CAIR Replacement Rule

Discussions between Texas Commission on Environmental Quality (TCEQ) and
EPA

April 28, 2009

I.  Introduction

	On Tuesday, April 28, 2009, EPA held a call with the Texas Commission
on Environmental Quality (TCEQ) to discuss the CAIR replacement rule. 
The summary that follows covers the key issues discussed during the
call. 

II.  EPA Opening Comments

	Sam Napolitano, CAMD, noted that illness had prevented Bill Harnett,
OAQPS, from joining the call, but that some of his key staff were on the
call.  Sam then briefly outlined the current situation, explaining that
EPA was beginning the process of creating a replacement rule for CAIR. 
The Agency is reviewing all options, setting up analyses, and preparing
technical models.  The goal is to finalize a replacement rule within two
years.  

	The primary objectives are to help states comply with the NAAQS and to
reduce interstate transport.  Therefore, EPA has decided that it would
be best to start working with states and stakeholders immediately.  EPA
has already held a number of meetings with state groups and stakeholders
and would like to hear from Texas about what type of replacement rule
would be most practical while also achieving the required emission
reductions.  Sam stressed that this is the beginning of a dialogue
process, and that EPA intends to continue these types of discussions
throughout the rule development process.  

	This is a chance for the stakeholders to talk to the key EPA staff that
will actually develop and write the rules, as well as the OGC attorneys
assigned to the rule development.  Sam stressed that EPA is interested
in hearing the stakeholders' thoughts and concerns.  Everything is on
the table as EPA puts together ideas for the new Assistant Administrator
for Air and Radiation, who should arrive within the next couple of
weeks.  

III.  TCEQ Opening Discussion 

	Kim Herndon, TCEQ, thanked Sam and EPA for the opportunity to share
ideas and to discuss the replacement CAIR rule.  She indicated that for
the most part TCEQ had questions for EPA, and she began by asking how
the CAIR replacement rule would mesh with CAIR as it is currently in
effect.

	Sam explained that the current CAIR rule was in effect and that EPA
credits the rule with 2.4 million tons of reductions and the largest SO2
reductions in 15 years.  EPA has distributed allowances for all sources
through 2010, and some sources were given allowances for 2011-2013.  In
general, the Agency is waiting for the new Assistant Administrator for
Air and Radiation before distributing later year allowances.  EPA has
informed the designated representatives (DRs) at the affected facilities
that the original CAIR will be in effect through 2010, after which it is
unclear what will happen.  The Agency has cautioned DRs to be careful
about trading or buying later year allowances given the regulatory
uncertainty.  

	Kim noted that Texas was under the FIP for Phase II of the original
CAIR.  TCEQ has been instructed by the state legislature to revise the
SIP for approval so that the state is not under the FIP for Phase II. 
She asked what TCEQ should do, given that the replacement CAIR rule is
supposed to be promulgated before Phase II.  Sam replied that a specific
discussion about Texas' SIP would be better coordinated through EPA
Region 6.  EPA would be very interested in helping work through any SIP
issues, but that process has to go through the Regions.  

	TCEQ posed several questions about details of the new CAIR replacement
rule, at which point Sonja Rodman, OGC, intervened to provide context to
the discussion.  She explained that EPA was at the very beginning of the
rulemaking process and had not made any decisions about specifics of a
replacement rule.  She noted that the D.C. Circuit Court had remanded
the rule after finding substantial flaws in how EPA had addressed
significant contribution.  The court ruled that EPA had failed to
quantify each state's individual contribution and found that the remedy
did not adequately remove each state's significant contribution.  EPA
now confronts fundamental questions about how to address significant
contribution and create a remedy that satisfies the court's decision.  

	The purpose of this meeting is to get a sense of what the states need
from EPA.  The Agency is not in a position to discuss the details of the
replacement rule because fundamental decisions about how the new rule
will work still need to be made by incoming management.  This is an
opportunity for Texas to talk to EPA about how the state believes the
Agency should address the fundamental issues raised by the court.  

Susana Hildebrand, TCEQ, explained that Texas was primarily concerned
with not penalizing sources in the state that had already made
significant NOx reductions as a result of state legislative requirements
set years ago.  Texas does not want to require further reductions from
those sources because, on average, other states have not made similar
reductions.  

	The group then turned to discuss the agenda EPA had provided and
distributed before the call.  

