Is the US Environmental Protection

35 ELR 10316 5-2005

ELRNEWS&ANALYSIS

Is the U.S. Environmental Protection Agency’s Revised New Source Review Rule Moving in the Right Direction?: A Deepened New Source Bias, and the Need for Pursuing Sustainable Energy Development in Air Pollution Control Law by Inho Choi

Table of Contents E. A Multi-Pollutant Trading Approach at the Introduction...... 10316 Federal Level ...... 10328 I. Discussion of the NSR Program ...... 10319 1. Four-Pollutant Bills ...... 10328 A. In General ...... 10319 2. Three-Pollutant Bills: The Bush B. New and Modified Major Stationary Administration’s Clear Skies Initiative . . 10329 Sources...... 10320 III. The 2002 New NSR Rule ...... 10329 C. NSR Applicability ...... 10320 A. A 10-Year Look-Back Period and the 1. Physical or Operational Change: The Routine Actual-to-Projected-Future-Actual Test ....10330 Maintenance Exception ...... 10320 B. PALs ...... 10330 2. A Significant Net Increase in Emissions . . 10321 C. The Clean Unit Exclusion ...... 10332 a. An Emissions Increase: The Actual- D. PCPs ...... 10332 to-Future-Actual Test...... 10321 IV. Another Round of Heated Debate Over the b. The WEPCO Rule: The Actual-to- New NSR Rules ...... 10333 Projected-Future-Actual Test and Its A. Criticisms of the New NSR Rule: Environmental Extended Application ...... 10322 Groups’ Arguments ...... 10334 c. A Significant Net Increase: B. Concerns About the Revised Routine Maintenance Netting ...... 10323 Exception Rule ...... 10335 II. NSR Failures and the Movement to Reform C. The U.S. Government Accountability Office the Current NSR Program...... 10324 (GAO) Studies on Stakeholders’ Views on the A. Grandfathering Under the CAA ...... 10324 New NSR Rules ...... 10336 B. Federal and State Efforts to Repeal D. The Stay of the Routine Maintenance Exception Grandfathering ...... 10325 Rule and the Uncertain Future for NSR 1. Congressional Efforts...... 10325 Reform ...... 10336 2. State Action ...... 10325 E. The Legality of the New NSR Rule ...... 10336 C. EPA’s Enforcement Initiative ...... 10326 Conclusion...... 10337 D. The Overhaul of EPA’s Enforcement Initiative...... 10327 1. The National Energy Policy Group’s Report his Article analyzes the revised new source review (NSR) rule and argues that it violates the Clean Air to the President ...... 10327 T 1 2. The DOJ’s NSR Report ...... 10327 Act’s (CAA’s or the Act’s) clean air mandate by changing the preexisting definition of the statutory term “change” and 3. EPA’s 90-Day NSR ...... 10327 by extending the demand growth exclusion to all sources and creating several NSR-exempt project-based construction activities that are applicable to existing sources, with- Inho Choi is an S.J.D. candidate and received his LL.M. in 2002 from out providing meaningful procedural safeguards. This is be- George Washington University Law School. He received an LL.M. in 1998, and an LL.B. in 1993 from the Chungnam National University Col- cause the new rule conflicts directly with the following re- lege of Law in South Korea. He can be contacted via e-mail at quirements under the CAA’s NSR program: (1) a proposed [email protected]. The author would like to express his greatest physical or operational change that would increase emis- gratitude to Prof. Arnold W. Reitze Jr., who is his mentor at George Wash- sions or result in collateral emissions must go through NSR ington University Law School and one of the nation’s leading environmental law experts, for his helpful comments on the earlier drafts of this preconstruction review; (2) emissions increases and de- Article and his strong encouragement throughout its preparation. All the remaining errors and misunderstandings are the author’s responsibility. 1. 42 U.S.C. §§7401-7671q, ELR Stat. CAA §§101-618. 5-2005 NEWS & ANALYSIS 35 ELR 10317 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. creases to be considered in NSR applicability determina- after EPA’s notice of disapproval.7 The EPA Administrator tions must be contemporaneous; and (3) once NSR is trig- can disapprove the entire SIP or part of it.8 Harsh sanctions gered, the stringent technology requirement, the best avail- may be imposed on states that fail to meet the statutory able control technology (BACT) or the lowest achievable deadlines for SIP submittal or NAAQS attainment.9 On the emissions rate (LAER), must be applied to the sources. other hand, states have the wide discretion to choose mea- The Article argues that the revised NSR rule is moving in sures to comply with NAAQS as long as they can demon- the wrong direction in that it strengthens a bias against new strate timely attainment to EPA and make reasonable fur- sources and enlarges preexisting loopholes in favor of old, ther progress. Each state, by adopting a SIP, is empowered dirtier sources, which have traditionally enjoyed significant to determine which sources to regulate and which pollution cost advantages over cleaner, more energy-efficient sources control measures to employ to meet NAAQS.10 In short, the under the grandfathering scheme. It observes that the U.S. CAA’s basic scheme for accomplishing its goals is “cooper- Environmental Protection Agency’s (EPA’s) reliance on the ative federalism” with distinct roles for the states and the new rule’s allegedly minimal impacts on air quality and the federal government. nation’s decade-long transition to a multi-pollutant trading However, state authority to shape air management strate- approach in air pollution control in justifying the rule gies and plans has its limits. Congressional dissatisfaction changes is untenable in view of congressional intent leading with the 1970 CAA’s performance led to the enactment of to the enactment of NSR and the literal meaning of the term the prevention of significant deterioration (PSD) and “change.” The Article concludes with the argument that the nonattainment programs in 1977. The main thrust of the overriding goal in NSR reform is to create a level playing PSD program is to protect and enhance the high air quality field for all sources, whether new or old, by building of areas with clean air. Under the nonattainment program, sustainability concerns into existing environmental and en- states are required to implement more stringent SIP require- ergy law, for example, through repealing grandfathering, the ments in return for more time for attainment in areas within adoption of output-based emissions standards and, possibly, their jurisdiction that have failed to meet the applicable the enactment of climate change policy aimed at reducing NAAQS. States must impose emissions reduction require- fossil fuel usage. ments based on reasonably available control technology (RACT) on existing major sources covered by EPA guide- Introduction lines.11 New and significantly modified major stationary sources that want to locate in PSD or nonattainment areas The permitting sections of Parts C and D of CAA Subchap- must obtain preconstruction permits from state permitting ter I are known as the NSR program,2 whose main goal is to agencies. For new sources in PSD areas, this usually means protect, maintain, and improve air quality while providing that they must go through air impact analyses and air quality for continued economic development and meeting energy modeling at the preconstruction stage, and meet post-con- needs.3 The CAA covers six criteria air pollutants: parti- culates (including particulate matter (PM) with a diameter 7. 42 U.S.C. §7410(c)(1). of 10 microns or less (PM10) and PM with a diameter of 2.5 8. Id. §7410(c)(1)(B). microns or less (PM2.5)), sulfur dioxide (SO2), nitrogen oxide (NO ), carbon dioxide (CO ), ozone (O ), and lead (Pb). 9. States may be subject to highway sanctions prohibiting approval and x 2 3 funding by the Secretary of Transportation of highway projects, and It also regulates toxic air pollutants and volatile organic to stringent offset requirements under the nonattainment NSR pro- compounds (VOCs). Under the Act’s clean air mandate, gram of at least 2 to 1. Id. §7509. EPA is to promulgate primary and secondary national ambi- 10. Id. §7407(a), declaring that ent air quality standards (NAAQS) for each of the six crite- 4 [e]ach State shall have the primary responsibility for assur- ria pollutants. Each state must then within three years pre- ing air quality within the entire geographic area comprising pare and submit to EPA for approval its implementation such State by submitting an implementation plan for such plan, called a state implementation plan (SIP), for meeting State which will specify the manner in which national pri- NAAQS.5 In their SIPs, the states, including tribal lands and mary and secondary ambient air quality standards will be territories, must demonstrate the timely attainment of achieved and maintained within each air quality control region in such State. NAAQS or “reasonable further progress” toward the attainment of NAAQS in all areas under their jurisdiction, using See also, e.g., Train v. Natural Resources Defense Council, 421 U.S. 6 60, 79, 5 ELR 20264 (1975) (concluding that “so long as the ultimate available monitoring data and modeling analyses. The EPA effect of a State’s choice of emission limitations is compliance with Administrator must promulgate a federal implementation the national standards for ambient air, the State is at liberty to adopt plan (FIP) if a state fails to submit a SIP by the statutory whatever mix of emission limitations it deems best suited to its par- deadline or if it submits an inadequate SIP,or fails to revise it ticular situation”); Union Elec. Co. v. EPA, 427 U.S. 246, 269, 6 ELR 20570 (1976) (stating that the states have “the power to deter- 2. See id. §§7470-7492, 7501-7515. The NSR regulations are found in mine which sources would be burdened by the regulations and to 40 C.F.R. §§51.165, 51.166, 52.21, 52.24, and pt. 51, app. S. what extent” in implementing their SIPs approved by EPA); EPA v. 3. See, e.g., H.R. Rep. No. 95-294, at 13 (1977), reprinted in 1977 Brown, 431 U.S. 99, 103, 7 ELR 20375 (1977) (per curiam). There- U.S.C.C.A.N. 1077, 1091 (noting that “[t]his section is proposed as a fore, a state can demonstrate timely attainment to EPA in its SIP by means of assuring realization of the dual goals of attaining air quality relying more on control measures that target area sources, such as standards and providing for new economic growth”). dry cleaners and gas stations, and mobile sources than other states. 4. See 42 U.S.C. §7409. 11. EPA has interpreted RACT to mean “the lowest emission limitation that a particular source is capable of meeting by the application of 5. See id. §7410. control technology that is reasonably available considering techno- 6. Id. §7503(c)(2)(B). CAA §§110(a)(2)(A)-(M) provide for the basic logical and economic feasibility.” The 1990 CAA Amendments in- requirements for the SIP, which are to be used by EPA as criteria for corporated this RACT requirement, as interpreted by EPA guide- the approval of individual SIPs. Id. §7410(a)(2)(A)-(M); see 40 lines. Arnold W. Reitze Jr., Air Pollution Control Law: C.F.R. §51. Compliance and Enforcement 79 n.18 (2001). 35 ELR 10318 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. struction air quality monitoring requirements.12 New in that sources are required to pursue the right mix of control sources in nonattainment areas must obtain an offset from options to minimize air quality impacts to the maximum ex- other sources in surrounding areas that is equal to or greater tent possible.15 It also is comprehensive because the appli- than the proposed increase in emissions at their facility.13 cant for an NSR permit must consider all possible environ- Once it is found by the permitting agency that NSR require- mental impacts on the environment a particular technology ments apply, new or significantly modified sources must in- would have, in the technology selection process.16 Thus, stall BACT or LAER in PSD and nonattainment areas, re- NSR is quite similar to an environmental impact analysis spectively.14 This technology requirement is quite onerous under the National Environmental Policy Act (NEPA) but, because of its substantive bite, NSR can be described as 12. See 42 U.S.C. §7475(e)(3)(B) (stating that PSD regulations “shall “NEPA with teeth.”17 Moreover, EPA has significant lever- require an analysis of the ambient air quality, climate and meteorol- 18 ogy, terrain, soils and vegetation, and visibility” at the proposed con- age over state decisions to choose NSR technology. As struction site and in nearby areas); 40 C.F.R. §52.21(m)(1)(iv), with the O3 nonattaiment program, NSR is the product of 52.21(m)(2), (m)(3). congressional policy judgment favoring the Act’s clean air 13. 42 U.S.C. §7503(c)(1). The applicable offset ratio is different de- goal at the expense of state sovereignty and industry’s oper- pending on the location’s nonattainment classification. CAA §182 ational flexibility. It constitutes an integral part of the Act’s sets out offset ratios for O3 nonattainment areas. An applicable minimum ratio is from VOCs of 1.1 in marginal areas down to 1.5 in ex- PSD and nonattainment programs and is one of the most im- treme areas (1.15 for moderate areas, 1.2 for serious areas, and 1.3 portant tools in moving the nation toward attaining the goal for severe areas). See id. §§7511a(a)(4), 7511a(b)(5), 7511a(c)(10), of clean air for all Americans. 7511a(d)(2), and 7511a(e)(1). In principle, the required emissions Attempting to balance the two competing interests of en- reductions must come from a source in the same area. Id. §7503(c)(1). However, an exception applies when the offset is pro- vironmental protection and accommodating economic and vided by a source in another attainment area with an equal or higher nonattainment classification (2) whose emissions from this area con- must contain enforceable conditions on design characteristics or tribute to nonattainment in the area where the new source is sited. Id. equipment. The owner or operator of a major emitting facility is re- This exception may apply in the context of transboundary pollution quired to perform BACT analysis independently of its analyses of its in which the transport of a pollutant emitted from sources located in source impacts on ambient air quality. The CAA requires EPA to is- upwind areas contribute to nonattainment in downwind areas. Off- sue guidance documents on BACT/LAER technology and to revise sets are often called emissions reduction credits (ERCs). Prior to the these documents at least every two years. 42 U.S.C. §7508. Addi- 1990 CAA Amendments, ERCs were still used in offsets in tionally, EPA may consider incidental effects of emissions of toxic nonattainment areas, bubbles and netting, and banking. See gener- pollutants, which are not regulated under the PSD program, in mak- ally U.S. EPA, Emissions Trading Policy Statement; General Princi- ing BACT determinations. See id. §7412(b)(6) (“The provisions of ples for Creation, Banking, and Use of Emission Reduction Credits, [the PSD program] shall not apply to [hazardous pollutants] under 51 Fed. Reg. 43814 (Dec. 4, 1986). [§112].”); see, e.g., In re North County Resource Recovery Assocs., 2 E.A.D. 229, 1986 EPA App. LEXIS 14 (Adm’r 1986) (stating that 14. 42 U.S.C. §§7502, 7503. Note that an area can be in attainment for “the net environmental impact of such emissions is eligible for con- one criteria pollutant and in attainment for another pollutant. As a re- sideration in making the BACT determination”) (emphasis added); sult, both technology standards could apply to the same source and see Draft NSR Workshop Manual, supra, at B.50-.53 (stating the source applicant must prepare for both PSD and nonattainment that “the generation or reduction of toxic and hazardous emissions, NSR, simultaneously. The nonattainment NSR requirements are including compounds not regulated under the Clean Air Act, are more stringent than the PSD NSR requirements. The applicant considered as part of the environmental impacts analysis[,]” citing In should identify all technologies, including those listed in re North County Resource Recovery Assocs., 2 E.A.D. at 229); see In RACT/BACT/LAER Clearinghouse (RBLC), in which EPA has re Steel Dynamics, Inc., 9 E.A.D. 165, 189 n.29, 2000 WL 833062 maintained a list of technologies on its website that have been dem- (EAB Apr. 23, 2000) (stating that state permitting agencies have onstrated to be effective on similar sources. The applicant should “considerable discretion to evaluate HAPs emissions and potential also consider a control technology that has successfully been ap- health impacts as part of its consideration of environmental impacts plied at other source categories. U.S. EPA, Draft New Source in general[,]” citing Draft NSR Workshop Manual, supra and Review Workshop Manual: Prevention of Significant De- In re North County Resource Recovery Assocs., 2 E.A.D. at 229). terioration and Nonattainment Area Permitting B.11 available at 15. In practice, EPA has employed a “top-down” approach. Under this (1990), http://www.epa.gov/region07/programs/artd/ approach, all technologically feasible and available technology op- air/nsr/nsrmemos/1990wman.pdf (last visited Mar. 1, 2005) [herein- Draft NSR Workshop Manual tions are identified and ranked on the basis of its stringency or effec- after ]. Pollution control technol- tiveness, and the permit applicant has the burden to reverse the pre- ogies that are being successfully applied to similar sources in foreign sumption in favor of the most stringent technology available, by countries are also potential candidates for BACT or LAER. Id.at showing why this will not be appropriate for it. See Draft NSR B.5. While BACT is determined “on a case-by-case basis, [after] tak- Workshop Manual, supra note 14. The NSR technology selection ing into account energy, environmental, and economic impacts, and process have traditionally focused primarily on end-of-pipe, post- other costs,” LAER is a much more demanding one, without men- combustion, controls. It, however, does not necessarily mean that tioning costs and other related considerations in the relevant provi- the chosen technology is limited to a particular pollution control sion. Compare 42 U.S.C. §7479(3); 40 C.F.R. §51.166(b)(12) technology. It may include the use of a cleaner fuel or innovative (BACT), with 42 U.S.C. §7501(3) (LAER). This is mainly because production processes, and, even, a combination of all available con- nonattainment areas must make reasonable further progress toward trol methods that can achieve the maximum degree of emissions re- attainment, which is intended to ensure that air quality in ductions of the pollutant subject to NSR. See 42 U.S.C. §7479(3) (re- nonattainment areas must be improved continuously, while allowing quiring that an applicable emission limitation be “based on the maxi- for economic growth. BACT is an emission limitation standard, mum degree of reduction of the [covered] pollutant...through ap- which is set at the most stringent level that can be achieved by a simi- plication of production processes and available methods, systems, lar source in industry unless it is proved by the applicant as techno- Reitze and techniques, including fuel cleaning, clean fuels, or treatment or logically or economically infeasible. , supra note 11, at 195. innovative fuel combustion techniques for control of each such pol- It usually requires the use of best available pollution control methods lutant”) (emphasis added). and technologies. If emissions standards prove to be infeasible, design, equipment, work practices, operational standards, or any com- 16. Draft NSR Workshop Manual, supra note 14, at B.26. bination thereof can be used. 40 C.F.R. §51.166(g)(12). LAER may 17. Gregory B. Foote, Considering Alternatives: The Case for Limiting also lack numerical emissions limitations because of “the technolog- CO2 Emissions From New Power Plants Through New Source Re- ical or economic limitations on the application of measurement view, 33 ELR 10642, 10651 (July 2004). methodology to a particular class of sources.” Id. §51, app. S. IV-A n.4. (“Hereafter, the term emission limitation shall also include such 18. See Alaska Dep’t of Envtl. Conservation v. EPA, 540 U.S. 461, 34 design, operational, or equipment standards.”) (emphasis in origi- ELR 20012 (2004) (holding that a state permitting agency must pres- nal). EPA has allowed states instead to prescribe a design, opera- ent a reasonable justification for its BACT determination to EPA’s tional, or equipment standard in the permits for these sources that satisfaction in order to meet the Act’s NSR requirements). 