

believed that there would be a state SIP process and time to comply just as there had

been with other rules. SeeMot. at 1 n.3 (4.5 and 3.5 years for compliance). EPA

requested that the Court remand CAIR while leaving it in place, stating that [i]f

EPA is required to conduct a new rulemaking to reinstate the emission reductions

required by CAIR, it would likely take 5-7 years for actual emission reductions to

occur.9 Significantly, this estimate of 5-7 years expressly included the time required

for State SIP development and submission processes. Id.

And EPAs contention (at 16) that petitioners facility can operate economically

under the Transport Rule is based on deeply flawed assumptions. For example, EPA

9SeeEPA Pet. Rehg Br., Attachment 2, Decl. of Brian J. McLean 16,North Carolina

v. EPA, No. 05-1244 (D.C. Cir. filed Sept. 24, 2008), attached hereto as Exhibit 2.


(Page 16 of Tot


17/78

13

assumed that low sulfur bituminous coal is available at a cost of approximately $2.00

per MM Btu. Exhibit 1 9. But low sulfur bituminous coal currently sells for $3.26

per MM Btuabout the same price as natural gas. Using the correct coal prices

demonstrates that plants like petitioners will only be able to run 25% of the time

under the Transport Rule. Id. And both EPA and proposed intervenors ignore

established case law holding that nonrecoverable compliance costs establish

irreparable harm. Mot. at 17-18.

Finally, EPA utterly ignores petitioners argument that, absent a stay, the

Transport Rule will inflict irreparable injury on petitioner and the States by abrogating

the States cooperative-federalism rights under the CAA. Id. at 18. By eliminating

petitioners and the States right to participate in the SIP process, the Transport Rule

intrudes on State authority and prevents the States from engaging in the regulatory

process that Congress has reserved for them under the CAA. Astoundingly, EPA has

no response to this argument despite the fact that similar concerns compelled this

Court to grant a stay of the NOXSIP Call. See Michigan v. EPA, No. 98-1497, 1999

U.S. App. LEXIS 38833, at *10 (D.C. Cir. May 25, 1999). Nor does EPA contest that

petitioner may raise these harms, or that they directly impact petitioner as well. Mot.

at 18 n.14. Though petitioner need only show irreparable harm to itself, see, e.g.,

Virginia Petroleum Jobbers Assn v. Federal Power Commn, 259 F.2d 921, 925 (D.C. Cir.

1958), that States, too, will suffer irreparable harm weighs decisively in favor of a stay.


(Page 17 of Tot


18/78

14

III. A STAY WILL NOT HARM THE PUBLIC INTERESTNotwithstanding its extremely high near-term costs, Phase 1 of the Transport

Rule will provide no benefits beyond those that CAIR continues to ensure. EPA

baldly asserts, without any support in the administrative record, that [t]he rule will

result in significant environmental health benefits for a large portion of the United

States population. EPA Br. at 2. EPAs sweeping, unsupported generalizations run

headlong into the administrative record, which shows indisputably that the projected

benefits of Phase I of the Transport Rule are the same as those CAIR already ensures.

Thus, a stay of the Transport Rule will not harm the public interest.

A. The Projected Attainment Levels Under CAIR And The TransportRule Are The Same

The purpose of both the Transport Rule and CAIR is to assist States in

attaining the NAAQS. 70 Fed. Reg. at 25,270; 76 Fed.Reg. at 48,209. Section

109(b)(1) of the CAA instructs EPA to set primary ambient air quality standards the

attainment and maintenance of which ... are requisite to protect the public health

with an adequate margin of safety. 42 U.S.C. 7409(b)(1). As such, the appropriate

measure of public harm is the number of areas that will attain the NAAQS in 2012-

2013 as a result of the Transport Rule that would not attain those standards under

CAIR.10 EPA does not even claim that the Transport Rule will increase the number

10 EPAs Regulatory Impact Analysis (RIA)in which it assessed the alleged publicbenefits of Phase I of the Transport Ruleis irrelevant because it analyzes only healthbenefits attributed to the Transport Rule in the absence of CAIR,which would remain in


(Page 18 of Tot


19/78

15

of areas in attainment over CAIR in 2012-2013. Nor can it. The projected areas of

attainment under CAIR and Phase I of the Transport Rule are exactly the same:11

CSAPR Phase I v. CAIR Phase I: 2012Number of Monitors Determined

NAAQS Scenario Nonattainment MaintenanceCSAPR12 2 9Daily PM2.5CAIR13 2 9CSAPR 1 1Annual PM2.5CAIR 1 1

There is therefore no basis from which to conclude that a stay of the Transport

Rule would have any adverse effect on the public health.14

effect if a stay is granted. The RIA did not address whether the health benefits ofCAIR are greater or lesser than those of the Transport Rule. Proposed IntervenorExelon relies exclusively on EPAs RIA in making its public harm argument, ExelonBr. at 14, rendering that discussion equally irrelevant.11 Although CAIR and the Transport Rule have a slight difference in ozone

attainment numbers, EPA concedes that the SO2 emissions (i.e., the PM2.5 NAAQS)are the primary measure of public harm. SeeEPA Br. at 13. Indeed, EPAs ownRegulation Impact Analysis demonstrates that more than 99% of the benefits of therule come from reductions in PM2.5. Mot. Tab 7 at 183-86 (Office of Air & Radiation,EPA,Regulatory Impact Analysis (RIA) for the Federal Implementation Plans toReduce Interstate Transport of Fine Particulate Matter and Ozone in 27 States;Correction of SIP Approvals for 22 States (June 2011)).1276 Fed Reg. at 48,255 (Table VI.C-2).13 Projected CAIR attainment is based on modeling results using an EPA model and

submitted by Southern Company and Utility Air Regulatory Group (UARG) toEPA in response to the Proposed Rule. EPA took no issue with the accuracy of themodel, responding: Thank you for your comments. EPA is finalizing the air quality-assured trading remedy for the reasons explained in section VII.A of the preamble tothe final Transport Rule. Office of Air & Radiation, EPA, Transport Rule PrimaryResponse to Commentsat 877 (June 2011), attached hereto at Exhibit 3.14 As such, the claimed health benefits set forth by proposed intervenors, Exelon Br at1, 13-17; Envtl. Group Br at 4-5, 16-18, are simply incorrect.