III.  Discussion of Agenda

	

1.  Baseline  

	Sam Napolitano noted that a number of issues arose during consideration
of which year to use as a baseline.  Some states have expressed concerns
about using a future year because of the many extrapolations required. 
Other concerns center on the fact that MACT requirements, and other
known settlements that will require controls to be installed, could not
be taken into account using current year data.  Because EPA knows that
the emission situation will have changed by the time the replacement
rule is promulgated, some have argued that the Agency should try to
forecast a future year baseline.  

	Susana Hildebrand expressed concern that units that have already
installed scrubbers might be unable to make further significant
reductions.  She suggested that EPA should use some type of emissions
factor or other mechanism to credit facilities that have already made
reductions and reward the early investment.  EPA should not require a
flat percentage reduction.  

Tim Smith, OAQPS, explained that EPA is wrestling with how to consider
cost when looking at significant contribution and a remedy that
satisfies the court decision.  In Texas' situation, where the sources
are already well-controlled, further reductions would clearly have a
much higher cost.  Susana agreed with Tim's characterization of her
comment as expressing a preference that EPA consider cost.  

David Schanbacher, TCEQ, provided additional background on the reduction
percentages that Texas has achieved.  He noted that Texas implemented a
cap and trade program in the 1990s for grandfathered facilities that had
not gone through the permitting process.  Through this program Texas was
able to achieve 50% reductions on average statewide.  Given this
success, the SIP group created a similar program for permitted
facilities, which gave Texas about a 50% reduction across the board. 
The state has also achieved significant reductions under SIP plans
implemented for Houston and Dallas, where they have realized nearly 90%
reductions.  Texas has also been working to replace some of the older
natural gas fired peaker units that have been responsible for
significant NOx emissions.  

	David noted that fear of being penalized is one of the primary concerns
of facility owners, and one of the reasons they resist putting on
controls proactively.  TCEQ believes that large reductions have been
achieved in Texas under the plans that have been implemented, and it
does not want federal regulations to penalize owners who put on controls
either proactively or in response to state regulations.  

Sam said he understood TCEQ's concerns.  EPA has attempted in the past
to consider, in an even-handed manner, the significant contribution that
upwind states make to downwind states and to set a limit where all
states over the limit for ozone or fine particles would, in an equitable
way, be part of addressing the transport problem for downwind states. 
He asked if TCEQ was concerned with EPA continuing to address transport
in that manner.

Susana Hildebrand explained that one of the key concerns is Texas's size
and the geographic location of all its plants.  Western plants have no
significant transport issues in most cases, but they get drawn into the
program because eastern plants are affecting neighboring states.  Texas
is large enough that multiple states could fit within its borders. 
Perhaps one way EPA could address this geographic challenge is to divide
the state into quarters.

David then noted that Texas is the one state with a self-contained grid,
which means it does not generate energy within its borders to export to
other states.  For the most part, what is generated in Texas is also
consumed here.

2.  Quantifying Significant Contribution

Sonja Rodman said that significant contribution was a big area to
address, with many options for the replacement rule.  For CAIR, EPA
established significant contribution through a two step process.  EPA
first conducted air quality modeling to determine which states should be
included in the region and then looked at the cost-effectiveness of
controls to determine significant contribution.  EPA established
regional caps and developed the state budgets for each pollutant
involved.  The D.C. Circuit Court ruled that EPA had failed to quantify
individual state significant contributions and thus also did not require
the specific state to eliminate its significant contribution.  As EPA
develops the new rule it is considering alternate ways to define
significant contribution.  The Agency welcomes suggestions, especially
on what role modeling and cost-effectiveness should play in quantifying
and remedying significant contribution.

TCEQ replied that it had not formed an opinion regarding significant
contribution or cost analysis.  TCEQ strongly criticized the idea that
west Texas was contributing to Illinois and east St.  Louis.

Sonja indicated that EPA would accept comments on dividing Texas for the
purpose of the CAIR replacement rule.  However, the issue has already
been litigated and is partially addressed in the recent court decision. 
Kim Herndon offered to assemble more formal comments on the issue. 
Sonja noted that one issue to address is whether any suggested dividing
lines are specifically related to interstate transport.  Kim responded
that the only differences between one state and another are government
boundaries.  Therefore, Texas should be able to create boundaries within
the state.  

Sonja noted that the Agency is willing to consider all options. 
However, from a defensibility standpoint lines unrelated to interstate
transport seem more difficult to defend in court.  Accepting a boundary
drawn by Texas is very different than working with state boundaries.  