5-2005 NEWS & ANALYSIS 35 ELR 10319 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. energy needs19 has led to a highly complicated regulatory legal system’s failure to attain the goal of sustainable en- system, which is often criticized by the regulated commu- ergy development. The correct direction to be taken in re- nity as burdensome, complex, time-consuming and costly, forming NSR should be to incorporate sustainability con- inflexible, and even frustrating good-faith efforts to im- cerns into legal decisionmaking processes under the CAA, prove environmental performance in pollution control tech- e.g., through the adoption of output-based emission stan- nology.20 Given its technology-forcing nature and onerous dards, repealing grandfathering, and/or the integration of requirements, it is not surprising that industry has every in- sustainable energy development goals into NSR permit- centive to avoid NSR by taking advantage of the weak- ting processes. nesses and loopholes in the NSR program. A spectrum of This Article aims to discuss the problems with NSR and stakeholders, including industry representatives, environ- analyze the new NSR rule in detail. It argues that, while its mental nongovernmental organizations (NGOs), and state impact will be minimal on electric utilities, the new NSR and federal regulators, reached a broad consensus on the rule arguably violates the CAA’s “clean air” mandate be- need for NSR reform around the early 1990s. EPA then cause: (1) a proposed physical or operational change that embarked upon a process for NSR reform by authorizing would increase emissions or result in collateral emissions the formation of a subcommittee to the Clean Air Act Ad- must go through NSR preconstruction review; (2) emissions visory Committee in 1993.21 Since then, especially EPA’s increases and decreases to be considered in NSR applicabil- new NSR enforcement initiative in the late 1990s, the NSR ity determinations must be contemporaneous; and (3) once program has been at the center of debate over how to reform NSR is triggered, the stringent technology requirement, this system. The stated objectives of the NSR reform BACT or LAER, must be applied to the sources. seemed promising.22 In reality, however, EPA is caught in Part I describes the elements of the CAA’s NSR program the middle of a tug of war between industries and environ- with much focus on baseline determinations and NSR appli- mentalists that want to shape the agenda to their own inter- cability. It partially compares the preexisting rule with the ests and values. new NSR rule. Part II explains why NSR has not worked as The new NSR rule, which was promulgated in 2003, is no well as expected at the time of its enactment in 1977, and exception. It creates a new controversy on its legality under discusses NSR reform moves by the U.S. Congress, some the CAA, provoking another round of heated debate. The states, and the previous and current Administrations. Part III new rule is moving in the wrong direction because it examines the new NSR rule and discusses what changes in strengthens a new source bias and enlarges preexisting loop- EPA’s prior position took place and the rationales for the holes in favor of old, dirtier sources, which have tradition- changes given by the Agency. Part IV discusses grave con- ally enjoyed significant cost advantages over cleaner, more cerns expressed by environmentalists and state agencies energy-efficient sources under the grandfathering scheme. about the potential adverse impacts of the new rule on exist- Allegedly minimal impacts on air quality and the nation’s ing air quality. It then critically analyzes EPA’s current legal decade-long transition to a multi-pollutant approach in air position and arrives at the presumptive conclusion that the pollution control should not be used as an excuse for relax- new NSR rule is violative of the CAA’s clean air mandate in ing preexisting rules. NSR has been the center of the U.S. view of congressional intent leading to the enactment of NSR and the literal meaning of the statutory term “change.” 19. See Chevron, U.S.A., Inc. v. Natural Resources Defense Council, The Article concludes with the argument that the overriding 467 U.S. 837, 851, 14 ELR 20507 (1984) (observing that in the NSR goal in NSR reform is to create a level playing field for program “Congress sought to accommodate the conflict between the sources, whether new or old, by building sustainability con- economic interest in permitting capital improvements to continue cerns into existing environmental and energy law. and the environmental interest improving air quality”). 20. A relevant EPA report reads as follows: I. Discussion of the NSR Program For more than 10 years now, the Environmental Protection Agency (EPA) has been engaged in an effort to improve the A. In General New Source Review (NSR) Program in response to wide- spread concerns from stakeholders who are concerned that it is too complex and burdensome, it introduces uncertainty in The essence of the PSD and nonattainment NSR programs is planning, it inhibits industry’s ability to quickly make needed the requirement for preconstruction review. The owner or changes, and it is not working as effectively as it could be to operator planning to construct a new major stationary protect air quality. source or to make a major modification to an existing major U.S. EPA, New Source Review Improvements: Supplemen- stationary source must undergo a preconstruction permit- tal Analysis of the Environmental Impact of the 2002 ting process. Preconstruction review is designed to select Final NSR Improvement Rules 1 (2002), available at proven modern pollution control technology as applied to http://www.epa.gov/nsr/documents/nsr-analysis.pdf (last visited Mar. 1, 2005) [hereinafter Supplemental Analysis of 2002 Fi- each regulated pollutant emitted from the facility, including nal NSR’s Impact]. new emissions of a collateral pollutant. In order to obtain a 21. U.S. EPA, Notice of Public Meeting, 58 Fed. Reg. 36407 (July 7, preconstruction permit, the facility must prove to the per- 1993). mitting agency that it would not result in a violation of NAAQS or any applicable PSD regulations in local or 22. See, e.g., U.S. EPA, Prevention of Significant Deterioration (PSD) 23 and Nonattainment New Source Review (NSR): Baseline Emissions downwind areas currently in compliance with NAAQS. Determination, Actual-to-Future-Actual Methodology, Plantwide Because NSR involves a lengthy and complex process, Applicability Limitations, Clean Units, Pollution Control Projects, 67 Fed. Reg. 80186, 80189 (proposed Dec. 31, 2002) (to be codified much attention is paid to its applicability. at 40 C.F.R. §§51, 52) (stating that the aim of NSR reform is to “reduce burden, maximize operating flexibility, improve environmental quality, provide additional certainty, and promote adminis- 23. For permit requirements, see generally 42 U.S.C. §7475(a); id. trative efficiency”). §7503(a) (nonattainment). 35 ELR 10320 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. B. New and Modified Major Stationary Sources New source is defined as any stationary source that begins construction or modification after the promulgation of Under the CAA, stationary source means “any source of proposed regulations for a source category.31 “‘[M]odifi- an air pollutant except those emissions [from mobile cation’ means any physical change in, or change in the sources].”24 CAA §111(a)(3) further defines the term sta- method of operation of, a stationary source which increases tionary source as “any building, structure, facility, or instal- the amount of any air pollutant emitted by such source or lation which emits or may emit any air pollutant.”25 The which results in the emission of any air pollutant not previ- threshold emission levels for qualification as a major sta- ously emitted.”32 These provisions are contained in the tionary source in nonattainment areas are set at a potential to Act’s new source performance standard (NSPS) program, emit (PTE) of more than 100 tons per year (tpy)26 of any pol- but the NSPS program has a purpose and scope that are lutant subject to regulation under the CAA down to smaller wholly different from the NSR program. BACT or LAER amounts depending on the area’s nonattainment classifica- are mass-based standards applicable only to major station- tion.27 In the case of PSD areas, the threshold is 100 or 250 ary sources, depending on the area’s air quality, is deter- tpy of any regulated pollutant under the CAA, depending on mined on a case-by-case basis, and is usually much more the source type.28 Under the NSR program, the amount of stringent than NSPS. On the other hand, generally speaking, emissions is calculated based on aggregating sources lo- NSPS is a national, uniform performance standard for ap- cated on contiguous or adjacent properties that are under proximately 69 categories, which does not mandate the use common control, having the same two-digit Standard Indus- of particular technologies. trial Classification code.29 Note that states have implemented minor source programs. Thus, even if new or modi- C. NSR Applicability fied sources do not qualify as major and, hence, are not subject to NSR, they can still be subject to minor source require- 1. Physical or Operational Change: The Routine ments imposed by states. A source’s emissions can include Maintenance Exception fugitive emissions.30 The NSR program has been applicable only to major modi- 24. Id. §7602(j). Actually, the term “major emitting facility” is used un- fications that would “result in a significant net emissions in- der CAA Subchapter I, Part C, Subpart 1. See id. §7479(1). Its defini- 33 tion is similarly worded as that of a major stationary source. crease,” and the NSR regulations establish significant 34 25. Id. §7411(a)(3). Roughly speaking, a stationary source is a discrete emissions levels, which vary by pollutant. Therefore, de- point from which one of any regulated air pollutants under the CAA termining whether a major modification has occurred is a is released, such as smokestacks. But note that fugitive emissions two-prong test. First, there must be a physical or operational may be included for the purposes of calculating emissions from stationary sources within the certain industrial categories covered by change at the facility. Neither Congress nor EPA has pro- EPA regulations. tion of State Implementation Plans, 45 Fed. Reg. 52676, 52690 26. Id. §7602(z). (Aug. 7, 1980). There are 27 source categories covered by this regu- 27. See id. §§7511a(c)-(e), 7511c(b)(2) (O3); id. §7512a(c)(1) (CO); id. lation. See id. at 52692. EPA agreed to withdraw its position as part §7513a(b)(3) (PM). This can be as low as 10 tpy of VOCs in an ex- of a settlement with industry petitioners in Chemical Mfrs. Ass’n v. treme O3 nonattainment area. EPA after a series of legal challenges to the rules, but the Agency 28. 42 U.S.C. §7479(1); 40 C.F.R. §52.21(b)(1). Usually the threshold is thereafter returned to the interpretation it initially adopted under the 250 tpy, but the 100-tpy threshold applies to a list of 28 source cate- 1980 regulations, a move encouraged by the judicial opinion of the gories (industrial groupings such as petroleum refineries, fossil D.C. Circuit in Duquesne Light Co. v. EPA. See No. 79-1112 (D.C. fuel-fired steam-generated electric power plants, pulp mills, and iron Cir. filed Jan. 26, 1979); 698 F.2d 456, 13 ELR 20251 (D.C. Cir. and steel mill plants). See 40 C.F.R. §52.21(b)(1)(a). See also U.S. 1983). Therefore, the Agency’s current position is that it will balance EPA, NSR 90-Day Review Background Paper 3 (2001), avail- all possible socioeconomic costs and benefits in determining able at http://www.epa.gov/air/nsr/documents/nsr-review.pdf (last whether fugitive emissions should be included in the calculation of visited Mar. 1, 2005) [hereinafter NSR Background Paper]. emissions in the context of PSD NSR. In light of the court ruling in 29. 40 C.F.R. §§51.166(h)(6), 52.21(b)(6). the Alabama Power case, it can be said that EPA has the discretion to determine whether to require a source category to consider fugitive 30. CAA §302(j) reads: emissions in the definition of a major source for the purposes of PSD Except as otherwise expressly provided, the terms “major and nonattainment NSR preconstruction review. For example, in stationary source” and “major emitting facility” mean any Ogden Projects, Inc. v. New Morgan Landfill Co., the U.S. District stationary facility or source of air pollutants which directly Court for the Eastern District of Pennsylvania concluded that “fugi- emits, or has the potential to emit, one hundred tons per year tive emissions may not be counted unless EPA has first conducted a or more of any air pollutant (including any major emitting fa- rulemaking” for listing a source category, as required by §302(j). cility or source of fugitive emissions of any such pollutant, as 911 F. Supp. 863, 878, 26 ELR 20843 (E.D. Pa. 1996). See also 40 determined by rule by the Administrator). C.F.R. §51.165(a)(1)(C) (nonattainment NSR). In addition, on No- vember 27, 2001, EPA promulgated a rule, under which a source 42 U.S.C. §7602(j) (emphasis added). However, there has been con- within a category subject to the NSPS or the hazardous air pollutants tinued controversy as to whether and how fugitive emissions will be (HAPs) rule issued after August 7, 1980, is not required to include handled under the NSR program. In Alabama Power Co. v. Costle, fugitive emissions of all regulated pollutants under PSD or the U.S. District Court for the District of Columbia (D.C.) Circuit nonattainment NSR for the purpose of determining whether it has a held that fugitive emissions must be included in determining major source status. See U.S. EPA, Change to Definition of Major whether a source constitutes a major emitting facility under CAA Source, 66 Fed. Reg. 59161, 59162 (Nov. 27, 2001) (codified at 40 §302(j). 636 F.2d 323, 10 ELR 20001 (D.C. Cir. 1979). The court ob- C.F.R. §70). However, sources are still required to include fugitive served that the wording of §302(j) was controlling in the definition emissions of all HAPs in determining whether they are major of a major emitting facility in §169(1), even though whether to in- sources under §112. Id. clude fugitive emissions in calculating threshold emission levels for major stationary sources should be determined by EPA. See id.at 31. 42 U.S.C. §7411(a)(2). 369-70. EPA then issued rules that listed the source categories cov- 32. Id. §7411(a)(4); 40 C.F.R. §60.2. ered by PSD and NSPS rules that were required to consider fugitive emissions. U.S. EPA, Requirement for Preparation, Adoption, and 33. See 45 Fed. Reg. at 52676; 40 C.F.R. §52.21(b)(2)(i). Submittal of State Implementation Plans; Approval and Promulga- 34. 40 C.F.R. §52.21(b)(23). 5-2005 NEWS & ANALYSIS 35 ELR 10321 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. vided a clear definition of these terms. But EPA’s NSR reg- ministrator directed the EAB to reconsider the administra- ulations recognize that certain types of projects are exempt tive order and to issue a final order. The EAB applied a from NSR and, among other things, allow for the exception four-part test to determined whether the routine mainte- for routine maintenance, repair, and replacement.35 nance exception was applicable to the company’s projects While creating certain categories of NSR-exempt activi- at issue: (1) the nature and extent of the change; (2) the ties clearly makes sense, the obscurity surrounding the ques- purpose of the change; (3) the frequency of the change; tion of what types of projects should be considered routine and (4) the cost of the change. It ruled that none of the maintenance has been highly controversial between regula- TVA’s 14 life-extension projects qualified for the routine tors and industry. Most of the past and current EPA- or maintenance exception, thereby violating the NSPS and state-initiated NSR enforcement actions have targeted in- NSR requirements.40 dustry’s strategic behavior aimed at maximizing the use of On July 26, 2002, the U.S. District Court for the Southern this exemption. The routine maintenance exception has cre- District of Indiana issued an important ruling on prelimi- ated a loophole that, if abused, could inflict significant dam- nary motions in an ongoing lawsuit involving the Southern age on the integrity of the entire NSR program. This is espe- Indiana Gas & Electric Company (SIGECO).41 The court cially so because a facility is not required to ask the permit- held that EPA’s enforcement was not barred by the Indiana ting agency to determine whether the planned activity is Department of Environmental Management’s (IDEM’s) within the scope of the routine maintenance exemption, al- previous determination that SIGECO’s plant upgrades con- though EPA will decide the applicability of the exemption stituted routine maintenance. SIGECO’s main argument on a case-by-case basis when asked to do so. was that the IDEM’s ruling was binding on EPA as a result The court’s ruling in Wisconsin Electric Power Co. of its delegation of enforcement power to the state agency.42 (WEPCO) v. Reilly36 provides useful guidance in this regard. The court rejected that argument, however, finding that EPA Responding to the utility petitioner’s argument that its is not precluded from bringing an enforcement action, given planned replacement project was within the scope of the the broad language of §113 of the Act, which provides that routine maintenance exception, the U.S. Court of Appeals EPA is authorized to enforce “any requirement or prohibi- for the Seventh Circuit ruled in favor of EPA that it was be- tion” of “an applicable implementation plan or permit,” and yond the exception and therefore was covered by NSPS and §111(c)(2) that authorizes EPA to enforce “any applicable NSR, finding as a reasonable application of the relevant reg- standard of performance.”43 It held that the doctrine of equi- ulations EPA-used factors, such as the nature, extent, pur- table estoppel does not apply unless EPA “knew the facts” pose, frequency and cost of work, for determining the appli- relating to a state agency’s ruling and had engaged in “affir- cability of the exception.37 The court did not agree with mative misconduct.”44 This ruling was another victory for WEPCO that the cost, magnitude, and nature of its project EPA which has been engaging in legal battles with large were irrelevant for purposes of the routine maintenance ex- electric utility companies since 1999. ception to NSPS and PSD. Among others, the court re- However, note that the definition of the term “signifi- garded the following facts as decisive: (1) the project was a cant” has been changed with respect to three newly created “life-extension” project; (2) WEPCO admitted that a project mechanisms designed to promote the use of clean energy of such magnitude “would normally occur only once or technologies: plantwide applicability limits (PALs), the twice during a unit’s expected life cycle,” and it never oc- Clean Unit exclusion, and pollution control projects (PCPs). curred before; and (3) it would cost at least $70.5 million.38 For sources choosing to use PALs or the Clean Unit exclu- Therefore, a strong presumption can be established from a sion, allowable emissions, instead of actual emissions, be- reading of the WEPCO decision that maintenance projects come the basis for determining whether a significant emis- intended to increase the life expectancy of an electric-gener- sions increase would result. A qualifying PCP is deemed not ating unit (or other industrial units) are considered a modifi- to result in an increase in collateral emissions if its net air cation (not routine), thereby triggering NSR. quality benefits are judged as positive. In 2000, EPA’s Environmental Appeals Board (EAB) heard a case involving life-extension projects at nine elec- 2. A Significant Net Increase in Emissions tric-generating units owned by the Tennessee Valley Au- thority (TVA)in Kentucky, Tennessee, and Alabama.39 This a. An Emissions Increase: The Actual-to-Future-Actual case also involved TVA as one of the nine electric utilities Test against which EPA took enforcement actions in 1999. Un- like other companies, for jurisdictional concerns, EPA is- Once it is determined that a physical or operational change sued an administrative order under §§113 and 167 of the to a major stationary source would occur, the next step is to CAA against TVA whose failure to comply with the order 40. See id. pt. III.C.3. and app. A. But in 2003, the U.S. Court of Appeals could independently lead to severe penalties. The EPA Ad- for the Eleventh Circuit struck down the administrative order on procedural grounds. See Tennessee Valley Auth. v. Whitman, 336 F.3d 1236 (11th Cir. 2003), reh’g en banc denied, 82 Fed. Appx. 220, 35. Id. §§52.21(b)(2)(iii) (PSD), 52.24(f)(5) (nonattainment). This 2003 U.S. App. LEXIS 27278, 33 ELR 20231 (11th Cir. 2003), cert. exemption was added after a similar provision under the 1975 denied sub nom. Leavitt v. Tennessee Valley Auth., 124 S. Ct. 2096 NSPS regulations. (2004). As a consequence, the EAB’s decision lost much of its 36. 893 F.2d 901, 20 ELR 20414 (7th Cir. 1990). precedential value. 37. See id. 910-13. 41. United States v. Southern Ind. Gas & Elec. Co., 2002 U.S. Dist. LEXIS 14039 (S.D. Ind. July 26, 2002). 38. Id. at 911-12. 42. Id. at **9-11, 14. 39. See In re Tennessee Valley Auth., No. CAA-2000-04-008, 9 E.A.D. 357, 2000 WL 1358648, 32 ELR 41231 (EAB Sept. 15, 2000) (final 43. Id. at **13, 15. order on reconsideration). 44. Id. at **16-17. 