(Page 19 of Tot


20/78

16

B. Emissions Reductions Are The Same Under CAIR And TheTransport Rule

Environmental intervenors assert that the Transport Rule will achieve up to

one million additional tons of SO2 reductions beyond those achieved by CAIR in

2012. SeeEnvtl. Group Br. at 4, 16. That is incorrect. Even putting aside the fact

that the relevant metric for determining benefits is attainment of the NAAQS, see

supraat 14-15, environmental intervenors have conducted an apples-to-oranges

comparison by failing to recognize that different states are included in CAIR and the

Transport Rule, and that the state budgets vary significantly between the two rules.

An apples-to-apples comparisonbetween state emission budgets for states included

under both programsshows that the Transport Rule actually allocates slightlymore

SO2 allowances than CAIR during Phase I.15 And a comparison between all included

and excluded states in CAIR and the Transport Rule demonstrates that CAIR actually

required more reductions overall.16

In a last-ditch effort to identify some harm that could flow from a stay, EPA

asserts that a stay will harm the public in the long term because sources will have no

15 The total CAIR SO2 budget for states included in both rules was 3,271,327 tons

while the total Transport Rule budget for the states included in both rules is 3,273,781tons. SeeSO2 Budgets States Included in Both CAIR and the Transport Rule ,attached hereto as Exhibit 4.16 The emissions reductions from the new States added under the Transport Rule total54,781 tons/year, but the emissions reductions from States subject to CAIR but notsubject to the Transport Rule totaled 347,869 tons/year. SeeSO2 EmissionReductions States Included in CAIR or the Transport Rule, But Not Both, attachedhereto as Exhibit 5.


(Page 20 of Tot


21/78

17

incentive to install controls in subsequent years. EPA Br. at 18. Yet EPA has

conceded that CAIRwhich EPA specifically acknowledges would remain in place

during a stay, id. at 9resulted in the opposite incentive, and brought about sizeable

reductions in SO2 and NOXfrom the power sector. Mot. Tab 7 at 234. As EPA itself

said, [b]ecause CAIR remains in effect until it is replaced, emission reductions

continue in the eastern US. Id. at 244.

In sum, despite its bald assertion of projected health benefits as a result of the

Transport Rule, every piece of data EPA cites regarding health benefits in the Rule

itself refers solely to achievements beginning in 2014, long after this Court will

complete its review of the Rule. See, e.g., 76 Fed. Reg at 48,313.

C. No Other Party Will Be Harmed By A Stay, But The Public WillBe Harmed If The Transport Rule Takes Immediate Effect

Finally, EPA erroneously asserts that the costs of Phase I of the Transport Rule

do not outweigh the benefits. EPA vaguely asserts that many of the 2012 costs

identified by [petitioner] would be incurred whether CAIR or the Transport Rule was

in place. EPA Br. at 18. But EPA ignores the fact that between 2005 and 2008

petitioner purchased over $285 million in SO2 allowances under the CAIR program.

Exhibit 1 8. The Transport Rule nullifies these purchases, which subsidized the

scrubbers purchased by other companies in exactly the manner that EPA

contemplated under CAIR. Id. Moreover, the Transport Rule grants those other

companies an allowance windfall while disregarding petitioners financial


(Page 21 of Tot


22/78

18

contributions to those scrubbers, and forces petitioner to begin its allowance

expenditures all over againassuming such allowances are even available for sale

with no viable alternative other than to dramatically curtail operations of its plants.17

Proposed intervenor Exelon asserts that the Transport Rule will not escalate

the cost of electricity, but claims that a stay of the Transport Rule would harm it by

devaluing its alleged investment in clean energy resources. Exelon Br. at 11, 12-13.

Exelons arguments are insincere at best. What Exelon stands to gain from the

Transport Rule is an enormous profit, for absolutely no investment in emissions

control technologya windfall profit that will be borne in large part by electricity

customers. Not receiving an unearned benefit is not the same as being irreparably

injured. Exelons brief summarizes how electricity is dispatched and generators earn

revenues and profits. Exelon Br. at 6-9. But it fails to mention that 93% of Exelons

total generation is nuclear, which is not subject to the Transport Rule.18 Nor does

Exelon explain that nuclear power is substantially less expensive to generate than

either gas or coal. For example, the average cost of nuclear dispatch is $10/MWh. By

comparison, the average cost to dispatch unscrubbed coal was approximately

17EPA alleges that hoarding of allowances is inconsistent with past observed tradingactivity. EPA Br. at 18-19. But the fluidity of the market under CAIR or the AcidRain program is simply not an adequate predictor for the future because theTransport Rule has ensured an extremely tight market given its budget allowances,assurance provisions and its expedited timeframe for compliance. Mot. at 17.18SeeAbout Exelon Corporation,http://www.exeloncorp.com/assets/newsroom/downloads/docs/CompanyFactSheets/fact_ExelonCorporation.pdf (last visited Sept. 15, 2011) (Exelon Fact Sheet).


(Page 22 of Tot


23/78

19

$30/MWh before the Transport Rule, but $45/MWh if the Transport Rule takes

effect (while scrubbed coal costs approximately $32/MWh). Mot. Tab 2 18.

Exelon admits that [l]ower cost plants are more likely to be dispatched and are

more profitable when they are dispatched, due to the higher spread between operating

costs and the market clearing price. Exelon Br at 7. As an operator of one of the

lowest-cost assets of all, Exelons nuclear fleet will always dispatchbut as the market

clearing price increases (as it will under the Transport Rule), Exelon will make

increasingly greater profits from those assets. Indeed, even assuming the minimal

1.7% increase in electricity prices that EPA predicts for 2012, Exelon will make $183

million in additional profits from its nuclear assets alone without any additional investment

or operating cost to them. Exhibit 1 17. Exelons purported concern about public harm

is belied by several other factors. First, Exelon currently holds only two coal assets,

for which it did not invest in controls, shutting them down in 2011 and 2012.19

Second, the Rule grants allowances to those coal plants for the next fouryears very

valuable assets in a tight allowance market. See40 C.F.R. 97.611(a)(2). Third, the

remainder of Exelons generation fleet is primarily gas-fired, and thus needs no

additional emissions controls to comply with the rule. Finally, Exelon did not bother

to install controls on its fleet of coal-fired power plants in and around Chicago, but

instead sold them to petitioners affiliateMidwest Generation; it was Midwest

19 Exelon Fact Sheet.


(Page 23 of Tot


24/78

20

Generation that undertook a $1.5 billioninitiative to install state-of-the-art controls at

those plants. Exhibit 1 7.Thus, Exelon has spent little, if anything, to comply with

the Ruleyet it stands to benefit enormously if the Rule is allowed to take effect.20

CONCLUSION

This Court should grant a stay pending review of the Transport Rule or, at a

minimum, expedited review to allow for a decision before the Rule takes effect.

