Delaware Department of Natural Resources & Environmental Control v. Environmental Protection Agency ( 2015 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 26, 2014 Decided May 1, 2015
No. 13-1093
DELAWARE DEPARTMENT OF NATURAL RESOURCES AND
ENVIRONMENTAL CONTROL,
PETITIONER
v.
ENVIRONMENTAL PROTECTION AGENCY,
RESPONDENT
ELECTRIC POWER SUPPLY ASSOCIATION, ET AL.,
INTERVENORS
Consolidated with 13-1102, 13-1104
On Petitions for Review of A Final Rule Promulgated
by the United States Environmental Protection Agency
David W. DeBruin argued the cause for petitioners PSEG
Power LLC, et al. With him on the briefs were Matthew E.
Price, Elizabeth C. Bullock, Shanna M. Cleveland, and Caitlin
S. Peale.
Valerie Satterfield Edge, Deputy Attorney General, Office
of the Attorney General for the State of Delaware, argued the
2
cause and filed the briefs for petitioner Delaware Department of
Natural Resources and Environmental Control.
Ashley C. Parrish, Karen Schoen, David G. Tewksbury, and
Stephanie S. Lim were on the brief for intervenor Electric Power
Supply Association in support of petitioners.
Austin D. Saylor, Attorney, U.S. Department of Justice,
argued the cause for respondent. With him on the brief were
Robert G. Dreher, Acting Assistant Attorney General, U.S.
Department of Justice, and Michael Horowitz, Attorney, U.S.
Environmental Protection Agency.
William L. Wehrum Jr. argued the cause for intervenors-
respondent. With him on the brief were Lisa G. Dowden,
Melissa E. Birchard, Leslie Ritts, and David M. Friedland.
Aaron M. Flynn entered an appearance.
Before: GARLAND, Chief Judge, WILLIAMS and RANDOLPH,
Senior Circuit Judges.
Opinion for the Court filed by Senior Circuit Judge
RANDOLPH.
RANDOLPH, Senior Circuit Judge: The State of Delaware,
industry and environmental organizations, and an industry
intervenor challenge a final rule of the Environmental Protection
Agency governing the use of certain kinds of power generators.
See National Emission Standards for Hazardous Air Pollutants
for Reciprocating Internal Combustion Engines; New Source
Performance Standards for Stationary Internal Combustion
Engines, 78 Fed. Reg. 6,674 (Jan. 20, 2013). A group of trade
associations and corporations intervened in support of EPA.
The generators are known as Reciprocating Internal Combustion
Engines. We refer to them here interchangeably as “backup
3
generators” or “emergency engines.” They typically run on
diesel fuel and expel numerous pollutants. See National
Emission Standards for Hazardous Air Pollutants for Stationary
Reciprocating Internal Combustion Engines, 69 Fed Reg.
33,474, 33,499 (June 15, 2004).
Delaware raises three issues in its petition for judicial
review. First, it argues that EPA acted arbitrarily and
capriciously when it modified the National Emissions Standards
for Hazardous Air Pollutants for the backup generators pursuant
to Section 112 of the Clean Air Act. 42 U.S.C. § 7412. Second,
it argues that, while modifying the National Emissions
Standards, EPA improperly revised the definition of the same
kind of generators in the New Source Performance Standards,
violating Section 111 of the Act. See 42 U.S.C. § 7411. And,
third, it argues that EPA unlawfully modified the National
Emissions Standards to exempt from emissions controls certain
non-emergency generators located in low-density areas.
All petitioners and the intervenor raise the first issue.
Delaware alone raises the other two. Because we hold that
Delaware lacks standing to challenge the exemption from
emissions controls for backup generators in low-density areas,
we need not address the third issue. For the reasons that follow,
we hold that EPA acted arbitrarily and capriciously when it
modified the National Emissions Standards and the Performance
Standards to allow backup generators to operate without
emissions controls for up to 100 hours per year as part of an
emergency demand-response program.
I.
Congress enacted the Clean Air Act “to protect and enhance
the quality of the Nation’s air resources.” 42 U.S.C.
§ 7401(b)(1). The Act governs the emissions of hazardous air
4
pollutants that present “a threat of adverse human health effects
. . . or adverse environmental effects.” Id. § 7412(b)(2).
Section 112 requires EPA to promulgate national emissions
standards for both “major sources” and “area sources” of
hazardous air pollutants. See id. § 7412(d)(1). A “major
source” is “any stationary source” that emits “10 tons per year
or more of any hazardous air pollutant or 25 tons per year or
more of any combination of hazardous air pollutants.” Id.
§ 7412(a)(1). An “area source” is “any stationary source . . .
that is not a major source,” id. § 7412(a)(2), which is to say, any
stationary source that emits less than ten tons per year of any
hazardous air pollutant or less than twenty-five tons per year of
any combination of hazardous air pollutants. When
promulgating such standards, EPA must consider “the known or
anticipated adverse effects of such pollutants on public health
and the environment.” Id. § 7412(e)(2)(A).
Under Section 112, EPA “first sets emission floors for each
pollutant and source category and then determines whether
stricter standards, known as ‘beyond-the-floor’ limits, are
achievable in light of the factors listed in section 7412(d)(2).”
Cement Kiln Recycling Coal. v. EPA, 255 F.3d 855, 858 (D.C.
Cir. 2001) (per curiam). Notably, these factors include the
“consideration [of] the cost of achieving such emission
reduction, and any non-air quality health and environmental
impacts and energy requirements.” 42 U.S.C. § 7412(d)(2).
Section 111 directs EPA to set emissions standards for new
and newly modified sources. Id. § 7411(d). A modified source
is one that has undergone “any physical change in, or change in
the method of operation[,] . . . which increases the amount of
any air pollutant emitted by such source or which results in the
emission of any air pollutant not previously emitted.” Id.
§ 7411(a)(4). Under Section 111, EPA must set standards for
5
emissions that “reflect[] the degree of emission limitation
achievable through the application of the best system of
emission reduction.” Id. § 7411(a)(1).
In rulemakings over the past decade, EPA has established
National Emissions Standards and Performance Standards for
pollutants emitted by backup generators.1 Such pollutants
include “[f]ormaldehyde, acrolein, methanol, and acetaldehyde.”
