BEFORE THE ILLINOIS POLLUTION CONTROL BOARD

IN THE MATTER OF:

1

1

PROPOSED NEW CAIR SO?, CAIR NOx

1

ANNUAL TRADING PROGRAMS,

1

R06-26

35

1LL.ADM.CODE 225,

1

(Rulemaking

-

Air)

CONTROL OF EMISSIONS FROM LARGE

)

COMBUSTION SOURCES,

1

SUBPARTS A, C, D, AND E

)

NOTICE OF FILING

Dorothy Gunn, Clerk

Illinois Pollution Control Board

James

R. Thompson Center

Suite 11-500

100 West Randolph

Chicago, Illinois 60601

Persons included on the

ATTACHED SERVICE LIST

PLEASE TAKE NOTICE that we have today filed with the Office of the Clerk of the

Pollution Control Board

POST-HEARING COMMENTS OF DYNEGY MIDWEST

GENERATION, INC., AND SOUTHERN ILLINOIS POWER COOPERATIVE,

copies of

Dated: January 5,2007

Sheldon A. Zabel

Kathleen

C. Bassi

Stephen

J. Bonebrake

SCHIFF

HARDIN, L1,P

6600 Sears Tower

233 South Wacker Drive

Chicago, Illinois 60606

3 12-258-5500

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007

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BEFORE THE ILLINOIS POLLUTION CONTROL BOARD

IN THE MATTER OF:

1

1

PROPOSED NEW CAIR SO2, CAIR NOx

)

ANNUAL TRADlNG PROGRAMS,

1

R06-26

35 ILL.ADM.CODE 225,

1

(Rulemaking

-

Air)

CONTROL OF EMISSIONS FROM LARGE

)

COMBUSTION SOURCES,

1

SUBPARTS A, C, D, AND E.

OF DYNEGY MIDWEST GENERATION,

AND SOUTHERN ILLINOlS POWER COOPERATlVE

NOW COME Participants, DYNEGY MIDWEST GENERATION, INC., and

SOUTHERN ILLINOIS POWER COOPERATIVE (collectively "the Companies"),

by and

through their attorneys,

SCI-IIFF HARDIN LLP, pursuant to the Hearing Officer's December 20,

2006, Order that post-hearing comments in the above-captioned matter are due

by January 5,

2007, and to 35 111.Adm.Code

5

102.108, and offer the following post-hearing comments:

INTRODUCTION

The Illinois Environmental Protection Agency ("Agency" or "Illinois EPA") invited the

Companies and other affected entities and interested parties to attend meetings at which the

Agency provided information regarding its development of the rule proposed in this Docket, as

well as the mercury rule (Docket R06-25). At the outreach meetings, the Agency provided

information regarding its proposal to comply with the

federal Clean Air Interstate Rule ("CAIR)

and established a structure where participants were to

email questions to the Agency that the

Agency would answer during the next weekly outreach meeting. Initially, the Agency provided

concepts, and these concepts were ultimately converted to regulatory language. The concepts

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presented by the Agency on January 24,2006, have not changed in any substantive way to this

date despite industry arguments concerning the size of the Clean Air Set-Aside ("CASA") and an

allocation methodology based upon only a two-year look-back and gross electrical output. The

only concession has been to allow the conversion of heat input to gross electrical output for the

first several years of the program.

The Companies have consistently expressed their position that a set-aside of 25% for the

CASA is not justifiable. The Agency's apparent view is that

"big ticket" pollution control

projects should and would be incentivized by the CASA. Any incentive should be directed at the

environmental benefit that results, not merely at the cost of the project. The Companies have

also expressed deep concerns about the two-year look-hack and the demonstrated inability of the

Agency to consistently and timely submit allocations to the U.S. Environmental Protection

Agency ("USEPA"). With the lack of

"levelizing" of a two-year look-back, failure on the part of

the Agency to timely submit allocations could be devastating to the Companies. In addition; the

Companies generally prefer that allocations be based upon heat input rather than gross electrical

output as proposed by the Agency. Finally, the Companies do not support any change to the

proposed reliance on fuel weighting as included in the rule.

11.

CASA

The Agency argues that as a matter of public policy, the CASA is necessary to encourage

projects that would benefit air quality and to support the Governor's various energy plans. The

benefits to air quality would be incentivized by the CASA by two means:

(I) rewarding the

generators for taking steps to control emissions in various ways and (2) encouraging the

development of "green" projects. The Agency never explains why it chose

25% of the total cap

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for the size of the CASA, and the size of the CASA has been a matter of disagreement from the

first stakeholder meeting last January.

Absent retirement of unused CASA allowances that

''w"

occur far into the future, the

Agency did not demonstrate how the CASA will result in improvements to air quality in Illinois.

The Agency repeated throughout its oral testimony, contrary, at the least, to the implications of

its written testimony and to the documents submitted to the Board with the initial proposal on

May

30: 2006, that the CASA would not reduce the overall emissions cap, either in Illinois or

regionally. In fact, modeling by the Agency's consultant, ICF, indicated that emissions of

nitrogen oxides

("NOx") in Illinois would not be reduced with a 25% CASA even if all of the

25% were retired. Springfield Transcript

("S Tr.") October 10,2006, a.m., p. 20; Technical

Support Document

("TSD"), pp. 67-68; ICF,

Analysis ofIllinois NOx Budget Reductions

(March

25,2006), Agency's Documents Relied Upon

#

33 ("ICF Report"), p. 3. Therefore, the proposed

CASA has only the potential to merely displace the location of the emissions

A.

Demonstrations

At least one of the Agency's purposes for proposing a 25% CASA has changed since

January 2006 when it first announced that it would seek such a large set-aside. In January and

throughout the stakeholder meetings, the Agency contended that the large set-aside was

necessary for attainment and that the Agency would retire unused, accrued allowances from the

collective set-aside pools. When challenged as to the means for claiming such credit, the

Agency evaded answering and finally merely stated that there is guidance. That guidance was

included in the Agency's initial regulatory submittal, which continued the theme that the unused,

accrued set-aside allowances were necessary for purposes of attaining and maintaining the

national ambient air quality standards ("NAAQS").

See

Statement of Reasons, Ex. F. However,

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by the time of hearing, the Agency appeared to have backed off the position it held from the

stakeholder meetings through submittal of the initial regulatory proposal: at the Springfield

hearing. the Agency acknowledged that it could not quantify the number of allowances that

would be available for retirement and that such retirements could not occur until

after the

attainment date. Therefore, such retirements are not usable in the attainment demonstration. The

Agency reinforced the statement that emissions represented by the CASA allowances would

remain in the regional pool at the Chicago hearing.

C f, Chicago Transcript ("C Tr."),

November 29.2006, pp. 31-32. The same frailties that attach to reliance on the unused, accrued

set-aside allowances for purposes of demonstrating attainment also apply to reliance on these

allowances in a maintenance plan: they cannot be

quantif ed and their number is not permanent.

As Exhibit

F to the Statement of Reasons in the Agency's initial regulatory submittal sets

forth, for emissions reductions to be creditable for purposes of meeting various federal

demonstration requirements. such as demonstrations of attainment, demonstrations of

Reasonable Further Progress

(RFP), or maintenance plan demonstrations, the reductions must be

quantifiable, permanent, surplus, and federally enforceable. Statement of Reasons, Ex.

F, pp. 4-

7. The retirement of unused. accrued set-aside allowances would be federally enforceable.

Whether they are surplus is perhaps arguable, if Illinois

EGUs not allocated those allowances

must replace them with purchases in the marketplace. While the retirement of a given

allowance, identified by its serial number, is permanent, the Agency cannot guarantee into the

future the number of allowances that would be retired under the regulatory scheme currently

before the Board. Rather, the Agency provides in the proposed rule that it

retire the unused,

accrued allowances.

5

225.475(b)(5). Therefore, the Agency cannot say that there is a

permanent number of allowances that would be retired into the future. Moreover, the Agency

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was unable or unwilling to describe the process it would follow when making such decisions,

including whether

tbat process would be public. October 11,2006, p.m., pp. 38-40. Finally, part

and parcel with the lack of a permanent number of allowances that can be identified to be retired

into the future, the reductions are not quantifiable. Because the allowances are those that are

unused and accrued from the CASA and because

the CASA depends, on an annual basis, upon

applications from project sponsors, the Agency cannot predict with certainty how many

allowances will be used from year to year and the rate at which unused allowances will accrue

and thereby be eligible for retirement.