Respectfully submitted,

Dated: September 16, 2011 /s/Gregory G. GarreGregory G. GarreClaudia M. OBrienLori Alvino McGillJessica E. PhillipsKatherine TwomeyLATHAM & WATKINS LLP555 11th Street, NWSuite 1000Washington, DC 20004Tel: (202) 637-2200Fax: (202) 637-2201Email: [email protected]

20 EPA quibbles with the mechanics of petitioners alternative request for expeditedreview. EPA Br. at 19-20. But EPA misses the point. If this Court concludes that astay is not warranted, it should at least expedite consideration of this important caseon a schedule that allows for the case to be briefed, argued, and decided as quickly aspossible.


(Page 24 of Tot


25/78

CERTIFICATE OF SERVICE

I hereby certify that on this 16th day of September 2011, I, Gregory G. Garre,

a member of the bar of this Court, caused the foregoing Reply In Support Of

Petitioners Motion For A Stay Or, In The Alternative, Expedited Review

to be served through the CM/ECF system, which will send a notice of filing to all

registered attorneys of record.

/s/Gregory G. Garre

Gregory G. Garre


(Page 25 of Tot


26/78

EXHIBITS TO PETITIONERS REPLY TO ITS MOTION FOR A STAY

OR, IN THE ALTERNATIVE, EXPEDITED REVIEW

ExhibitNo. Date Description

1 09/16/2011 Declaration of Scott Wilson

2 09/24/2008 EPA Petition for Rehearing Brief, Attachment 2,Declaration of Brian J. McLean,North Carolina v.EPA, No. 05-1244 (D.C. Cir.)

3 06/2011 Office of Air & Radiation, EPA, Transport Rule Primary

Response to Comments(excerpt)

4 09/16/2011 SO2 Budgets States Included in Both CAIR and theTransport Rule

5 09/16/2011 SO2 Emission Reductions States Included in CAIRor the Transport Rule, But Not Both


(Page 26 of Tot


27/78

EXHIBIT 1


(Page 27 of Tot


28/78

IN THEUNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIAENIE HOMEROTYGENERATION, L.P., ))

Case No. 11-1302Petitioner,

v.UNI1ED STA1ESENVIRONMENTALPR01ECTIONAGENCYANDLISA P. JACKSON,ADMINIS1RATOR,

))))))))))))Respondents.

DECLARATION OF SCOTT WILSONI, Scott Wilson, do hereby declare under the penalty of p e ~ u r y , pursuant to 28

U.S.C 1746, as follows:1. I am Managing Director of Analytics for Edison Mission Marketing and

Trading. I am responsible for the analysis of the external markets that impactthe financial performance of our parent company, Edison Mission Energy("EME"). I joined the company in 2000 when EME purchased Gtizen Power.I have been doing commodity market analysis and trading for over thirty years.I manage a group of ten people who develop and maintain fundamental


(Page 28 of Tot


29/78

models. l The Analytics department uses a third-partyfWldamental model toanalyze market impacts related to environmental policy. TIlls declaration ismade in support of Petitioner's Reply In Support of Its Motion for a Stay, or Inthe Alternative, Expedited Review.

2. I have personal knowledge of the issues and activities referred to herein, exceptwhere stated on information and belief. If called upon to testify, I could andwould testify truthfully thereto.

3. The purpose of this declaration is to explain the effect on electricity marketsand consumers, and the irreparable hann that will result to petitioner, if EPNsrule, "Federal Implementation Plans: Interstate Transport of Fine ParticulateMatter and Ozone and Correction of SIP Approvals," 76 Fed. Reg. 48,208(Aug. 8, 2011) ("Transport Rule"), is pennitted to take effect, and my beliefthat a stay of the effective date of the Transport Rule pending this Court'sreview, or expedited briefing in the alternative, is needed to prevent this hann.

EME Homer City's Commitment to Emission Reductions4. E:rv1E Homer GtyGeneration, L.P. ("E:rv1E Homer Gty") is an indirect

subsidiary of Edison Mission Energy, LLC ("EME"), an independent powerproducer engaged in the business of developing, acquiring, owning or leasing,

1 A fWldamental model uses classic economic theory by defining a supply cost curveand a demand cost curve. The intersection point of the two curves provides theexpected clearing price. These models can vary in complexity.

2


(Page 29 of Tot


30/78

capacity to generate and sell electricity into the wholesale energy market. EN1EHomer Gty and EN1E are part of the Edison International family ofcompanies. EN1E Homer Gty operates one of the largest coal-fired powerplants in western Pennsylvania, the 1,884 MW Homer Gty electric generatingstatIon.

5. EN1E has committed to aggressive and substantial emissions reductions at itsfacilities. For example, EN1E Homer Gty has spent over a quarter of a billiondollars over the past decade to install NOx and S02 emission controls. In2003, EN1E Homer Gtyinstalled three selective noncatalytic reductions("SCR") to control NOx, which have resulted in reductions of approximately68,000 tons of NOx. Similarly, in 2001, EN1E Homer Gtyinstalled a flue gasdesulfurization ("FGD") on one of its units to control S02. The FGD hasresulted in emissions reductions of approximately 170,000 tons of S02emissions and 2,500 pounds of mercuty, with mercuty emissions at a ratewithin the range of 0.5 to 0.9 Ibs/1Btu. Sa! Edison Internationall0Q 201l.