69 Fed Reg. at 33,475. “[T]hese pollutants have been associated
with several health-related concerns, including cancer,
respiratory problems, and premature death.” Emission
Standards for Stationary Diesel Engines, 73 Fed. Reg. 4,136,
4,138 (Jan. 24, 2008).
Backup generators have traditionally been used in
emergency situations “to produce power for critical networks or
equipment . . . when electric power from the local utility is
interrupted.” 69 Fed. Reg. at 33,512. For years, they were not
subject to the same level of regulation as larger generators. See
id. at 33,477.
1
See generally National Emission Standards for Hazardous Air
Pollutants for Reciprocating Internal Combustion Engines, 75 Fed.
Reg. 51,570 (Aug. 20, 2010), National Emission Standards for
Hazardous Air Pollutants for Reciprocating Internal Combustion
Engines, 75 Fed. Reg. 9,648 (Mar. 3, 2010), Standards of Performance
for Stationary Spark Ignition Internal Combustion Engines and
National Emission Standards for Hazardous Air Pollutants for
Reciprocating Internal Combustion Engines, 73 Fed. Reg. 3,568 (Jan.
18, 2008), Standards of Performance for Stationary Compression
Ignition Internal Combustion Engines, 71 Fed. Reg. 39,154 (July 11,
2006), National Emission Standards for Hazardous Air Pollutants for
Stationary Reciprocating Internal Combustion Engines, 69 Fed. Reg.
33,474 (June 15, 2004).
6
That began to change in 2004, when EPA promulgated a
rule allowing backup generators to operate without emissions
controls for unlimited periods “in emergency situations and for
routine testing and maintenance.” Id. at 33,512. It also allowed
them to operate without emissions controls for “an additional 50
hours per year in non-emergency situations.” Id. Four years
later, EPA became “concerned that if stationary emergency
engines are allowed to operate in non-emergency situations[,]
they may be inappropriately used for peaking power” that is,
to supply power to an energy grid during periods of high
demand and, accordingly, EPA specified “that the 50 hours
allowed for non-emergency situations cannot be used to generate
income for a facility to supply power to an electric grid or
otherwise supply power as part of a financial arrangement with
another entity.” 73 Fed. Reg. at 3,583.
In two separate rules in 2010, EPA promulgated standards
for hazardous air pollutant emissions from backup generators.
The regulations allowed backup generators to operate without
emissions controls for fifteen hours each year as part of
“demand response programs” during “emergency conditions that
could lead to a potential electrical blackout.” 75 Fed. Reg.
9,648, 9,667, 9,677 (Mar. 3, 2010) (rule for compression
ignition engines); see also 75 Fed. Reg. 51,570, 51,591 (Aug.
20, 2010) (rule for spark ignition engines) (collectively, the
“2010 Rule”). Demand response programs, which we discuss
more below, are programs through which customers reduce their
consumption of electric energy from the grid in response to high
prices or other incentives. See 18 C.F.R. § 35.28(b)(4).
“Soon after the 2010 rule was final, the EPA received
petitions for reconsideration of the 15-hour limitation for
emergency demand response . . ..” 78 Fed. Reg. at 6,679. On
June 7, 2012, as a result of these petitions, EPA proposed
amendments for National Emissions Standards for stationary
7
backup generators and amendments to the Performance
Standards for stationary internal combustion engines. See 40
C.F.R. Ch. I, Subch. C., Pt. 63, Subpt. ZZZZ (National Emission
Standards); 40 C.F.R. Ch. I, Subch. C., Pt. 60, Subpt. IIII & JJJJ
(Performance Standards).
EPA’s final rule, issued on January 30, 2013, radically
revised the fifteen-hour limit. The rule’s preamble described its
purpose as addressing the “use of existing engines for
emergency demand response and system reliability” and noted
that using such generators “as part of emergency demand
response programs can help prevent grid failure or blackouts.”
78 Fed. Reg. at 6,679. Under the new rule, backup generators
are permitted to operate exempt from emissions controls for
“emergency demand response” for up to 100 hours each year, in
addition to actual emergency situations and maintenance. Id. at
6,679-80, 6,704-05; see also id. at 6,681, 6,695-97 (modifying
Performance Standards for consistency). The rule limits
emergency demand response operation to two circumstances:
first, when a “Reliability Coordinator” (such as an independent
electric grid operator) “has declared an Energy Emergency Alert
Level 2,” or, second, when “there is a deviation of voltage or
frequency of [five] percent or greater below standard voltage or
frequency.” Id. at 6,705.2
Petitioners filed a timely petition for review on April 1,
2013. See 42 U.S.C. § 7607(b)(1); FED. R. APP. P. 15.
2
The 2013 Rule explains that, during a Level 2 alert, “there is
insufficient energy supply and a true potential for electrical
blackouts.” 78 Fed. Reg. at 6,679. There is disagreement in the
record whether the term “emergency demand response” is a misnomer.
We do not resolve that issue here and understand “emergency” in this
context to mean the circumstances during which the 2013 Rule allows
backup generators to operate for up to 100 hours.
8
II.
Before turning to the merits of the case, we address the
threshold issue of standing. See Steel Co. v. Citizens for a Better
Env’t, 523 U.S. 83, 101 (1998).
To establish standing under Article III of the Constitution,
a petitioner “bears the burden of averring facts in its opening
brief” that “demonstrate it has suffered a concrete and
particularized injury that is imminent and not conjectural, that
was caused by the challenged action, and that is likely to be
redressed by a favorable judicial decision.” Texas v. EPA, 726
F.3d 180, 198 (D.C. Cir. 2013) (citing Sierra Club v. EPA, 292
F.3d 895, 899-901 (D.C. Cir. 2002) and Lujan v. Defenders of
Wildlife, 504 U.S. 555, 560-61 (1992)). When considering
standing, we assume the validity of the petitioner’s merits
argument. See Del. Dep’t of Natural Res. & Envtl. Control v.
FERC, 558 F.3d 575, 578 (D.C. Cir. 2009).