The Agency's next air quality argument for

such a large set-aside is that the-more-NOx-

reduced-the-better principle should apply. This phrase first gained widespread popularity as a

reason for reducing

NOx on a regional basis during development of the NOx SIP call' and was

coined by the modelers at the Lake Michigan Air Directors Consortium (LADCO), who had a

leading role in

tbat process. However, the Agency has not demonstrated that several aspects of

this approach are applicable. First, Robert

Kaleel explained the concept of the NOx disbenefit,

where reductions of

NOx result in an increase in ozone in the vicinity of the reductions. S Tr.,

October 10,2006, p. 97. Where the reductions are large enough, such as significant reductions

from a coal-fired power plant,

the NOx disbenefit can impact ozone levels in a nonattainment

area, if the power plants are located in a nonattainment area. In recognition of this phenomenon,

Congress included Section

182(f) in the 1990 Clean Air Act Amendments, and Illinois obtained

a waiver from

NOx requirements under that section relative to the I-hour ozone standard. 61

Fed.Reg. 2428 (January 26, 1996). Mr. Kaleel noted that Illinois' NOx waiver was rescinded

'

USEPA's requirement that states it found significantly contributed to downwind 1-hour

ozone nonattainment revise their state implementation plans

("SIPS") to comply with a cap on

NOx emissions. 63 Fed.Reg. 57355 (October 27, 1998).

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with the rescission of the 1-hour ozone standard and implied that Illinois has not sought a waiver

from ozone

NOx requirements pursuant to Section 182(f) relative to the 8-hour standard. S Tr.,

October 10,2006, a.m., pp. 96-98. However, the Agency did not provide any discussion or

explication of the air quality effects of reducing

NOx in the nonattainment areas in this

proceeding. The Agency claimed in the TSD and Mr.

Kaleel's testimony that various additional

reductions of

NOx are necessary in order for the state to demonstrate attainment of the ozone and

PM2.5 NAAQS but provided no elucidation of those claims. TSD, pp. 35-50;

S Tr., October 10,

2006, a.m.. p. 20; Agency

Ex.4, pp. 6-7.

Mr. Kaleel also revealed that preliminary monitoring data indicate that the Chicago area

has attained the 8-hour ozone standard.

S Tr., October 10,2006, p.m., p. 33. He gave no

indication or reason to believe that the preliminary data is likely to substantially change through

quality

assuranceiquality control procedures. This calls into question Table 3-5 in the TSD and

Mr.

Kaleel's testimony. Air quality data and modeling data are apparently not matching.

Further, requesting redesignation of those areas that have attained the 8-hour ozone standard

removes a fair number of statutory requirements that the Agency must contend with, thus

reducing the amount of administrative detail with which the Agency must deal. Also, relevant

for this rulemaking, attainment of the 8-hour ozone standard in Chicago was achieved without

the implementation of any part of the CAIR. This calls into serious question the need for a 25%

CASA for air quality purposes relative to ozone.

Comprehensive Approach to Clean Air Act Requirements

Another recurrent theme in the Agency's submittal is that reductions are needed for

numerous requirements: PM2.5 attainments, ozone attainment. haze, the new PM2.5 standard,

BART, RACT, and on and on. Yet the Agency's analysis of the CASA, as discussed above,

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demonstrates that the CASA will not decrease NOx emissions in Illinois. Further, the Agency

presented no comprehensive plan, either in this proceeding or otherwise, that illustrated an

organized, developed approach to the myriad of federal requirements with which the Agency

must comply. Industry is not obstructionist in opposing the Agency's approach and recognizes

that there may be a need for some level of reduction of

NOx and sulfur dioxide ("SOz") and is

quite willing to make it. However, industry cannot support the

ad hoc,

willy-nilly approach

-

or

lack of comprehensive, organized approach

-

that the Agency has put forth so far. This approach

has forced individual companies, including the operators all of the

EGUs subject to this proposed

rule except City Water Light

&

Power to enter into negotiations with the Agency on an

individual basis, sometimes successfully and sometimes not, resulting in the inconsistent hodge

podge of regulation that

Part 225 is or will become. These companies find this necessary in

order to protect their future interests and to gain as great a level of certainty as they can regarding

future regulation for their business purposes.

If the Agency claims that the proposed rule plays a role in the attainment demonstrations

that must he submitted to

USEPA, it must explain exactly the role that the proposal will play in

the overall plan for the attainment demonstrations, particularly when asked about it. The Agency

has failed to do so. It included tables in the TSD and Mr.

Kaleel's testimony (TSD p. 39; S Tr.,

October

10,2006, p.m., pp. 57-59) indicating the percentage reduction of local (i e

,

within the

nonattainment area) emissions of volatile organic compounds ("VOC"), regional

(I e

.

outside the

nonattainment area and within the larger geographic region included in the CAIR)

NOx, and

regional

SO? necessary for Illinois to demonstrate attainment through modeling but could not

point to which part this rulemaking plays in the entire plan for demonstrating attainment.

Moreover, the Agency did not provide information regarding the amount of local

NOx reduction

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necessary for attainment. While the entire scheme is not the scope of this rulemaking and may

not even be within the purview of the Board, the Board and public are, nevertheless, entitled to

know what piece of the scheme this is, particularly when the proposed rule deviates so

significantly from the federal requirement, which addresses these same overarching air quality

concerns. That is,

USEPA promulgated the federal CAIR to address the regional aspects of

PM2.5 attainment, ozone attainment, and haze; further USEPA has stated that states may rely on

their participation in the federal CAIR trading programs to satisfy the Clean Air Act's

RACT~

and BART requirements. 70 Fed.Reg. 25161; 25260,25300 (May 12,2005); 70 Fed.Reg.

39103, 39137 (July 6,2005). Inclusion of a 30% set-aside (including the New Unit Set-Aside

("NUSA")), where

USEPA proposed only a 5% set-aside, reduced to 3% in 2015, magnifies the

need for the Agency to explain how the proposal fits into its overall plan for meeting the

numerous requirements of the Clean Air Act, particularly when the implication is that this same

industrial sector, the coal-fired power plants, will be the source of future reduction requirements

-

if they become necessary. With no demonstrated air quality benefit deriving from the 25%

CASA, it is incumbent upon the Agency to explain in detail how this all works.

The Agency has a duty to explain what is necessary and how the proposed rule satisfies

some of the air quality needs and, most particularly, how a 25% CASA accoinplishes satisfaction

of those needs

-

when any reductions accomplished by the set-aside are not certain and when the

emissions represented by the CASA remain in the regional pool of allowances and when the

Agency's own consultant found that the CASA would not result in

NOx reductions in Illinois

Please note that

USEPA bas granted a petition for reconsideration and will reconsider

whether CAIR satisfies RACT. 71

Fed.Reg. 75902 (December 19,2006).

-8-

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C.

Lack of Identified Proieets

The Agency was not able to identify projects that justify the size of the set-aside. The

Agency's Ross Cooper indicated that there are several wind generation projects in Illinois, which

industry acknowledges. Mr. Charles Kubert, witness at the Chicago hearing for the

Environmental Law and Policy Center, could not state that there are sufficient

EEIRE projects to

use up anywhere near the 9,150 allowances that comprise this sector of the CASA. C Tr.,

November 29,2006, p. 192. The megawatts that wind power, landfill gas. biomass, and solar

photovoltaics will generate are very small -Mr. Kubert stated that there are only about 2,000

MW under development

-

certainly not equal to 25% of Illinois' budget. C Tr., November 29,

2006, p. 192. Thus, the number of expected EEIRE projects, and resulting allowances, is quite

small and does not justify the proposed enormous 25% set-aside

The Agency identified a number of new coal-fired projects either permitted or under

review that could obtain allowances from

both the NUSA and the CASA. The Agency also

recognized that Ameren, through opting in to the Multi-Pollutant Standards ("MPS") adopted in

the R06-25 mercury mlemaking, would he eligible for early adopter CASA allowances. As

proposed, Southern Illinois Power Cooperative ("SIPC") would he eligible for a small number of

CASA allowances under the clean technology category, and the

Taylorville Energy Center, if

that project proceeds, will be eligible for a number of allowances

from that same category plus

from the NUSA.