35 ELR 10322 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. identify whether that change would produce a significant b. The WEPCO Rule: The Actual-to-Projected- net increase in emissions in order for the source to be subject Future-Actual Test and Its Extended Application to NSR. The initial step for the permitting agency to take is to determine the baseline for the actual emissions before the As mentioned above, under the preexisting rule, there was change, which is compared to the projected post-change an important exception that electric-generation units, called emissions to determine if there will be an increase in emis- electric utility steam-generating units (EUSGUs), were sub- sions before and after the modification.45 Under the old rule, ject to a different standard other than the PTE: the ac- the pre-change actual emissions were to be calculated based tual-to-projected-actual test that had been adopted in the on the average rate in tpy, actually emitted during the previ- 1992 regulation, known as the WEPCO rule,53 as a result of ous two years, if those emissions were representative of nor- the 1990 WEPCO ruling. In this case, the Seventh Circuit mal operations at the unit during this time.46 Therefore, the faulted EPA for wholly disregarding past operating condi- baseline emissions meant a source’s actual emissions tions at the facility for which an emission history could be shortly before the proposed modification begins. The per- established, so that “a more realistic assessment of its im- mitting agency was allowed to use a different time period if pact on ambient air quality levels is possible, and thus is di- the source shows that it is more representative of normal op- rected.”54 The court required EPA to utilize a different cal- erations.47 If that is the case, the calculation of actual emis- culation method for an electric steam-generating unit’s sions must be based on “the unit’s actual operating hours, like-kind replacements of equipment if it is an established production rates, and types of materials processed, stored, operation. After the decision, EPA’s WEPCO rule adopted or combusted during the selected time period.”48 The new an “actual-to-future-actual methodology” for changes at NSR rule replaced the 2-year time period with a 10-year electric utility plants except the construction of a new unit or look-back period except for electric-generation units.49 reconstruction of an existing emissions unit.55 Under this Once the baseline is determined, the following step is to formula, the premodification actual emissions are compared calculate projected postmodification emissions. Under the to the projected postmodification actual emissions, and the old rule, which still applies to new sources, post-change pro- baseline emissions are calculated based on the highest jected emissions must be equal to the PTE, which was de- hourly emissions rate achievable in any two-year period fined as “the maximum capacity of a stationary source to within a five-year period preceding the proposed change.56 emit a pollutant under its physical and operational de- For verification purposes, a utility must monitor actual sign.”50 While it was relatively easy to determine a new emissions after the modification and report data and infor- source’s PTE, much of the controversy over NSR applica- mation to the permitting agency for the first five years.57 In bility had centered around this issue, which was the trickiest some cases, EPA or the state agency may extend a monitor- part of NSR implementation. The PTE, as applied by EPA, ing period up to 10 years if the 10-year period is determined was based on the presumption that the unit will run at full ca- to be more appropriate.58 Also, the new regulations ex- pacity (namely, 24 hours a day year-round). This was the empted emissions increases due to demand growth. In- so-called actual-to-potential test. EPA had applied this test creases in emissions caused by high market demand for to modifications to existing sources since it is presumed electricity may not be included in the calculation of pro- that they have not begun normal operations. This test was jected-future-actual emissions.59 Understandably, however, quite onerous for most existing sources because they usually it is a very difficult task to distinguish between increased do not operate at their maximum capacity. Even after the emissions due to demand growth and those emissions in- WEPCO decision, the actual-to-potential test had been ap- creases from the physical or operational change. EPA con- plied to all sources with the exception of fossil fuel-fired ceded this problem and proposed to eliminate the demand electric utilities51 until the new NSR rule was promulgated growth exclusion in its 1998 Notice of Availability.60 How- in 2003. As will be discussed below, the actual-to-future-ac- 52 53. See U.S. EPA, Requirements for Preparation, Adoption, and tual test is in place for all sources. Submittal of Implementation Plans; Approval and Promulgation of Implementation Plans; Standards of Performance for New Station- ary Sources, 57 Fed. Reg. 32314 (July 21, 1992) (codified at 40 C.F.R. §§51, 52, and 60). 45. See Letter from Francis X. Lyons, Regional Administrator, to Henry 54. 893 F.2d at 917 (quoting Alabama Power Co. v. Costle, 636 F.2d Nickel, Counsel for Detroit Edison Company, Detroit Edison Appli- 323, 379, 10 ELR 20001 (D.C. Cir. 1979) (emphasis in original). cability Determination: Detailed Analysis 18 (May 23, 2000), avail- 55. 57 Fed. Reg. at 32326. See Memorandum from John Seitze, Director able at http://yosemite.epa.gov/r5/ardcorre.nsf/36ae8bf3212bb6b of Air Quality Planning and Standards, U.S. EPA, to Air Directors 28625650c0079f5da/dde17f64f29e6a36862568ef0067cb13/$FILE/ Regions I-X, at 2 (July 1, 1994). de_enclosure.pdf (last visited Mar. 1, 2005) [hereinafter Letter from Francis Lyons]. 56. 57 Fed. Reg. at 32324. See also 40 C.F.R. §52.21(b)(3)(i)(b) (pre-2002 NSR rule); Supplemental Analysis of 2002 Final 46. 40 C.F.R. §§52.21(b)(21)(ii), 51.165(a)(1)(xii), 51.166(b)(21) NSR’s Impact, supra note 20, at F-1. (pre-2002 NSR rule). 57. 57 Fed. Reg. at 32325. 47. Id. §52.21(b)(21)(ii) (pre-2002 NSR rule). This provision was heavily influenced by the WEPCO decision. 58. Id. See 40 C.F.R. §§52.21(b)(21)(v), 51.165(a)(1)(xii)(E), 51.166(b)(21)(v) (pre-2002 NSR rule). 48. Id. 59. 57 Fed. Reg. at 32326; 40 C.F.R. §52.21(b)(41)(ii)(c) (pre-2002 49. Id. §§52.21(b)(48), 51.165(a)(1)(xxxv), 51.166(b)(47) (2003). NSR rule). See 893 F.2d at 918 n.13 (observing that market fluctua- 50. Id. §52.21(b)(4) (pre-2002 NSR rule). tions in the electricity marketplace make it difficult for utilities to use synthetic minor permits (quoting Puerto Rican Cement Co. v. EPA, 51. See 893 F.2d at 901. EPA’s continued use of the actual-to-potential 889 F.2d 292, 298, 20 ELR 20259 (1st Cir. 1989))). test was upheld by federal courts. See, e.g., Puerto Rican Cement Co. v. EPA, 889 F.2d 292, 20 ELR 20259 (1st Cir. 1989). 60. EPA said: 52. 40 C.F.R. §§52.21(b)(41), 51.165(a)(1)(xxviii), 51.166(b)(40) [A]ttempting to discern whether increased utilization and (2003). emissions should be attributed to physical or operational 5-2005 NEWS & ANALYSIS 35 ELR 10323 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. ever, the 2003 new NSR rule extends the WEPCO rule and preexisting rule, any increase or decrease is deemed to be the demand growth exclusion to all other industries.61 The contemporaneous if it happened within the five-year period only difference between EUSGUs and other sources is that immediately before the change actually occurs.63 Thus a a 10-year look-back period applies to the latter in calculat- major emitting facility can net out of NSR by subtracting ing baseline emissions. The owner or operator of an exist- any “creditable” decreases it caused to happen in the two ing source is now allowed to project future-actual emis- years of the previous five-year period.64 Sources cannot sions based on historical data on its operations during any claim a change in emissions as offsets that it is otherwise ob- one of the 5 or 10 years immediately preceding the pro- ligated to comply with under their permit conditions or other posed change. applicable laws.65 Any increase in emissions is creditable “only to the extent that the new level of actual emissions ex- c. A Significant Net Increase: Netting ceeds the old level.”66 To be creditable, any emission decrease must: (1) reflect emission reductions from the old The final element in determining NSR applicability is that level of actual emissions or the old level of applicable allow- an increase in emissions must be a net increase. Therefore, able emissions, whichever is lower; (2) be “enforceable as a the reviewing authority must determine if there will be a net practical matter” before the proposed modification actually increase in emissions. Net emissions are determined after occurs; (3) have “approximately the same qualitative signif- considering “[a]ny other increases and decreases in actual icance for public health and welfare as that attributed to the emissions at the major stationary source that are contempo- increase from [the proposed modification]”; and (4) not re- raneous with the [proposed] change,” in addition to the pro- sult from the use of the “add-on control technology or appli- jected increase in emissions from the change.62 Under the cation of pollution prevention practices” relied on by the source in qualifying for the Clean Unit exemption.67 These changes versus purely independent demand-satisfying increased capacity utilization will be much more difficult in the requirements are designed to prevent “paper credits” from future, as restructuring in the electric power industry allows being used and to ensure that offset trading must represent electric-generating companies to compete for retail custom- real progress toward attainment of NAAQS. ers. As a result, the marketplace will drive electric generators In 1979, EPA proposed a premodification notification re- to function as any other consumer-driven industry, that is, to quirement with regard to netting, but it was never adopted ensure their ability to supply the market and collaterally to in- 68 crease their revenues. In addition, as utilities respond to a due to objection from industry. As a result, currently the competitive market for the generation of electric power they owner or operator planning a change to his facility that has can no longer be expected to accurately predict their level of the potential to significantly increase net emissions may operations and post-change emissions. Each physical or op- forego NSR completely using a netting mechanism, and is erational change that makes it possible for a source to efficiently increase its level of utilization, then, will likely be not required to notify EPA or the state permitting agency of pursued and turned into electricity for sale. it. This lack of control over netting practices has been the target of criticism by environmentalists for creating another U.S. EPA, Notice of Availability; Alternatives for New Source Re- significant loophole, along with the routine maintenance view (NSR) Applicability for Major Modifications; Solicitation of Comment, 63 Fed. Reg. 39857, 39860 (July 24, 1998). exclusion, that has allegedly been taken advantaged of by industry, especially grandfathered coal-fired electric utili- 61. 40 C.F.R. §§52.21(b)(41)(ii)(c), 51.165(a)(1)(xxviii)(B)(3), ties. There is little data available concerning how frequently 51.166(b)(40)(ii)(c) (2003) (demand growth exclusion). 62. Id. §52.21(b)(3) (emphasis added). The current regulations for netting was heavily influenced by the D.C. Circuit’s 1979 decision in Law: What’s Worked; What’s Failed; What Might Work,21Envtl. Alabama Power Co. v. Costle, 636 F.2d 323, 402, 10 ELR 20001 L. 1549, 1622-25 (1991). (D.C. Cir. 1979). The court stated: “The Agency retains substantial 63. 40 C.F.R. §52.21(b)(3)(ii). See also id. §§51.165(a)(vi), discretion in applying the bubble concept. First, any offset changes 51.166(b)(3). Net emissions after the change are equal to the pro- claimed by industry must be substantially contemporaneous. The jected emissions increases from the baseline plus plantwide cred- Agency has discretion, within reason, to define which changes are itable increases minus plantwide creditable decreases. Note that substantially contemporaneous. Second, the offsetting changes must states may use a different time period in calculating a net emis- be within the same source, as defined by EPA.” (emphasis added). sions change. The use of netting was finally upheld by the Court in the famous Chevron case. Chevron, U.S.A., Inc. v. Natural Resources Defense 64. In California, however, netting is not allowed, and NSR thresholds can be as low as one pound per day. See Report by a Panel of the Council, 467 U.S. 837, 14 ELR 20507 (1984). The Court observed National Academy of Public Administration (NAPA) for that the PSD and nonattainment NSR permit program “represented a the U.S. Congress and the U.S. EPA, A Breath of Fresh balance between the economic interests in permitting capital im- Air: Reviving the New Source Review Program provements to continue and the environmental interest in improving 31 (2003), air quality.” Id. at 851. It finally concluded that EPA’s policy deci- available at http://209.183.198.6/NAPA/NAPAPubs.nsf/9172a14f sion to adopt flexible mechanisms such as netting “represent[ed] a 9dd0c36685256967006510cd/ae53e82c36ab2f1985256d1800494 reasonable accommodation of manifestly competing interests and 4b5/$FILE/Fresh+Air+Full+Report.pdf (last visited Mar. 1, 2005) (citing interview with California air officials) [hereinafter NAPA [was] entitled to deference” in the absence of contrary clear congres- NSR Report sional intent. Id. at 865. EPA has developed and implemented a pol- ]. icy to promote emissions trading, including netting. See 51 Fed. Reg. 65. See 40 C.F.R. §52.21(b)(3)(iii)(a)-(b). 43814. Netting is an internal trading mechanism in which increased 66. Id. §52.21(b)(3)(v). emissions in one point are used to offset decreased emissions in other points as long as it is expected that there is no net increases in emis- 67. Id. §52.21(b)(3)(vi)(a)-(d). sions within the entire plant. Bubble is a very similar mechanism be- 68. U.S. EPA, Requirement for Preparation, Adoption, and Submittal of cause all individual emission sources under the control of the same State Implementation Plans; Approval and Promulgation of State person are regarded as a single source for regulatory purposes, as if Implementation Plans, 45 Fed. Reg. 51923 (Sept. 5, 1979). How- the total emissions combined were coming from a single imaginary ever, EPA stressed that “owners and operators are hereby put on outlet in the bubble. The bubble is what makes netting legal in the notice that they should maintain sufficient records regarding con- first place. But it is different in that it is used by existing sources to temporaneous emission increases and decreases so as to verify no pursue flexibility in complying with pollution control requirements, permit was required.” See 45 Fed. Reg. at 52676. EPA added a sim- and that the use of bubbles is limited by the regulatory definition of a ilar requirement to the 1975 NSPS regulations, but it was subse- source. See Arnold W. Reitze Jr., A Century of Air Pollution Control quently removed. 35 ELR 10324 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. netting actually is used. According to one study, approxi- plants.74 Most of the new power plants have been gas-fired mately 800 netting transactions took place in between 1974 plants.75 Grandfathering facilitated gaming of the NSR pro- and 1989.69 An estimated cost savings were somewhere be- gram by the electric power industry which took advantage tween $25 million and $300 million, which mostly came of the routine maintenance exception and netting to forego from avoiding costs associated with permitting processes NSR altogether. This has given huge cost advantages to old, and installing modern pollution control.70 dirty coal-burning power plants over oil- and gas-fired It is important to note, however, that the new NSR rule power plants, and renewable energy facilities. It creates an has changed the preexisting netting policy in a significant uneven playing field in the energy sector and thus frustrates way by adopting the new definition of baseline emissions efforts to promote efficient use of energy and renewable en- (in other words, changing the prior definition of the statu- ergy development.76 It apparently contravenes the “pol- tory term “change”). Thus, the baseline year is not the year luter-pays” principle enunciated in various international en- when the proposed construction actually takes place, but vironmental agreements, and is the most significant hurdle any year in a 10-year look-back period during which the for the United States to moving toward achieving the future highest emissions were ever recorded. energy policy goal of sustainability. Electric utilities are by far the nation’s largest polluters. II. NSR Failures and the Movement to Reform the Old and energy-inefficient coal-fired power plants release Current NSR Program into the atmosphere significant amounts of SO2,NOx and PM, as well as CO2, disproportionately compared to other A. Grandfathering Under the CAA stationary sources, even over 30 years after the passage of the 1970 CAA. In 1998, electric utilities were responsible The perceived failures of NSR are attributable to grand- for 25% of national NOx emissions, 67% of SO2 emissions, 77 fathering under the CAA. Old sources were exempted be- and 8% of PM10 emissions, respectively. Electricity gener- cause it was thought to be more economically efficient to ation was responsible for approximately 40% of national mandate the installation of new pollution controls at the CO2 emissions in 2001, which are believed to be associated time existing facilities would be upgraded, rather than re- 71 74. In 2000, more than 50% of electricity was generated “by coal-fired quiring those facilities to be retrofitted immediately. Con- power plants, most of which were built between 1950 and 1980.” gress expected many of the existing plants would soon be re- Byron Swift, Grandfathering, the New Source Review, and Nitrogen tired and replaced with new ones, and that future technologi- Oxide—Making Sense of a Flawed System, 15 Env’t Rep. (BNA) cal breakthroughs would make the costs of state-of-the-art 1538, 1538 (2000). According to EPA, of 274 PSD permits issued 72 since 1995, over 250 have been issued to gas turbine electric power pollution control technologies significantly lower. Unlike plants, with only 10 going to coal-fired power plants. NSR Back- Congress’ expectations, however, the dichotomy between ground Paper, supra note 28, at 9. new and existing sources has allowed grandfathered major 75. In addition to burdensome NSR requirements, the main reason is sources to stay operational beyond their expected life cycle that new gas-fired turbines can produce electricity more cheaply without being subject to NSPS and NSR requirements. No- than new coal-fired power plants. Natural gas power plants are less tably, electric utilities have kept their old coal-fired electric expensive and take less time to build, since they requires much lower 73 construction costs and are relatively small and modular, thereby units operating beyond life expectancy. Few new coal- minimizing capital expenditures and maintenance and other related burning electric power plants have been constructed since costs. See Environmental Law Institute, Cleaner Power: 1980, and preconstruction permits for major modifications The Benefits and Costs of Moving From Coal Generation to Modern Power Technologies 21 n.17 (2001). In 2000, the have rarely been issued to grandfathered coal-fired power Energy Information Administration projected that 92% of new power plants were expected to be fired by natural gas during the next 20-year period. U.S. Energy Information Administration 69. Robert W. Hahn & Gordon L. Hester, Where Did All the Markets (EIA), Annual Energy Outlook 2001 With Projections to Go? An Analysis of EPA’s Emissions Trading Program,6Yale J. on Reg. 2020, at 73 (2000) (DOE/EIA-0383). However, construction of new 109, 133 (1989). In this article, the authors observed: coal-fired power plants has recently been proposed in increasing From available data it appears that netting is the most com- numbers. See Foote, supra note 17, at 10643. In recent years, natural monly used emissions trading activity by a wide margin. In gas prices have gone up, as gas supply has become constrained due to 1984, the only year for which detailed data are available, an increased demand and limited stocks of natural gas in North Amer- estimated 900 sources used netting. This is about fifteen ica. This volatility in gas prices have negatively impacted some of the combined-cycle gas turbines, whose competitiveness and thus times as often as offsets were used during the same year, and attraction for investment money rest heavily on relatively low and it is far more often than bubbles have ever been used. stable gas prices. See Tom Woods, What Are the Prospects for Id. (citation omitted). Coal?; Unless Gas Prices Stabilize, Coal Prices Will Continue Ris- ing, Pub. Utils. Fortnightly, May 9, 2004, at 13. 70. Id. at 136. H.R. Rep. No. 76. Other factors are the low price of coal and the fact that the assets of 71. See 95-294, at 185-86 (1977), reprinted in 1977 old power plants were fully amortized during their life span. The cost U.S.C.C.A.N. 1077, 1264-65. of producing electricity in grandfathered electric power plants 72. See id. ranges between 1.5 and 3 cents per kilowatt hour (kwh). See Bruce Biewald, David While & Tim Woolf, Grandfathering and En- 73. Although EPA’s NSPS regulations were revised several times, old vironmental Comparability: An Economic Analysis of Air electric power plants are still running, thereby even avoiding NSPS Emission Regulations and Electricity Market Distortions requirements. See Arnold W. Reitze Jr., State and Federal Com- 28, tbl. 5.1. (Prepared for the National Association of Regulatory mand-and-Control Regulation of Emissions From Fossil Fuel Elec- Envtl. L. Utility Commissioners by Synapse Energy Economics. Inc., Cam- tric Power Generation Plants,32 369, 380-83 (2002). bridge, Mass. 1998), available at http://www.synapse-energy.com/ Grandfathering is not limited to NSPS and NSR. Prior to the enact- publications.htm (last visited Mar. 1, 2005). ment of the 1990 CAA Amendments, grandfathered power plants were allowed to disperse their emissions using tall smokestacks. 77. U.S. EPA, National Air Pollutant Emission Trends: They were subject to less restrictions when compared to new units. 1900-1998, at 2-2, 2-3 (2000) (EPA 454-R-00-002), available at With the acid rain program being implemented, however, they may http://www.epa.gov/ttn/chief/trends/trends98/trends98.pdf (last not use that option, since it must reduce their SO2 and NOx emissions visited Mar. 1, 2005) [hereinafter 1998 National Air Pollutant to the levels set by the Act or the regulations. Emission Trends]. 