Petitioner Conservation Law Foundation, “a private,
nonprofit membership organization dedicated to the protection
of public health and New England’s environment,” asserts that
its “members live, work, and recreate in areas affected by
emissions from diesel generators, particularly densely populated
urban areas.” Pet’r FirstEnergy, et al. Br. at 16. For an
association to have standing, “it must demonstrate that at least
one member would have standing under Article III to sue in his
or her own right, that the interests it seeks to protect are germane
to its purposes, and that neither the claim asserted nor the relief
requested requires that an individual member participate in the
lawsuit.” NRDC v. EPA, 489 F.3d 1364 (D.C. Cir. 2007) (citing
Hunt v. Wash. State Apple Adver. Comm’n, 432 U.S. 333, 342-
43 (1977)). Here, the Foundation claims that “the challenged
rule will increase emissions of harmful air pollutants from
[backup generators], threatening the health and welfare of CLF’s
9
members.” Pet’r FirstEnergy, et al. Br. at 16 (citing Exs. A-C).
The Foundation provided declarations from two of its members
to that specific effect. Since these members assert harm
traceable to the rise in backup generator emissions that would be
redressable by government action, their interests in health are
germane to the Foundation’s purposes, and individual
participation in the lawsuit is not required, the Foundation has
standing. See Sierra Club v. EPA, 699 F.3d 530, 533 (D.C. Cir.
2012).
Petitioners FirstEnergy Solutions Corp., Calpine Corp., and
PSEG Power LLC (collectively, the “Generator Petitioners”)
claim to have standing based on the alleged distorting impact the
2013 Rule has on organized capacity markets in which the
Generator Petitioners compete. Intervenor Electric Power
Supply Association asserts standing for the same reason. We
need not address this argument, since the Generator Petitioners
have submitted a joint brief with the Foundation, and the
Association raises the same claims as raised in the joint brief.
Because “constitutional and prudential standing can be shown
for at least one plaintiff, we need not consider the standing of
the other plaintiffs to raise that claim.” Mountain States Legal
Found. v. Glickman, 92 F.3d 1228, 1232 (D.C. Cir. 1996).3
Delaware asks us to vacate three portions of the 2013 Rule:
the modified National Emissions Standards that allow for 100
hours of demand response, the similarly revised Performance
Standards, and the exemption from emissions controls of certain
non-emergency generators located in remote areas.
3
EPA concedes that the Foundation “does appear to have
standing” and that the Electric Power Supply Association asserts the
same issue raised in the Foundation’s joint brief. Resp’t Br. at 1 n.1.
10
EPA challenges Delaware’s standing to bring any of these
claims. It argues Delaware did not satisfy its burden of
identifying “actual or imminent and concrete and particularized
injury stemming from” EPA actions. Resp’t Br. at 2-3 (internal
quotation marks omitted). Indeed, Delaware’s argument in
favor of standing in its opening brief is thin. In a single
paragraph, Delaware asserts that its standing is “self evident,”
Pet’r Del. Br. at 11 (citing Sierra Club, 292 F.3d at 900),
arguing its “air quality is impacted by emissions from the
engines covered by the [Performance Standards] and [National
Emissions Standards] that originate upwind.” Id. The added
pollution will, so Delaware argues, negatively impact
Delaware’s ability to attain the National Ambient Air Quality
Standards (“NAAQS”) that Delaware has to maintain pursuant
to the Clean Air Act. Id. In its opening brief, Delaware offers
no specific evidence that the winds carry pollutants from backup
generators into the state, or in what quantity, or with what
frequency, or that backup generators in the remote-area
subcategory are located near enough to Delaware to pose a
threat to the state’s air quality. Its brief also points to no
specific place in the record, which extends for thousands of
pages, where that information could be found. Its only
additional authority is Massachusetts v. EPA, 549 U.S. 497,
516-25 (2007) (holding state petitioners had standing to
challenge EPA order denying a petition for rulemaking to
regulate greenhouse gas emissions from motor vehicles).
Typically the petitioner “bears the burden of averring facts
in its opening brief” that establish standing. Texas v. EPA, 726
F.3d at 198; see also D.C. CIR. R. 28(a)(7) (“When the . . .
petitioner’s standing is not apparent from the administrative
record, the brief must include arguments and evidence
establishing the claim of standing.”). Taken by themselves, the
bare assertions in the opening brief may be insufficient to
establish standing.
11
But our case law allows us the discretion to look beyond the
opening brief and consider material submitted later if the
petitioner “reasonably believed [its] standing [wa]s
self-evident.” Am. Library Ass’n v. FCC, 401 F.3d 489, 492
(D.C. Cir. 2005); see also Ctr. for Sustainable Econ. v. Jewell,
779 F.3d 588, 598-99 (D.C. Cir. 2015); Ams. for Safe Access v.
Drug Enforcement Admin., 706 F.3d 438, 444 (D.C. Cir. 2013).
We choose to exercise that discretion here for three reasons.
First, Delaware is part of PJM Interconnection, LLC the
regional transmission organization that operates the power grid
for over 60 million customers in the mid-Atlantic region and the
Midwest. See J.A. 1,790. As we will discuss below, part of
EPA’s motivation for this rule was to allow the use of
emergency engines for demand response in the PJM region, and
EPA explicitly sought to accommodate what it believed to be a
PJM-specific sixty-hour availability requirement for emergency
engines. See 78 Fed. Reg. at 6,679; National Emission
Standards for Hazardous Air Pollutants for Reciprocating
Internal Combustion Engines; New Source Performance
Standards for Stationary Internal Combustion Engines, 77 Fed.
Reg. 33,812, 33,817 (proposed June 7, 2012). There is evidence
in the administrative record that backup generators represent
nearly fifteen percent of demand response in the PJM region and
that demand response use is growing therein. See J.A. 2,114.
Second, the congressionally created Northeast Ozone Transport
Region includes Delaware and other states in the mid-Atlantic
and northeast regions, see 42 U.S.C. § 7511c, and we have
previously noted that ozone pollution from these states
contributes to pollution in each other. See Virginia v. EPA, 108
F.3d 1397, 1401 (D.C. Cir. 1997); see also Appalachian Power
Co. v. EPA, 249 F.3d 1032, 1036-37 (D.C. Cir. 2001) (per
curiam) (describing EPA finding that stationary source
emissions in upwind states contributed to ozone nonattainment
in other states and “trigger[ed] direct federal regulation of
12
stationary sources”). Third, parts of Delaware are in
nonattainment, and its experts aver that most of the emissions
that negatively impact its ability to attain the NAAQS come
from out of state. See Addendum to Pet’r Del. Reply Br. at 4;
see also EPA, Current Nonattainment Counties for All Criteria
Pollutants, http://www.epa.gov/airquality/greenbook/ancl.html
(last visited Apr. 22, 2015) (listing counties in nonattainment).
