Excerpt from on-the-record response to the Association of Electric
Companies of Texas and the Gulf Coast Lignite Coalition

These commenters have questioned whether or not EPA’s modeling of
available emission reductions has accurately captured the
cost-effectiveness of increasing sub-bituminous consumption at units
currently blending various shares of Texas lignite.  While EPA believes
that its main analyses of the Transport Rule accurately reflect the most
cost-effective SO2 reductions available to Texas at the stringency level
of a Group 2 state, in response to these concerns, EPA also conducted
sensitivity analysis to address the cost-effectiveness of units
continuing to blend lignite coal under the 2012 SO2 budget for Texas in
the final rule.  The purpose of this analysis is to determine if the
Transport Rule’s SO2 assurance level for Texas is robust to varying
levels of blending lignite and sub-bituminous coals at Texas facilities;
in other words, the analysis investigates whether other cost-effective
emission reductions exist in Texas aside from coal-switching to meet the
state’s Transport Rule SO2 assurance level in 2012.

In this analysis, EPA constrained Texas units from increasing their
blending of sub-bituminous coal beyond the level each unit reported to
EIA for 2010.  This is a conservative scenario for fuel blending, as EIA
data shows that these units have significantly increased their level of
sub-bituminous blending over several years leading to 2010 and thus
already exhibit a multi-year trend of decreasing lignite consumption
before the Transport Rule was promulgated.  For the purposes of this
sensitivity analysis, however, their sub-bituminous blending is
prevented from growing beyond 2010 levels, notwithstanding the trend
through 2010.  Under these conditions, Texas is still projected to meet
its 2012 SO2 assurance level using other cost-effective emission
reduction strategies, including greater dispatch from lower-emitting
generators, while still maintaining 2010 lignite blending levels.  The
sensitivity analysis reveals that Texas can still achieve its assurance
level with other emission reductions available at the same marginal cost
shared by all Group 2 states.  That common marginal cost (the projected
Group 2 SO2 allowance price in 2012) remains about $600 in both the main
Transport Rule remedy analysis and this lignite-blending sensitivity
analysis.  Therefore, this analysis shows that the Texas SO2 assurance
level is robust across a wide spectrum of lignite and sub-bituminous
blending levels at Texas units.

Texas is still projected in this sensitivity scenario to emit less SO2
than its assurance level in both 2012 and 2014, even with its EGUs
continuing to consume in the future the level of lignite reported to EIA
in 2010.  This sensitivity analysis therefore shows that Texas can
sustain the operation of lignite mines and the provision of lignite coal
to Texas EGUs while still cost-effectively meeting the Transport
Rule’s emission reduction requirements.  Also, coal-switching is only
one of many ways by which Texas can comply; EPA data show that 75% of
Texas coal capacity will be scrubbed by 2012 and analysis shows that
those units can increase their generation.  Finally, natural gas-fired
units benefiting from substantially expanding Texas natural gas supplies
and low near-term prices can also increase their generation to help
Texas cost-effectively meet its 2012 SO2 budget.

EPA believes this sensitivity analysis demonstrates the flexibility that
is inherent in the Transport Rule programs as applied to Texas coal
choice specifically and applied to all states covered by the Transport
Rule more broadly.  While EPA established emission reduction
requirements for the states based on its modeling of the most
cost-effective reductions available at cost thresholds used to define
each state’s significant contribution and interference with
maintenance, EPA chose to implement these emission reduction
requirements as state emission budgets under which units can choose from
a variety of emission reduction behaviors.  This program design allows
units to consider all relevant local economic factors when making
dispatch, retrofit, and/or coal choice decisions factoring in the
programs’ market-based cost of emitting SO2 and NOX.

In addition, with the flexibility to submit a SIP to determine its
preferred allowance allocation pattern beginning in 2013 under EPA’s
expedited allowance allocation SIP process, Texas (as well as other
states) has the freedom to augment preferred compliance activities as
the state sees fit.

 The projected allowance price is slightly higher than the $500 per ton
cost threshold basis of the Group 2 SO2 state budgets due to banking
behavior under the trading programs.