5-2005 NEWS & ANALYSIS 35 ELR 10325 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. with global climate change.78 The heavy use of coal for elec- five years for those affected units to comply with its man- tric generation significantly contributes to acid deposition date, and directed EPA to develop an emissions trading 83 and precipitation, ground-level O3 formation, reduced visi- mechanism to help affected units meet its deadline. On bility in pristine areas, and global climate change.79 More- November 7, 1997, a similar bill was introduced in the U.S. over, in today’s deregulatory environment in the electricity House of Representatives by Rep. Frank Pallone (D-N.J.).84 markets, there also is concern among the environmental This House bill provided for a nationwide cap-and-trade 85 community that coal-fired power plants with cost advan- program for NOx and PM2.5. tages will be more fully utilized. This implies that the nation’s air will be dirtier and greenhouse gas (GHG) emis- 2. State Action sions will increase. Given the fact that air pollution problems root in the massive use of fossil fuels for electricity Some states have moved to eliminate the grandfathered sta- production, regulation of CO2 and NSR reform could tus of old electric power plants, and/or to adopt a multi-pol- 80 produce synergistic effects. Inducing the retirement of lutant trading strategy which may include CO2 emissions grandfathered coal-fired power plants and promoting en- control. On May 17, 2000, the governor of the state of Con- ergy efficiency and use of renewable energy sources should necticut signed an Executive Order directing the Connecti- be a top priority goal. It should be pursued through legal re- cut Department of Environmental Protection to develop forms that aim to align energy production with environmen- regulations no later than May 1, 2003, to reduce annual SO2 tal goals. and NOx emissions from 61 major sources, including all fossil fuel-fired power plants, by 30-50% and by 20-30%, re- B. Federal and State Efforts to Repeal Grandfathering spectively.86 The final regulations, which were promulgated on December 28, 2000, require covered facilities to take 87 1. Congressional Efforts NOx control measures throughout the year. The regulations extend the coverage of the SO2 acid rain program to 61 Several bills were proposed in Congress that would have re- from 28 units. They also require the 28 units to retire some moved the grandfathering of old coal-fired power plants. On of their SO2 allowances, which were initially allocated un- October 9, 1990, one U.S. Senate bill, sponsored by Sen. Jo- der Title IV.88 Emissions trading may be used to comply 89 seph Lieberman (D-Conn.), would have required some fos- with the NOx and SO2 reduction requirements. sil fuel-fired electric-generating units constructed after Au- In 2001, Texas enacted legislation to phase out grand- gust 17, 1971, to be subjected to the same emissions stan- fathering of one-third of the state’s industrial facilities, un- dards those applied to new or modified units.81 Affected der which those in East Texas must go through permitting by units would be fossil fuel-fired steam-generating units with 2007, and other facilities by 2008.90 The same year, Massa- the capacity of 25 megawatt hours (Mwhs) and intercon- chusetts promulgated a regulation requiring fossil fuel-fired nected to the interstate electrical transmission grid for the boilers, including indirect heat exchangers with a nameplate wholesale sales of electricity.82 The bill would have allowed capacity of 100 Mwhs or more, to meet output-based emission rate standards that would cut NOx emissions by 50% 78. U.S. EPA, Inventory of U.S. Greenhouse Gas Emissions and SO2 emissions by 74%. This regulation covers mercury, and Sinks: 1900-2001, at ES-15 (2003) (EPA 430-R-03-004), CO2, and fine particle emissions from power plants and em- available at http://yosemite.epa.gov/OAR/globalwarming.nsf/Unique 91 KeyLookup/LHOD5MJQ6G/$File/2003final-inventory.pdf (last ploys a credit trading mechanism. visited Nov. 22, 2004) [hereinafter 2003 U.S. GHG Emissions and Sinks]. 83. Id. 79. In the United States, 90% of coal is consumed in the electricity sec- 84. H.R. 2909, 105th Cong. (1998). tor. Id. at 2-13. More than 90% of electric utility NOx and SO2 emis- 85. Id. The introductory part of the bill expressed concerns about the an- sions came from coal-fired power plants, two-thirds of whose emis- ticipated harmful effects on the nation’s air quality of electricity de- sions took place during bituminous coal combustion. 1998 Na- tional Air Emission Trends regulation pushed by the Federal Energy Regulatory Commission in , supra note 77, at 2-2. Coal combus- recent years after the passage of the 1992 Energy Policy Act, espe- tion represented approximately 85% of CO2 emissions from fossil cially in nonattainment areas suffering from transboundary pollu- fuel-fired electric generation. See 2003 U.S. GHG Emissions and Sinks tion. It said that the nation and the general public would not benefit , supra note 78, at 2-4, tbl. 2-3. This is so because the carbon much from competition in the electricity marketplace “if some com- content of coal per unit of energy produced is much higher than that petitors enjoy an advantage resulting from externalization of envi- of petroleum or natural gas. Petroleum and natural gas contain 25% ronmental or other costs, permitting them to charge prices for elec- and 45% less carbon than coal, respectively. Id. at ES-14. Coal con- tricity that do not reflect the full economic and environmental cost of tains carbon content of 95 teragrams CO2 equivalent per quadrillion production.” Id. British thermal unit (Tg CO2 Eq./QBtu), while natural gas’ carbon intensity is about 53 Tg CO2 Eq./QBtu. Id. at 2-14. Note that Tg CO2 86. Exec. Order No. 19 (May 19, 2000). Connecticut chose to target Eq./QBtu is a weighted value of each fuel type’s global warming po- these sources to comply with the 1998 NOx SIP call. tential (GWP). 87. Regulations of Connecticut State Agencies (RCSA) §22a–174-22. 80. Regulation of CO2 requires the reduced usage of fossil fuels. This in 88. Id. §22a–174-19a. turn would bring “ancillary benefits” to society in the form of reduced emissions of other persistent air pollutants. See Dallas 89. The SO2 program is to be implemented in two phases. In Phase I, av- Burtraw et al., Ancillary Benefits of Reduced Air Pollution in the eraging is only allowed. For basic information about the final regula- United States From Moderate Greenhouse Gas Mitigation Policies tions, see Bureau of Air Management, Connecticut Depart- in the Electricity Sector (Resources for the Future, Discussion Paper ment of Environmental Protection, The Implementation of No. 01-61, 2001), available at http://www.rff.org/rff/Documents/ Executive Order No. 19: RCSA Sections 22a–174-19a & 22 RFF-DP-01-61.pdf (last visited Mar. 1, 2005). Strong and effective (2001), available at http://www.dep.state.ct.us/air2/siprac/2001/ NSR enforcement would lead to upgrading grandfathered old facili- sec19.pdf (last visited Mar. 1, 2005). ties, making them more energy efficient and thus saving energy. 90. S.B. 493, H.B. 356 (2001). Good for the environment. Good for the U.S. economy. 91. See Emissions Standards for Power Plants, 310 C.M.R. §7.29, at 81. S. 2610, 105th Cong. (1998). http://www.mass.gov/dep/bwp/daqc/files/regs/729final.doc (last 82. Id. visited Mar. 1, 2005). 35 ELR 10326 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. New Hampshire’s Clean Power Strategy placed caps on geted the industry’s decade-old practice in which electric emissions of four covered air pollutants from three coal- utilities made component replacements incrementally for fired power plants owned by Public Service Company of the purpose of maintaining reliability, efficiency, and safety 92 New Hampshire. It expects to cut 75% of SO2 and mercury of electric-generating plants. It also included enforcement emissions and 70% of NOx emissions from baseline levels. actions against the refinery, wood products, and other indus- 98 This strategy also required a 7% reduction of CO2 emissions tries. EPA’s changed position was based on its 1998 NSR by 2010, which is the same as the reduction target for the guidance, which adopted a more stringent definition of United States under the Kyoto Protocol.93 The state of New modifications.99 According to the NSR guidance, there were Hampshire employs a cap-and-trade approach, in which the two scenarios in which NSR requirements could be in- company is allowed to comply with these requirements us- voked: (1) when a stationary source exceeded an applicable ing credits earned by purchasing from outside sources or major source threshold level without obtaining a precon- banking its future emissions, and offers several other incen- struction permit; and (2) when a stationary source with a tives designed to lower compliance costs and encourage the synthetic minor permit exceeded an applicable major source timely attainment by the company of the reduction goals.94 threshold level in violation of the permit limitation.100 In The state of Illinois directed the Illinois EPA to issue find- both situations, violating sources would be required to un- ings about the need for controlling emissions from power dergo the NSR process. EPA’s theory of liability was three- plants by September 30, 2004, and, if needed, to propose fold: (1) utility life-extension projects replacing major com- rules containing options to reduce those emissions to be fi- ponents of the unit are not considered routine; (2) the re- nalized by the Illinois Pollution Control Board.95 On June duced hours of operation during interim shutdowns or cur- 20, 2002, North Carolina enacted its Clean Smokestacks bill tailments are excluded when the physical construction is in- requiring 14 coal-fired power plants to reduce NOx emis- volved; and (3) component repair or replacement projects sions 77% by 2009, and SO2 emissions 73% by 2013, from that caused forced outages or deratings can always be pro- 1998 baseline levels.96 jected to increase the utilization of the unit after the project.101 EPA intended to narrow or close a loophole in the C. EPA’s Enforcement Initiative NSR program that it believed was being taken advantage of by regulated industries to forego NSR using the routine As a response to perceived failures of the NSR program dis- maintenance exception. While many electric utilities al- cussed above, EPA mounted enforcement actions against leged that EPA’s new interpretation constituted a rulemak- coal-fired power plants owned by seven large electric utili- ing without fair notice as required by the Administrative ties in midwestern and southeastern regions during the Clinton Administration.97 This enforcement initiative tar- the order was “legally inconsequential” and thereby did not constitute final agency action within the meaning of the Administrative Procedure Act (APA). The panel reasoned that, notwithstanding ex- 92. New Hampshire Clean Power Act, H.B. 284 (2002). See Environ- plicit congressional intent, the statutory scheme was unconstitution- mental Services Department, the State of New Hampshire, ally drafted that authorizes EPA to impose penalties for failure to Clean Power Strategy: An Integrated Strategy to Reduce comply with an administrative order without any provision for af- Emissions of Multiple Pollutants From New Hampshire’s fording challengers due process rights. It concluded that, since a Electric Power Plants 69-71 (2001),available at http://www. mere failure to comply with an administrative order cannot be al- des.state.nh.us/ard/pdf/NHCPS.pdf (last visited Mar. 1, 2005). lowed to deprive any person of his property or liberty, the order at issue was not final agency action subject to judicial review. See supra 93. Id. at 71, tbl. 11-2. Part I.C.1. and text accompanying note 40. On December 22, 2000, 94. Id. at 71-80. EPA sued Duke Energy in the U.S. District Court for the Middle Dis- DOJ NSR Report 95. Michael Bologna, Governor Signs Law Seeking to Limit Pollution trict of North Carolina. , supra,at15. From “Grandfathered” Power Plants, 32 Env’t Rep. (BNA) 1602, 98. See id. at 17-19 and 43, app. II; Christopher W. Armstrong, EPA’s 1602 (Aug. 10, 2001). New Source Review Enforcement Initiative, Nat. Resources & Env’t 96. Air Quality/Electric Utilities Bill, S.B. 1078 (2002). This bill pro- , Winter 2000, at 203, 203-04. EPA’s NSR enforcement began vides for a two-phase reduction of SO emissions from the power in the late 1980s. The early enforcement actions were filed against 2 the wood products industry. The WEPCO decision was an ignition plants, which must reduce 49% of their SO2 emissions by 2009. Key facts of the bill are available in the official website of the Division of point for enforcement actions against large electric utilities. Begin- Air Quality, North Carolina Department of Environment & Natural ning in the mid-1990s, EPA’s Petroleum Refinery Initiative addressed possible NSR violations in the refinery industry. See DOJ Resources, at http://daq.state.nc.us/news/leg/stackfacts.shtml (last NSR Report visited Mar. 1, 2005). , supra note 97 at 11-19. 97. Reitze, supra note 73, at 389-90; see Office of Legal Policy, U.S. 99. Memorandum from Eric V. Schaeffer, Director, Office of Regula- Department of Justice (DOJ), New Source Review: An tory Enforcement, Guidance on the Appropriate Injunctive Relief Analysis of the Consistency of Enforcement Actions With for Violations of Major New Source Review Requirements (Nov. the Clean Air Act and Implementing Regulations 13-14 17, 1998), available at http://www.epa.gov/Region7/programs/artd/ (2002), available at http://www.usdoj.gov/olp/nsrreport.pdf (last air/nsr/nsrmemos/nsrguida.pdf (last visited Mar. 1, 2005). DOJ NSR Report visited Mar. 1, 2005) [hereinafter ]. The initial 100. See id. at 3-6. EPA said that “as part of an EPA settlement, the Con- list included: (1) American Electric Power Company; (2) Ohio Edi- sent Decree should require a minimum level of control which the son and First Energy; (3) Cinergy Corporation; (4) Southern Indiana Agency believe[d] ensures BACT/LAER-equivalent emission re- Gas & Electric Company; (5) Illinois Power Company; (6) Southern ductions.” Id. at 3. To avoid the NSR requirements, a new source or Company affiliates (including Alabama Power Company and Geor- an existing source opting in to the old actual-to-potential test can vol- gia Power Company); and (7) Tampa Electric Company. Id.at14. untarily choose to become a “synthetic minor source” by agreeing to The same day, EPA Region IV issued an administrative compliance a permit condition setting a federally enforceable emission limit on order under CAA §§113 and 167 against nine coal-fired power the changed unit, which imposes restrictions on its operations, such plants owned by the TVA. See id. 16. In September 2000, the EAB as hours of operation less than full capacity, the use of pollution con- ruled that none of the TVA’s 14 rehabilitation projects did not qual- trols, and changes in production. See NSR Background Paper, ify for the routine maintenance exception under the NSR and NSPS supra note 28, at 6-7; Letter from Francis Lyons, supra note 45, regulations. TVA then filed a lawsuit challenging the administrative at 18. compliance order in the Eleventh Circuit. After several jurisdictional issues had been resolved, the three-judge panel in the Eleventh Cir- 101. Makram B. Jaber, Utility Settlements in New Source Review Law- cuit finally held that it lacked jurisdiction to review the order since suits, Nat. Resources & Env’t, Winter 2004, at 22, 23. 5-2005 NEWS & ANALYSIS 35 ELR 10327 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. Procedure Act (APA),102 some of the offending power tor of the Office of Regulatory Enforcement, resigned in a plants facing EPA enforcement actions agreed to the instal- protest to the new Administration.107 In his resignation let- lation of control equipment or implementation of process ter, he strongly criticized the Bush Administration for its changes that were equivalent to NSR requirements through hostility to the Agency’s NSR enforcement campaign.108 settlement with EPA.103 2. The DOJ’s NSR Report D. The Overhaul of EPA’s Enforcement Initiative On January 15, 2002, the DOJ published its NSR report. The 1. The National Energy Policy Group’s Report to the DOJ’s NSR report almost exclusively focused on the rou- President tine maintenance exception. It asked: (1) whether the enforcement actions constitute “a substantive change in EPA’s EPA’s enforcement campaign was subject to a possible interpretation of the CAA and its regulations that would re- change when the current Bush Administration took office. quire APA-compliant notice-and-comment rulemaking”; In late January 2001, the Bush Administration convened a and (2) whether, despite a lack of administrative rulemak- National Energy Policy Development Group (NEPD) to be ing, EPA’s interpretation of the routine maintenance excep- headed by Vice President Dick Cheney. The NEPD submit- tion is “reasonable” in light of the Act and its implementing ted its 170-page report to the president on May 16, 2001.104 regulations, and prior guidance documents.109 Based on a The NEPD recommended in its report that the president di- reading of the applicable case law, the DOJ found adminis- rect federal agencies to review the NSR program.105 Ac- trative rulemaking procedures unnecessary because it be- cordingly, President George W. Bush ordered EPA to con- lieved that EPA’s legal position in the enforcement actions duct a 90-day review of the NSR regulations and asked the against large electric utilities could be categorized as being U.S. Department of Justice (DOJ) to independently deter- interpretive and “did not constitute a departure from a prior mine whether EPA’s enforcement campaign was consistent authoritative interpretation of ‘routine maintenance.’”110 with the CAA or its implementing regulations, or whether it Moreover, the report emphasized that EPA was entitled to constituted administrative rulemaking within the meaning Chevron deference111 in its interpretation of the CAA, and of the APA.106 Shortly thereafter, Eric Schaeffer, EPADirec- that it deserved utmost deference as announced in Bowles v. Seminole Rock & Sand Co.112 in the interpretation of its own 102. 5 U.S.C. §§551 et seq., available in ELR Stat. Admin. Proc. implementing regulations.113 It finally concluded that it 103. As of the end of 2003, the DOJ settled litigation with the following would continue to pursue the enforcement actions pending companies: Tampa Electric Company, PSEG Fossil Limited Liabil- in federal courts.114 ity Company, Virginia Electric Power Company, Wisconsin Elec- tric, Southern Indiana Gas & Electric Company, and Alcoa, Inc. In this regard, on October 24, 2002, the Southern District (electric utilities); Chevron, U.S.A., Inc., Conoco, Premcor, Navajo of Indiana held that EPA’s interpretation did not constitute Refining Company, Montana Refinery, Murphy Oil, Cenex, Ergon, a rulemaking in violation of the APA.115 Therefore, there Coastal Eagle Point, Koch Petroleum Corporation, BP Exploration & Oil Company, Motiva/Equilon/Shell, and Marathon Ashland Pe- exists an authoritative judgment that EPA’s enforcement troleum Limited Liability Company (refineries); Willamette Indus- actions are not unlawful. However, the reason why the pace tries, Inc. and Boise Cascade Corporation (wood products compa- of the litigation has been slow thus far is that EPA has to nies). On October 6, 2004, EPA announced that it had reached settlement with Citgo Petroleum Corporation, one of the nation’s largest prove facts which often spanned more than two decades. refineries. Under the settlement, Citgo agreed to spend an estimated Most of the reviewing courts did not enter summary judg- $320 million to install state-of-the-art emissions control technolo- ment for EPA.116 gies, to pay a $3.6 million civil penalty, and to invest in $5 million worth of a supplemental environmental project at one of its six refin- 3. EPA’s 90-Day NSR ing facilities. EPA estimated that the settlement would reduce NOx and SO2 emissions by more than 7,184 and 23,250 tpy, respectively. U.S. EPA, Press Release, U.S. Announces Clean Air Agree- For its part, EPA finalized its 90-day review of the NSR pro- ment With CITGO Petroleum Corp.; Petroleum Refiner to Reduce Air Emissions at Refineries in Five States (Oct. 6, 2004), available at http://yosemite.epa.gov/opa/admpress.nsf/b1ab9f485b098972852562 107. See Steve Cook, Departing EPA Official Issues Broadside at Bush e7004dc686/db2aa8edb865a54485256f2500534222!OpenDocument Administration’s Clean Air Programs, 33 Env’t Rep. (BNA) 462 (last visited Mar. 1, 2005); see also Juliet Eilperin, Citgo Reaches (Mar. 1, 2002). $323 Million Emissions Settlement, Wash. Post, Oct. 7, 2004, at A12. 108. See Letter of Resignation, Eric V. Schaeffer, Director Office of Regulatory Enforcement (Feb. 28, 2002), available at http://www. 104. Report of the National Energy Policy Development Group, Mindfully.org/Reform/2002/Resignation-SchaefferEPA28feb02. National Energy Policy: Reliable, Affordable, and Envi- htm (last visited May 25, 2004). ronmentally Sound Energy for America’s Future (2001), DOJ NSR Report available at http://www.whitehouse.gov/energy (last visited Mar. 1, 109. See , supra note 97, at 24. 2005). 110. Id. at 25-33. 105. It recommended to the president that EPA, in consultation with the 111. See 467 U.S. 837, 842-43, 14 ELR 20507 (1984). Secretary of Energy and other federal agencies, “review New Source 112. See 325 U.S. 410 (1945). Review regulations, including administrative interpretations and 113. See DOJ NSR Report, supra note 97, at 35-36. It argued that the implementation, and report to the president within 90 days on the im- Christensen case decided by the Supreme Court in 2000 reaffirmed pact of the regulations on investment in new utility and refinery gen- the Seminole Rock’s holding. DOJ NSR Report, supra note 97, at eration capacity, energy efficiency, and environmental protection.” 