In light of these factors, it was reasonable for Delaware to
believe that its standing was self-evident. Accordingly, we look
beyond the opening brief to the reply brief to establish standing.
See Ams. for Safe Access, 706 F.3d at 444; Am. Library Ass’n,
401 F.3d at 495-96; see also Communities Against Runway
Expansion, Inc. v. FAA, 355 F.3d 678, 685 (D.C. Cir. 2004)
(looking to supplemental declarations submitted with reply brief
to establish injury and, thus, standing).
Delaware’s reply brief and its accompanying addendum
provide an explanation of the injuries that gave rise to
Delaware’s reasonable belief that its standing was self-evident.
It cites a letter in the record sent by Ali Mirzakhalili, Director of
Delaware’s Department of Natural Resources and
Environmental Control’s Division of Air Quality, to EPA in
August 2012, see J.A. 2,107-08, and provides in an addendum
two affidavits, one from Mirzakhalili and another from Marty
Prettyman, a Delaware environmental scientist, see Addendum
to Pet’r Del. Reply Br. at 1-17, 20-29.
In his letter, Mirzakhalili argues that the EPA rule would
have an “adverse” impact on air quality and that “[i]t is of vital
importance not to increase emissions of oxides of nitrogen
(NOx), especially on high electricity demand days.” J.A. 2,107.
He also argues a lower ambient air quality standard is “looming”
that “will require additional NOx emission reductions,” and
EPA’s proposed rule “increases rather than decreases NOx
13
emissions that contribute to the formation of ozone.” J.A.
2,107-08. In his affidavit, Mirzakhalili states that emissions
from emergency demand response programs significantly impact
ozone pollution in Delaware, Addendum to Pet’r Del. Reply Br.
at 10, that at least 90 percent of the pollutants contributing to
Delaware’s failure to attain the NAAQS “come from pollutants
transported from other states,” id. at 3, that such pollution incurs
medical costs that are borne by the state, id. at 4-5, and that
stronger emissions controls on backup generators in other states
would benefit Delaware, id. at 11-12. Prettyman charts the
rising number of demand response incidents in the PJM regional
power grid, id. at 23, and states that the remote area exemption
for certain engines poses an environmental hazard, id. at 24-25,
though it is unclear if such engines are within or proximate to
Delaware.
This evidence suffices to establish that Delaware has
suffered a concrete and imminent injury stemming from the
portions of the 2013 Rule allowing backup generators to operate
without emissions controls for up to 100 hours per year as part
of an emergency demand-response program. See Appalachian
Power, 249 F.3d at 1066-67; see also Massachusetts v. EPA,
549 U.S. at 521. Thus, Delaware’s challenges to the modified
National Emissions Standards and the related Performance
Standards are properly before us.
But a petitioner “must demonstrate standing for each claim
he seeks to press,” DaimlerChrysler Corp. v. Cuno, 547 U.S.
332, 352 (2006), and Delaware’s challenge to the exemption
from emissions controls of certain non-emergency generators
located in remote areas is another matter.
In both its opening brief and its reply brief, Delaware offers
no evidence that backup generators in the remote-area
subcategory are located near enough to Delaware to pose a
14
threat to the state’s air quality. To the contrary, the Mirzakhalili
letter cited in Delaware’s reply brief states that “[m]ost of these
installations are in remote, unpopulated areas.” J.A. 2,122. The
only examples the letter offers of these remote locations are
references to the Powder River Basin of Wyoming and “fields”
of generators “visibly evident across Wyoming and Colorado,
and . . . throughout Nebraska and California.” J.A. 2,122-23.
Nothing in Delaware’s briefs or supplemental affidavits
mentions a location in or near Delaware or even upwind of the
state. Considered alongside Delaware’s credible claims of
injury from backup generators in upwind and contiguous states,
its assertions regarding remote-area engines are strikingly weak.
Accordingly, Delaware has failed to meet its burden of showing
that it has standing to challenge the 2013 Rule’s
subcategorization of existing stationary spark ignition engines
located at area sources in sparsely populated areas. See Ass’n of
Flight Attendants-CWA, AFL-CIO v. U.S. Dep’t of Transp., 564
F.3d 462, 467 (D.C. Cir. 2009) (considering but rejecting
standing arguments made in reply brief and accompanying
submissions).
Accordingly, we address only EPA’s modification of the
National Emissions Standards and the Performance Standards to
allow backup generators to operate without emissions controls
for up to 100 hours per year as part of an emergency
demand-response program, see 40 C.F.R. §§ 60.4211(f)(2),
60.4243(d)(2), 63.6640(f)(2), and we do not address the remote-
area exemption, see 40 C.F.R. § 63.6675.
III.
We “may reverse” a final EPA rule if we find the agency’s
action “arbitrary, capricious, an abuse of discretion, or otherwise
not in accordance with law.” 42 U.S.C. § 7607(d)(9)(A). This
language from the Clean Air Act differs from that of the
15
Administrative Procedure Act. Section 706 of the APA states
that the “reviewing court shall” “hold unlawful and set aside
agency action” the court finds to be “arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law,” 5
U.S.C. § 706(2)(A). But “the standard we apply is essentially
the same under either Act,” the CAA or the APA. Ethyl Corp.
v. EPA, 51 F.3d 1053, 1064 (D.C. Cir. 1995); see also West
Virginia v. EPA, 362 F.3d 861, 867-68 (D.C. Cir. 2004).
To prevail, an “agency must ‘examine the relevant data and
articulate a satisfactory explanation for its action including a
rational connection between the facts found and the choice
made.’” Nat’l Shooting Sports Found., Inc. v. Jones, 716 F.3d
200, 214 (D.C. Cir. 2013) (quoting Motor Vehicle Mfrs. Ass’n
v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)
(quotation marks omitted)). “To be regarded as rational, an
agency must also consider significant alternatives to the course
it ultimately chooses.” Allied Local & Reg’l Mfrs. Caucus v.
EPA, 215 F.3d 61, 80 (D.C. Cir. 2000). We will reverse when
agency action is “based on speculation,” Jones, 716 F.3d at 214,
or when the agency did not “engage the arguments raised before
it,” NorAm Gas Transmission Co. v. FERC, 148 F.3d 1158, 1165
(D.C. Cir. 1998) (quoting K N Energy, Inc. v. FERC, 968 F.2d
1295, 1303 (D.C. Cir. 1992)).