Not only is there no evidence of EEIRE projects that would justify anything approaching

a 25% CASA, through the "tipping" provisions of the CASA, ultimately, a significant portion of

the CASA allowances could go to Ameren. It boils down to the five other power generators in

Illinois subject to this rule subsidizing Ameren's reductions, largely in

SOz. under the MPS

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through the CASA. We note that Ameren's base rate for SO2 was significantly higher than the

other Illinois generators because Ameren chose to purchase

SO* allowances under the Acid Rain

Program (42 U.S.C.

$5

7651-76510) rather than to install add-on control equipment or to switch

to low-sulfur coal. We also note that Ameren, after making all those

SO2 reductions, would

arrive at an

SO2 rate that is still the highest in the state. We find it extremely inequitable that the

five other power generation companies in the state should be expected to subsidize Ameren

through the CASA when the other companies had reduced

SO2 emissions, thus benefiting the

environment, for many years prior to implementation of the MPS.

So, it appears that while many CASA allowances will he allocated and will not he

available for retirement, many of the allocated CASA allowances will he issued to Ameren to

accomplish,

by 2012, what the other companies had accomplished many years earlier

-

in the

case of Midwest Generation,

by 1980. and in the case of Dynegy, in stages from 1999-2005.

SIPC, of course, already has a scrubber on its Unit 4 and its circulating fluidized bed boiler

("CFB") is designed to control sulfur emissions.

D.

Effect of 25% Set-Aside on Economic Analysis of the Proposed Rule

Setting aside 25% of Illinois' cap is the equivalent of providing no allowances to

approximately a 4,250 MW EGU. This is equivalent to not allocating allowances to the entirety

of Dynegy's system plus City Water Light

&

Power plus SIPC

-

with 102 MW still not

accounted for.

See

Midwest Generation ("MWG") Ex. 1. This is significant.

James Ross testified on behalf of the Agency that the proposed rule is highly cost

effective as defined

by USEPA, even with the 25% CASA. S Tr., October 10,2006, a.m., p. 58.

However, Mr. Ross could not say whether the revenues associated with allowance trading, part

of what makes the federal CAIR highly cost effective, that are lost

by the companies because of

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the 25% set-aside were considered in the IPM analysis. Apparently, the Agency's logic is that

the cap is not affected by the 25% CASA and the CASA allowances remain in the regional pool

to be purchased by Illinois

EGUS~ that are not allocated a number of allowances sufficient to

cover their emissions, and so the rule remains within the scope of USEPA's determination of

highly cost effective. Mr. Ross stated that the CASA is available to offset the costs associated

with installing pollution control equipment to comply with the CAIR. However, this is circular

reasoning. If EGUs must purchase allowances that

USEPA intended be allocated to them

without cost, then the Illinois rule is significantly different from USEPA's assumptions in its

highly cost effective analysis and significantly more costly than for EGUs in states with

set-

asides the same as or at least closer to the 5% NUSA in the model rule. Indeed, ICF predicted

additional allowance purchase costs of more than $25 million per year as a result of

the proposed

CASA, a cost not included in USEPA's analyses. ICF Report, pp.

4-5.

Had USEPA believed that the cap for Illinois should be 25% less. then it would have

made the cap 25% smaller. USEPA's highly cost effective analysis was based upon an annual

cap of 76,230 tons and a

seasonal cap of 30,701 tons of NOX.~ USEPA's assumption was that

95% of the cap would be allocated without cost to affected

EGUS,~

with unused allowances to be

returned to the EGUs from whom they were set-aside. USEPA's analysis did not assume a

CASA of any size. The proposed rule departs from these assumptions of what is highly cost

effective significantly

-

by 25%.

Which clearly admits that the set-aside will not contribute towards attainment

These numbers reflect the Phase

I caps. The Phase I1 caps are 63,525 and 28,981 tons,

respectively.

5

The remaining 5% was to be allocated to the NUSA, reduced to 3% in 2012.

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The Agency argues that USEPA granted flexibility to states with respect to inclusion of a

set-aside for

EEJRE

projects. USEPA does not suggest anywhere in the Preamble to the CAIR

that there should be an additional set-aside for early adopters, clean coal technology, and so

forth. In fact,

USEPA added the Compliance Supplement Pool ("CSP) to the annual NOx

program for the purpose of encouraging early reductions and to help EGUs that could not

comply without threatening the integrity of the grid. The Agency proposes to first retire the CSP

of 11,299 allowances allocated to Illinois and to twist

USEPA's intent to encourage early

reductions by then taking away an additional 19,058 allowances from the general pool annually

and redistributing a portion of them to early adopters, touting this as an incentive. To call the

Agency's machinations an incentive is stretching the concept to the extreme. This is exhibiting

pretzel-like flexibility, very bent but rigid

E.

Governor's Sustainable

Ener~

Enerw Plan (August 2006)

The Agency relied upon the Governor's Sustainable Energy Plan to justify the size of the

EEJRE

portion of the CASA. However, the Agency's w-itness presenting and supporting that

reliance was unable to answer questions about the Sustainable Energy Plan, and some of the

questions still have not been answered, such as whether the Agency is a member of the Illinois

Sustainable Energy Advisory Council, how the Council is to function, whether the Council's

findings or decisions are enforceable and if so how, and who is responsible for actually ensuring

that the requisite percentage of power generated in Illinois is renewable

-

the power generators

or the distributors of power in Illinois. In the Agency's Post-Hearing Comments, filed October

27, 2006, the Agency states that it is still researching this issue. Agency's Post-Hearing

Comments (October

27,2006), p. 8. The Companies assert that, based upon the language in the

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Governor's Sustainable Energy Plan (Statement of Reasons, Ex. G), the responsibility for

ensuring that the requisite percentage of power utilized in Illinois lies with the distributors of

power. The distributors of power are

the only persons who can control where their power comes

from.

The EGUs, on the other hand, are not distributors (with the possible exception of Ameren)

and have no way of knowing what level of renewable energy is being used in Illinois and,

moreover, have no control over usage of renewable energy in Illinois. They must sell their

power pursuant to contracts or spot bids or as their independent power dispatcher dispatches the

power.

At the second hearing, we learned from Mr. Kubert that the Governor has yet another

plan, the Governor's Energy Plan. He advocated increasing the size of the CASA to

accommodate that new plan. Through its cross-examination of Mr. Kubert, the Agency

established that it does not bear responsibility for developing the program to implement that plan

and that there are no regulations or other mandates with respect to that plan. C Tr., November

29,2006, pp. 191-192. The Companies agree. The Companies believe that it would be more

appropriate to eliminate the CASA for that very reason. The Agency's logic expressed through

its cross-examination of Mr. Kubert applies to

the EE/RE portion of the CASA to the extent that

the Agency has relied on the Governor's energy plans as justification for the set-aside.

F.

Dis~arate Treatment of EGUs Subieet to Consent Decrees

In carving out reductions not eligible for CASA allowances, the Agency included EGUs

subject to consent decrees entered into on or before May 30,2006. The clear purpose of this

carve-out was to exclude Dynegy from participation in the CASA for reductions it will achieve

pursuant to its consent decree with

USEPA, which just happened to become effective

approximately a year before the Illinois CAIR proposal was filed. The Agency's rationale is that

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a consent decree is the result of an enforcement action and assumes that there has been some

wrong-doing on the part of the defendant and that such activity should not be rewarded through

the CASA.

S Tr., October 12,2006, pp. 50-5 1. Inconsistent with this view, however, the

Agency allows for projects required by consent decrees entered into subsequent to May 30,2006,

to be eligible for CASA allowances, reasoning that if the parties to the consent decree do not

want the projects to be eligible for CASA allowances. such exclusion should be explicitly

included in the consent decree.

S Tr., October 12,2006, pp. 58-59.