36; see Christensen v. Harris Country, 529 U.S. 576, 588 (2000). It also recommended that the DOJ “review existing enforcement actions regarding New Source Review to ensure that the enforcement 114. DOJ NSR Report, supra note 97, at 39-40. actions are consistent with the Clean Air Act and its regulations.” Id. 115. United States v. Southern Ind. Gas & Elec. Co., 2002 WL 31427523 at 7-14. (S.D. Ind. Oct. 24, 2002); see also United States v. Ohio Edison Co., 106. David G. Mandelbaum, Thoughts on the Bush Clean Air “Strategy” 276 F. Supp. 2d 829, 33 ELR 20253 (S.D. Ohio 2003). So Far and a Suggestion for What Might Work,21Temp. Envtl. L. 116. See, e.g., United States v. SIGECO, 2003 WL 21024595 (S.D. Ind. & Tech. J. 1, 6 (2002). Apr. 17, 2003). 35 ELR 10328 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. gram in June 2002.117 EPA’s final report borrowed largely [it] also believes, however, that for particular industry from the findings of its pervious study of NSR118 and com- sectors the benefits currently attributed to NSR could be ments from various stakeholders, including members of the achieved much more efficiently and at much lower cost general public. It addressed the impacts of the NSR program through the implementation of a multipollutant national on capital investment in the energy sector, especially for cap and trade program. In particular, the President’s Clear Skies initiative is a much more certain and effec- electric utilities and refineries. This issue had important im- tive way of achieving emissions reductions from the plications for the adequacy and reliability of the nation’s en- power generation sector.123 ergy supplies. EPA’s findings were twofold. For new power plants and refineries, EPA found that There may be some truth in these findings in view of the time delays and costs associated with the NSR process it- the NSR program has not significantly impeded invest- self. Perhaps, NSR may have “failed to accommodate ade- ment in new power plants or refineries. For the utility in- quately industries with short product cycles and large-scale dustry, this is evidenced by significant recent and future batch production, affecting them in ways that may reduce planned investment in new power plants. Lack of con- 124 struction of new greenfield refineries is generally attrib- their competitiveness.” But the findings and industry uted to economic reasons and environmental restrictions comments seemed to reaffirm the common understanding unrelated to NSR.119 that the NSR program has not worked as intended at the time of its enactment. They also implied that the CAA’s NSR For existing power plants and refineries, EPA concluded scheme may have been gamed by some industries. The low that number of NSR permits issued to old, dirtier electric power the NSR program has impeded or resulted in the cancel- units and cost disparities between grandfathered and new lation of projects which would maintain and improve re- power plants dictate this conclusion. Therefore, it is one liability, efficiency and safety of existing energy capac- thing to say that NSR reform is needed, and it is another to ity. Such discouragement results in lost capacity, as well argue that NSR itself is to blame for its alleged failures to in- as lost opportunities to improve energy efficiency and re- 120 duce clean energy development. The challenge is how to reduce air pollution. design the regulatory structure in a way that distinguishes EPA’s findings appeared to favor more to industry’s domi- good- and bad-faith players and rewards the former. There nant view that the NSR program “discourage[s] investment also is a need to level the playing field for alternative energy in both preserving and maintaining utility and refinery gen- resources, which, thus far, have been disadvantaged under erating capacity as well as in improving energy efficiency the current regime. and expanding capacity.”121 Furthermore, whereas it said there is no question that the NSR program has made a signif- E. A Multi-Pollutant Trading Approach at the Federal icant contribution to improving the nation’s air quality,122 Level EPA stated that 1. Four-Pollutant Bills 117. U.S. EPA, New Source Review: Report to the President (2002), available at http://www.epa.gov/nsr/documents/nsr_report_ There have been legislative efforts to introduce multi-pol- to_president.pdf (last visited Mar. 1, 2005) [hereinafter EPA 90- lutant bills primarily targeting the electric utility industry. Day NSR]. This move is inspired largely by the relatively successful 118. See NSR Background Paper, supra note 28. An interagency performance of the acid rain program under the 1990 group composed of several federal agencies and a private consult- CAA.125 On the other hand, it derives in part from the wide- ing firm, ICF Consulting Inc., participated in the preparation of this preliminary report. See EPA 90-Day NSR, supra note 117, spread recognition that it is much more economical to con- at 2-3. centrate regulatory energy and efforts on the electric utility 119. Id.at1. industry often characterized by inefficiencies. The so-called 120. Id. four-pollutant bill, called the Clean Power Act, was introduced in the Senate to mandate reductions in SO ,NO , mer- 121. See id. at 8-21. However, it did not make any definitive findings sup- 2 x ported by fresh data and rigorous analysis. EPA based its findings cury, and CO2 emissions from electric power generators us- more on general perceptions among industry than on hard evidence. ing a cap-and-trade approach on a pollutant-by-pollutant Its NSR Background Paper did find that “capital expenditures for basis.126 This Senate bill would require the electric-genera- air pollution control as a percentage of total capital expenditures on new plant construction are significantly lower than those expendi- tion industry to cut 75% of its SO2 and NOx emissions, 90% tures on existing plants.” NSR Background Paper, supra note 28, at of its neurotoxin mercury emissions, and 20% of its CO2 18. It noted that it could not answer the question of “whether or not emissions, respectively, and calls for implementation of NSR had affected the economic behavior of new plant owners or de- policies such as strengthened efficiency standards for build- velopers.” Id. at 21. It then illustrated a number of factors that may ings and appliances, and incentives for development of re- contribute to cost increases, such as the costs of pollution costs, and 127 time delays, complexity and regulatory uncertainty, commonly as- newable energy sources. But it is now being stalled in the sociated with NSR. Id. at 21-23. It did state, however, that these costs were difficult to quantity, and referred to comments and studies that argued economic factors, not environmental regulations, are deci- or 1.4 million tons of criteria pollutants per year. It noted that 90% of sive in making siting and expansion decisions. Id. at 24. As for the re- those reductions were thought to be from electric utilities. EPA 90- finery industry, it found that pollution control costs constituted a Day NSR, supra note 117, at 9. small portion of capital investment. Id. at 41-42. Then EPA rather summarily concluded that NSR has impeded or resulted in the can- 123. Id. at 2 (emphasis added). cellation of projects that would maintain or improve reliability, effi- 124. NAPA NSR Report, supra note 64, at 100-03. ciency or safety of existing power plants and refineries. 125. See 42 U.S.C. §§7651-7651o. 122. It conceded the difficulty of quantifying the benefits in the report, but its NSR Background Paper did estimate that as a result of NSR 126. S. 556, 107th Cong. (2001). 4.1 million tons of all regulated air pollutants per year were avoided 127. Id. 5-2005 NEWS & ANALYSIS 35 ELR 10329 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. face of opposition to the inclusion of CO2 as one of the cov- pected to continue to grow. In its 2002 report to the United ered pollutants.128 Nations, the U.S. Department of State projected that GHG emissions would increase by 42.7% until 2020.136 It is ex- 2. Three-Pollutant Bills: The Bush Administration’s Clear pected that political support would increase for addressing Skies Initiative global warming through regulation of CO2 as an air pollutant, but, as of now, the lack of political enthusiasm remains a President Bush has pushed the Clear Skies Initiative (three- significant obstacle to establishing a nationwide global pollutant bill),129 and, on February 27, 2003, S. 485 and H.R. warming strategy. 999, known as the Clear Skies Act of 2003, were introduced After a series of energy bills had been defeated in Con- in both houses of Congress, which would create a cap-and- gress, EPA announced that it would pursue a regulatory ap- trade program for SO2,NOx, and mercury for electric utili- proach until a White House-sponsored three-pollutant bill is ties, with a possibility of future downward cap adjustments, passed.137 On March 15, 2005, it promulgated regulations, and deadlines of 2008, 2010, and 2018.130 This bill would which would adopt an emission trading mechanism for util- 138 exempt all changes at existing sources, called “affected ity SO2,NOx, and mercury emissions. Under the finalized units,” from NSR requirements, and would require that new rules, the current SO2 cap emissions would be further tight- 139 sources meet NSPS rather than BACT or LAER. A station- ened and NOx control would become more stringent. ary source qualifies as an affected unit if it satisfies the re- However, the exclusion of CO2 may increase the long- quirement that its operational changes not “increase the term costs of CO2 control by postponing the issue of regu- maximum hourly emissions of any air pollutant achievable lation of CO2 to a future day, and could have chilling ef- at the unit during the last five years.”131 Therefore, the pro- fects on voluntary efforts by the private sector and some posed bill tried to amend the current law concerning NSR states to reduce CO2 and other GHG emissions. preconstruction review. EPA’s recent NSR reform efforts have been based on this bill’s basic scheme.132 On the other III. The 2002 New NSR Rule hand, the Clear Skies Initiative is designed to reduce carbon intensity by encouraging electric power plants to develop On December 31, 2002, EPA promulgated new NSR rule, 140 clean coal technologies with regard to CO2 emissions and by which took effect on March 3, 2003. The same day, it pub- supporting other programs to enhance energy efficiency and lished a proposed rule for changing a regulatory definition to develop renewable energy resources and clean fuels.133 for the “routine maintenance, repair, replacement exemp- Carbon intensity is “the ratio of [GHG] emissions to economic output,” and President Bush’s plan aims to reduce 136. U.S. Department of State, Climate Action Report 2002, at 73 134 (2002), available at http://yosemite.epa.gov/oar/globalwarming. carbon intensity by 18% in the next 10 years. This effort Nsf/content/ResourceCenterPublicationsUSClimateActionReport. could be promising, given the fact that energy-related CO2 html (last visited Mar. 1, 2005). emissions contribute over 80% of national GHG emis- 137. Press Release, U.S. EPA, New Power Plant Rule to Achieve Largest sions.135 But it appears that the plan will not greatly help the Emission Reductions in a Decade (Dec. 4, 2003), available at http:// nation to achieve the Kyoto Protocol target, or even the sta- yosemite.epa.gov/opa/admpress.nsf/b1ab9f485b098972852562 e7004dc686/17302e197330932585256df200686549?Open bilization goal of the Climate Change Convention, because Document (last visited Mar. 1, 2004). it does not impose any legal obligations on industry to re- 138. U.S. EPA, Rule to Reduce Interstate Transport of Fine Particulate duce CO2 emissions, and because the U.S. economy is ex- Matter and Ozone (Interstate Air Quality Rule); Revisions to Acid Rain Program; Revisions to the NOx SIP Call, 70 Fed. Reg. __ (Mar. 128. This bill was reintroduced in 2003. S. 366 and H.R. 2042, 108th 15, 2005) (codified at 40 C.F.R. §§51, 72, 73, 74, 77, 78, and 96); Cong. (2003). This bill had a “birthday” provision that would require U.S. EPA, Standards of Performance for New and Existing Station- existing power plants to meet NSR and NSPS requirements 30 years ary Sources: Electric Utility Steam-Generating Units, 70 Fed. Reg. from either the date of the plant began operation or 10 years after pas- __ (Mar. 15, 2005) (codified at 40 C.F.R. §§60, 63, 72, and 75). sage of the bill, whichever is later. For updated information about 139. Eric Pianin, EPA Aims to Change Pollution Rules: Utilities Could congressional activity, see Pew Center on Global Climate Change, Buy Credits From Cleaner-Operating Power Plants, Wash. Post, 108th Congress Proposals, at http://www.pewclimate.org/what_s_ Dec. 5, 2003, at A2. The final rules are based on proposed rules dated being_done/in_the_congress/108th.cfm#Clean_Coal (last visited January 30, 2004. Under the proposed interstate air quality rules, a Mar. 1, 2005). cap on SO2 emissions would be further tightened in the eastern half 129. See Steve Cook, Bush’s Clear Skies Plan Moving Slowly in Both of the United States beyond the current level required under the Houses; Senate Markup Planned, 34 Env’t Rep. (BNA) 2009 Act’s acid rain program. 69 Fed. Reg. at 4617. This was possible by (2003). applying a new PM2.5 standard in view of the fact that SO2 emissions 130. S. 485 and H.R. 999, 108th Cong. (2003). are main precursors to fine particle pollution and regional haze. And, more areas and sources would have to comply with more stringent 131. See U.S. EPA, Summary of the Clear Skies Act of 2003, at 4-5 NO control requirements under the new eight-hour O standard. available at x 3 (2003), http://www.epa.gov/air/clearskies/CSA2003 EPA proposed to find that NOx emissions from sources in 25 states shortsummary2_27_03_final.pdf. and the District of Columbia significantly contribute to the 132. See, e.g., Hearings Before the Clean Air Subcomm. of the Comm. on nonattainment of the new eight-hour O3 NAAQS in downwind ar- Environment and Public Works (Apr. 8, 2003) (testimony of Chris- eas. Id. at 4570. Since NOx emissions are also precursors to the for- tine Todd Whitman, Administrator, EPA), available at http://www. mation of fine PM, NOx reduction requirements would be imposed epa.gov/air/clearskies/testimony.html (last visited Mar. 1, 2005). throughout the year in areas found to significantly contribute NOx emissions to PM2.5 NAAQS nonattainment downwind. See id.at 133. See News Release, White House, Global Climate Change Policy 4633. In the final rules, EPA made relatively minor changes to the Book (Feb. 2002), available at http://www.whitehouse.gov/news/ proposed rules by reducing the number of covered states subject to releases/2002/02/climatechange.html (last visited Mar. 1, 2004). new fine particle-related SO2 and Nox reduction requirements based 134. Id. on new modeling results, by adding such new features as opt-in re- 135. U.S. EPA, Inventory of U.S. Greenhouse Gas Emissions quirements, and by deciding to apply new NOx reduction require- and Sinks: ments one year earlier. For a concise summary of the final rules, see 1990-2000, at 2-1 (2003) (EPA 236-R-02-003), avail- U.S. EPA, Basic Information able at http://yosemite.epa.gov/oar/globalwarming.nsf/UniqueKey (2005), available at http://www. Lookup/SHSU5BMQAR/$File/2002-inventory.pdf (last visited epa.gov/cair/basic.html. Nov. 22, 2004). 140. 67 Fed. Reg. at 80186. 35 ELR 10330 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. tion” to NSR.141 After reviewing the comments received on be included.150 For EUSGUs, the baseline emissions are the proposed changes to the routine maintenance exemption, average emission rate, in tpy, of any regulated pollutant dur- EPA issued a final rule in October 2003.142 ing any two years within the five-year period shortly before the proposed construction begins.151 A. A 10-Year Look-Back Period and the Actual-to- The new rule not only retained the demand growth exclu- Projected-Future-Actual Test sion, which had been applied to electric utilities as part of the WEPCO rule, but also extended the exclusion to all Generally speaking, the December 31, 2002, rule was based sources. Therefore, sources “could exclude emissions re- on the 1996 NSR reform proposal.143 Its key provisions can sulting from increased utilization due to demand growth that be summarized as follows. The actual-to-projected-future- the unit could have accommodated before the change” in actual test is extended to all source categories. The new rule calculating projected future emissions or establishing did not adopt the potential-to-potential test proposed by PALs.152 This was in stark contrast to EPA’s position in its some members of the electric utility industry.144 Sources 1998 Supplemental Notice.153 Furthermore, the source have the option to choose between the preexisting actual- owner is not subject to rigorous reporting requirements. to-potential test and the new actual-to-future-actual test.145 Sources choosing the former are not subject to recordkeep- B. PALs ing requirements that otherwise apply to sources using the actual-to-future-actual test.146 The actual-to-future-actual PALs can only be established through a public comment test allows source owners to project future actual emissions process.154 A PAL is one option that sources can use to avoid based on projected capacity and usage, historic trends and NSR. It establishes a plantwide emissions cap for any regu- emissions from the unit before the modification, and other lated pollutant, which is similar to a bubble concept.155 As emissions factors, during any one of the 5-10 years immedi- long as a PAL is not exceeded, a source can increase its ately preceding the proposed change.147 emissions without triggering NSR, thereby affording maxi- Different time periods for determining the baseline emis- mum flexibility.156 If PALs are set in an environmentally sions apply: a 10-year look-back period for all industries, friendly manner and can actually be successful in giving in- except for EUSGUs that is still subject to the WEPCO rule’s centives for source owners to install state-of-the-art pollu- five-year period. Sources, except EUSGUs, may use any tion control equipment or processes, they could make a sig- consecutive 24-month period in the past 10 years.148 They nificant contribution to achieving the dual goals of NSR re- may consider “the utilization rate of the equipment, fuels form: environmental protection and economic growth. EPA and raw materials used in the operation of the equipment, used the term “baseline actual emissions” instead of “actual and applicable emission factors.”149 However, past emis- emissions” that it had used in its 1996 NSR reform pro- sions that are not allowed under “the most current legally posal.157 While in its 1998 notice it had said that it consid- enforceable limits” applicable to the changed unit must not ered requiring facilities to consider contemporaneous emission decreases and increases, EPA stated that “there is no 141. Id. at 80290. need[]toquantify contemporaneous emissions increases 142. U.S. EPA, Prevention of Significant Deterioration (PSD) and and decreases for individual emissions units.”158 Nonattainment New Source Review (NSR): Equipment Replace- ment Provision of the Routine Maintenance, Repair, and Replace- 150. Id. ment Exclusion, 68 Fed. Reg. 61248 (Oct. 27, 2003). The purpose of this new rule is to maintain and improve safety, reliability, and effi- 151. Id. at 80189. ciency. Id. at 61252. It contains two key features, which all aim to 152. Id. at 80192. simplify the applicability of the routine maintenance exception, 153. See 63 Fed. Reg. at 39860-61 (stating that the exclusion “ignore[d] thereby offering regulatory certainty. First, it established the cost the realities of a deregulated electric power sector,” and that its threshold at 20% of the cost to replace the entire process unit. To “self-implementing and self-policing” mechanism created enforce- qualify, replacement equipment must be “functionally equivalent,” ment problems). which means it serve the same function and basic design parameters as the old one, such as heat input and fuel consumption. Id. Second, 154. 67 Fed. Reg. at 80206. The applicant must go through all applicable activities whose cost are below an annual maintenance allowance to procedural requirements, under the state’s minor NSR permit pro- be set by EPA on an industry-by-industry basis would be exempt gram or the Title V operating program. “Where the PAL is estab- from NSR. Id. Because of a lot of controversy about this second op- lished in a major NSR permit, major NSR public participation proce- tion, EPA did not finalize it in issuing the final rule. Id. (“We have dures apply.” Id. at 80208. decided, for now, not to take final action on the proposed annual 155. As a practical matter, PALs can be established for more than one pol- maintenance, repair and replacement allowance approach.”). As a lutant. See id. result of this final rule, many of the changes to existing sources that 156. Id. at 80206. would otherwise trigger NSR under the CAA will be out of NSR altogether. EPA’s position on the routine maintenance exception is 157. See id. n.26. well reflected in its pronouncement of NSR recommendations, 158. Id. at 80206-07; see also 63 Fed. Reg. at 39863 (pointing out that which had been published immediately before the 2002 new NSR PALs could function as another loophole for avoiding NSR if the rule was proposed. See U.S. EPA, New Source Review, New contemporaneity requirement as dictated by the Alabama Power Source Review Recommendations 4-6 (2002). court is not applied). EPA noted: 143. U.S. EPA, Prevention of Significant Deterioration and Nonattain- We believe that the concept of contemporaneity, as articulated ment New Source Review; Proposed Rules, 61 Fed. Reg. 38249 in Alabama Power and as set forth in the regulations governing (proposed July 23, 1996) (to be codified at 40 C.F.R. §§51 and 52). the major NSR program, does not apply to PALs. The PAL 144. 