1. EPA’s Proposed Interstate Air Quality Rule Consideration of Issues Associated with Possible Expansion of IAQR to the West Patrick Cummins, WGA Background for WRAP Board Meeting April 6, 2004 Tempe, Arizona Note: Slides 2-11 based on EPA presentation at WRAP’s February 2004 Stationary Sources Forum Meeting in Denver.

2. Long Range Transport of Air Pollution • Air pollution can travel hundreds of miles and cause health and environmental problems on regional or national scales • Emissions contributing to PM2.5 and ozone nonattainment often travel across state lines, especially in the eastern U.S. • SO2 and NOx contribute to PM2.5 transport • NOx contributes to ozone transport • Attaining national ambient air quality standards in the eastern U.S. will require some combination of emissions reductions from: • sources located in or near nonattainment areas (e.g., mobile sources); and • sources, such as power plants, located further from the nonattainment area • Clean Air Act contains provisions for states and EPA to address interstate pollution transport • EPA is also addressing ozone and particle pollution from mobile sources by implementing national fuel and engine standards.

3. Regional Emissions Contribute Significantly to Local Nonattainment Problems Urban v. Regional Contribution to PM Concentrations (Annual Average, ug/m3) • Because emissions are often transported across state boundaries, both regional and local action is needed to address air quality issues. • Federal action would significantly reduce the burden on state and local governments by addressing transport.

4. Counties With Monitors Exceeding the Ozone and PM2.5 NAAQS in 2002 Ozone Nonattainment (226 Counties) PM2.5 Nonattainment (49 Counties) Both Nonattainment (71 Counties)

5. Proposed IAQR: Key Elements • Proposed geographic scope based on impact of emissions (SO2 and NOx) from individual states on 8-hour ozone and PM2.5 nonattainment • Sets an emission reduction requirement for each State, based on capping EGU emissions at levels that EPA believes are highly cost effective • Provides an optional cap and trade program based on successful Acid Rain trading program • Allows states flexibility on how to achieve the reductions, including which sources to control and whether to join the trading program • Proposes a two-phase program with declining caps (budgets) • SO2: 3.9 million tons in 2010 and 2.7 million in 2015 • NOx: 1.6 million tons in 2010 and 1.3 million in 2015

6. Significant Contribution - Overview • Two-step approach for interpreting section 110(a)(2)(D). Patterned after successful 1998 NOx SIP Call. • Step 1 – Air quality assessment to identify upwind States that contribute significantly (before considering cost) to downwind nonattainment • Step 2 – Control cost assessment to determine the amount of emissions in each upwind State that should be reduced to eliminate significant contribution to downwind nonattainment. EPA has proposed that highly cost-effective reductions for EGUs should be achieved • Factors considered: • Degree and geographic extent of current and future nonattainment; • Potential impact of local controls on future nonattainment; • Potential for individual pollutants to be transported between States; • Extent to which pollution transport across State boundaries will contribute to future nonattainment; and • Availability and timing of controls to achieve highly cost-effective reductions.

7. States controlled for both SO2 and NOx States controlled for ozone season NOx only States not covered under the IAQR rule IAQR: Affected Region and Emission Caps Emissions Caps (for the affected region) million tons 2010 2015 SO2 3.9 2.7 NOx 1.6 1.3

8. Projected National Electricity Prices • Retail electricity prices are expected to gradually decline from today’s levels but then rise over time, both with and without the Interstate Air Quality Rule • The Interstate Air Quality Rule has a small impact on national electricity prices Note: Retail prices from 2000 are from AEO2003 and represent national prices. Prices for the period 2005 and after were calculated using the Retail Electricity Price Model.