The Companies disagree with the Agency's rationale for excluding

EGUs that entered

into consent decrees prior to May 30,2006. Part of the Agency's rationale for excluding

pre-

May 30,2006 consent decrees is that a consent decree is somehow not voluntary. S. Tr., October

12,2006, pp. 50-5

1. This is flatly inconect, and the Agency concludes as much by its proposed

disparate treatment.

First, no source is compelled to enter into a consent decree, and quite often, perhaps even

more often than not, a consent decree contains no admission of liability or guilt. This is true for

consent decrees involving the Agency as well. Entry into a consent decree does not conclude or

presuppose an adjudication of liability or guilt.

Ently into a consent decree is a totally voluntary

action, quite often driven by financial considerations. Defending enforcement suits is expensive.

It is no secret that prosecuting authorities often propose penalties that are slightly less than the

costs of pursuing a defense in order to "encourage" or "force" settlement. In other words, one

cannot defend against an enforcement suit, regardless of the defendant's guilt or innocence. for

the cost to avoid the suit

by settling. Therefore, entry into the consent decree is a business

decision and not in any way an involuntary act. Likewise, the

pro.jects that may be included in a

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consent decree, while enforceable after the consent decree is entered, are negotiated and

voluntary up until entry of the consent decree.

Second, this transparent rationale is shown to be exactly what it is -pretext -by the fact

that future consent decrees are eligible for allowances

unless

the consent decree specifically

excludes

such eligibility. If the "compulsion" rationale truly applied to consent decrees, it would

apply equally to all decrees, regardless of the date they happen to become effective. Certainly if,

as the Board has ruled, electing to comply with the MPS in the mercury rule, with the resulting

imposition of

SO;? and NOx emissions limits and allowance surrenders, is voluntary, then

entering into a consent decree is at least equally voluntary.

G.

Review

of CASA Allowance Allocations

The Agency testified, through David Bloomberg, that it has provided for no Board review

of the Agency's decisions regarding the allocation of allowances from the CASA.

S Tr., October

11,2006, p.m., pp.

31-31,36. The Companies note that while the regulations do not provide for

Board review of the Agency's final decisions regarding CASA allocations, the

Environmental

Protection Act ("Act") provides for the review of permits issued by the Agency. 415 ILCS 5/40

and 40.2. Section

225.410(d)(8) says that every allocation or transfer of an allowance to a NOx

compliance account is an automatic revision to the account holder's permit. The Agency's

response to questions about appeal raise several issues.

First, the authority to appeal an agency's final decision or final action does not rest with

the Illinois EPA to

grant or deny through regulations. Only the General Assembly has the

authority to do that. So the presence or absence of a provision for appeal of the Agency's

decisions on CASA allocations is irrelevant. Second. an agency's final actions or decisions

should be appealable to some authority. in this ease probably the Board or possibly review in

the

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circuit court would even be preferable. The CAIR as proposed creates a situation where the

Agency is taking final actions or making final decisions that do not all squarely fit under the

appeal provisions of the Act, because the Agency has not issued permits to the universe of

probable project sponsors eligible to receive CASA allocations. Arguably, then, the

Administrative Procedure Act ("APA"). 5 ILCS

100/1-1

et

seq., applies for those project

sponsors who do not have air permits and if those decisions by the Agency would be reviewed

by

the circuit court. possibly all comparable decisions should be. Third, for EGUs and other

project sponsors who do hold permits issued by the Agency, the Companies presume that the

permit appeal procedures of the Act and the Board's regulations apply to denials of applications

for CASA allowances, just as those appeal procedures apply to permits issued with conditions

that are not acceptable to the permittee. The proposal already provides that project sponsors who

do not comply with the Subpart must retum an equivalent number of allowances to the Agency.

5

225.455(h). While an upheld appeal of a CASA allocation would not likely qualify as

noncompliance with the Subpart, it could result in a readjustment of the distribution of CASA

allowances for the given time period, which could involve the retum of allowances to the

Agency for redistribution. The language of Section

225.455(b) should be amended to reflect this

potentiality.

H.

Adding

Overfire Air to the CASA

Ameren proposed to add "advanced" overfire air ("OFA") to the CASA

-

or delete the

exclusion of OFA from the CASA.

See generally

testimony of Michael Menne and cross-

examination of Steven Whitworth,

C. Tr. November 29,2006, pp. 88-89. It appears that, if the

Board were to accept Ameren's proposal without certain qualifications, Ameren would again be

rewarded merely for coming to par with the other generators in the state. Specifically, Mr.

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Whitworth testified that only two of Ameren's Illinois units, Coffeen 1 and 2, are currently fitted

with OFA. C Tr., November 29,2006. p. 101. Mr. Whitworth acknowledged that OFA is a

fairly common technology. C

Tr., November 29,2006, pp. 80-81.

Perusal of the CAAPP permits of the other power plants in Illinois will demonstrate that

most of the non-Ameren units are already equipped with OFA. Moreover, the Companies

believe that Mr. Whitworth underestimates the removal efficiency of OFA

systenis that are not

"advanced." The claimed differentiation in emission reductions between existing and so-called

"advanced" OFA is really no difference at all, as many OFA systems will achieve reductions in

the range touted

by Mr. Whitworth. Therefore, Ameren's proposal should be rejected.

Unless the regulated community as a whole would be given credit for OFA systems,

regardless of the date of installation, that achieve a specified level of

NOx removal (rather than

by use of some type of ambiguous "advanced" OFA scheme), the Companies cannot support

Ameren's requested addition to the CASA. If a previously installed OFA and a newer one

achieve comparable results, the label "advanced" warrants no special treatment.

I.

Annual Operation of SCRs

Dominion suggested that annual operation of SCRs installed since adoption of Part 217.

Subpart

W should be eligible for CASA credit. See Dominion Ex. 1; C Tr., November 29,2006,

pp. 13-14. If the Agency and the Board consider inclusion of Dominion's suggestion, the

Companies request that

the resulting CASA language should also include annual operation of

previously-installed SNCRs, as well.

J.

Purpose of the CASA

A purpose of the CASA is to encourage early reductions. principally obtained through

construction and operation of new or upgraded pollution control devices. S

Tr., October 10,

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2006, a.m., pp. 116-1 17. However, the Agency very specifically proposes to retire the CSP

established in the federal CAIR for Illinois.

5

225.480. USEPA allotted 11,299 CSP allowanees

to Illinois for use in the annual

NOx program. 70 Fed.Reg. 25161,25320 (May 12,2005). CSP

allowances may be used for early reductions. Rather than using the CSP for early reductions, the

Agency proposes to carve out "incentives" for those who reduce early from the general pool of

annual

NOx allowanees.

Not only does the Agency propose to take away allowances from the general pool for

early adopter projects, it became rather obvious, through the Agency's cross-examination of

witnesses at the Chicago hearing, that a purpose of the CASA was also to subsidize the costs of

installation, if not operation, of "big-ticket" (more expensive) pollution control equipment

installed to achieve early reductions regardless of their efficacy as compared to less expensive

controls.

C

f, C Tr., November 29,2006, pp. 115-121. While the Companies do not quarrel

with the Agency's decision to attempt to allow

EGUs installing equipment to recoup some of the

cost, the Companies do see some inconsistencies in the Agency's "policies" that favor only more

expensive technologies and an apparent skewing of the direction of the allocations of the CASA.

Moreover, this attempt to subsidize "big-ticket" pollution control equipment through the CASA

has illogical underpinnings.

A purported purpose of the CASA is to encourage projects that will benefit the

environment. S

Tr.. October 10, 2006, a.m., pp. 70-71. With respect to pollution control

projects, the project does not have to be a "big-ticket" project in order to benefit the

environment. Low

NOx burners and OFA are less "big ticket" than SNCR, yet they benefit the

environment without exposing the environment to ammonia slip or leaks. While the Companies

do not support the inclusion of new OFA or low

NOx burners in the CASA without allowances

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for those who have already installed comparable levels of control, as discussed above, the

Agency's reasoning that OFA should be disallowed because it isn't a "big-ticket" item is not

supportable.