67 Fed. Reg. at 80189. program differs in certain important respects from our current 145. Id. regulations and from the 1978 regulations at issue in Alabama Power. The Alabama Power court was not presented with the 146. Id. PAL approach for determining whether there was an increase 147. Id. in emissions and did not consider whether the principles it set 148. Id. at 80196. forth in its opinion would apply to such an approach. 149. Id. at 80195. 67 Fed. Reg. at 80215. 5-2005 NEWS & ANALYSIS 35 ELR 10331 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. A PAL is the sum of the baseline actual emissions plus an the authority may create a new PAL level that is more repre- amount equal to the applicable significant level for the cov- sentative of the source’s actual emissions, or taking into ac- ered pollutant.159 The formula for establishing a PAL is count other relevant factors.172 Despite emissions increases complicated. The calculation of the baseline emissions dis- exceeding the plantwide emissions cap, the PAL may be ad- tinguishes between existing units with more than a two-year justed upward without triggering NSR requirements if it is operating history and new units with less than a two-year op- demonstrated that the owner is unable to reduce emissions erating history.160 The first step is to calculate the baseline levels below the PAL even with BACT-equivalent technol- actual emissions based on the average emission rates, in tpy, ogy being applied to units that have a PTE greater than the of existing units for the covered pollutant that existed during applicable significant level.173 Otherwise, all exceedances any consecutive 24-month period chosen by the applicant above the PAL must go through NSR.174 Readjustment de- within the 10-year period immediately preceding the cisions during the 10-year term are largely at the discretion change.161 The second step is to add emissions equal to PTEs of the reviewing authority with some exceptions.175 of existing and new units that were constructed since the Any monitoring system must be “based on sound science 24-month period and then to subtract the emissions of any and must conform to generally acceptable scientific proce- units that was “permanently shut down” or dismantled since dures for data quality and manipulation.”176 Any monitoring that time period.162 Baseline emissions must reflect cur- system contained in the permit must satisfy the minimum re- rently available technology requirements.163 APAL’s quirements as required by the rule.177 Monitoring systems facilitywide emissions cap should consider fugitive emis- must be able to precisely quantify the emissions from each sions to the extent it is quantifiable.164 The permitting unit on a 12-month rolling basis.178 But this does not mean agency must include a PAL in a federally enforceable per- that the use of a continuous emissions monitoring system mit.165 It must specify in the permit that a reduced PAL level (CEMS) or other rigorous monitoring requirements is man- would be imposed at the time any applicable federal or state dated. The source may employ emission factors to monitor requirements that it is aware of prior to issuing the permit.166 actual emissions at each unit.179 Sources must use “current A PAL will be valid for 10 years.167 It would be renewed emissions or other current direct measurement data.”180 The for another 10 years if there is a timely request for renewal reevaluation of the data must occur “at least once every 5 and the reviewing authority approves it.168 At renewal time, years” for the PAL term, using “a performance evaluation the PAL must be revised in consideration of newly applica- test or other scientifically valid means [ ] approved by the re- ble requirements.169 Where a source’s PTE has declined be- viewing authority.”181 Then the final rule provided for mini- low the PAL, the new PAL must be readjusted at a level that mum recordkeeping requirements.182 The facility owner does not exceed its PTE.170 Besides these requirements, in must submit a semiannual emissions report to the authority, general, the reviewing authority has great discretion to choose the new PAL. It can approve the application without 172. Id. any adjustments to the original PAL if the sum of the base- 173. Id. at 80210. line actual emissions plus an amount equal to the applicable 174. Id. significant level for the covered pollutant is equal to or 175. Id. The final rules explained the reasons for mandatory adjustments: 171 greater than 80% of the PAL level. If it is less than 80%, (1) To correct typographical/calculation errors made in setting the PAL or to reflect a more accurate determination of 159. 67 Fed. Reg. at 80208. The 1996 NSR reform proposal used the lan- emissions used to establish the PAL; (2) to reduce the PAL if guage “a reasonable operating margin less than the applicable signif- the owner or operator of the major stationary source creates icant emissions rate.” 61 Fed. Reg. at 38265. The final rule has in- creditable emissions reductions for use as offsets; or (3) to re- stead chosen “the applicable significant amount” as specified in the vise a PAL to reflect an increase in the PAL. NSR regulations or the CAA. For explanation on the part of EPA, see 67 Fed. Reg. at 80218-19. Id. 160. 67 Fed. Reg. at 80218-19. 176. Id. at 80211. 161. Id. EPA said that “you will have broad discretion to select any con- 177. See id. at 80212-13. See also 40 C.F.R. §60, app. B. secutive 24-month period in the last 10 years to determine the base- 178. 67 Fed. Reg. at 80211. Compliance with the PAL is determined line actual emissions.” Id. based on a consecutive 12-month period, rolled monthly. Id.at 162. Id. at 80208-09. For EUSUGs, however, a different formula is ap- 80214. plied. Whether nor not a shutdown is considered permanent is de- 179. The monitoring system must be one of the following methods or any cided on a case-by-case basis considering all relevant facts and cir- combination thereof: cumstances. The foremost consideration is the intention of the owner or operator of the unit at issue. There is a rebuttable presumption that (1) Mass balance for processes, work practices, or emissions “[s]hutdowns of more than 2 years, or that have resulted in the resources using coatings or solvents; (2) Continuous Emissions moval of the source from the State’s emissions inventory,” are per- Monitoring System (CEMS); (3) Continuous Parameter manent. Id. at 80209 n.30. Monitoring System (CPMS) or Predictive Emissions Moni- toring System (PEMS) with Continuous Emissions Rate Mon- 163. Id. at 80209. itoring System (CERMS) or automated data acquisition and 164. Id. at 80208. handling system (ADHS), as needed; or (4) emission factors. 165. Id. Id. at 80211. 166. Id. at 80209. 180. Id. 167. Id. 181. Id. 168. See id. at 80209-10. At least 6 months prior to, but not earlier than 18 182. Id. at 80213. Emissions data during periods of startup, shutdown, months from, the expiration date of the PAL, the facility owner or maintenance, and malfunction must be collected even though they operator must submit a complete application. Id. at 80209. may not be considered part of the emissions in determining compli- 169. Id. ance with the PAL. The reviewing authority has the discretion to approve different monitoring for various operating conditions for each 170. Id. unit. However, the facility owner is still subject to the same mini- 171. Id. mum monitoring requirements. Id. 35 ELR 10332 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. and must record “all periods of deviation, including the date Other units must go through a SIP-approved permitting and time that a deviation started and stopped and whether process.194 the deviation occurred during a period of startup, shutdown, A unit may requalify for the Clean Unit status after the or malfunction.”183 10-year period, subject to the above-mentioned applicability test. In other words, it must go through major NSR or a C. The Clean Unit Exclusion SIP-approved permitting process once again and meet technology requirements for pollution control to be adopted at The Clean Unit exclusion applies to units that installed the unit, reflecting advances in technology and changes to BACT or LAER through recent NSR.184 A unit can still the existing unit during the effective period.195 Where the qualify as a clean unit if it is demonstrated that its emissions unit’s location has been reclassified as a nonattainment area control level is comparable to BACT or LAER.185 The new during the term, it must install LAER or LAER-comparable NSR rule adopted a new applicability test. The Clean Unit pollution control at the time of expiration to requalify.196 status gives its owner operational flexibility to make any The required emissions reductions under the Clean Unit change to the designated clean unit without triggering NSR exclusion are not allowed to be used for netting purposes or if a change to the unit does not alter the emissions limitations as offsets.197 But those reductions below the emissions limi- or work practice requirements imposed in the permit in con- tation that qualifies the unit as a clean unit can be used in a junction with BACT or LAER, or physical or operational netting analysis or as offset credits if the general require- characteristics that formed the basis of the BACT or LAER ments applicable to netting or offsetting are met.198 In prin- determination, or if it does not result in a significant net ciple, the Clean Unit exclusion is pollutant-specific with the emissions increase in violation of the CAA.186 The compa- exception that “simultaneous Clean Unit status [may be rability requirement is satisfied when the candidate pollu- granted] for other pollutants at those emissions units that are tion control technology is BACT or LAER chosen for other sufficiently controlled to independently qualify as ‘clean’ similar sources in the RACT/BACT/LAER Clearinghouse for each pollutant.”199 The Clean Facility exclusion, which (RBLC), or when it is demonstrated on a case-by-case basis was proposed in the 1996 proposed rule, was omitted.200 that it is “substantially as effective” as BACT or LAER.187 The Clean Unit status will be valid up to 10 years.188 The D. PCPs new applicability test was a departure from the 1996 NSR reform proposal, which stated that the new rule would base The new NSR rule extended the utility-specific PCP exclu- the Clean Unit status on the unit’s pre-change hourly poten- sion to all types of sources.201 Listed PCPs are automatically tial emissions rate.189 In 1996, EPA proposed that there exempted from NSR if there is no violation of a NAAQS or would be three routes to be used for the Clean Unit designa- any of the PSD requirements, such as PSD increments and tion. The first and second would be through major or minor visibility.202 PCPs that are not listed must pass the “environ- NSR, which took place within the last 10 years.190 As for the mentally beneficial” test on a case-by-case basis.203 The third, to be comparable BACT or LAER, the pollution con- PCP exclusion offers flexibility while giving incentives for trol technology’s performance level must be: “(1) the aver- sources to install modern pollution control. Therefore, its age of the BACT or LAER for equivalent sources over a re- success depends in large part on the effectiveness of the cent period of time (such as 3 years); or (2) [ ] within some technology selected. percentage (such as 5 or 10) of the most recent, or average of the most recent, BACT or LAER levels for equivalent or 194. Id. 191 similar sources.” For the units within the third category, 195. Id. This means that they are subjected to the control technology de- the 1996 proposed rule provided that the Clean Unit status termination, air quality review, public participation and other re- 192 quirements under state-administered permit programs, which are de- would last for five years. signed to ensure that no violation of a NAAQS or any of the PSD re- As a result of these changes, stringency required for qual- quirements (increments or visibility) would not occur. ifying technologies is greatly reduced, and thus it would be 196. Id. at 80226. Note that the new rule stated: much easier for major sources to use the clean unit option. However, we will not necessarily require you to meet an ad- Furthermore, its longer term (10 years other than 5 years) ditional investment test to re-qualify for Clean Unit status for would have potential to offset much of the beneficial effects the same controls. That is, unless the controls used to estab- that the Clean Unit exclusion might otherwise have. Units lish Clean Unit status are no longer BACT/LAER or compa- 193 rable, there will be no requirement for an investment to re- that have gone through major NSR automatically qualify. qualify for Clean Unit status. Id. 183. Id. at 80213-14. 197. Id. at 80227. 198. Id. at 80228. 184. Id. at 80189. 199. Id. 185. Id. at 80190. 200. If adopted, the clean facility exclusion would have exempted from 186. Id. at 80189-90. NSR requirements major stationary sources that have undergone 187. Id. at 80222. NSR for the entire source within the last 10 years. 61 Fed. Reg. at 38258. 188. Id. at 80190. 201. 67 Fed. Reg. at 80233. 189. Id. at 80222. 202. Id. at 80190. There is a rebuttable strong presumption that listed 190. Id. at 80222-23. PCPs and technologies, and other standards are environmentally 191. Id. at 80223. beneficial. See id. at 80233-34. 203. Id. at 80190. For non-listed PCPs and technologies, the reviewing 192. Id. authority must consider the case-specific factors and employ a pub- 193. Id. lic notice-and-comment process. Id. at 80234. 5-2005 NEWS & ANALYSIS 35 ELR 10333 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. One of the concerns about the PCP exclusion is that PCPs tal benefits result when the emissions reductions of the pri- may result in emissions increases of any collateral pollutant, mary pollutant(s) are anticipated to outweigh any potential which triggers NSR under the CAA. The 1996 proposal em- increases in collateral pollutants.213 The new actual-to-fu- bodied the “primary purpose” test, which said that the pri- ture-actual test is applied to the calculation of any collat- mary function of a PCP is to reduce pollution.204 It also eral emissions increase.214 PCPs are available both in PSD stated that the listed add-on technologies and switch to less and nonattainment areas.215 Only where any collateral pol- polluting fuels may qualify as a PCP that would be pre- lutant contributing to nonattainment increases by a signifi- sumed to be environmentally beneficial.205 Other PCPs not cant amount as a result of the PCP can the offset require- listed must be environmentally beneficial, and new add-on ment apply.216 technologies must be demonstrated in practice.206 Another significant change was that the applicant for the The new rule eliminated the primary purpose test and ex- PCP exclusion is not required to conduct air quality model- panded the scope of listed PCPs and add-on technologies.207 ing if he determines no air quality-related values (AQRVs) It included as potential PCPs energy efficiency projects, exists in a nearby Class I area that could be impacted by ex- the replacement, reconstruction, and modification of exist- pected collateral emissions increases.217 The applicant can ing pollution control equipment, and work practice stan- make this determination after checking information, which dards.208 Upgraded or rebuilt control equipment must is publicly available on the Internet about whether any achieve a more stringent level of emissions reductions than AQRVs such as visibility have been identified for that area the original one in terms of input- or output-based emissions by the federal land manager.218 Even if an AQRV exists that rate or must have the same level of performance, provided have been identified by the federal land manager, the appli- that it is more energy-efficient.209 It clarified that non-air cant also is not required to conduct a modeling analysis if pollution impacts would not be considered in the environ- there is no likely correlation between the AQRV and the pol- mentally beneficial determination.210 It limited the applica- lutants emitted as a result of the PCP, including the case bility of the PCP exclusion to existing sources.211 where collateral emissions will not increase by a significant One of the most significant changes to the 1996 NSR pro- amount.219 Then the applicant is merely required to submit posal was that the environmentally beneficial test is con- such determination to the reviewing agency.220 In general, ducted based on the determination as to whether a PCP the reviewing authority has the discretion to request more would have net environmental benefits.212 Net environmen- specific information about adverse impacts on AQRVs in nearby Class I areas and, if it determines it as necessary, to 204. Id. at 80232; see 61 Fed. Reg. at 38261. require the applicant to conduct air quality modeling.221 205. 67 Fed. Reg. at 80232; see 61 Fed. Reg. at 38260. These changes aim to streamline the PCP process for pro- 206. 67 Fed. Reg. at 80232; see 61 Fed. Reg. at 38261. viding major sources with incentives to undertake environ- 222 207. 67 Fed. Reg. at 80233. mentally beneficial projects. 208. Id. 209. Id. at 80234. IV. Another Round of Heated Debate Over the New NSR Rules 210. Id. EPA explained: [C]ross-media tradeoffs are difficult to compare, so it is diffi- The new NSR rules provoked uproar among many stake- cult to weigh their importance in appraising the overall environmental benefit of a PCP. We solicited comments in the holders. Nine northeastern states brought suit in the U.S. proposal on how to compare cross-media pollution, but we received no suggestions on how to design such a system. As a could be exempted from the application of the environmentally beneficial test). result, we have determined that it is inappropriate to consider non-air impacts when considering whether projects, activi- 213. 67 Fed. Reg. at 80232. ties, or work practices qualify for the PCP Exclusion. 214. Id. Id. at 80236. 215. Id. 80237. 211. Id. at 80235. EPA reasoned: 216. Id. EPA said, however, that “a less than significant emissions increase may be subject to a State’s minor NSR requirements.” Id. Installing or implementing a project on an existing source is 217. Id. more likely to improve the environment than is the construction of a new source, since one can reasonably expect a PCP 218. Id. to reduce overall emissions, barring a considerable utilization 219. Id. increase. New sources, however, introduce new emissions to 220. Id. the air without reducing existing emissions, and conse- quently should be as clean as possible. Furthermore, new 221. Id. emissions units are among the major capital investments in 222. In this regard, EPA said: industrial equipment, which are the very types of projects that The new, broader PCP Exclusion will ensure equitable treat- Congress intended to address in the NSR provisions when ment of all source categories and remove any disincentive for such projects result in an overall emissions increase from the companies that wish to install pollution control and pollution major stationary source. Thus, when emissions from a new prevention projects, to the extent allowed by the CAA .... source exceed the significant level, they are subject to NSR, Despite today’s rule revisions addressing a broader array of and all emissions that are generated from the new project pollution control and pollution prevention projects at a larger should be addressed in the major NSR permit evaluation for variety of sources, we feel that the rule’s procedures are less the major stationary source. complex than and are clearer than the WEPCO PCP Exclu- Id. sion and the July 1, 1994 policy guidance. We are satisfied that the final PCP Exclusion best achieves the goals of mini- 212. 61 Fed. Reg. at 38262 (soliciting comment on whether applicants for mizing regulatory burden and reducing procedural delays for the PCP exclusion should be required to consider cross-media im- projects that ensure net overall environmental protection. pacts on any of the applicable CAA requirements; stating that only “de minimis” increases in the emissions of a collateral pollutant Id. at 80233. 