BEFORE THE ILLINOIS POLLUTION CONTROL BOARD
IN THE MATTER OF:
)
)
PROPOSED NEW CLEAN AIR
)
R06-26
INTERSTATE RULES (CAIR)
)
(Rulemaking – Air)
SO
2
, NO
x
ANNUAL AND NO
x
)
OZONE SEASON TRADING
)
PROGRAMS, 35 ILL. ADM. CODE 225,
)
SUBPARTS A, C, D AND E
)
NOTICE OF FILING
To:
Dorothy Gunn, Clerk
Persons included on the
Illinois Pollution Control Board
ATTACHED SERVICE LIST
James R. Thompson Center
Suite 11-500
100 West Randolph
Chicago, Illinois 60601
PLEASE TAKE NOTICE that we have today filed with the Office of the Clerk of the
Pollution Control Board the POST-HEARING COMMENTS OF MIDWEST GENERATION,
LLC, a copy of which is herewith served upon you.
/s/ Karl A. Karg
Karl A. Karg
Dated: January 5, 2007
Karg A. Karg
Cary R. Perlman
Andrea M. Hogan
LATHAM & WATKINS LLP
Sears Tower, Suite 5800
233 South Wacker Drive
Chicago, IL 60606
Telephone: (312) 876-7691
Fax: (312) 993-9767
karl.karg@lw.com
ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007
* * * * * PC #8 * * * * *
BEFORE THE ILLINOIS POLLUTION CONTROL BOARD
IN THE MATTER OF:
)
)
PROPOSED NEW CLEAN AIR
)
R06-26
INTERSTATE RULES (CAIR)
)
(Rulemaking – Air)
SO
2
, NO
x
ANNUAL AND NO
x
)
OZONE SEASON TRADING
)
PROGRAMS, 35 ILL. ADM. CODE 225,
)
SUBPARTS A, C, D AND E
)
POST-HEARING COMMENTS OF MIDWEST GENERATION, LLC
NOW COMES Participant MIDWEST GENERATION, LLC, by and through their
attorneys, LATHAM & WATKINS, LLP, pursuant to the Hearing Officer’s Order of December
20, 2006, and pursuant to 35 Ill. Adm. Code §102.108, and offers the following post hearing
comments:
NOx Allowance Look-Back Period and Annual Updating
The IEPA’s proposed rule for allowance trading includes a two-year look-back period to
determine an EGU’s allowances, to be updated annually. Midwest Generation is concerned that
the two-year look-back will, from time to time, encompass periods when the EGUs experience
outages of various lengths of time. Under the current language of the proposed rule, this
situation cannot be avoided. IEPA concludes that the affected 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.
In addition, Midwest Generation is concerned about the process of annual updating and
the relevant look-back period. 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
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ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007
* * * * * PC #8 * * * * *
years, such as the highest three years’ operation out of a specified five-year period, it becomes
critical that the updating occur annually and timely.
Importantly, USEPA has suggested a permanent baseline for sources in the model rule.
See
70 Fed.Reg. 25161, 25279 (May 12, 2005). New sources roll into 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 units 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). We find USEPA’s reasoning sound and urge the
Board to give it due consideration.
Midwest Generation believes that USEPA’s approach is the best approach for providing
certainty to existing plants, integrating new plants into the allowance system, and minimizing the
resource burden on IEPA associated with annual updating. Nonetheless, should IEPA believe
that annual updating is necessary, Midwest Generation urges the Agency to consider using a
five-year look-back (3 highest years of operational heat input over a five year period). We
believe that this approach will help ensure a levelizing of the allowances for EGUs in Illinois and
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ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007
* * * * * PC #8 * * * * *
will avoid inappropriate allowance windfalls or penalties associated with unexpected or extended
outages.
When the Agency presented the approach of annual updating at one of the very early
outreach meetings, Power Companies raised the issue of the Agency’s failure to timely allocate
allowances under Part 217, Subpart W with Laurel Kroack, Air Bureau Chief. In fact, the
allocation was late by several years. At the Springfield hearing, the Agency assured the Board
and the public that the lack of timely allocation was due to a situation where the employee
responsible for the work had left the Agency, 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. While Midwest
Generation appreciates the Agency’s forthright comments on this issue, we remain concerned
that future human error could result in an identical situation, and we believe the rules 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 in a timely manner, USEPA will rely upon the previous allocation to cover the
unallocated period. 40 CFR §§ 96.141(b)(2) and 96.341(b)(2). If, in the future, a timely
allocation is not made 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 the current language of the proposed rule. Either of Midwest Generations’
proposed alternatives would avoid this adverse outcome.