IV.
To understand this case and petitioners’ claims, we must
discuss energy markets and capacity markets and their
relationship to demand response.
Under the Federal Power Act, the Federal Energy
Regulatory Commission (“FERC”) has jurisdiction over the
“transmission of electric energy in interstate commerce,” 16
U.S.C. § 824(b)(1), and is responsible for maintaining the
16
reliability of the electric grid, see id. § 824o(b)(1). FERC has
certified the North American Electric Reliability Corporation
(“NERC”) as the nation’s “electric reliability organization,” and
NERC has developed enforceable standards to ensure electric
grid reliability. See Alcoa, Inc. v. FERC, 564 F.3d 1342, 1344-
45 (D.C. Cir. 2009). FERC regulates electricity grid managers
known as Independent System Operators (“ISOs”) or Regional
Transmission Organizations (“RTOs”) (collectively, “System
Operators”), who are responsible for ensuring electric reliability
within their regions of responsibility. See Braintree Elec. Light
Dep’t v. FERC, 550 F.3d 6, 8-9 (D.C. Cir. 2008) (describing
history of RTOs).4
These System Operators are usually involved in both the
energy and capacity markets. Energy “is the amount of
electricity generators actually provide to the grid and is available
to be used at any moment. Organized wholesale electricity
markets buy and supply electricity instantaneously.” Kennedy
Maize, Texas and the Capacity Market Debate, Power Mag.,
Feb. 1, 2014.5
Capacity is different. “‘Capacity’ is not electricity itself but
the ability to produce it when necessary. It amounts to a kind of
call option that electricity transmitters purchase from
4
See also Michael H. Brown & Richard P. Sedano, Electricity
Transmission: A Primer 53 (2004) (describing responsibilities of grid
operators).
5
See also Brown & Sedano, Electricity Transmission at 67
(defining the “wholesale power market” as “[t]he purchase and sale of
electricity from generators to resellers . . . along with the ancillary
services needed to maintain reliability and power quality at the
transmission level”); J.A. 2,399 (“[A]ctual system load (real-time
customer demand) is met via the energy and other daily markets.”)
(Analysis Group Report).
17
parties generally, generators who can either produce more or
consume less when required.” Conn. Dep’t of Pub. Util. Control
v. FERC, 569 F.3d 477, 479 (D.C. Cir. 2009); see also Me. Pub.
Util. Comm’n v. FERC, 520 F.3d 464, 467 (D.C. Cir. 2008) (per
curiam), rev’d in part sub nom. NRG Power Mktg., LLC v. Me.
Pub. Util. Comm’n, 558 U.S. 165 (2010). These sales may
occur years in advance of when the capacity is actually needed;
power generators are thus able to plan and build facilities to
meet future demand. See Md. Pub. Serv. Comm’n v. FERC, 632
F.3d 1283, 1284-85 (D.C. Cir. 2011) (per curiam).
ISOs and RTOs typically require local utilities delivering
electricity to users (known as “load-serving entities,” or LSEs)
to purchase a certain amount of capacity to ensure reliability
during periods of high demand. See, e.g., Elec. Consumers Res.
Council v. FERC, 407 F.3d 1232, 1234 (D.C. Cir. 2005). “The
goal is for [utilities] to purchase sufficient capacity to easily
meet expected peaks in electricity demand on their transmission
systems.” Conn. Dep’t of Pub. Util. Control, 569 F.3d at 479.
“Payments for capacity provide a revenue stream to
maintain and keep current resources operating and to develop
new resources. Investors need sufficient long-term price signals
to encourage the maintenance and development of generation,
transmission and demand-side resources.” PJM, Reliability
Pricing Model, Demand Response and Energy Efficiency 1
(2009); see also PJM Interconnection, LLC, 128 FERC ¶ 61157P 24 (Aug. 14, 2009) (“Since energy and ancillary services
revenues in an export area are not sufficient by themselves to
support new entry, capacity payments are needed to provide the
proper incentives for new efficient entry in that area and to
retain existing efficient generators over the long term.”).
Capacity markets vary across the country, but “the primary
goal of each of these markets is the same: ensure resource
18
adequacy at just and reasonable rates through a market-based
mechanism that is not unduly discriminatory or preferential as
to the procurement of resources.” FERC Staff, AD13-7-000,
Centralized Capacity Market Design Elements 2 (2013); see also
N.E. Power Generators Ass’n v. FERC, 707 F.3d 364, 367 (D.C.
Cir. 2013). In some markets, System Operators administer
auctions whereby LSEs procure capacity. See Centralized
Capacity Market Design at 1-2.
We recently explained how the process works in New York.
There, “[c]apacity suppliers bid a quantity of capacity into the
auction, and the total amount of capacity bid creates a supply
curve, which intersects with a predetermined demand curve.”
TC Ravenswood, LLC v. FERC, 741 F.3d 112, 114 (D.C. Cir.
2013). Supply and demand meet to set a price, which LSEs pay
to purchase capacity. Id. “In theory, this market design
encourages desirable investment by signaling the need for more
generation and by enabling power generators to recoup their
costs in the capacity market.” Id.Capacity auctions do “not differentiate among capacity
resources based on any type of resource specific reliability
criteria.” J.A. 2,397 (Analysis Group Report). The capacity
markets select resources almost exclusively on the basis of
price they do not place a value on “fuel type, technology type,
or resource flexibility.” Id.; see also TC Ravenswood, 741 F.3d
at 114; Conn. Dep’t of Pub. Util. Control, 569 F.3d at 479-80.
Capacity can be supplied by power plants, but it can also be
supplied by demand-response resources. Traditionally, “demand
response” simply referred to “a reduction in the consumption of
electric energy by customers.” See 18 C.F.R. § 35.28(b)(4).6
6
See also FERC Staff, National Action Plan on Demand
Response, Docket No. AD09-10, at 3 (2010), available at
19
For example, a consumer may temporarily shut off air
conditioning on a hot day.