6. As a result of its emission reduction efforts, EN1E Homer Gty is not even inthe top thirty power plants with regard to its rate of S02 emissions during2010. Sa! Chart Below based on EPNs Continuous Emission MonitoringSystem:

3


(Page 30 of Tota


31/78

2010 S02EmissionRate

Plant (1b/MMB tu)1. Niles (OHORION) 4.63982. RAReid 4.61173. Green River (KY) 4.07674. Fair Station 3.76425. Whitewater Valley 3.51196. Kyger Creek 3.34777. Walter C Beckjord 3.30868. Muskingum River 3.14259. Annstrong PowerStation 3.090410. Shawville 3.068811. Blue Valley 2.931512. Frank E Ratts 2.920113. Avon Lake 2.764514. Picway 2.752915. Jefferies 2.671216. Portland (PA) 2.658717. Gadsden 2.516718. SamuelACarlson 2.467719. Dolphus MGrainger 2.446520. Greene County(AL) 2.440021. Alma 2.424222. Merrimack 2.423723. New Castle Plant 2.414424. Wabash River 2.355725. Hunlock PowerStation 2.351926. Albright 2.351127. Leland aIds 1 &2 2.179028. Urquhart 2.170529. Yorktown 2.153230. J ShermanCooper 2.087431. Titus 2.084932. R Gallagher 2.0787

4


(Page 31 of Tot


32/78

33. Homer CityStation 2.0784

7. EME's subsidiary Midwest Gen. has also taken substantial steps at great cost tocontrol emissions at its Illinois plants. In 1999, Midwest Gen. purchased fromExelon G>tporation ("Exelon") six uncontrolled coal plants. Midwest Gen.has since spent $1.5 billion to install emissions controls on these uncontrolledplants purchased from Exelon. Sre Edison Intemationall0Q 2011. For

example, in 2008 and 2009, Midwest Gen. installed at those plants activatedcarbon injection ("AQ") for mercury controls. Since those controls wereinstalled, Midwest Gen. has reduced mercury emissions by 862 pounds thoughthe end of 2010. Id. Midwest Gen has also installed or is installing state-of-the-art controls to reduce NOxand 502 emissions at all of its plants. Id

8. EME has also assisted in reducing emission through the purchase of allowancesunder CAIR Through CAIR and other cap-and-trade programs (including theAcid Rain Program and the NOx SIP Call), G>ngress and EPA ensured that allpower plants collectively paid for emission controls that would be installed onlyon some plants. G>ngress and EPA intentionally designed these programs sothat the most costly controls would only be installed on a subset of plants thatwere the most cost-effective to control. Because these programs allowedsufficient lead-time for companies to develop their control strategies anddistributed allowances equitably based on historic levels of operation, all plants

5


(Page 32 of Tot


33/78

could choose whether to install controls or purchase allowances. Importantly,plants that chose to install controls did not bear the full cost of installing oroperating them. Plants without advanced controls have been required formanyyears to purchase allowances from those that do have them. Forexample, between 2003 and 2011, Homer Gtypurchased over $285 million ofS02 allowances. This is approximately equal to the cost of one FGD for amid-sized coal plant in 2011 dollars. In this way, Homer Gtyshared in the costof controls that were installed on other plants.

The Cost and EffectOfThe Transport Rule9. The Transport Rule will increase the marginal cost of running the plant at

EME Homer Gty. Based on our internal modeling, the unscrubbed EMEHomer Gty units 1 and 2 may only be able to run 25% of the time. EPNsassertion to the contraty is based on unrealistic model inputs. EPNs modelshows two of EME Homer Gty's units emitting approximately 87,000 tons ofS02 under the Transport Rule. EPA also shows that Pennsylvania does notviolate its variability limit. In EPNs comparison of Homer Gty's emissionsunder the Transport Rule and the base case, the model implies that Homer Gtycan reduce S02 by switching from higher-sulfur bituminous coal to lowersulfur bituminous coaL EPNs model implies that there are large amounts oflow-sulfur bituminous fuel available for sale at a cost of approximately $2.00per MNIBtu. That estimate is much lower than current prices. Low sulfur

6


(Page 33 of Tot


34/78

bituminous coal is currently selling for $3.26 per :MN.lBtu. When the actualprice and availabilityof low sulfur bituminous coal are factored in, it is clearthat this compliance approach does not make it viable to operate Homer Gtyat historic levels.

10. The Transport Rule will also lead to job losses. For example, LuminantGeneration CompanyLLC ("Luminant")-which has also filed a petition forreview and requested a stay of the Transport Rule-announced on September12,2011 that it will be forced to shut down two generating units with a capacityof 1,200 megawatts at its Monticello Power Plant. Luminant also announcedplans to stop mining lignite at its Thenno, WInfield, and Big Brown/Turlingtonmines in Texas, and to use coal from the PowderRiver Basin in Montana andWyoming instead of Texas lignite at the Monticello Unit 3 and Big BrownUnits 1 and 2. The company estimated that 500 workers will be laid off due tothe changes made necessary by the Transport Rule. SreNancyJ. Moore, DailyEnvironmental Report, Lurrinant to Oae Texas Facilities,. SUf5 EPA Orer C1'tlS"S-StateAirRule (2011) (Attachment A).

11. The Transport Rule may also fundamentally change how electricity isdispatched in the market and thereby increase the price of electricity. Theelectricity market operates as follows: each competitive electricity market in thecountry has an "independent system operator" or ("ISO") which is responsiblefor determining which electricity generating units run on any given day at any

7


(Page 34 of Tot


35/78

given hour to meet demand. For example, the ISO for the Mid-Atlantic regionin which E11E Homer Gty is located is P]M Interconnection, LLC ("P]M").P]M forecasts an electricity load for each hour of every day (incorporating areserve margin in case electricity demand is higher than anticipated) based onweather, day of the week, time of day and other factors. Additionally, PJMreceives offer curves from each generator in the region, offering to dispatchelectricity from the generator's assets for a specified price per asset. In simplest

terms, PJM sorts those dispatch offers from lowest to highest cost, uses itscomputer models to identify the least marginal cost at which it can satisfy itsload and reserve requirements, and directs each generator to run certain unitseach hour on that basis. The highest cost unit which is dispatched in that hoursets the electricity price which is paid by consumers, and at which all generatorsare paid for generating during that hour.

12. EPNs rule will change how electricity dispatch occurs in one of either two coreways. First, if a unit lacks sufficient allowances to operate (and cannotpurchase those allowances), it must raise its offer so that the ISO dispatcheshigher marginal cost units to satisfy its demand and reserve requirements.Electricity prices will rise for consumers, while the generator will incur anirrecoverable loss in revenue because its unit cannot generate.