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ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007
* * * * * PC #8 * * * * *
Moreover, the upshot of a failure to timely allocate 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 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, Midwest Generations’ main concern with the proposed
rule is that it fails to provide an assurance that we will be allocated the allowances to which the
rule entitles us in a timely fashion. That certainty is an absolute necessity for Midwest
Generation. Further, Midwest Generation needs some level of protection against future human
error. That level of protection should come through an allocation methodology that provides
“levelizing” to cover those times when there are outages and when allocations are not made in a
timely manner. 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. Midwest Generation respectfully urges the Board to revise the
rule to reflect this three-year averaging concept and the five-year look-back period.
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ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007
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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.. 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 Midwest Generation believes is
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. Midwest Generation requests 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 Midwest Generation requests that the Board
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.
Midwest Generation also requests that the Board seriously consider heat input as the
basis for allocations. USEPA has provided the formula for converting gross electrical output
into heat 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).
Midwest Generation has reported and certified heat input data for years. In contrast, though
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ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007
* * * * * PC #8 * * * * *
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.
RESPECTFULLY SUBMITTED,
MIDWEST GENERATION, LLC
By:
/s/ Karl A. Karg
Karl A. Karg
Dated: January 5, 2007
Karg A. Karg
Cary R. Perlman
Andrea M. Hogan
LATHAM & WATKINS LLP
Sears Tower, Suite 5800
233 South Wacker Drive
Chicago, IL 60606
Telephone: (312) 876-7691
Fax: (312) 993-9767
karl.karg@lw.com
6
ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007
* * * * * PC #8 * * * * *
CERTIFICATE OF SERVICE
I, the undersigned, certify that on this 5th day of January, 2007, I have served
electronically the attached POST-HEARING COMMENTS OF MIDWEST GENERATION,
LLC, upon the following person:
Dorothy Gunn, Clerk
Illinois Pollution Control Board
James R. Thompson Center
Suite 11-500
100 West Randolph
Chicago, Illinois 60601
and by first-class mail with postage thereon fully prepaid and affixed to the persons listed on the
ATTACHED SERVICE LIST.
/s/ Karl A. Karg
Karl A. Karg
Karg A. Karg
LATHAM & WATKINS LLP
Sears Tower, Suite 5800
233 South Wacker Drive
Chicago, IL 60606
Telephone: (312) 876-7691
Fax: (312) 993-9767
karl.karg@lw.com
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ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007
* * * * * PC #8 * * * * *
SERVICE LIST
(R06-26)
John Knittle
Hearing Office
Illinois Pollution Control Board
James R. Thompson Center
100 W. Randolph
Suite 11-500
Chicago, Illinois 60601
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
Matthew J. Dunn, Division Chief
Office of the Illinois Attorney General
Environmental Bureau
188 West Randolph, 20
th
Floor
Chicago, Illinois 60601
Virginia Yang, Deputy Legal Counsel
Illinois Department of Natural Resources
One Natural Resources Way
Springfield, Illinois 62702-1271
David Rieser
James T. Harrington
Jeremy R. Hojnicki
McGuire Woods LLP
77 West Wacker, Suite 4100
Chicago, Illinois 60601
Sheldon A. Zabel
Kathleen C. Bassi
Stephen J. Bonebrake
SCHIFF HARDIN, LLP
6600 Sears Tower
233 South Wacker Drive
Chicago, Illinois 60606
Katherine D. Hodge
N. LaDonna Drive
HODGE DWYER ZEMAN
3150 Roland Avenue, P.O. Box 5776
Springfield, Illinois 62705-5776
William A. Murray
City of Springfield, Office of Public Utilities
800 East Monroe, 4
th
Floor, Municipal Building
Springfield, Illinois 62757-0001
Faith E. Bugel
Environmental Law and Policy Center
35 East Wacker Drive, Suite 1300
Chicago, Illinois 60601
Keith I. Harley
Chicago Legal Clinic, Inc.
205 West Monroe Street, 4
th
Floor
Chicago, Illinois 60606
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ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007
* * * * * PC #8 * * * * *
SERVICE LIST
(R06-26)
S. David Farris
Manager, Environmental, Health and Safety
City Water Light & Power
201 East Lake Shore Drive
Springfield, Illinois 62757
Sasha M. Reyes
Steven K. Murawski
Baker & McKenzie
One Prudential Plaza, Suite 3500
130 East Randolph Drive
Chicago, IL 60601
Bruce Nilles
Sierra Club
122 West Washington Avenue, Suite 830
Madison, Wisconsin 53703
Daniel D. McDevitt
General Counsel
Midwest Generation, LLC
440 South LaSalle Street, Suite 3500
Chicago, Illinois 60605
Bill S. Forcade
Katherine M. Rahill
Jenner & Block LLP
One IBM Plaza
Chicago, Illinois 60611
James H. Russell
Winston & Strawn LLP
35 W. Wacker Drive, 40
th
Floor
Chicago, Illinois 60601
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ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, JANUARY 5, 2007
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