Industry and environmental petitioners are concerned with
what they consider a new phenomenon in demand response,
whereby some consumers substitute the supply of capacity from
traditional sources with backup generators. Consumers draw
energy from the generators and not from the grid, “which
reduces electricity consumption from the grid as measured at the
customer’s meter,” according to a report in the administrative
record. J.A. 2,142. By doing so, they “displace[] electricity that
otherwise would be provided by the grid.” J.A. 2,391 (Analysis
Group Report). So-called “demand response ‘aggregators’ have
adopted the practice of grouping backup generators together to
form ‘virtual power plants’ of considerable size,” according to
comments presented to EPA by intervenor Electric Power
Supply Association. J.A. 2,223-24.7
The performance obligations for these demand response
providers and traditional generators differ; traditional generators
have a “must-offer requirement” in accordance with which they
http://www.ferc.gov/legal/staff-reports/06-17-10-demand-response.pdf
(FERC uses “‘demand response’ to refer to the ability of customers to
respond to either a reliability trigger or a price trigger from their utility
system operator, load-serving entity, regional transmission
organization/independent system operator (RTO/ISO), or other
demand response provider by lowering their power consumption.”).
7
Respondent-Intervenor EnerNOC, Inc.—a corporation that
specializes in demand response and partly relies on the use of backup
generators subject to the 2013 Rule—claims on its website that it is
“rapidly building the world’s largest virtual power plant.” EnerNOC,
Our Impact, http://www.enernoc.com/about/our-impact (last visited
Apr. 22, 2015).
20
provide energy into the grid whenever “called upon,” but
“demand response capacity resources,” like backup generators,
“are not subject to the must-offer requirements,” absent system
emergencies. Centralized Capacity Market Design at 19.
Petitioners and the supporting intervenor argue that demand
response in capacity markets based on backup generators is
growing with negative effects on reliability and the
environment. They argue there are four reasons why. First,
because backup generators do not have to conform to emissions
controls like regular power plants, their electricity costs less to
produce and they can charge less and underbid conventional
power suppliers in capacity markets. Second, as backup
generators displace traditional power plants in capacity markets,
demand for traditional power generation drops, and because
traditional power generators rely on capacity markets to “recoup
their costs,” TC Ravenswood, 741 F.3d at 114 they under-
invest in power plants that produce electricity for the energy
markets. This reduction in supply undermines the reliability of
the power grid. Third, as the power supply decreases and the
grid becomes less stable, the number of power emergencies
increases. And, fourth, as emergencies increase, the actual use
of “dirty” backup generators correspondingly increases, causing
greater pollution. In short, petitioners and the intervenor argue
that instead of protecting the nation’s air resources and
improving grid reliability as EPA claims, the 2013 Rule has the
opposite effect.
V.
During the notice and comment period, petitioners
presented their concerns about the 2013 Rule’s impact on the
efficiency and reliability of the energy grid. They contend that
EPA should have, but did not, respond properly to their well-
21
founded concerns. See Allied Local & Reg’l Mfrs. Caucus, 215
F.3d at 80.
Petitioners are correct. EPA’s action was arbitrary and
capricious on that ground alone. In addition, EPA appears to
have relied on faulty evidence when justifying the exemption
increase from fifteen hours to 100 hours. EPA also did not
consider the alternative of limiting the exception to parts of the
country not served by organized capacity markets. We should
further note that EPA did not obtain the views of FERC or
NERC on the reliability considerations upon which EPA based
the exemption.
1. Efficiency and Reliability
Several commenters explained how EPA’s final rule
threatens the efficiency and reliability of the energy markets by
creating incentives for backup generators to enter the capacity
markets and force out more efficient, traditional power
generators.
For instance, at a hearing for public comments on the
proposed rule in July 2012, Christina E. Simeone of the non-
profit PennFuture Energy Center testified that the 2013 Rule
would “create distortions in energy markets by making demand
response from uncontrolled [backup] units artificially cheap.”
J.A. 1,697. She pointed to evidence showing that demand
response programs were growing in the region overseen by PJM
Interconnection. By making backup generators “artificially
cheap, EPA is creating a rush to these resources,” and, thus,
harming reliability by diverting investment from power
generation resources “needed to secure the grid.” J.A. 1,699.
At the same hearing, Shannon Maher Banaga of Petitioner
PSEG Power, LLC testified that demand response resources
22
were not needed to ensure reliability. J.A. 1,703. Backup
generators are “economic resource[s]” that “comp[]ete[] directly
with other forms of capacity, most particularly generation,” she
said. J.A. 1,705. As backup generators play a larger role in
capacity markets, “the number of so-called ‘emergencies’ is
going to go up.” J.A. 1,706.
In August 2012, Monitoring Analytics, LLC, acting in its
capacity as the Independent Market Monitor (“IMM”) for PJM,
submitted comments to EPA objecting strongly to the reliability
rationale of the proposed rule. “Some have asserted that an
exemption for [backup] generators participating in demand side
response [ ] programs provides benefits to the organized
wholesale electricity markets,” it wrote. J.A. 2,338. “Those
arguments have no merit. On the contrary, providing the
exemption will have negative consequences for efficiency and
reliability.” Id. It argued the 100-hour exemption “conflicts
with and would undermine the development of the demand side
of these markets” and is totally unnecessary to support
reliability. Id. According to IMM, given the interplay between
the capacity and energy markets, the exemption would distort
both. See J.A. 2,340-41.
Petitioner Calpine Corporation submitted a letter to EPA in
August 2012 echoing these concerns. The proposed rule “would
incentivize the procurement of diesel-fired [behind-the-meter]
generators masquerading as ‘demand response’ in electricity
capacity markets and thereby displace clean generating
resources . . ..” J.A. 2,355. Backup generators are not necessary
for reliability in organized competitive markets, since “the
market will simply procure other resources instead of [a behind-
the-meter generator] that has not had to internalize the costs of
emissions controls.” Id. Indeed, the increased reliance on
demand-response resources available in capacity markets “may
actually impair system reliability” since the traditional power
23
generators they displace “operate more reliably” than the
demand-response resources. J.A. 2,356. “Simply put, the
Proposed Rule’s exemption is nothing less than a subsidy for
dirty generating sources.” Id.
Nor were these concerns merely hypothetical. An August
2012 report submitted to EPA by Northeast States for
Coordinated Air Use Management, a non-profit association of
air quality agencies in the northeast, explained that “demand
response programs appear to be shifting a portion of overall
electricity demand from traditional generating resources that
supply the grid to more dispersed, unregulated diesel
generators.” J.A. 2,142; cf. J.A. 1,711, 1,757 (comments
showing an increase in demand-response resources offered into
auction from 2009 to 2010).