13. Second, if a unit purchases allowances to enable it to run, that allowance pricemust be factored into the dispatch cost for the unit. E11E Homer Gty

8


(Page 35 of Tot


36/78

estimates, based on EPNs predicted allowance prices, that the cost ofallowances will substantially increase electricity prices for units withoutadditional controls. As an illustrative example, if unscrubbed coal today costsan estimated $30/MWh to dispatch, while scrubbed coal costs approximately$32/MWh, once the Transport Rule takes effect, the cost of unscrubbed coalcould jump to as high as $4S/MWh.2 As such, the ISO would not dispatchthose units so long as it can meet its demand and reserve requirements bydispatching other generating units with a lower marginal cost. The net result,again, is that the unit with a Transport Rule shortfall is dispatched lessfrequently--even if it has purchased sufficient allowances-and electricityprices rise for consumers, while the generator incurs an irrecoverable loss inrevenue because its unit cannot generate.

Exelon Stands To Gain Enonnous Profit From The Transport Rule14.1 have reviewed Exelon's website and I understand that, as of 2009,93% of

Exelon's total generation is nuclear, which is not subject to the Transport Rule.According to Exelon's website, it currently holds only two coal plants, both ofwhich are shutting down in 2011 and 2012. The remainder of Exelon'sgeneration fleet is primarily gas- fired and needs very little in tenus of emissionscontrols to comply with the Transport Rule.

2 I have reviewed Genon Energy, Inc.'s ("Genon") petition and request for a stay.9


(Page 36 of Tot


37/78

15. I believe that every single one of Exelon's nuclear facilities is categorized as in"Independent Power Producer" and all but one operates in PJMInterconnection, LLC ("PJM"). All of their assets are dispatched as describedabove and priced as described below.

16. Nuclear power is substantially less expensive to generate than either gas or coal.For example, the average cost of nuclear dispatch is $ 10/MWh. Bycomparison, unscrubbed coal cost approximately$30/MWh before the

Transport Rule, but $45/MWh if the Transport Rule takes effect (whilescrubbed coal costs approximately $32/MWh). Lower cost plants are morelikely to be dispatched and are more profitable when they are dispatched, dueto the higher spread between operating costs and the market clearing price. Asan operator of the low-cost assets, Exelon's nuclear fleet will always dispatch,and as the market clearing price increases under the Transport Rule, Exelonwill make enormous profits from those assets without having to invest in anyemissions controls.

17.To put the magnitude of this windfall into context, in 2010, Exelon hadapproximately 172 millionMWh nuclear generation. For every $l/MWh (or$0.001 kWh) increase in power price due to the Transport Rule, Exelon willgain $172 million in revenue wthattany additional imestrrmt or operating cat to themFor every $0.01 kWh increase in power prices due to the Transport Rule,

The prices Genon estimates on page 11 of its brief are also reasonable estimates.10


(Page 37 of Tot


38/78

Exelon will gain $1.7 billion in revenue 71it:ha!t incurringanyadditianal inu:strrl?nt aroperating cats. Even EPA estimates that the Transport Rule will increaseelectricity prices by 2.2%. See RIA at p. 266. Between January and June of2011, the average wholesale electricity price in the PJM market was$48.47/MWh.3 A 2.2% wholesale price increase equates to $49.54/MWh, or anincrease of $1.07/MWh. At that price, which is almost certainly understated,Exelon would accrue an additional $183 million per year in profit from theTransport Rule, without any additional investment or increase in operatingcost.

3 Monitoring Analytics, State cfthe Market ReportfarPfM at 12 (August 15,2011)(Attachment B).11


(Page 38 of Tot


39/78

I declare under penalty of perjwy underthe laws of the United States that theforegoing is true and correct.

EXECl.JTED this 16th day of September, 2011 at Boston, Massachusetts.~ " , J ~

t t Wtlson

12


(Page 39 of Tot


40/78

ATTACHMENT A


(Page 40 of Tot


41/78

Source: Daily Environment Report: News Archive > 2011 > September > 09/13/2011 > News > Air Pollution:

Luminant to Close Texas Facilities, Sues EPA Over Cross-State Air Rule

177 DEN A-10

Ai r Pol lu t ion

Luminant to Close Texas Facilities,

Sues EPA Over Cross-State Air Rule

By Nancy J. Moore

AUSTIN, TexasLuminant will close coal-fired electrical generatingfacilities in Texas to comply with the Environmental Protection Agency's

Cross-State Air Pollution Rule, the company announced Sept. 12, addingthat it has filed a legal challenge to that rule in federal court (Luminant

Generation Co. v. EPA, D.C. Cir., No. 11-1315, 9/12/11).

The energy company, which is the largest power generator in Texas, saidit will shut down two generating units with a capacity of 1,200 megawattsat its Monticello Power Plant in Northeast Texas.

Luminant also plans to stop mining lignite at its Thermo, Winfield, and BigBrown/Turlington mines in Texas, and to use coal from the Powder River

Basin in Montana and Wyoming instead of Texas lignite at the MonticelloUnit 3 and Big Brown Units 1 and 2. The company estimates that 500workers will be laid off due to the changes.

In the lawsuit filed in the U.S. Court of Appeals for the District of ColumbiaCircuit, Luminant asked for review of the EPA's final Cross-State AirPollution Rule, published Aug. 8 (76 Fed. Reg. 48208; 152 DEN A-13,8/8/11).

The company is asking the court to invalidate the rule as it applies to Texas, and seeks a stay of therule while the lawsuit is pending.

EPA Rejects Rationale for Closings

EPA rejected the company's allegation that layoffs were necessary to meet the CSAPR. Gina McCarthy,

assistant EPA administrator for air and radiation, said in a statement that the agency had doneextensive outreach to industry to ensure there were an array of compliance options and had workedspecifically with Luminant. Those efforts including exploring additional flexibility for the companyand encouraging more reliance on technologies the company has already installed.

It is unfortunate that company leadership rushed to a decision that needlessly puts their workers'jobs at risk, McCarthy said.

Governor, State Agency Criticize EP A

Texas Gov. Rick Perry (R) criticized the EPA rules as road blocks. The Texas Commission on

Environmental Quality, saying the Luminant job losses were a sad confirmation of its earlierstatements on the cross-state rule, said the rules, imposed on Texas without adequate notice andwithout adequate scientific justification, will kill jobs, put the brakes on economic growth, increase

energy costs and impair our energy securityall with little or no positive environmental effects.