A more supportable reason would be that low NOx burners and OFA have been

installed on almost all of the EGUs in the state except those owned by Ameren, who claims to

have taken OFA to a new

level. If so, Ameren has had plenty of opportunity to employ that new

level in Illinois

as well as in Missouri. Low NOx burners and OFA should be the minimum

standards of

NOx control that the Agency would expect; therefore, they should not eligible for

CASA allowances. Moreover, if "advanced" OFA really is better, then those installing it will

have some extra allowances after installing it and that should be enough benefit for being late

in

controlling NOx emissions; those sources should not receive an extra bonus from the CASA.

Even more compelling, though, is the concept that if the Agency did not set aside

25% of

the

ailowances USEPA anticipated would be allocated to EGUs, there would not be a need to

find machinations to return allowances to EGUs through the CASA.

Finally, the CASA as it is currently structured subsidizes the construction of pollution

control equipment by some companies at the expense of others. Perhaps the most shocking

example of this is Kincaid. Dominion has improved the operation of the Kincaid facility

exponentially since obtaining it from Commonwealth Edison. C Tr., November 29,2006, pp.

12-13. Its

SO* emission rate is far below Ameren's, and it has installed SCRs. Likewise, SIPC

has installed

the CFB, a clean coal technology, baghouses, a scrubber, and an SNCR. There is

nothing more these EGUs should have to do to comply with the CAIR other than to operate their

NOx controls year-round. Yet they are effectively penalized 25% of the allowances USEPA

anticipated they would receive. Although SIPC may receive some allowances from the CASA,

as it should for installing and operating a well-controlled CFB, that number of allowances does

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not come close to the 25% it will lose to the CASA. For example, USEPA would allocate SIPC

1,270

a~lowances.~

SIPC estimates that it will receive 1,023 base allowances under the Agency's

proposed system and no allowances from the CASA, based upon 2005 operations under the

language as

proposed.7 The shortfall is particularly significant to a small company such as SIPC.

K.

CASA Allowances for MPS Reductions

Despite the Agency's proposal in its Motion to Amend to clarify that projects undertaken

pursuant to the MPS are not included within the scope of the exclusion from CASA eligibility of

"Projects required to meet emission standards or technology requirements under State or federal

law or regulation" (Attachment to Motion to Amend,

p. 44, 5 225.460(d)(2)), it appears that the

MPS requires such allowances to be surrendered to

the Agency. Specifically, the MPS provides

as follows:

The owner or operator of EGUs in an MPS Group must not sell or

trade to any person or otherwise exchange with or give to any

person

NOx allowances allocated to the EGUs in the MPS Group

for vintage years 2012 and beyond that would otherwise be

available for sale, trade or exchange as a result of actions taken to

comply with the standards in subsection (e) of this Section. Such

allowances that are not retired for compliance must be

surrendered to the Agency on an annual basis, beginning in

calendar year 2013.

Docket R06-25, Second Notice Order,

5 225.233(f)(l) (in part), p. 113 (November 2,2006). The

proposed CASA provides that, beginning in 2009

(5 225.470(b)), sponsors of early adopter

projects may apply for CASA allowances for 10 years

(5 225.470(d)(2)), and sponsors of

upgrade projects may apply for CASA allowances for 15 years

6

Notice of Data Availability,

<epa.gov/airmarketslcair/noda/allocations~,

7

Please note that it appears that there was an error in the equation applying to CFBs in

Section

225.465(b)(5)(ii). It is SIPC's understanding that the Agency will include a correction to

that formula in the comments that the Agency will file on January 5, 2007.

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When the provisions of the CASA are read with the provisions of the MPS, it appears

that project sponsors who have

NOx projects operational prior to 2012 and SO:! projects

operational prior to 2013

(see

Docket R06-25, Second Notice Order.

3

225.233(0(1), p. 113

(November

2,2006)), may he allocated and may bank allowances from the CASA early adopter

or upgrades categories. Beginning in 2012 for

NOx projects and 2013 for SO2 projects,

however, the project sponsors may apply for allowances from the CASA, but under the language

quoted above from Section

225.233(f)(l) of the MPS, the project sponsors would have to

surrender those allowances back to the Agency because those allowances would have

been

generated "as a result of actions taken to comply with the standards of subsection (e) of this

Section

[225.233]." Docket R06-25, Second Notice Order,

3

225.233(f)(l), p. 113 (November 2,

2006). The Agency giveth. and the Agency taketh

away.'

L.

Conclusion

Because industry has not been presented with a comprehensive plan regarding the

reduction requirements that are necessary from the power generation sector through the next

number of years

while the state attains the ozone standard in Metro-East, the PM2.5 standard,

and its haze obligations, industry is very reluctant to agree that a 30% set-aside is justifiable or

evcn beneficial to other interests the state appears to attempt to promote through creation of this

set-aside.

It is either a misguided attempt to support so-called green projects, or it is skewed to

benefit one

company. Neither is acceptable. The CASA represents 4.521 MWe (25% of 17,007

MWe). MWG Ex. 1. This is a significant amount of generation, greater than any single plant in

Illinois and greater than any single entire system in Illinois other than Midwest Generation's and

Presumably, the allowances that are surrendered to the Agency pursuant to the MPS

will be retired. However, although the Agency stated that such allowances would be retired, a

requirement that the Agency do so is not included in the language of the MPS.

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Ameren's, but only if EEI is included in the Ameren system. MWG Ex. 1. At

$2,500.00/allowance, this represents $47,643,750.00 value lost to the existing power generators

on an annual basis plus $9,528,750.00 in allowance value for the NUSA. This is significant.

Absent a comprehensive plan, the Agency must constantly

chip away at emissions from the coal-

fired power plants, imposing more and more control, making it very difficult to plan, and

creating inconsistencies, such as the conflict inherent in the MPS allowance surrender

requirement discussed above. As the Agency appears to prefer the fragmented, chipping-away

approach to a consistent, coinprehensive plan approach, industry cannot afford for the Agency to

remove 25% of the allowances that

USEPA intended be allocated to industry, for a purpose that

is nebulous and without any demonstrated air quality improvement. Indeed,

USEPA derived its

more comprehensive approach after considering the interplay between various existing and

future

requirements.'

Moreover, the Agency has specifically omitted the CSP of 11,299 allowances, worth

$28,274,500.00 at

$2,500.00/allowance. This, too, is not insignificant. Since the Agency

proposes to encourage early reductions, the cost of

the lost CSP is actually double that, or

$56,495.000.00, since the allowances necessary to provide that encouragement are taken from

the general pool and then

ultin~ately returned to the Agency through the language of the MPS.

111.

ALLOCATION METHODOLOGY

There are several aspects of the allocation methodology proposed by the Agency that are

troubling to the Companies.

or example, Phase 1 of the CAMR relies on the CAIR. Phase 1 of the CAIR NOx

program relies upon the NOx SIP call. The federal approach exemplifies a multi-pollutant

strategy and is seamless in its applicability and implementation.

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A.

Heat Input v. Gross Electrical Output

Departing from USEPA's position in the federal CAIR and the model rule, the Agency

has proposed that allowance allocations be based upon gross electrical output rather than the

traditional basis of heat input.

USEPA does recommend gross electrical output as the basis for

allowance allocations for new units, converting the gross electrical output to heat input.

See

conversion factor, 71 Fed.Reg. 25328,25357 (April 28,2006). The Agency justifies the use of

gross electrical output on two factors:

(1) that it encompasses projects that do not have heat

input and (2) that it encourages efficiency

USEPA retained its reliance on heat input as the basis for allocations in the CAIR FIP, as

well. Explaining this reliance,

USEPA stated:

EPA believes, as it stated in the final CAIR, that allocating

to existing units based on a baseline of historic heat input data,

rather than output data, is desirable because accurate protocols

currently exist for monitoring this data and reporting it to EPA,

and several years of certified data are available for most of

existing units.

71

Fed.Reg. 25328,25356 (April 28,2006). It became clear at the hearing in Springfield that the

Agency believed that gross electrical output data is already reported to

USEPA and that the data

reported is as reliable as heat input data.

USEPA's statement in the FIP appears to contradict

that belief.