35 ELR 10334 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. Court of Appeals for the District of Columbia (D.C.) Circuit a permitting authority to approve the source’s quantifica- seeking an order staying the new proposed rule on Decem- tion of fugitive emissions.231 This concern may be ad- ber 31, 2002, the day it was promulgated.223 They contended dressed by applying conservative assumptions about quan- that “the changes to the preexisting NSR regulations devi- tifiable fugitive emissions. But verification systems will ated from CAA requirements and also that EPA’s vary in terms of stringency from state to state. Given the fact rulemaking process was procedurally flawed.”224 On March that fugitive emissions are extremely difficult to quantify, 6, 2003, however, the D.C. Circuit refused to grant the mo- inclusion of fugitive emissions will likely create enormous tion for the stay.225 enforcement problems or big loopholes, depending on the will or the financial resources of a state or local air quality A. Criticisms of the New NSR Rule: Environmental management agency. Groups’ Arguments A recent report, published by the Environmental Integrity Project (EIP), shows that large quantities of fugitive emis- A coalition of environmental groups also filed a petition for sions in “upset” conditions are being released from regu- reconsideration with EPA. Environmental groups argued lated stationary sources.232 This report analyzed upset re- that EPA must begin a new rulemaking process for three ports submitted by 57 facilities in 5 states, which include reasons: (1) EPA had relied on “materials and recommen- California, Louisiana, Ohio, Pennsylvania, and Texas. dations that were developed after the 1996 and 1998 com- These facilities include oil refineries, chemical plants, natu- ment periods,” thereby precluding informed public com- ral gas-fired power plants, and one carbon black plant.233 Of ment; (2) changed circumstances after 1998 justified new these facilities, relatively accurate information about fugi- rulemaking, such as electricity deregulation and a better un- tive emissions was available only with regard to 37 facilities derstanding of the public health and environmental effects from Texas and Louisiana.234 of power plant emissions; and (3) the December, 31, 2002, The EIP found that these facilities, in 2003, emitted fugi- NSR rule violated the substantive provisions of the CAA, tive emissions in an amount that is many times greater their and EPA failed to adequately explain why the deviations in reported 2002 annual emissions. Of six natural gas plants, 235 the new rule from the 1996 and 1998 proposals were war- four released significant amounts of VOCs and SO2. Ten ranted.226 Environmental groups challenged almost every of the 18 refineries included in the study had annual emis- aspect of the final rule, alleging that it creates too many sions of at least one pollutant, SO2, CO, or VOCs, that were loopholes and, hence, would seriously compromise the en- more than one-quarter of reported emissions.236 Chemical vironmental protection goal of the CAA’s NSR program. plants and the one carbon black plant emitted significant First, they argued that EPA’s business cycle rationale for quantities of VOCs and CO during upsets. Benzene and bu- the 10-year look-back period is unfounded in light of the tadiene, toxic air pollutants subject to regulation under CAA study it relied on,227 and that basing the calculation of the §112, were released in massive amounts from some of the baseline actual emissions on a source’s highest emissions chemical plants.237 VOC and CO emissions from the carbon rate in any year within a 10-year period would nullify the black plant were 85 and 8 times greater the reported emis- simple mandate of the CAA, which requires NSR whenever sions, respectively.238 a proposed change is expected to result in an emissions in- In overall, these 37 facilities released 63,411,603 pounds crease, and violates the contemporaneity requirement as ar- of air pollutants in 2003, which included 167,133 pounds ticulated by the D.C. Circuit in the 1979 Alabama Power of benzene and 142,754 pounds of butadiene.239 More Co. v. Costel228 case. According to environmental groups, than one-half of these emissions were CO emissions, and allowing netting transactions in addition to a 10-year base- the other one-half were split almost equally by VOCs and 240 line period and the use of a different time period for each SO2 emissions. regulated pollutant confirmed the conclusion that EPA’s This report demonstrates two things. First, many station- methodology violates the CAA’s requirement that NSR be ary sources may have gamed upset provisions under the based on contemporaneous emissions increases and de- CAA and facility-specific permit variances under state creases as part of the proposed change.229 Also, they warned SIPs.241 Second, most states have not yet developed a highly that allowing inclusion of fugitive emissions in baseline developed fugitive emissions reporting system. Even in emissions calculation would inflate baseline emissions, on case a relatively reliable reporting system is in place, such as the one hand, and overestimate projected emissions, on the one in Texas, regulated sources underreported their fugitive other hand, making it easy for existing sources to escape emissions. Therefore, environmental groups’ argument NSR.230 Environmental groups contended that the new NSR rule lacks meaningful limitations on the discretion of 231. Id. at 8-9. 232. EIP, Gaming the System: How Off-the-Books Industrial 223. David Mastroyannis-Zaft, EPA’s Revised New Source Review Regu- Upset Emissions Cheat the Public Out of Clean Air (2004) lations Take Effect,30Ecology L.Q. 805, 805 (2003). available at http://www.environmentalintegrity.org/pubs/EIP_upsets_ report_FULL.pdf (last visited Mar. 1, 2005). 224. Id. at 805-06. 233. Id.at5. 225. New York v. EPA, No. 02-1387, 2003 U.S. App. LEXIS 19029 (D.C. Cir. Mar. 6, 2003). 234. Id. at 5, 20-21. 226. Earthjustice, Petition for Reconsideration 1-8 (2003), avail- 235. Id. at 7-8; see also id. at 8, fig. 2. able at http://www.earthjustice.org/backgrounder/documents/NSR 236. Id. at 8-9; see also id. at 8, tbl. 2. petition.pdf (last visited Mar. 1, 2005). 237. Id.at9. 227. Id.at16. 238. Id. 228. 636 F.2d 323, 10 ELR 20001 (D.C. Cir. 1979). 239. Id.at5,9;see also id. at 6-7, tbl. 1. 229. Earthjustice, supra note 226, at 21-25. 240. Id. at 5, fig. 1. 230. Id.at9. 241. See id. at 13-17. 5-2005 NEWS & ANALYSIS 35 ELR 10335 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. raising serious concerns about inclusion of fugitive emis- Finally, environmental groups contended that, unlike the sions in the calculations of baseline emissions and future prior proposals, the final rule sets the effective term of the projected actual emissions should be paid attention to by Clean Unit exemption at 10 years and allows the exemption EPA and state and local air officials. to be renewed for another 10 years without the unit being Second, environmental groups contended that EPA failed subject to new technology requirements.251 They basically to reasonably explain why it had decided to retain the de- argued that EPA’s chosen method for the Clean Unit desig- mand growth exclusion and even to extend it to other indus- nation “flatly contravenes the statutory requirement[s] [ ] tries, because it did not come up with a new rationale for jus- that a modification be determined based on changes that in- tifying the significant departure from its prior position.242 crease emissions,”252 and that the chosen technology should Specifically, the lack of procedural safeguards “would place be BACT or LAER, the most stringent one of its kind.253 an unduly large burden on [state] permitting authorities,” deny the public access to emissions data, and transform B. Concerns About the Revised Routine Maintenance NSR into post-construction review.243 Also, state-by-state Exception Rule variations in NSR enforcement would weaken the effectiveness of the NSR program.244 Many stakeholders expressed concerns about EPA’s pro- Third, they argued that EPA’s decision not to subject posed rule for the routine maintenance exception, because it PALs to the contemporaneity requirement violated the CAA would allow sources to avoid NSR indefinitely by making and were arbitrary and capricious because of the Agency’s changes to their facilities in an incremental manner, thereby failure to explain the reason for the change to prior propos- resulting in increased pollution. They argued that EPA’s cat- als.245 Under the final rule, the term of a PAL is 10 years. egorical approach failed to consider “the large diversity of And, despite the bubble concept underlying PALs, a source industries and situations,” because even sources with the owner is allowed to raise the PAL level without undergoing same industry have different maintenance needs “based on NSR, provided that the existing major emissions units cur- such factors as age, prior maintenance history, intensity of rently subject to a BACT or LAER requirement that was im- use, raw materials used in production processes, climate, posed within the last 10 years are not contributing to the and local labor costs.”254 They also alleged that the cost emissions increase.246 Automatic renewal is granted to the threshold and the minimum annual budget allowance to be source whose average emissions in any 2 years within the established by EPA violated the statutory requirement that preceding 10 years are at least 80% of the PAL. Environ- NSR be conducted whenever emissions increases would re- mental groups argued that, combined with a 10-year look- sult from a proposed change.255 According to them, states, back period used for setting a PAL, this would allow for net- especially downwind states, would face more difficulty en- ting during an extended period of time, deprive the public suring compliance with NAAQS, since “the proposed per se of a meaningful opportunity to participate in establishing exemptions deprive states of one of the strongest tools they PALs, and does not create any incentive to install modern have in controlling emissions: federally uniform restrictions pollution control.247 They also alleged that the final rule on modifications to existing sources.”256 This is because permits the use of alternate monitoring without providing cost-based exclusions may “allow sources to operate indefi- any meaningful check on the discretion of a state permit- nitely without implementing state-of-the-art control tech- ting authority and includes emissions factors with inherent nology.”257 Furthermore, the cost-based approach would inaccuracies as one of the four monitoring approaches, de- not eliminate uncertainty altogether, in that even an activity spite the fact that “a PAL necessitates superior monitoring” which falls within the annual budget but is in essence not a to be effective.248 routine maintenance is considered a major modification.258 Fourth, environmental groups criticized EPA for choos- Establishing annual maintenance allowances “invites ma- ing the net emissions benefits test to be used for determining nipulation of expenditure.” Sources would likely engage in a qualifying PCP in violation of the statutory requirement creative, but bad, accounting practices in an attempt to that NSR be triggered whenever a proposed physical or op- spread costs in a multiyear period.259 This in turn will lead to erational change would “result[ ] in the emission of any air conflict and litigation over the cost calculation, and thereby pollutant not previously emitted.”249 More specifically, they create another administrative complexity and resulting argued that EPA had not provided an opportunity for public costs and time, which might otherwise be spent on other comment on the inclusion of the replacement or reconstruc- more important legal issues.260 tion of an emissions unit as a PCP,or offered any new justifi- In June 2002, EPA promised to reconsider the rules. On cation for the departure from its prior position that, however October 27, 2003, however, it promulgated the final regula- beneficial, “major capital investments in industrial equipment are the very types of projects that Congress intended to 251. Id. at 94-96. address in the new source modification provisions.”250 252. Id.at94. 253. Id. at 96-104. 242. Earthjustice, supra note 226, at 27-31. 254. Victor B. Flatt et al., Let the People Speak: Notice-and-Comment 243. Id. at 31-42. Rulemaking (Lessons From the Controversial New Source Review Proposal of the Clean Air Act), 34 ELR 10115, 10119, 10122 (Feb. 244. Id. at 33-34. 2004). 245. Id. at 46-55. 255. See id. at 10119-20, 10124, 10126-27. 246. Id. at 55-58. 256. See id. at 10129-30. 247. Id. at 58-67. 257. Id. at 10123. 248. Id. at 70-85. 258. See id. at 10119. 249. Id. at 112-21. 259. See id. at 10122. 250. Id. at 121-35. 260. See id. at 10125. 35 ELR 10336 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. tion for the routine maintenance exception without much of D. The Stay of the Routine Maintenance Exception Rule a change.261 The only exception was that EPA decided not to and the Uncertain Future for NSR Reform finalize the annual budget allowance proposal.262 EPA also decided to implement the NSR rule as finalized on Decem- On December 24, 2003, the D.C. Circuit ordered the stay of ber 31, 2002. the routine maintenance rule.270 However, the court once again denied the motions for the stay of the December 2002 C. The U.S. Government Accountability Office (GAO) NSR rule on the grounds that “[p]etitioners [had] not dem- Studies on Stakeholders’ Views on the New NSR Rules onstrated sufficient changed circumstances to justify revis- iting the [May 6] order.”271 On July 1, 2004, EPA formally In response to objections to the new rules, Congress com- issued an administrative stay,272 and announced that it missioned the GAO to conduct surveys of key stakeholders’ planned to reconsider three issues concerning the routine views on the revisions. In a October 2003 report, the GAO maintenance rule: (1) whether the rule as originally final- found that federal and state enforcement officials and other ized is allowable under the CAA; (2) the legal basis for se- stakeholders were concerned that some of the revisions, es- lecting the 20% cost threshold; and (3) a simplified proce- pecially the proposed changes to the routine maintenance dure for incorporating a FIP into SIPs to accommodate rule, would negatively impact ongoing federal and state en- changes to the NSR rules.273 Many observers expected the forcement actions and settlement negotiations with indus- result of the presidential election to decide the fate of the try.263 It also found that certain provisions in the December NSR rules, and several observers have predicted that the 2002 final rule would limit the public’s access to emission U.S. Supreme Court will ultimately hear the NSR debate data, because “[u]nder the rule, fewer facility changes may given splits in the various circuits.274 Because President trigger NSR and thus the need for permits and related re- Bush was reelected last November, it is expected that EPA quirements to notify the public about changes and to solicit will continue to push its NSR initiative, and that the Court comments—unless state and local air quality agencies have will ultimately resolve the ongoing controversy surround- their own permit and public outreach rules.”264 Further- ing the new NSR rule in coming years. more, the GAO pointed out that the lack of clarity about the definition of “reasonable possibility” and its “self-policing” E. The Legality of the New NSR Rule nature in NSR determinations with regard to the demand growth exclusion “could potentially hinder enforcement The new NSR rule will not have much national impact until and monitoring activities.”265 states with an approved NSR program complete the SIP re- The October 2003 GAO report prompted some congres- visions and implement their revised NSR regulations upon sional members to ask EPA’s Inspector General to investi- EPA’s approval. Currently, the new NSR rule has been im- gate the Administration’s claims that the new regulations plemented in 11 states that do not have an approved NSR would not affect the ongoing NSR enforcement actions.266 program and other some states with a delegated NSR pro- A study conducted by a Rockefeller Family Fund project gram.275 Hence, it is somewhat too early to tell how the new and Council of State Governments found that changes to the NSR rule will change the behavior of regulated industry in preexisting NSR rules could lead to an almost combined 1.4 any significant manner. million tons more of persistent air pollutants in 12 northeast- When reading its brief submitted recently to the D.C. Cir- ern states.267 cuit, EPA’s legal position hinged primarily on two grounds. In another report published in February 2004, the GAO First, relevant CAA provisions are ambiguous such that gave a survey result, which showed that a majority of the EPA is entitled to Chevron deference for the new definition state officials expected the new rules to increase air emis- of the statutory term “change.”276 Second, the environmen- sions.268 According to the report, some state officials were tal impacts of the new rule would be positive or zero, since it concerned that the revisions would rather complicate their would give regulated sources the incentive to engage in en- jobs and thereby increase their workloads, since weakened NSR enforcement would give fewer options for states to 270. New York v. EPA, 2003 U.S. App. LEXIS 26520 (D.C. Cir. Dec. 24, comply with NAAQS.269 2003). 271. Id. 261. 68 Fed. Reg. at 61248. 272. U.S. EPA, Prevention of Significant Deterioration (PSD) and 262. Id. at 61252 (“We have decided, for now, not to take final action on Nonattainment New Source Review (NSR): Equipment Replace- the proposed annual maintenance, repair and replacement allow- ment Provision of the Routine Maintenance, Repair, and Replace- ance approach.”). ment Exclusion; Stay, 69 Fed. Reg. 40274 (July 1, 2004) (codified at 263. U.S. GAO, New Source Review Revisions Could Affect Utility En- 40 C.F.R. §§51 and 52). forcement Cases and Public Access to Emissions Data 15-21 (2003) 273. Id. at 40278. (GAO-04-58), available at http://www.gao.gov/new.items/d0458. pdf (last visited Mar. 1, 2005). 274. Darren Samuelsohn, Clean Air: Court Schedule Indicates NSR Rules’ Fate Rests on Next Presidential Administration, Green- 264. Id. at 21-25. wire, Feb. 26, 2004, Air, Water & Climate, Vol. 10, No. 9, available 265. Id. at 25-26. at LEXIS, Nexis Library, Greenwire File. 266. 2 Studies Contradict EPA on New Rules; Changes to Boost Pollu- 275. Mastroyannis-Zaft, supra note 223, at 809. Associated Press tion, They Say, , Oct. 23, 2003, at A2. 276. See Brief for the United States and EPA at 69-72, New York v. EPA, 267. See id. No 02-1387 (D.C. Cir. Dec. 31, 2002), available at http://www.epa. gov/nsr/documents/respondentbrief.pdf (last visited Mar. 1, 2005). 268. U.S. GAO, Key Stakeholders’ Views on Revisions to the New Source EPA relied heavily on the Chevron and Alabama Power cases. With Review Program 13-23 (2004) (GAO-04-274), available at respect to PALs, EPA argued that the Alabama Power case gives it http://www.gao.gov/new.items/d04274.pdf (last visited Mar. 1, the authority to set a plantwide emissions cap. According to EPA, 2005). deciding on the length of the contemporaneous period is also a “mat- 269. Id. at 23-24. ter [ ] left to its discretion.” See id. at 93-95. 5-2005 NEWS & ANALYSIS 35 ELR 10337 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. vironmentally beneficial projects without the fear of being gram requirements or by tightening preexisting standards subject to NSR.277 Adverse environmental impacts on exist- and requirements that it deemed necessary to move the na- ing air quality that could otherwise result from rule changes tion toward meeting clean air goals. There is no doubt that would be reduced to a minimum by implementation of a congressional intent in enacting the NSR program in 1977, number of safeguards provided under the new rule.278 was to bring more and more sources into its coverage over Throughout the brief, EPA stressed the fact that it has the time. Congress did not anticipate that NSR would become duty to balance the CAA’s clean air goal and economic an end run game played by grandfathered sources, in partic- growth needs in implementing the Act’s NSR program.279 ular those in the energy industry. As a result, contribution to Put differently, the reason for revising the prior rule was mo- air quality improvements from industry has come mainly tivated by the Agency’s belief that it deprived existing from new sources or existing sources’ compliance with resources of operational flexibility to meet increased market quirements under other programs under the CAA. demand or failed to give them incentives to invest in pollu- Moreover, EPA’s new definition of the term “change” is tion control technologies or energy efficiency projects, against its common sense understanding. The primary pur- which would otherwise have produced air quality improve- pose of NSR should be to improve existing air quality. Any ments. EPA made it clear that the primary goal of the new imaginative interpretation of the term “change” cannot go NSR rule is not to unduly inhibit economic growth, by stat- too far so as to violate this simple mandate. It is therefore ing that “the purpose of the NSR provisions is not to compel clear that the enactment of the NSR program was the nation’s emissions reductions from existing sources, but to limit choice to emphasize clean air goals rather than economic emissions increases resulting from physical or operational growth. To paraphrase, the purpose of the NSR program is to changes.”280 In other words, in EPA’s view, the new NSR compel emission reductions from existing sources whenever rule aims to return the previous state of affairs tilting toward they propose a change that will increase their actual emis- environmental considerations to the right balance between sions in a way that adversely impacts existing air quality. air quality protection and economic development needs. Thus, the first prong of EPA’s legal position is untenable. I would like to respond to EPA’s position by making two Second, EPA’s argument that the new NSR rule would points. First, even if it is conceded that EPAhas the authority lead to air quality improvements because, in its view, more to interpret the NSR provisions in order to balance the existing sources are expected to have incentives to invest in NSR’s two equally important goals, the overriding goal of clean energy technologies cannot withstand analysis. Expe- the CAA is to improve air quality on a continual basis for the rience with implementation of a variety of environmental benefit of the general public. The NSR program has func- statutes tells us that industry responds to the economics tioned as one of the valuable tools for accomplishing that rather than act on its environmental awareness. More often noble goal. Throughout the Act’s history, Congress has con- than not, it is clear market signals, usually in the form of un- tinued to increase the Act’s stringency by adding new pro- ambiguous statutory or regulatory mandates, that have suc- ceeded to motivate regulated sources to become cleaner or 277. See id. at 65-66, 76-82. For example, in justifying its argument that more energy efficient. Under the new rule, existing sources the Clean Unit exclusion would produce air quality