But Eva Hernandez of the Sierra Club called the Luminant announcement a victory for all Texans whocare about clean air. A Sept. 12 press release from the Sierra Club suggested the layoffannouncement could be tied to poor financial management of the plants, rather than to the cross-

state rule. The environmental group pointed out that San Antonio City Public Service is phasing out itsDeely coal-fired plant and retraining workers rather than laying them off.

Daily Environment Report

BNA Snapshot

Luminant Generation Co.

v. EPA, D.C. Cir., No. 11-1315, filed 9/12/11

Key Takeaway:

Luminant claims EPA'sCross-State Air PollutionRule has forced it to closetwo power plants and lay

off 500 workers.

Potential Impact:

Lawsuit, if successful,would invalidate the EPA

rule.

What's Next: Thechallenge is now before

the D.C. Circuit.


(Page 41 of Tot


42/78

Texas has not yet filed an action in federal court, but the state on Sept. 8 petitioned EPA to reconsiderthe rule and asked for a stay (In re Federal Implementation Plans: Interstate Transport of FineParticulate Matter and Ozone and Correction of SIP Approvals, 76 Fed. Reg. 48,208 (Aug. 8, 2011),

EPA Docket No. EPA-HQ-OAR-2009-0491, filed 9/8/11).

Texas Claims Major Changes From Proposal

The state charges that the rule as adopted differs substantially from the proposed rule. The proposedrule only covered nitrogen oxide emissions in Texas during ozone season, while the final rule covers

annual nitrogen oxide and sulfur dioxide emissions, according to the state's petition. Further, the statedid not receive adequate notice of the rule or sufficient opportunity to comment, the petition said.

In Luminant's statement announcing the shutdowns, it also said it will begin a substantial investment

program to upgrade the capabilities of existing environmental control equipment, install newenvironmental control equipment, and implement programs to reduce emissions at Monticello Unit 3and two other facilities, the Martin Lake Power Plant in Rusk County and the Sandow 4 Power Plant in

Milam County. The company said it would invest $280 million by the end of 2012 and plans to investmore than $1.5 billion in environmental control equipment control equipment by the end of thedecade.

By Nancy J. Moore

The Luminant petition to the U.S. Court of Appeals for the District of Columbia Circuit is

available at http://op.bna.com/env.nsf/r?Open=jsun-8lmsd5.

The Texas petition for reconsideration of the Cross-State Air Pollution Rule is available athttp://op.bna.com/env.nsf/r?Open=jsun-8lmux2.

The Cross-State Air Pollution Rule is available at http://www.gpo.gov/fdsys/pkg/FR-2011-08-

08/pdf/2011-17600.pdf.

Contact us at http://www.bna.com/contact/index.html or call 1-800-372-1033

ISSN 1521-9402

Copyright 2011, The Bureau of National Affairs, Inc.. Reproduction or redistribution, in whole or in part,and in any form, without express written permission, is prohibited except as permitted by the BNA Copyright

Policy. http://www.bna.com/corp/index.html#V


(Page 42 of Tot


43/78

ATTACHMENT B


(Page 43 of Tot


44/78

2011

State of the Market Report for PJM

Monitoring Analytics, LLCIndependentMarket Monitorfor PJM

Q2

8.15.2011


(Page 44 of To


45/78

www.monitoringanalytics.com

Monitoring Analytics and the Monitoring Analytics logo are registered trademarks of Monitoring Analytics, LLC.

Copyright 2011, by Monitoring Analytics, LLC, All Rights Reserved


(Page 45 of To


46/78

2011 Monitoring Analytics, LLC www.monitoringanalytics.com

Color:P S7483 | Logo Font:Futura edium | Tint:40% | 9/13/08

PREFACEPREFACE

2011 Quarterly State of the Market Report for PJM: January through June

PREFACE

The PJM Market Monitoring Plan provides:

The Market Monitoring Unit shall prepare and submitcontemporaneously to the Commission, the State Commissions,the PJM Board, PJM Management and to the PJM MembersCommittee, annual state-of-the-market reports on the state ofcompetition within, and the efciency of, the PJM Markets, andquarterly reports that update selected portions of the annual report

and which may focus on certain topics of particular interest tothe Market Monitoring Unit. The quarterly reports shall not be asextensive as the annual reports. In its annual, quarterly and otherreports, the Market Monitoring Unit may make recommendationsregarding any matter within its purview. The annual reports shall,and the quarterly reports may, address, among other things, theextent to which prices in the PJM Markets reect competitiveoutcomes, the structural competitiveness of the PJM Markets,the effectiveness of bid mitigation rules, and the effectiveness ofthe PJM Markets in signaling infrastructure investment. Theseannual reports shall, and the quarterly reports may includerecommendations as to whether changes to the Market MonitoringUnit or the Plan are required.1

Accordingly, Monitoring Analytics, LLC, which serves as the MarketMonitoring Unit (MMU) for PJM Interconnection, L.L.C. (PJM),2 and is also

known as the Independent Market Monitor for PJM (IMM), submits this2011 Quarterly State of the Market Report for PJM: January through June.

1 OATTAttachmentM(PJMMarketMonitoringPlan)VI.A.CapitalizedtermsusedhereinandnototherwisedenedhavethemeaningprovidedintheOATT,PJMOperatingAgreement,PJMReliabilityAssuranceAgreementorothertariffthatPJMhasonlewiththeFederalEnergyRegulatoryCommission(FERCorCommission).

2 OATTAttachmentMII(f).


(Page 46 of To


47/78


PREFACEPREFACE

2011 Quarterly State of the Market Report for PJM: January through JuneUSCA Case #11-1315 Document #1330156 Filed: 09/16/2011 Page 22 of 53

(Page 47 of To


48/78


Color:P S7483 | Logo Font:Futura edium | Tint:40% | 9/13/08

INTRODUCTION 1SECTION


SECTION 1 - INTRODUCTION

The PJM Interconnection, L.L.C. operates a centrally dispatched,competitive wholesale electric power market that, as of June 30, 2011,had installed generating capacity of 179,813 megawatts (MW) and morethan 700 market buyers, sellers and traders of electricity in a regionincluding more than 58 million people in all or parts of Delaware, Illinois,Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina,Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District ofColumbia (Figure 1-1)1. In the rst six months of 2011, PJM had total billings

of $18.7 billion. As part of that market operator function, PJM coordinatesand directs the operation of the transmission grid and plans transmissionexpansion improvements to maintain grid reliability in this region.