9. Other Projected Impacts Natural Gas & Coal Prices Gas Coal Note: Minemouth and Henry Hub prices

10. Coal Production for Electricity Generation (million tons)

11. Other Projected Impacts Generation Mix 2010 2015 2020 Other Renewables Hydro Nuclear Gas/Oil Coal

12. Possible Expansion of IAQR to Address Western Regional Haze • EPA’s January proposal requested comment on possible expansion of IAQR to address impact of NOx and SO2 emissions from utilities on regional haze • WRAP’s new Stationary Sources met in February and identified issues for further discussion • Work Group consisting of WRAP governmental partners and stakeholders was formed to address issues in more detail • Work Group met in March. Several conference calls. • Developed “Key Principles for Extending the IAQR to Western States” for consideration by WRAP Board

13. Possible Form of Western SO2 Program Under the IAQR • National SO2 Program with regional cap for Western states • Integrated with current national SO2 trading program for electric utilities (Title IV - Acid Rain) • Regional cap consistent with the Annex -- 271,000 actual tons per year in 2018 (9 states) -- Allocate allowances accordingly -- Interim milestones to assure reasonable progress • Regional cap is important for ensuring real emission reductions in the West (not just compliance through emission trading)and corresponding allowances for Western sources • 9-transport region states emit less than 4% of national total from utilities

14. Possible Form of Western SO2 Program Under the IAQR • Address SO2 from utilities in remaining WRAP states (WA, MT, ND, & SD) and neighboring states • Include in Western cap? • Would satisfy utility SO2 requirements for first regional haze SIPs (i.e., through 2018) • Annex remains in effect in 5-states • Satisfies SO2 BART requirement for all sources • Tribal and new source set-asides • IAQR would help ensure Annex targets are met • Regional haze SIPs would still have to address non-utility sources (except non-utility SO2 sources in 309 states)

15. Making progress…………. • Utility SO2 Emission in 9-State Transport Region • 1999 - 430,000 tons • 2002 - 383,000 tons (largest reductions in NM & WY) • 2018 target - 270,000 tons • Additional 70,000+ tons reduced from Centralia plant in Washington state • More reductions on the way… • Xcel – Metro Denver reductions completed in 2003 • Mohave (NV), Springerville (AZ) – “in the pipe”

16. Possible Form of Western NOx Program Under the IAQR • Separate Western NOx trading zone or a national NOx program with appropriate allowances and “flow control” • Work Group recommendation: “NOx cap for Western electric generating units (EGUs) that reflects cost effective emissions reductions based on the aggressive application of combustion controls to all existing EGU sources” • Which states would be in Western NOx zone? -- 15 Western states are currently not covered by IAQR (13 “lower-48” WRAP states plus OK and NE)

17. Possible Form of Western NOx Program Under the IAQR • 2002 NOx emission rate for 15 states: 0.30 #/mmbtu • Clear Skies approach to Western NOx zone based on holding gas constant and applying combustion controls to existing coal units • Resulted in about a 20% reduction from current levels • Combustion control technology is improving “For purposes of arriving at a cap number, it will be important to analyze the availability of cost-effective combustion control technology for different kinds of boilers.” – IAQR Work Group • Additional analysis needed to determine likely range of reductions with combustion control technology

18. WRAP Emissions(13 Contiguous States) SO2 NOx 1996 2018 Note: Emissions do not include expected benefits of EPA’s proposed Tier IV off-road engine standards.

19. 2002 IMPROVE Monitoring Data Percent Light Extinction Due to Ammonium Sulfate on the 20% Worst Days

20. 2002 IMPROVE Monitoring Data Percent Light Extinction Due to Ammonium Nitrate on the 20% Worst Days

21. Other Issues and Questions • Options for state/regional versus federal program to meet budgets? • Options for participation by non-utility sources? • Phasing and timing of reductions? • Interim milestones • Final compliance date (2018?) • SIP requirements – 2007 or an additional SIP? • Regulatory certainty • Satisfy utility requirements for regional haze through 2018 (BART and reasonable progress) • New Source Review? • Local impacts and non-visibility impacts?

22. Other Issues and Questions • Modeling and analysis to evaluate costs, benefits, and adequacy of caps (Does EPA have some modeling?) • How would IAQR reductions compare to what may be achieved through regional haze SIPs? • Relationship to upcoming proposal to address NOx under the Prevention of Significant Deterioration program? • What process could the WRAP follow to address these issues? Timing? • Work Group recommends meeting with EPA • It’s the cap…..!

23. EPA’s Next Steps for IAQR • Supplemental Notice on Interstate Air Quality Rule Apr/May 2004 • Comment period May/June 2004 • Finalize Interstate Air Quality Rule Dec 2004