EPA offered wan responses to these comments. EPA
construed the concerns as arguments that the 2013 Rule “will
encourage the use of backup generators in lieu of cleaner
alternatives of energy” but “there is no guarantee that this would
be the case.” J.A. 2,579. EPA seems to have missed the forest
for the trees: the overriding concern of these comments was the
perverse effect the 100-hour exemption would have on the
reliability and efficiency of the capacity and energy markets, not
the specific clean energy alternatives that could supply the grid
instead of backup generators. EPA essentially said that it was
not its job to worry about those concerns: “The issues related
[to] management of energy markets and competition between
various forms of electric generation are far afield from EPA’s
responsibilities for setting standards under the CAA.” J.A.
2,582; see also J.A. 2,592 (“Decisions about what units to allow
to be bid into the capacity market and relied on for reliability are
not under the EPA’s purview and should be left to the entities
24
that are responsible for maintaining the reliability of the electric
grid.”).8
But EPA cannot get away so easily from its obligations
under the APA to respond to “relevant and significant”
comments. Cement Kiln Recycling Coal. v. EPA, 493 F.3d 207,
225 (D.C. Cir. 2007) (quoting Grand Canyon Air Tour Coal. v.
FAA, 154 F.3d 455, 468 (D.C. Cir. 1998)). Naturally, an agency
need not “discuss every item of fact or opinion included in the
submissions made to it.” Pub. Citizen, Inc. v. FAA, 988 F.2d
186, 197 (D.C. Cir. 1993) (quoting Auto. Parts & Accessories
Ass’n v. Boyd, 407 F.2d 330, 338 (D.C. Cir. 1968)). But an
agency must respond sufficiently to “enable us to see what
major issues of policy were ventilated . . . and why the agency
reacted to them as it did.” Id. (quoting Auto. Parts, 407 F.2d at
335) (ellipsis in original).
EPA did not even do that much. It refused to engage with
the commenters’ dynamic markets argument. At points, its later
statements contradicted earlier responses; while the final rule
placed reliability at the center of its reasoning, see 78 Fed. Reg.
at 6,679, EPA’s response to comments insisted it was not
“justifying its regulation primarily on the reliability needs of the
bulk power system.” J.A. 2,592; cf. Farmers Union Cent. Exch.,
Inc. v. FERC, 734 F.2d 1486, 1520 (D.C. Cir. 1984) (“Such
self-contradictory, wandering logic does not constitute an
adequate explanation” of agency action). EPA seeks to excuse
its inadequate responses by passing the entire issue off onto a
different agency. Administrative law does not permit such a
8
EPA also responded to these comments by noting that areas of
the country not served by organized capacity markets do rely on
backup generators to protect the reliability of the grid. See, e.g., J.A.
2,580. We find this response equally inadequate for the reasons
explained in Part V.3.
25
dodge. See Gen. Chem. Corp. v. United States, 817 F.2d 844,
846 (D.C. Cir. 1987) (per curiam) (finding agency action
arbitrary and capricious where agency analysis was
“inadequately explained”).
During oral argument, EPA’s attorney told the court that
EPA “heard” the commenters’ concerns about the 2013 Rule.
But merely hearing is not good enough EPA must respond to
serious objections. See Allied Local & Reg’l Mfrs. Caucus, 215
F.3d at 80. By failing to do so here, its rulemaking was arbitrary
and capricious. See State Farm, 463 U.S. at 43-44.
2. Backup Generator Aggregation
EPA’s 100-hour exemption in the 2013 Rule was arbitrary
and capricious for still another reason: EPA failed to respond to
comments suggesting that the 100-hour limit was based on
faulty evidence.
In support of its claim that the fifteen-hour cap was
inadequate, EPA specifically relied on comments from a prior
rulemaking, see J.A. 1,548 (PJM Comment from Feb. 14, 2011),
indicating that resources were required to be available for a
minimum of sixty hours per year to participate in PJM’s
“Emergency Load Response Program.” See 78 Fed. Reg. at
6,679.
But, as PJM explained to EPA in comments written in
August 2012 in response to this rule, the sixty-hour minimum
does not apply to individual engines. J.A. 1791. Rather, these
engines may be aggregated together to meet the sixty-hour
availability requirement. Id. PJM explained that in 2012 “the
environmental limitations on individual [backup] units . . . are
not necessarily dispositive of the ability of demand response
resources to participate in PJM’s markets or to maintain bulk
26
power system reliability.” Id.; see also J.A. 2346-47 (IMM
Comments); J.A. 2,104-05 (CLF Comments).
EPA seems to have either intentionally discounted PJM’s
later explanation of its requirement or simply confused the later
comment for the earlier one. Another commenter brought the
possible confusion to EPA’s attention, but EPA did not
specifically respond, saying it considered demand-resource
needs “in all areas of the country, not just PJM.” J.A. 2,596.
And yet, EPA significantly grounded the 2013 Rule in a PJM
requirement that does not exist for individual engines.
In light of PJM’s 2012 comments, EPA failed to give an
adequate reason for relying on the PJM availability requirement.
See 78 Fed. Reg. at 6,679. EPA’s action was thus arbitrary and
capricious on this ground, as well. See State Farm, 463 U.S. at
43; see also Nat’l Gypsum Co. v. EPA, 968 F.2d 40, 41 (D.C.
Cir. 1992) (vacating and remanding where EPA offered
inadequate scientific evidence and failed to offer substantial
evidence for decision).
3. Alternative Option
Petitioners argue that backup generator-based demand
response resources “simply provide a reliability service that
could and would be equally met by alternative
resources” traditional energy generators that comply with
emissions controls especially in organized capacity markets.
Pet’r FirstEnergy, et al. Br. at 22 (citing Analysis Group
Report).
EPA counters that petitioners “ignore[] that resources other
than emergency engines are typically unavailable for emergency
demand response purposes in those areas of the nation not
served by organized capacity markets.” Resp’t Br. at 39-40.
27
EPA argues that by setting a nationwide annual limit of 100
hours, it “took into account the fact that emergency engines help
to ensure reliable electric service not just in areas with organized
capacity markets, but also in many rural communities and small
municipal systems.” Id. at 45.
This statement does not explain why EPA failed to limit the
100-hour exemption to areas of the country not served by
organized markets. At least one commenter, the Electric Power
Generation Association, proposed such an alternative. See J.A.