Figure 1-1 PJMs footprint and its 18 control zones2

1 Seethe2010 State of the Market Report for PJM,VolumeII,AppendixA,PJMGeographyformapsshowingthePJMfootprintanditsevolutionpriorto2011.

2 OnJune1,2011,theAmericanTransmissionSystems,Inc.(ATSI)ControlZonejoinedthePJMfootprint.

PJM Market Background

PJM operates the Day-Ahead Energy Market, the Real-Time EnergMarket, the Reliability Pricing Model (RPM) Capacity Market, the RegulatioMarket, the Synchronized Reserve Markets, the Day Ahead SchedulinReserve (DASR) Market and the Long Term, Annual and Monthly Balancof Planning Period Auction Markets in Financial Transmission Right(FTRs).

PJM introduced energy pricing with cost-based offers and market-clearinnodal prices on April 1, 1998, and market-clearing nodal prices with markebased offers on April 1, 1999. PJM introduced the Daily Capacity Markeon January 1, 1999, and the Monthly and Multimonthly Capacity Marketfor the January through May 1999 period. PJM implemented an auctionbased FTR Market on May 1, 1999. PJM implemented the Day-AheaEnergy Market and the Regulation Market on June 1, 2000. PJM modiethe regulation market design and added a market in spinning reserve oDecember 1, 2002. PJM introduced an Auction Revenue Rights (ARRallocation process and an associated Annual FTR Auction effective Jun1, 2003. PJM introduced the RPM Capacity Market effective June 1, 2007PJM implemented the DASR Market on June 1, 2008.3,4

On June 1, 2011, PJM integrated the American Transmission Systems, Inc(ATSI) Control Zone. The metrics reported in this 2011 Quarterly State o

the Market Report: January through June include the one month of ATSzone resources presence in the PJM markets.

Conclusions

This report assesses the competitiveness of the markets managed bPJM in the rst six months of 2011, including market structure, participanbehavior and market performance. This report was prepared by anrepresents the analysis of the independent Market Monitoring Unit (MMUfor PJM.

3 Seealsothe2010 State of the Market Report for PJM,VolumeII,AppendixB,PJMMarketMilestones.4 Analysisof2011marketresultsrequirescomparisontoprioryears.Duringcalendaryears2004and2005,PJMconductedthephasedintegrati

ofvecontrolzones:ComEd,AmericanElectricPower(AEP),TheDaytonPower&LightCompany(DAY),DuquesneLightCompany(DLCO)andDominion.InJune2011,theAmericanTransmissionSystems,Inc.(ATSI)ControlZonejoinedPJM.Byconvention,controlzonesbearthenaofalargeutilityserviceproviderworkingwithintheirboundaries.Thenomenclatureappliestothegeographicarea,nottoanysinglecompany.Foradditionalinformationontheintegrations,theirtimingandtheirimpactonthefootprintofthePJMserviceterritorypriorto2011,seethe 2010 Staof the Market Report for PJM,VolumeII,AppendixA,PJMGeography.


(Page 48 of To


49/78


INTRODUCTION1SECTION


r each PJM market, market structure is evaluated as competitive ort competitive, and participant behavior is evaluated as competitive ort competitive. Most important, the outcome of each market, marketrformance, is evaluated as competitive or not competitive.

e MMU also evaluates the market design for each market. The marketsign serves as the vehicle for translating participant behavior within

e market structure into market performance. This report evaluates theectiveness of the market design of each PJM market in providing marketrformance consistent with competitive results.

arket structure refers to the ownership structure of the market. The three

votal supplier test is the most relevant measure of market structurecause it accounts for both the ownership of assets and the relationshiptween ownership among multiple entities and the market demandd it does so using actual market conditions reecting both temporald geographic granularity. Market shares and the related Herndahl-rschman Index (HHI) are also measures of market structure.

articipant behavior refers to the actions of individual market participants.

arket performance refers to the outcome of the market. Marketrformance reects the behavior of market participants within a marketucture, mediated by market design.

arket design means the rules under which the entire relevant marketerates, including the software that implements the market rules. Marketes include the denition of the product, the denition of marginal cost,

es governing offer behavior, market power mitigation rules, and thenition of demand. Market design is characterized as effective, mixedawed. An effective market design provides incentives for competitivehavior and permits competitive outcomes. A mixed market design has

gnicant issues that constrain the potential for competitive behavior tosult in competitive market performance, and does not have adequatees to mitigate market power or incent competitive behavior. A awed

arket design produces inefcient outcomes which cannot be corrected bympetitive behavior.

The MMU concludes the following for the rst six months of 2011:

Table 1-1 The Energy Market results were competitive

Market Element Evaluation Market Design

MarketStructure:AggregateMarket Competitive

MarketStructure:LocalMarket NotCompetitive

ParticipantBehavior Competitive

Market Performance Competitive Effective

The aggregate market structure was evaluated as competitive becausethe calculations for hourly HHI (Herndahl-Hirschman Index) indicate

that by the FERC standards, the PJM Energy Market during the rstsix months of 2011 was moderately concentrated.Based on the hourlyEnergy Market measure, average HHI was 1216 with a minimum of889 and a maximum of 1564 in the January through June period of2011.

The local market structure was evaluated as not competitive due tothe highly concentrated ownership of supply in local markets createdby transmission constraints.The results of the three pivotal suppliertest, used to test local market structure, indicates the existence ofmarket power in a number of local markets created by transmissionconstraints. The local market performance is competitive as a resultof the application of the TPS test. While transmission constraintscreate the potential for local market power, PJMs application of thethree pivotal supplier test mitigated local market power and forcedcompetitive offers, correcting for structural issues created by local

transmission constraints.