3.  Remedy

	Tim Smith outlined the issue of remedy:  What remedy should be applied
to the quantified significant contribution?  What types of approaches
should be considered?  Is the trading option practical?  Tim noted that
EPA had heard suggestions ranging from a strict command-and-control
program to a trading program, as well as various combinations of the
two.  Some states expressed interest in combining looser standards with
a trading program in an effort to leverage the increased reductions that
can be gained by allowing trading.  

TCEQ indicated that it generally supports the cap and trade philosophy
and believes there is value in allocating allowances in a manner that
gives credit to facilities already operating at low emission rates. 
TCEQ raised concerns that in the past rules have been developed that did
not take into consideration trading programs other than the NOx SIP
Call.  Texas has a cap and trade program separate from the NOx SIP Call.
 Assumptions about the NOx SIP Call do not apply to all states with
trading programs.  It is frustrating when comments from EPA Headquarters
do not seem to recognize the existence of other trading programs.  

Sam acknowledged TCEQ's concern and indicated that he had heard about
the program before during a presentation by Susana Hildebrand at MIT. 
Per Sam's request, Susana agreed to send him materials about Texas' cap
and trade program.  

Tim asked for examples of the types of comments TCEQ thought overlooked
their program.  Kim noted that she did not have any specific comment in
front of her, but that responses concerning state trading programs would
often start with such phrases as "If you are a NOx SIP Call state this
applies, otherwise this does not apply to you".  In general, the
responses seemed to imply that the NOx SIP Call is the only program of
its kind, which is not true because there are states with different cap
and trade programs.  

Sam noted that nothing said at this point would be taken as an official
position.  These calls are a chance for states to think aloud and offer
ideas.  

Susana suggested that EPA consider trading zones so that states can
count on certain reductions during ozone planning.  It is hard for
states to incorporate CAIR reductions into modeling for their SIPs.  A
trading zone would guarantee states that there would be certain amounts
of reduction within a trading zone.  States could then incorporate those
known reductions into SIP planning.  Under the original CAIR it was not
clear where the reductions would take place, which made it harder to try
and incorporate those reductions in the planning process.  

Sam said that EPA considered trading zones during the NOx SIP Call, but
that it ultimately decided not to include the zones.  He asked whether
TCEQ had thoughts about major air sheds or about how EPA should set up
the zones.  Susana replied that TCEQ did not have any specific
recommendations to make.  It would like to see improvements in the Gulf
cost region that might help the Houston and Beaumont areas. 
Specifically, there are concerns about transport from Louisiana, and
Louisiana has similar concerns about transport from Texas.  A trading
zone in which both states could quantify the reductions would be
helpful.  

4.  Affected Area/National Ambient Air Quality Standards (NAAQS)

	Which states or regions should be covered by the rule?  Sam Napolitano
noted that some stakeholders had recommended expanding CAIR to include
western states.  What should the timing of the rule look like?  Should
EPA start with existing NAAQS?  Or, should it try to integrate the newer
NAAQS into a replacement rule?  Timing becomes a key element when
considering which NAAQS to target.  

	

Kim Herndon suggested that it would be helpful if the reductions from
the CAIR replacement rule lined up with the attainment dates.  For
example, the initial NOx part of the current CAIR will be implemented in
2010 and Texas needs the reductions in 2009.  Sam noted that the CAIR
annual NOx program began on January 1, 2009.

Tim Smith then asked whether EPA should address the 2008 NAAQS.  Susana
Hildebrand said EPA should address the 2008 NAAQS and by-pass the 2006
NAAQS because by achieving the 2008 levels states would have met the
2006 requirements.  She then inquired whether EPA thought the
replacement rule would continue with an annual and summer program.  Sam
responded that the summer program was largely to reassure the eastern
states that the NOx Budget program reductions were achieved.  

Susana suggested that the ozone season become an annual program because
if other states are contributing to Texas' ozone problem, those states
should have the same year-round controls Texas requires.  With the
lowering of the NAAQS and possible inclusion of the entire state, it is
even more important that other contributing states have annual controls.
 

Sam noted that EPA had transitioned away from the NOx Budget program and
into CAIR.  What happens between now and when the final revised CAIR is
published is unclear, but EPA does feel that the program has been
extremely helpful in reducing ozone problems in the east.  

IV.  Concluding Points

	Sam Napolitano thanked TCEQ members and said EPA would take all of
their suggestions under consideration.  He mentioned that meeting notes
would be sent out to all the participants and suggested that they
include additional comments as addenda to the notes.  This will help
continue the dialogue process.

	TCEQ thanked EPA for providing an opportunity to begin the dialogue
process.  Staff will continue discussing the issues EPA has raised and
will try to add comments or further thoughts to the meeting notes.

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