1,780-83. Tens of millions of Americans live in states served by
organized markets.9 Yes, EPA received comments that
exempting backup generators from emissions controls would aid
reliability “for small, rural municipalities,” J.A. 2,556; see also
J.A. 1,931-32, J.A. 1,944, but it did not adequately explain why
it adopted a nationwide rule when such an allegedly overbroad
action has the potential to distort organized markets. EPA
asserts that it “was perfectly reasonable” for it “to promulgate a
rule of nationwide applicability, rather than establish different
limits on emergency demand response operation based on the
specific (and not necessarily permanent) market conditions in a
particular location.” Resp’t Br. at 48.
For support, EPA cites National Telephone Co-Op
Association v. FCC, 563 F.3d 536 (D.C. Cir. 2009), in which we
held that the Federal Communications Commission’s
explanation of its rejection of an alternative policy option “was
reasonable and reasonably explained.” Id. at 542; see also
Resp’t Br. at 48. But that case is instructive for exactly what is
lacking in EPA’s actions in the instant case. There, petitioner
argued that the FCC could have created a “partial or blanket
exemption” from an order requiring the portability of telephone
9
See FERC, Docket No. MO4-2-000, State of the Markets
Report 5-6 (2004).
28
numbers for “small wireline carriers.” Id. The FCC rejected the
proposal after carefully articulating its reasons, noting the
proposal “would harm consumers in small and rural areas across
the country by preventing them from being able to port [or
transfer their numbers] on a permanent basis” and discourage
further competition that could help customers. See id.; In re
Telephone Number Requirements for IP-Enabled Services
Providers, 22 F.C.C.R. 19531, 19611 ¶16 2007 WL 3306343(2007). In short, the FCC identified a specific harm of the
alternative proposal.
Here, the only rationale provided for a national rule was a
vague desire for uniformity.10 While EPA emphasized in the
administrative proceeding the benefits to rural areas of the rule,
see, e.g., J.A. 2,596, it did not address why a more limited rule
would not achieve the same outcome without posing risks to
organized energy markets.
We do not “broadly require an agency to consider all policy
alternatives in reaching [a] decision.” State Farm, 463 U.S. at
51. But “[a]t the very least this alternative way of achieving”
EPA’s objective, namely by limiting the 100-hour exemption to
address the reliability needs of rural locations, “should have
been addressed and adequate reasons given for its
abandonment.” Id. at 48. Because EPA too cavalierly
sidestepped its responsibility to address reasonable alternatives,
its action was not rational and must, therefore, be set aside. See
Allied Local, 215 F.3d at 80; see also Allentown Mack Sales &
Serv., Inc. v. NLRB, 522 U.S. 359, 374 (1998).
10
We note that a concern for uniformity did not prevent EPA
from establishing a subcategory of stationary engines located in
sparsely populated areas. See 40 C.F.R. § 63.6675. Clearly, a desire
for nationwide uniformity is not always dispositive.
29
4. FERC Input
An undercurrent coursing through this case has been that,
while EPA justifies the 2013 Rule on the basis of supporting
“system reliability,” 78 Fed. Reg. at 6,679; see also Resp’t Br.
at 29, grid reliability is not a subject of the Clean Air Act and is
not the province of EPA. There is no indication that either
FERC, the federal entity responsible for the reliability of the
electric grid, 16 U.S.C. § 824o(b)(1), or NERC, FERC’s
designated electric reliability organization, see Alcoa, 564 F.3d
at 1345, was involved in this rulemaking or submitted their
views to EPA.
During the comment period, when a commenter suggested
EPA “work with FERC . . . to ensure grid reliability does not
depend on stationary [backup generators],” J.A. 2,594, EPA
responded that the rulemaking’s purpose was to address
emissions from the emergency engines “and to minimize such
pollutants within the Agency’s authority under the CAA. It is
not within the scope of this rulemaking to determine which
resources are used for grid reliability, nor is it the responsibility
of the EPA to decide which type of power is used to address
emergency situations.” J.A. 2,595. Such responsibility was
“within the hands of the power authorities and not” EPA. Id. In
the preamble to the 2013 Rule, EPA similarly stated that
concerns about the impact of demand response in capacity
markets “are comments more appropriately directed towards the
FERC.” 78 Fed. Reg. at 6,685.
But EPA cannot have it both ways it cannot
simultaneously rely on reliability concerns and then brush off
comments about those concerns as beyond its purview. EPA’s
response to comments suggests that its 100-hour rule, to the
extent that it impacts system reliability, is not “the product of
agency expertise.” State Farm, 463 U.S. at 43.
30
When asked at oral argument where EPA rooted its
authority to regulate engines on the basis of grid reliability,
EPA’s attorney cited 42 U.S.C. § 7412(d), which instructs EPA
to “consider[]” the cost of achieving emission reductions. Id.§ 7412(d)(2). “Costs” can mean many different things,
including the cost associated with increased risk, but it is unclear
from the record how EPA weighed those costs here, when it
suggested that system reliability was the responsibility of other
specialized agencies but then did not seek input from them. On
remand, we encourage EPA to solicit input from FERC, as
necessary. Cf. Williams Natural Gas Co. v. FERC, 872 F.2d 438,
450-51 (D.C. Cir. 1989) (suggesting agency, on remand, solicit
new comments to obtain needed information).
VI.
We reverse the challenged rules that contain the 100-hour
exemption for emergency engines under the National Emissions
Standards, 40 C.F.R. § 63.6640(f)(2), and the Performance
Standards, 40 C.F.R. §§ 60.4211(f)(2), 60.4243(d)(2). We
remand them to EPA for further action. See 42 U.S.C.
§ 7607(d)(9); West Virginia, 362 F.3d at 867. The rest of the
2013 Rule remains in effect.
If vacating these portions of the 2013 Rule will cause
administrative or other difficulties, “EPA (or any of the parties
to this proceeding) may file a motion to delay issuance of the
mandate to request either that the current standards remain in
place or that EPA be allowed reasonable time to develop interim
standards.” Cement Kiln Recycling Coal., 255 F.3d at 872; see
also Columbia Falls Aluminum Co. v. EPA, 139 F.3d 914, 924
(D.C. Cir. 1998) (“If EPA wishes to promulgate an interim
treatment standard, the Agency may file a motion in this court
to delay issuance of this mandate in order to allow it a
reasonable time to develop such a standard.”).
So ordered.