PJM markets are designed to promote competitive outcomes derived fromthe interaction of supply and demand in each of the PJM markets. Marketdesign itself is the primary means of achieving and promoting competitiveoutcomes in PJM markets. One of the MMUs primary goals is to identifyactual or potential market design aws.5 The approach to market powermitigation in PJM has focused on market designs that promote competition(a structural basis for competitive outcomes) and on limiting market powermitigation to instances where the market structure is not competitive andthus where market design alone cannot mitigate market power. In the PJMEnergy Market, this occurs only in the case of local market power. When atransmission constraint creates the potential for local market power, PJM

5OATTAttachmentM


(Page 49 of To


50/78


INTRODUCTION 1SECTION


applies a structural test to determine if the local market is competitive,applies a behavioral test to determine if generator offers exceed competitivelevels and applies a market performance test to determine if such generatoroffers would affect the market price.6

Table 1-2 The Capacity Market results were competitive


MarketStructure:AggregateMarket NotCompetitive

MarketStructure:LocalMarket NotCompetitive

ParticipantBehavior:LocalMarket Competitive

Market Performance Competitive Mixed

The aggregate market structure was evaluated as not competitive.The entire PJM region failed the preliminary market structure screen(PMSS), which is conducted by the MMU prior to each Base ResidualAuction, for every planning year for which it was completed. For almostall auctions held from 2007 to the present, the PJM region failed theThree Pivotal Supplier Test (TPS), which is conducted at the time ofthe auction.

The local market structure was evaluated as not competitive. Allmodeled Locational Deliverability Areas (LDAs) failed the preliminarymarket structure screen (PMSS), which is conducted by the MMUprior to each Base Residual Auction, for every planning year for whichit was completed. For almost every auction held, all LDAs failed theThree Pivotal Supplier Test (TPS), which is conducted at the time ofthe auction.

Participant behavior was evaluated as competitive. Market powermitigation measures were applied when the capacity market sellerfailed the market power test for the auction and the submitted sell offerexceeded the dened offer cap.

Market performance was evaluated as competitive.Although structuralmarket power exists in the Capacity Market, a competitive outcomeresulted from the application of market power mitigation rules.

Market design was evaluated as mixed because while there are manypositive features of the Reliability Pricing Model (RPM) design, thereare several features of the RPM design which threaten competitiveoutcomes.These include the 2.5 percent reduction in demand in Base

6 Themarketperformancetestmeansthatoffercappingisnotappliediftheofferdoesnotexceedthecompetitivelevelandthereforemarketpowerwouldnotaffectmarketperformance.

Residual Auctions, a denition of DR which permits an inferior producto substitute for capacity and inadequate rules to address buyer sidmarket power.

Table 1-3 The Regulation Market results were not competitive7


MarketSt ructure Not Competi tive

Pa rt ic ip an t Beh av io r C om pet it ive

Market Performance Not Competitive Flawed

The Regulation Market structure was evaluated as not competitiv

because the Regulation Market had one or more pivotal supplierwhich failed PJMs three pivotal supplier (TPS) test in 94 percent of thhours in the rst six months of 2011.

Participant behavior was evaluated as competitive because markepower mitigation requires competitive offers when the three pivotasupplier test is failed and there was no evidence of generation ownerengaging in anti-competitive behavior.

Market performance was evaluated as not competitive, despitcompetitive participant behavior, because the changes in market rulesin particular the changes to the calculation of the opportunity cosresulted in a price greater than the competitive price in some hoursresulted in a price less than the competitive price in some hours, anbecause the revised market rules are inconsistent with basic economlogic.

Market design was evaluated as awed because while PJM haimproved the market by modifying the schedule switch determinationthe lost opportunity cost calculation is inconsistent with economilogic and there are additional issues with the order of operation in theassignment of units to provide regulation prior to market clearing.

7 AsTable13indicates,theRegulationMarketresultsarenottheresultoftheofferbehaviorofmarketparticipants,whichwascompetitiveasresultoftheapplicationofthethreepivotalsuppliertest.TheRegulationMarketresultsarenotcompetitivebecausethechangesinmarketrulinparticularthechangestothecalculationoftheopportunitycost,resultedinapricegreaterthanthecompetitivepriceinsomehours,resulinapricelessthanthecompetitivepriceinsomehours,andbecausetherevisedmarketrulesareinconsistentwithbasiceconomiclogic.Tcompetitivepriceistheactualmarginalcostofthemarginalresourceinthemarket.ThecompetitivepriceintheRegulationMarketisthepricethatwouldhaveresultedfromacombinationofthecompetitiveoffersfrommarketparticipantsandtheapplicationoftheprior,correctapproachtocalculationoftheopportunitycost.Thecorrectwaytocalculateopportunitycostandmaintainincentivesacrossbothregulationandenergymarketsistotreattheofferonwhichtheunitisdispatchedforenergyasthemeasureofitsmarginalcostsfortheenergymarket.Todootherwiseistoimputealowermarginalcosttotheunitthanitsownerdoesandthereforeimputeahigherorloweropportunitycostthanitsownerdoes,dependingonthedirectiontheunitwasdispatchedtoprovideregulation.Ifthemarketrulesand/ortheirimplementationproduceinefcientoutcomes,thennoamountofcompetitivebehaviorwillproduceacompetitiveoutcome.


(Page 50 of To


51/78


INTRODUCTION1SECTION


ble 1-4 The Synchronized Reserve Markets results were competitive

arket Element Evaluation Market Design

arketStructure:RegionalMarkets NotCompetitive

articipantBehavior Competitive

arket Performance Competitive Effective

The Synchronized Reserve Market structure was evaluated as notcompetitive because of high levels of supplier concentration andinelastic demand.

Participant behavior was evaluated as competitive because the market

rules require cost based offers.

Market performance was evaluated as competitive because theinteraction of the participant behavior with the market design results inprices that reect marginal costs.

Market design was evaluated as effective because market powermitigation rules result in competitive outcomes despite high levels ofsupplier concentration by offer capping those suppliers.

ble 1-5 The Day-Ahead Scheduling Reserve Market results were competitive

arket Element Evaluation Market Design

arketStructure Competitive

articipantBehavior Mixed

arket Performance Competitive Mixed

The Day-Ahead Scheduling Reserve Market structure was evaluatedas competitive because the market failed the three pivotal supplier testin only a limited number of hours.

Participant behavior was evaluated as mixed because while mostoffers appeared consistent with marginal costs, about ve percent ofoffers reected economic withholding.

Market performance was evaluated as competitive because therewere adequate offers at reasonable levels in every hour to s

Documents

Wilson Peition to Ct of Appls CSAPR