The Agency initially proposed that all units install wattmeters by January

1, 2007, to

measure gross electrical output, apparently not understanding the costs of the wattmeters, the

costs of operation of the wattmeters, and the complexities involved with installation. At the

Springfield hearing, it became apparent that what the Agency thought was a relatively simple

process is not, and the Agency clarified that its intent was to capture the information currently

provided to

USEPA. S Tr., October 11,2006, a.m.; pp. 21-26. Subsequently, the Agency

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submitted a Motion to Amend Rulemaking (November 27,2006) in which this issue is

addressed. Motion to Amend, pp.

6-7,39, 71. The language proposed by the Agency in the

Motion to Amend still includes some issues, and the Companies suggest that the language

merely require whatever is submitted to

USEPA under 40 CFR Parts 60 andlor 75. See

Response to Motion to Amend, pp. 5-6.

SIPC, for reasons discussed further below, adamantly opposes reliance on gross electrical

output as the basis for allowance allocations. Dynegy is in the process of installing upgraded

wattmeters at all of its plants because the independent system operator, who dispatches

electricity in

Dynegy's region, requires them. This, however. is a multi-year process because the

meters can be installed only during a planned outage. Dynegy prefers reliance on gross electrical

output as the basis for allocations, but because of the great deal of historical data on heat input,

because quality assurance procedures for heat input reporting are well-established, because it

was the basis

USEPA used for establishing the states' caps under the federal CAIR, and because

the Agency has put forth no compelling reason to switch from heat input as the basis for

allocations, Dynegy would find heat input as a

basis for allocations acceptable.

The Agency has included a formula in its proposal at Section

225.435(a)(2) to convert

heat input to gross electrical output. The efficiency assumed in the formula is not representative

of actual efficiencies at the plants. This formula disadvantages the vast majority of the regulated

entities to varying degrees and is particularly disadvantageous to SIPC, as discussed below. If

gross electrical output can be determined from heat input through application of a formula, the

reverse is true as well: heat input could be determined through application of a reverse formula

to gross electrical output:

USEPA has provided such a formula in the CAIR (71 Fed.Reg. 25328,

25357 (April 28,2006)). Therefore, retaining heat input as the basis for allocations would not

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discourage CASA projects with no or difficult-to-determine heat input, and it would flow more

seamlessly from the existing allocation formula included in Part 217, Subpart W. That some

CASA projects will not have heat input is not a valid reason for basing an allocation

methodology on gross electrical output both because heat input can be determined through

application of a formula and because the relative amount of gross electrical output without a heat

input in Illinois is extremely small. This rationale is an example of the tip of a dog's tail

wagging the entire dog.

Dr. Kunkel, testifying on behalf of Christian County Generation ("CCG), stated that his

integrated

gasificatiodeombined cycle ("IGCC") project would be greatly disadvantaged by an

allocation methodology that relies upon heat input. C Tr., November 28,2006. pp.

126-129.

However, if an appropriate conversion formula were applied, or if there were a formula that

CCG or

Dr. Kunkel could suggest that would he more appropriate to IGCC plants, that issue is

set aside. Moreover, if Illinois followed the federal example, Dr.

Kunkel's problem would not

even be a problem. because, as a new source, CCG would he allocated allowances based upon

gross electrical output pursuant to

USEPA's formula.

With respect to encouraging efficiency, the Companies note that not all boiler types that

are considered environmentally beneficial or clean coal technology are exceedingly efficient.

CFBs are an example in point. CFBs are considered a clean coal technology and are eligible for

allowance allocations under the CASA in that category. As the Agency testified at hearing, a

purpose of the CASA is to

incentivize such projects, and SIPC, who has the only CFB in the

state that is subject to this rule. appreciates that the Agency has recognized that it is deserving of

such consideration. However, operation of the CFB, particularly in a setting such

as that at SIPC

where recovered fine coal is the fuel, is not as efficient

as other types of boilers from a gross

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electrical output standpoint. SIPC's CFB is approximately 23% less efficient than SIPC's

cyclone

unit.'' Compared to USEPA's list of the top 25 most efficient boilers, SIPC's CFB is

almost

40% less efficient. Yet SIPC'S CFB has inherently lower NOx and SO2 emissions than

the comparable cyclone or pulverized coal boiler and has been designed to bum recovered fine

coal, thus benefiting the environment significantly. In fact, much of the environmental benefit of

the CFB comes from the way the boiler operates, but it is this very type of operation that creates

a heat rate penalty, a less efficient boiler. In other words, the environmental controls of a CFB

occur inside the boiler resulting in a gross heat rate penalty, whereas other types of boilers,

because controls are

external to the boiler, appear more efficient when comparing gross heat

rates. Moreover, SIPC's CFB is further controlled by SNCR and a baghouse. These design

features and control equipment use up electricity generated by the unit or require greater Btu to

generate electricity, thus further reducing its efficiency. As a result, SIPC's CFB is penalized,

probably more than any other unit in the state, by the use of gross electrical output as the basis

for allowance allocations, particularly egregious when the CFB, as discussed above, has

inherently lower emissions and was designed to bum recovered coal fines, thus providing

additional environmental benefit by reducing acid

run-off.

B.

Acceptable Gross Electrical Output Data

It became clear in the Springfield hearing that the Agency intended that EGUs would

have the choice of submitting actual gross electrical output data or heat input data that would be

converted to gross electrical output values during the first several years of the new CAIR

NOx

trading programs but that the language proposed did not reflect that intent. The Agency also

indicated at the Springfield hearing that there is "other data" that the Agency may find

lo That is, it requires 23% more Btu to generate a kilowatt-hour from Unit 123, the CFB,

than from Unit

4, the cyclone unit.

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"acceptable," but the Agency offered no indications as to how it would determine what is

"acceptable." S Tr., October

1 I, 2006, a.m., p. 26. The Agency was operating under the

assumption that gross electrical output data is submitted regularly to

USEPA's Clean Air Market

Division ("CAMD), which administers the national trading programs, including the future

CAIR trading programs. S Tr., October 11,2006, a.m.,

p. 17. Apparently, a part of that

assumption was that the data submitted was uniform and quality assured, in the manner that heat

input is.

Since the Springfield hearing, the Companies understand that the Agency has inquired of

CAMD what is submitted to them. Representatives of the Companies discussed this issue with

the Agency prior to the Agency's filing of its November

27th Motion to Amend Rulemaking.

The Companies responded to the Motion to Amend on December

7th and attempted to further

qualify the issue in their Response.

The Companies' understanding is that the Agency will accept as gross electrical output

data any data that is acceptable to

USEPA pursuant to 40 CFR Part 60 or 75. The Companies are

concerned with the inclusion of language that suggests there must be an actual measurement

device installed on the generator, effectively a wattmeter, when such is not required by

USEPA

pursuant to 40 CFR Part 60 or 75. The Companies urge the Board to ensure that the language

included in the rule reflects the parties' intent.

C.

Fuel Weighting

The Companies support the Agency's proposal regarding weights assigned to fuel types.

Jason

Goodwin testified on behalf of Zion Energy LLC, a peaking facility, and requested that the

Board remove the fuel weighting or, in the alternative, take the approach of South Carolina and

assign a factor of 1.0 for coal and 0.6 for all other fuels. Such a change would result in even

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fewer allowances to be allocated to the Companies, which provide the baseload rather than just

the peaking generation in the state, and with a

25% CASA, the Companies cannot support any

amendments to the proposal that would further reduce the number of allowances to be allocated

to them. Both

USEPA and the Agency proposed use of fuel factors, and the Companies believe

that use of fuel factors is appropriate for the reasons set forth by these agencies. Zion Energy

can offer no reason to deviate from the fuel factors other than its own financial benefit.

USEPA.

in its reconsideration of this issue, retained the fuel factors, and the Board should retain them

here as proposed by the Agency.

D.