benefits, EPA can avoid NSR more easily than in the past. It is hard to be- cited the result of its review of a flexible permit pilot program, which shows that five of the six participating facilities reduced their emis- lieve that they will have incentives to install state-of-the-art sions beyond emissions limits contained in their permits. Id.at109 pollution control technologies or inherently cleaner energy and n.61. technologies that they had little incentive to use under the 278. EPA argued that only a small percentage of sources, 3% of total previous rule. The opposite will be more true. Given this, emissions, might be able to take advantage of a higher baseline using the new methodology used for calculating baseline emissions. See PALs, the Clean Unit exclusion, and PCPs will likely be id. at 78-79. EPA reiterated its statements in the preamble of the 2002 underutilized. Otherwise, their frequent use will lead to NSR rule. First, the demand growth exclusion is implementable, and more and more existing sources escaping NSR for an ex- state minor NSR and Title V operating permit programs will be suc- tended period of time. If it is assumed that their use will be cessful in incorporating into permits monitoring requirements adequate to prevent its abuse. See id. at 95-101. Second, in order to use subject to adequate public scrutiny, as EPA argues, industry the Clean Unit exclusion, sources that have not gone through NSR will find it cumbersome and hence not worthy of pursuit to must comply with all the requirements of the NSR program. Further- opt in to such mechanisms. Furthermore, EPA seems to ne- more, renewal is not an automatic one, and to requalify, an existing clean unit must meet all the criteria as if it applied for the Clean Unit glect the fact that new sources, which have been the driving exclusion for the first time. The public has a right to participate in the force for technological innovation, will experience more of process for designating a clean unit under the state minor NSR or the an economic disadvantage under the new NSR rule. The no- Title V operating permit program, except for units that have recently tion of a level playing field or environmental comparability gone through NSR. At renewal time, an existing unit can requalify only if it complies with the requirements applicable in the area re- hardly found its way into the new rule. classified as nonattainment or more severe nonattainment. See id.at 112-16. Third, to qualify for the PCP exclusion, a source may install one of the listed pollution control technologies presumed to be envi- Conclusion ronmentally beneficial, and in its application must provide detailed information showing the environmental benefits of a control tech- To summarize, the new NSR rule is another example of nology it plans to use. If the proposed project does not belong to one of the presumptively beneficial PCPs, it must be approved by the re- EPA’s failure to reconcile two conflicting goals: environ- viewing authority in a state minor NSR or a Title V operating permit- mental protection and economic development. While alleg- ting process that provides for public notice-and-comment before the edly providing increased simplicity and flexibility to indus- applying source begins construction. A qualifying source has an ongoing legal duty to operate its PCP in a manner that continues to pro- try, the rules aggravate the problems with the preexisting duce net environmental benefits, while minimizing emissions of col- rules such as a bias against new sources and, most impor- lateral pollutants. See id. at 122-26. tantly, compromise the clean air goals of the NSR program. 279. Id. at 28, 75, 76, 95, 112. It appears that the issuance of the new NSR rules is out- 280. Id. at 73-74, 75, 94-95 (emphasis in original). side the scope of EPA’s delegated authority under the CAA. 35 ELR 10338 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. The Act contains three simple but clear requirements in its on new sources were minimal. Even if it is assumed that the NSR program: (1) a proposed physical or operational findings were correct, EPA seems to overlook the fact that change that would increase emissions or result in collateral its new NSR rule would have the effect of skewing the pre- emissions must go through NSR preconstruction review; existing unlevel playing field toward old, grandfathered (2) emissions increases and decreases to be considered in sources more than in the past, however insignificant it might NSR applicability determinations must be contemporane- be. In other words, EPA stands on the wrong foundation. ous; and (3) once NSR is triggered, the most stringent tech- Because the status quo has been changed in a way that would nology requirement, BACT or LAER, must be applied to the aggravate intersource and regional disparities in emission source. In issuing the new NSR rules, EPA seemed to be so reduction requirements, the new NSR rule may not deliver preoccupied with one of the two NSR goals, i.e., easing the its goal of economic efficiency unless it provides for addi- regulatory burdens on industry, that it forgot the clear man- tional mechanisms that would zero out all the advantages it dates of the CAA. may give to existing sources, in order to maintain the pre- Although it has becomes less important in controlling existing status quo. The fundamental solution for resolv- emissions of large coal-fired power plants, which has ing the inequities in NSR implementation should be to re- incrementally been brought under the multi-pollutant trad- peal grandfathering and to adopt uniform output-based ing approach, NSR is still a valuable tool that can be used as emission standards that are equally applicable to new and a backstop to impose more stringent requirements on existing sources. grandfathered plants. Moreover, NSR enforcement repre- When implementing environmental and energy law, sus- sents one of the most significant options available for states tainable development takes the form of environmental com- to utilize in compelling other source categories, such as re- parability. Environmental comparability generally refers to fineries, smelters, wood products industries, to update exist- a general policy approach that is designed to fully internal- ing pollution control. EPA should reconsider the December ize the negative externalities of energy production and con- 2002 NSR rule. NSR reform should not result in a rollback sumption.283 Its central strategy is to incorporate sustain- of preexisting rules. Rather, it should be aimed at improve- ability concerns into the current law under which all sources ments in the nation’s air quality and laying the foundation can compete on an equal footing with one another solely on for creating the clean energy path. the basis of environmental performance, regardless of their In pursuing these goals, it is advisable for the nation to lis- age.284 Available policy tools to this end include, among ten to the following recommendations of the National Acad- other things, the phaseout of grandfathering, the adoption of emy of Public Administration in its EPA-commissioned output-based emissions standards, and providing subsidies report, which, among others, include: (1) repealing grand- for accelerating the commercial deployment of cleaner, fathering; (2) retaining NSR for new sources; (3) the contin- more energy-efficient sources such as renewable energy.285 uation of vigorous NSR enforcement; (4) the replacement of They essentially symbolize sticking to the principle of sus- NSR for existing source with a compulsory three-tier sys- tainable development in the energy law field. tem (cap-and-trade for industrial sources with reliable mon- Environmental regulation discriminates against new and itoring records, cap-and-net, or unit-cap for other sources); cleaner energy sources. In most instances, it imposes on new and (5) requiring all new and existing sources to regularly sources more stringent emission reduction requirements on report their emissions data to regulatory agencies and the a percentage, input basis, even though these sources often- public in order to enhance accountability.281 To add to these times are much cleaner than old, grandfathered sources be- recommendations, netting also should not be allowed. In the cause of the inherent nature of fuels or combustion technol- alternative, reporting requirements should be imposed on ogies actually used.286 “In 1996, coal plants had average those sources seeking credits for contemporaneous net 283. See generally David R. Wooley, Environmental Comparability,12 emissions decreases at their facility. Another alternative ap- Nat. Resources & Env’t 276 (1998). proach to NSR is to adopt output-based emissions standards 284. Id. at 279. and to put more of an emphasis on energy efficiency and Bruce Biewald et al. conservation goals in NSR permitting processes, in order to 285. For a discussion of various policy tools, see , 282 supra note 76, at 46-55. facilitate sustainable energy development. 286. Technology-based standards take the form of “emission rate” stan- EPA has justified changing the preexisting NSR rule on dards, which are typically expressed in terms of the amount of emis- the basis of the findings of its 90-day NSR report to the pres- sions of a regulated pollutant based on heat input, such as pounds per ident, which said that the old NSR rule impeded the energy million Btu (lbs./mm Btu). More demanding emission rates are required of clean fuel-burning sources under the name of BACT. Es- development and environmentally beneficial projects of ex- tablishing emission reduction requirements on a percentage, input isting power plants and refineries, while its adverse impacts basis penalizes new clean fuel-burning sources in two respects. First, clean fuel-burning sources usually employ highly energy-efficient fuel combustion technologies. For example, the maximum thermal 281. See NAPA NSR Report, supra note 64, at 133-37. efficiency of state-of-the-art combined-cycle, natural gas-fired plants is nearly 60%, whereas the most energy-efficient coal-burn- 282. See Foote, supra note 17. In this article, the author, who is currently ing technology currently in dominant use has a thermal efficiency of EPA’s Assistant General Counsel in the Air and Radiation Division, 33% at best. See Steven Ferrey, The New Rules: A Guide to argued that the NSR program can be implemented to promote clean Electric Market Regulation 4 (2000). Thus, input-based emis- energy technologies and energy conservation using a hierarchical sion standards disregard energy efficiency aspects, producing the approach, under which permitting agencies apply: (1) conservation; practical effect of rewarding old, energy-inefficient energy sources, (2) renewable energy; (3) energy efficiency; and (4) add-on control which are primarily grandfathered coal-fired power plants. Second, technologies in descending order, with some help from states’ inte- clean fuel-burning sources embodying energy-efficient technolo- grated resource planning (IRP) and demand-side management gies are subject to percentage reduction requirements. Though being (DSM) policy. See id. at 10648, 10657-62. Notably, he argued that less polluting, more energy efficient, these sources must install ex- CO2 emissions, which EPA has concluded is not an air pollutant, pensive modern post-combustion control equipment whose effi- should be considered in NSR permitting decisions. See id.at ciency gains are questionable in terms of effectiveness in pollution 10662-69. control compared to incurred investment monies. See Swift, supra 5-2005 NEWS & ANALYSIS 35 ELR 10339 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. emission rates that were [thirty] or [fifty] times higher than sources in two ways. First, grandfathering of allowances new gas units with low-NOx combustion and SCR con- constitutes “scarcity rents” for large existing sources, be- 287 trols.” Midwest electric utilities’ average NOx emissions cause new sources have to purchase allowances in the trad- may be 10 times higher than those in the Northeast region ing market to begin operation. Second, input-based allow- even on a per Mwh basis.288 ance allocation is another form of discrimination against Although implementation of both the CAA’s NOx acid new and cleaner, more energy-efficient sources, because 289 290 rain program and EPA’s NOx 1998 SIP call have had the these sources need more allowances under an input-based effect of addressing these disparities in emissions reduction allocation formula than under an output-based one. requirements to some extent, they fall short of achieving the Nine northeastern states and the District of Columbia un- environmental comparability goal. The SIP call’s emissions der the Ozone Transport Commission (OTC) NOx cap-and- limit of 0.15 pounds per million British thermal units291 is trade program295 or other states opting-in to EPA’s NBP “still roughly [ten] to [twenty] times less stringent than typi- have not set aside allowances for new sources, or even if cal NOx emission rates required of new natural gas com- they did, the number of set-aside allowances were “not large bined-cycle units in nonattainment areas.”292 enough to cover all the new power plants seeking to enter 296 Moreover, both CAA’s SO2 allowance trading and the the market.” These inequities can be addressed ade- 293 EPA’s NOx Budget Trading (NBP) program designed to quately by establishing a cap-and-trade program, which in- implement its 1998 NOx SIP call each allocate SO2 and NOx corporate the following three features: (1) the adoption of an allowances based on historical operating data such as fuel output-based allowance allocation method; (2) periodical input.294 This allocation method penalizes new and cleaner updating of allowance allocations; and (3) the application of the same emission rate to new and existing sources.297 The note 74, at 1539 (observing that new gas-fired plants subject to rigor- way in which the method for making allowance allocations ous NSR control requirements would have to incur the cost of $2,500 on an output basis, called the Uniform Generation Perfor- to $10,000 per ton of NOx removed, while grandfathered, coal- mance Standard, can be implemented as follows. First, the fired plants could reduce NOx emissions “at prices as low as $300 per ton”). relevant authority calculates the amount of total allowable emissions. Second, it establishes the same emission rate, 287. Tim Woolf & Bruce Biewald, Electricity Market Distortions Associ- ated With Inconsistent Air Quality Regulations, Elec. J., Apr. 2000, which is applicable to all new and existing sources on a per at 44. kilowatt hour or Mwh basis, “by dividing the cap by the ex- 288. Ellen Roy, The Uniform Generation Performance Standard: Con- pected generation for that region over a set period of necting Electric Industry Restructuring and Air Quality Improve- time.”298 Additionally, an output-based cap-and-trade pro- ment, Elec. J., Jan./Feb. 1998, at 59. gram can be designed to allow renewable energy sources to 289. 42 U.S.C. §7651f. Section 407 subjects affected coal-fired units with directly participate in trading. In this way, more efficient SO2 reduction requirements under other provisions of the acid rain sources, regardless of their age and the chosen energy tech- program to the emissions rate standards for NOx. These units must achieve new emission rates set by the EPA Administrator, which nology, can gain a competitive advantage. This in turn pro- were to be implemented at the same pace as the SO2 emission limita- vides strong incentives for generation sources to become tions under Subchapter IV. See id. cleaner, more energy-efficient. 290. Relying on its authority under CAA §110(k) to force states to amend their SIPs upon a finding of “significant contribution” to another state’s NAAQS attainment or maintenance, called a SIP call, EPA in ginning operation after December 31, 1995, must purchase allow- 1998 made a NOx SIP call against 22 eastern states and the District of ances in EPA-administered auctions or from existing sources who Columbia. See id. §7410(k)(5); U.S. EPA, Finding of Significant have allowances to sell in the secondary market. Id. §7651d(g)(3)- Contribution and Rulemaking for Certain States in the Ozone Trans- (4). Under EPA’s NBP, a state’s baseline inventory for large elec- port Assessment Group Region for Purposes of Reducing Regional tric-generating units is based on “the higher of the 1995 or 1996 Transport of Ozone; Final Rule, 63 Fed. Reg. 57356 (Oct. 27, 1998) ozone season heat input values.” 63 Fed. Reg. at 57407. Covered (codified at 40 C.F.R. §§51, 72, 75, and 96). large nonelectric-generating units, which are defined as nonutility industrial boilers and turbines units with a capacity greater than 291. In its 1998 NOx SIP call, EPA made a finding that “highly cost-effective” controls on large electric-generating units included both com- 250 mm Btu per hour or with NOx emissions greater than one ton bustion and post-combustion control techniques that could be used per day, are required to achieve a 60% reduction of their preexist- to achieve an emission rate of 0.15 lbs./mm Btu based on the unit’s ing NOx emissions. Id. at 57378, 57415. But note that participat- 1995-1996 average utilization rate. Id. at 57378. In fact, the chosen ing states have the discretion to apportion allowances between covered units. emission rate standard is the NSPS for NOx emissions applicable to coal-fired units that has existed since 1979. See 40 C.F.R. §60.44a. 295. Under CAA §§176A and 184, northeastern states comprising the 292. Woolf & Biewald, supra note 287, at 47. OTC, except Virginia, agreed to implement a regional NOx cap- and-trade program in 1994 and finalized a model rule for NOx allow- 293. The NOx SIP call gave the states the flexibility to choose which ance trading in 1996, which would be implemented by participating sources to target and mix of control measures needed to achieve the states beginning in 1999. See 42 U.S.C. §§7506a, 7511c; Memoran- required NOx emissions reductions. Its most significant feature, dum of Understanding Among the States of the Ozone Transport however, was its requirement that the states allocate a budget for fos- Commission on the Development of a Regional Strategy Concern- sil fuel-fired electric steam-generating units, with the option to par- ing the Control of Stationary Source Nitrogen Oxide Emissions ticipate in an EPA-administered regional cap-and-trade program. (Sept. 27, 1994); Laurel J. Carlson, Northeast States for Co- EPA’s NBP was launched on May 1, 2003, in eight northeastern ordinated Air Use Management/Mid-Atlantic Regional states and the District of Columbia acting under the Ozone Transport Air Management Ass’n NOx Budget Model Rule (1996), Commission (OTC), thereby replacing the OTC’s NOx trading pro- available at http://www.epa.gov/airmarkets/otc/otcrule.zip (last gram with respect to these states. Beginning on May 31, 2004, 11 OTC, NO Budget Program: U.S. visited Mar. 1, 2005); x 1999-2002 other states subject to the NOx SIP call joined the program. See Progress Report 5 (2003) (EPA 430-R-03-900), available at EPA, NOx Budget Trading Program: 2003 Progress and Compliance Report http://www.epa.gov/airmarkets/otc/otcreport.pdf (last visited Mar. (2004) (EPA 430-R-04-010), available at 1, 2005). http://www.epa.gov/airmarkets/cmprpt/nox03/noxreport03.pdf (last visited Mar. 1, 2005). 296. Woolf & Biewald, supra note 287, at 45-46. 294. Under CAA Subchapter IV, SO2 allowances were allocated using 297. Id.at47. historic fuel input and other operating data from 1985 through 1987. See 42 U.S.C. §§7651c(a)(2). On the other hand, new facilities be- 298. Roy, supra note 288, at 57. 35 ELR 10340 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. It is important to note, however, that implementation of sources had to surrender up to 50% of their allowances if output-based allowance allocation or NSPS proves difficult they left over unused allowances.301 in practice. At one time, EPA pursued output-based NSPS Climate change policy may be the most effective way of for NOx control applied to electric utility boilers built, modi- promoting clean energy development, given that there are fied, or reconstructed after July 9, 1997, but it withdrew the currently no commercially available carbon capture and se- proposal after the D.C. Circuit’s vacatur.299 Massachusetts, questration technologies. Thus, it has the effect of restrict- one of the OTC states that had agreed to implement the OTC ing fossil fuel usage. Because old, dirtier sources usually use NOx cap-and-trade program in 1994, adopted an output- more carbon-intensive fuels, it rewards cleaner, more effi- based allocation formula in November 1997. But it still set cient energy sources, without relying on output-based stan- different emission rate standards for four different catego- dards. Put differently, well-designed climate change policy ries of affected sources, and new sources were allocated al- has the potential to send price signals to energy producers lowances based on their permit limits.300 Worse, new and consumers that adequately reflect environmental externalities of energy-related products and activities. 299. U.S. EPA, Revision of Standards of Performance for Nitrogen Oxide Most of these and other reform proposals require action Emissions From New Fossil Fuel-Fired Steam-Generating Units; on the part of Congress. It will take time to gain political cur- Revisions to Reporting Requirements for Standards of Performance rency. The United States badly needs the leadership of both for New Fossil Fuel-Fired Steam-Generating Units, 63 Fed. Reg. 49442 (Sept. 16, 1998); Lignite Energy Council v. EPA, No. chambers of Congress to clear the way for achieving the 98-1525, 1999 U.S. App. LEXIS 26263, *2, 30 ELR 20279 (D.C. goal of sustainable development. Cir. 1999). 300. Roy, supra note 288, at 62. 301. Id.