Look-Back Period and Annual U~dating

The Companies are very deeply troubled by the Agency's approach to annual allowance

allocations. The proposed rule includes a two-year look-back period to

determine an EGU's

allowances, to be updated annually. The Companies' concern with the two-year look-back is

that the look-back period will, from time to time, encompass periods when the

EGUs experience

outages of various lengths of time. This cannot be avoided. The Agency reasons that the

Companies will know that they have experienced such outages and can save allowances not

needed during the year in which the outage occurred for

that future year when the EGU will

receive a "short" allocation because of the current outage. It is not clear how companies that opt

in to the MPS will be able to bank their allowances to cover outage years, since allowances

generated as a result of MPS emissions limitations must be surrendered. The second part of the

Companies' concern lies with the annual updating. Clearly, where the look-back is so short with

no "levelizing" allowed through the averaging of a number of years' operations chosen from a

larger number of years, such as the highest three years' operation out of a specified five-year

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period, it becomes critical that the updating occur annually and timely. The Agency's approach

might work as the Agency intends in an ideal world. The world, unfortunately, is not ideal.

USEPA suggested a permanent baseline for sources in the model rule. See 70 Fed.Reg.

25161, 25279 (May 12; 2005). New sources roll in to the existing source permanent baseline

once they have five years' operating data, causing an adjustment of all existing sources'

allocations. 70

Fed.Reg. 25161; 25279 (May 12,2005). USEPA reasoned that the permanent

baseline "will eliminate the potential for a generation subsidy (and efficiency loss) as well as any

potential incentive for less efficient existing unit to generate more." 70

Fed.Reg. 25161,25279

(May

12; 2005). USEPA states that the permanent baseline approach is easier to implement

administratively. 70

Fed.Reg. 25161,25279 (May 12,2005).

USEPA retained the permanent baseline in the CAIR FIP:

EPA has chosen not to utilize an updating system for allocating

allowances, in order to avoid the subsidization of increased fuel use (or

increased electricity generation) and the associated market distortions. If

allocations were based upon updated heat input (or updated output) data

then increased fuel use (or increased electricity generation) would result

in increased future allocations and thus would in effect be subsidized.

71

Fed.Reg. 25328,25356 (April 28; 2006). The Companies find USEPA's reasoning sound and

urge the Board to give it due consideration.

When the Agency presented the approach of annual updating at one of the very early

outreach meetings; the Companies raised the issue of the Agency's failure to timely allocate

allowances under Part 217, Subpart

W with Laurel Kroack, Air Bureau Chief. Ms. Kroack

appeared not to realize that the Agency had been tardy in its allocations.

It is troublesome that

the Agency was tardy, and it is troublesome that management did not know and do something

about it more quickly. In

fact, the Agency was tardy by several years. At the Springfield

hearing, the Agency assured the Board and the public that the situation was because an employee

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responsible for the work had left and that his work had not been picked up. S Tr., October 11,

2006, a.m., p. 125. The Agency further assured the Board and the public that this situation could

never happen again.

S Tr., October 11,2006, a.m., pp. 125-126. If it happened once, it could

happen again. This person's supervisors surely knew that he was responsible for allowance

allocations, they surely knew when he left the Agency, and they knew or should have known

that responsibility needed to be shifted." The Companies are not reassured by the Agency's

protestations that the situation has been cured. The lapse is a function of human error, and

human error happens. The

rnles should be written in a manner to ensure against

-

or at least to

minimize -the negative outcomes of human error, to provide a safety net in a rule such as this

one,

i. e., participation in a national trading program.

USEPA has provided in its NOx trading rules that when a state fails to allocate

allowances timely,

USEPA will rely upon the previous allocation to cover the unallocated

period. 40 CFR

$5

96.141(b)(2) and 96.341(b)(2). If the Agency falls again into a pattern of not

timely allocating allowances for the

two NOx programs proposed by these rules, some EGUs

will, without question, be frozen at

an allowance level that reflects extensive outages. This

cannot be avoided under this aspect of the proposed rule.

Moreover, the upshot of the Agency's tardiness in allocating allowances is not only the

peril in which the Agency places EGUs in terms of their holding sufficient allowances to comply

with the rule, but also the impact of the failure to timely allocate on the business of emissions

trading. The business of emissions trading is not restricted to EGUs, and certainly the Agency's

proposed rule expands the participation of others beyond the regulated community to an even

greater extent. The failure to allocate allowances as set forth in a rule reverberates throughout

'I IF they knew and did nothing, they were irresponsible; if they did not know, they were

irresponsible. Either way, the failure was not of just one person.

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ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007

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the emissions trading industry and could have an effect on that market beyond the direct

economic impact to the EGUs entitled by the rule to their allowances.

The large economic impact aside, the Companies' main concern is that they be assured

that they will be allocated the allowances to which the rule entitles them in a timely fashion.

That certainty is a paramount necessity. Further, the Companies need some level of insurance

against human error. That level of insurance should come through an allocation methodology

that provides "levelizing" to cover those times when there are outages and when allocations are

not made timely. Illinois EGUs are accustomed to

an allocation methodology based upon the

average of the three highest years' heat input during a five-year look-back period. The averaging

of the three highest years levelizes the effects of outages. All EGUs are treated the same. in that

all EGUs are looking at their three highest years' heat input during the look-back period, thus

avoiding skewing the allowances to some EGUs to the detriment of others. Further, relying on

an average of the highest three years avoids the disastrous effect of being frozen at an allowance

level established on years that included extensive outages. The five-year look-back is necessary

to afford the three years' average. The Companies urge and request the Board to revise the rule

to reflect this three-year averaging concept and the five-year look-back.

Dr. Kunkel of CCG testified that the continued allocation of allowances for retired units

is not an incentive for retirement of those units (C

Tr., November 28,2006, pp. 134-136) while

the ability to obtain allowances is an incentive for the construction of new sources (C Tr.,

November 28,2006, pp. 136-137). Dr.

Kunkel did not elaborate as to why he believed these

statements to be the case. Indeed,

USEPA reasoned quite the opposite with respect to the

retirement of sources in the Preamble to the federal CAIR.

USEPA said, "Retired units will

continue to receive allowances indefinitely, thereby creating an incentive to retire less efficient

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007

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units instead of continuing to operate them in order to maintain the allowances allocations." 70

Fed.Reg. 25161,25279 (May 12,2005). Further, USEPA said in the CAIR FIP, "Retired units

will continue to receive allowances indefinitely, thereby avoiding creation of a disincentive to

retire less efficient units." 71

Fed.Reg. 25328,25357 (April 28,2006). Dr. Kunkel appears to

apply the same logic to the effect of the availability of allowances for new sources, yet he

disagreed with this logic with respect to the incentive to retire sources. It would seem that the

logic would work both ways: the incentive of allowances would encourage the shutdown of less

efficient sources just as it would, under Dr.

Kunkel's thinking, encourage the construction of

new sources.

E.

Conclusion

A

permanent baseline comprised of the three highest years' operational heat input or

converted heat input over a five-year period would provide the level of certainty of the allowance

stream that Dr. Kunkel sought. A permanent baseline is, administratively, much easier to

implement, requiring less intense man-hours on the part of the Agency and less subject to the

vagaries of state personnel practices. The baseline would be adjusted only as new units roll in to

the permanent baseline. Similarly, a block allocations based upon a baseline derived from a

five-

year look-back updated every five years would provide the certainty and levelizing that the

Companies believe important. While proponents of new units appear to prefer the quicker roll-in

that the Agency describes in its approach, the relative certainty of the allowance stream would

overcome the more lengthy stay in the NUSA. The Companies request that the Board seriously

consider the values of a permanent baseline or a five-year updating baseline compared to the

disadvantages of the Agency's proposed annual updating system. If the Board believes that an

updating allocation methodology is preferable, then the Companies request that the Board

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007

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consider extending the look-back to five years, with the allocations based upon the average of the

three highest years of operation, the system that is currently in place in Illinois under Part 217,

Subpart

W.

The Companies also request that the Board seriously consider heat input as the basis for

allocations.

USEPA has provided the formula for converting gross electrical output into beat

input: the gross electrical output is multiplied by the heat input conversion factor of 7,900

Btu/KWh to calculate the heat input value. 71 Fed.Reg. 25328,25357 (April 28,2006). The

Companies have reported and certified heat input data for years. In contrast, though output data

is reported, the manner of its measurement and its quality assurance is not

uniform; therefore, the

data is not as reliable as heat input data. Some of the regulated community will be advantaged

by this sudden switch to a different form of regulating emissions, while others, particularly SIPC,

will be severely disadvantaged, even through use of the formula proposed by the Agency to

convert heat input into a gross electrical output value. New units, however. that do not have

easily measured heat input will have notice of how their gross electrical output will be converted

to heat input. Therefore, basing allowance allocations on heat input is the most equitable and

acceptable approach for this rule.

1V.

SUGGESTED IMPROVEMENTS TO THE RULE AS PROPOSED

Assuming that the Board will adopt the Agency's proposal with only limited adjustment

necessitated by the

etidence in the record, the Companies offer the following suggestions to

improve the rule in addition to those contained it their Response to the Agency's Motion to

Amend Rulemaking.

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007

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A.

CASA Size

The Companies strongly encourage the Board to reduce the CASA size to

5%

of the

state's cap. This

5%

number would cover the allowances necessary to address the projects that

Mr. Kubert stated were in development.

B.

CASA Cateeories

The Companies recommend that the CASA be limited to EEIRE projects if the size of the

CASA is reduced as urged above. If the existing companies are not effectively penalized by the

loss of an additional

20% of their allowances as anticipated by USEPA in establishing the state's

cap, then the additional CASA categories are not necessary. As proposed. they merely amount to

a redistribution of a very large number of allowances, essentially resulting in the subsidization of

a company that did not act to reduce emissions and is only now catching up, to some extent, with

the emissions levels of other systems in the state, by companies that have reduced their emissions

over a longer period. To do otherwise does not recognize the good faith in which the Companies

and other EGUs in the state exhibited in reducing emissions to meet

NOx SIP call and Acid Rain

Program obligations rather than merely relying on purchasing allowances in those programs.

If the Board

determines that it will not reduce the size of the CASA as requested in these

Comments, the Companies urge the Board to accept the changes to the CASA indicated in their

Response to the Agency's Motion to Amend Rulemaking.

With respect to Ameren's request to include OFA in the CASA, the Companies agree that

reductions obtained through advanced OFA, equivalent to the reduction levels of SNCR, may be

more beneficial to the environment than reductions achieved via SNCR because of the use of

ammonia, urea, or other NOx-reducing reagents with SNCR. However, OFA cannot be operated

in certain types of boilers and neither of the Companies and probably none of the other EGUs in

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007

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Illinois have what Mr. Whitworth described as "advanced" OFA, though the level of NOx

reduction at many of the existing OFA systems equals or exceeds Ameren's proposed

"advanced" OFA reduction level. If the Board

determines that it is appropriate to include OFA

as a CASA category, it should include eligibility for historical OFA systems that meet or exceed

the 30% reduction threshold that Mr. Whitworth suggested regardless of whether upgrades to

existing OFA systems are necessary to achieve such a reduction level

C.

Compliance Suuplement Pool

One of USEPA's purposes in establishing the CSP for the annual NOx CAIR program

was to reward early adopters, one of the CAIR categories. The Companies urge the inclusion of

the CSP in the rule, rather

than its retirement. This would effectuate one of the CASA categories

in a manner that does not amount to most of the regulated community subsidizing one member.

D.

Allocation Methodology

The Companies strongly urge the Board to reject the allocation methodology proposed by

the Agency and to adopt one that reflects

USEPA's model rule. Such an allocation methodology

would have a permanent baseline based upon the highest three years' heat input during 2001

through 2005 and, for new units, based upon their three highest years' gross electrical output

converted to heat input once they have five years' operation, reflecting the fuel factors currently

included in the proposal. In the alternative, block allocations based upon a five-year updating

baseline would provide a level of certainty that would be preferable to the proposed annually

updating two-year look-back system. The Companies have very serious concerns with the

proposed annual updating methodology based upon a two-year look-back.

The Companies fear

that the Agency will fail to consistently manage such a process for two trading programs plus the

CASA in the

timeframes set forth in the rule.

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CERTIFICATE OF SERVICE

I, the undersigned, certify that on this 5th day of January, 2007, I have served

electronically the attached

POST-HEANNG COMMENTS OF DYNEGY MIDWEST

GENERATION, INC., AND SOUTHERN ILLINOIS POWER COOPERATIVE,

upon the

following persons:

Dorothy

Gunn, Clerk

Illinois Pollution Control

Board

James R. Thompson Center

Suite 11-500

100 West Randolph

Chicago, Illinois 60601

and electronically and

by first-class mail with postage thereon fully prepaid and affixed to the

persons listed on the

ATTACHED SERVICE LIST.

Sheldon A. Zabel

Kathleen C. Bassi

Stephen J. Bonebrake

SCHIFF

HARDIN, LLP

6600 Sears Tower

233 South Wacker Drive

Chicago, Illinois 60606

3 12-258-5500

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007

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SERVICE LIST

0106-26)

John Knittle

Hearing Office

Illinois Pollution Control Board

James R. Thompson Center

100 W. Randolph

Suite 11-500

Chicago, Illinois 60601

knittlei@,ipcb.state.il.us

-

Rachel Doctors, Assistant Counsel

John J. Kim, Managing Attorney

Air Regulatory Unit

Division of Legal Counsel

Illinois Environmental Protection Agency

1021 North Grand Avenue, East

P.O. Box 19276

Springfield, Illinois 62794-9276

rachel.doctors@,illinois.rov

j0hn.i .kim@,illinois.eov

-

David Rieser

James

T. Harrington

Jeremy R. Hojnicki

McGuireWoods LLP

77 West Wacker, Suite 4100

Chicago, Illinois 60601

drieser@,mcguirewoods.com

jharrin@on@,mcguirewoods.com

jhoinicki@,mcguirewoods.com

Matthew J. Dunn, Division Chief

Office of the Illinois Attorney General

Environmental Bureau

188 West Randolph. 20" Floor

Chicago, Illinois 60601

mdunn@,atg.state.il.us

William A. Murray

City of Springfield, Office of Public Utilities

800 East Monroe,

4" Floor, Municipal

Virginia

Yang, Deputy Legal Counsel

Illinois Department of Natural Resources

One Natural Resources Way

Springfield, Illinois 62701-1271

virginia.yang@,illinois.gov

Katherine D. Hodge

N.

LaDonna Driver

HODGE DWYER ZEMAN

3150 Roland Avenue, P.O. Box 5776

Springfield, Illinois 62705-5776

khodge@,hdzlaw.coni

nldriver@,hdzlaw.com

Faith E. Bugel

Environmental Law and Policy Center

35 East Wacker Drive, Suite 1300

Chicago, Illinois 60601

fbugel@,elpc.org

Building

Springfield, Illinois 62757-0001

S. David Farris

Manager, Environmental, Health and Safety

City Water Light

&

Power

201 East Lake Shore Drive

Springfield, Illinois 62757

dfarris@,cwlp.com

Keith I. Harley

Chicago Legal Clinic, Inc.

205 West Monroe Street,

4" Floor

Chicago, Illinois 60606

kharleyii%kentlaw.edu

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007

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SERVICE LIST

(R06-26)

Sasha M. Reyes

Steven J. Murawski

Baker

&

McKenzie

One Prudential Plaza, Suite 3500

130 East Randolph Drive

Chicago, IL 60601

sasha.m.reves@,bakernet.com

steven.i.murawski@,bakernet.com

Daniel D. McDevitt

General Counsel

MIDWEST GENERATION, LLC

440 South

LaSalle Street, Suite 3500

Chicago, Illinois 60605

dmcdevitt@,mwgen.com

Bill S. Forcade

Katherine M. Rahill

JENNER

&

BLOCK LLP

One

IBM Plaza

Chicago, Illinois 6061 1

hforcade@,ienner.com

krahiIl@,ienner.com

Bruce Nilles

Sierra Club

122 West Washington Avenue, Suite 830

Madison, Wisconsin 53703

bruce.nilles@,sierraclub.org

James H. Russell

Winston

&

Strawn LLP

35 W. Wacker Drive,

4oth Floor

Chicago, Illinois 60601

jrussell@,winston.com

Karl A. Karg

Cary R. Perlman

Andrea M. Hogan

Latham

&

Watkins LLP

5800 Sears Tower

233 South Wacker Drive

Chicago, Illinois 60606

karl.car~@lw.com

cary.~erlman@lw.corn

andrea.horran@lw.com

I

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007

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