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Is the U.S. Environmental Protection Agency’s Revised NewSource Review Rule Moving in the Right Direction?: A DeepenedNew Source Bias, and the Need for Pursuing Sustainable Energy

Development in Air Pollution Control Law

by Inho Choi

Table of Contents

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . 10316I. Discussion of the NSR Program . . . . . . . . . . 10319

A. In General . . . . . . . . . . . . . . . . . . . . . . . . 10319B. New and Modified Major Stationary

Sources. . . . . . . . . . . . . . . . . . . . . . . . . . . 10320C. NSR Applicability . . . . . . . . . . . . . . . . . . . 10320

1. Physical or Operational Change: The RoutineMaintenance Exception . . . . . . . . . . . . . 10320

2. A Significant Net Increase in Emissions . . 10321a. An Emissions Increase: The Actual-to-Future-Actual Test. . . . . . . . . . . . . 10321b. The WEPCO Rule: The Actual-to-Projected-Future-Actual Test and ItsExtended Application . . . . . . . . . . . . 10322c. A Significant Net Increase:Netting . . . . . . . . . . . . . . . . . . . . . . . 10323

II. NSR Failures and the Movement to Reformthe Current NSR Program. . . . . . . . . . . . . . 10324A. Grandfathering Under the CAA . . . . . . . . . 10324B. Federal and State Efforts to Repeal

Grandfathering . . . . . . . . . . . . . . . . . . . . . 103251. Congressional Efforts. . . . . . . . . . . . . . . 103252. State Action . . . . . . . . . . . . . . . . . . . . . 10325

C. EPA’s Enforcement Initiative . . . . . . . . . . . 10326D. The Overhaul of EPA’s Enforcement

Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . 103271. The National Energy Policy Group’s Report

to the President . . . . . . . . . . . . . . . . . . . 103272. The DOJ’s NSR Report . . . . . . . . . . . . . 103273. EPA’s 90-Day NSR . . . . . . . . . . . . . . . . 10327

E. A Multi-Pollutant Trading Approach at theFederal Level . . . . . . . . . . . . . . . . . . . . . . 103281. Four-Pollutant Bills . . . . . . . . . . . . . . . . 103282. Three-Pollutant Bills: The Bush

Administration’s Clear Skies Initiative . . 10329III. The 2002 New NSR Rule . . . . . . . . . . . . . . 10329

A. A 10-Year Look-Back Period and theActual-to-Projected-Future-Actual Test . . . . 10330

B. PALs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10330C. The Clean Unit Exclusion . . . . . . . . . . . . . 10332D. PCPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10332

IV. Another Round of Heated Debate Over theNew NSR Rules . . . . . . . . . . . . . . . . . . . . . . 10333A. Criticisms of the New NSR Rule: Environmental

Groups’ Arguments . . . . . . . . . . . . . . . . . . 10334B. Concerns About the Revised Routine Maintenance

Exception Rule . . . . . . . . . . . . . . . . . . . . . 10335C. The U.S. Government Accountability Office

(GAO) Studies on Stakeholders’ Views on theNew NSR Rules . . . . . . . . . . . . . . . . . . . . . 10336

D. The Stay of the Routine Maintenance ExceptionRule and the Uncertain Future for NSRReform . . . . . . . . . . . . . . . . . . . . . . . . . . . 10336

E. The Legality of the New NSR Rule . . . . . . . 10336Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10337

This Article analyzes the revised new source review(NSR) rule and argues that it violates the Clean Air

Act’s (CAA’s or the Act’s)1 clean air mandate by changingthe preexisting definition of the statutory term “change” andby extending the demand growth exclusion to all sourcesand creating several NSR-exempt project-based construc-tion activities that are applicable to existing sources, with-out providing meaningful procedural safeguards. This is be-cause the new rule conflicts directly with the following re-quirements under the CAA’s NSR program: (1) a proposedphysical or operational change that would increase emis-sions or result in collateral emissions must go through NSRpreconstruction review; (2) emissions increases and de-

Inho Choi is an S.J.D. candidate and received his LL.M. in 2002 fromGeorge Washington University Law School. He received an LL.M. in1998, and an LL.B. in 1993 from the Chungnam National University Col-lege of Law in South Korea. He can be contacted via e-mail [email protected]. The author would like to express his greatestgratitude to Prof. Arnold W. Reitze Jr., who is his mentor at George Wash-ington University Law School and one of the nation’s leading environ-mental law experts, for his helpful comments on the earlier drafts of thisArticle and his strong encouragement throughout its preparation. All theremaining errors and misunderstandings are the author’s responsibility. 1. 42 U.S.C. §§7401-7671q, ELR Stat. CAA §§101-618.

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35 ELR 10316 5-2005

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creases to be considered in NSR applicability determina-tions must be contemporaneous; and (3) once NSR is trig-gered, the stringent technology requirement, the best avail-able control technology (BACT) or the lowest achievableemissions rate (LAER), must be applied to the sources.

The Article argues that the revised NSR rule is moving inthe wrong direction in that it strengthens a bias against newsources and enlarges preexisting loopholes in favor of old,dirtier sources, which have traditionally enjoyed significantcost advantages over cleaner, more energy-efficient sourcesunder the grandfathering scheme. It observes that the U.S.Environmental Protection Agency’s (EPA’s) reliance on thenew rule’s allegedly minimal impacts on air quality and thenation’s decade-long transition to a multi-pollutant tradingapproach in air pollution control in justifying the rulechanges is untenable in view of congressional intent leadingto the enactment of NSR and the literal meaning of the term“change.” The Article concludes with the argument that theoverriding goal in NSR reform is to create a level playingfield for all sources, whether new or old, by buildingsustainability concerns into existing environmental and en-ergy law, for example, through repealing grandfathering, theadoption of output-based emissions standards and, possibly,the enactment of climate change policy aimed at reducingfossil fuel usage.

Introduction

The permitting sections of Parts C and D of CAA Subchap-ter I are known as the NSR program,2 whose main goal is toprotect, maintain, and improve air quality while providingfor continued economic development and meeting energyneeds.3 The CAA covers six criteria air pollutants: parti-culates (including particulate matter (PM) with a diameterof 10 microns or less (PM10) and PM with a diameter of 2.5microns or less (PM2.5)), sulfur dioxide (SO2), nitrogen ox-ide (NOx), carbon dioxide (CO2), ozone (O3), and lead (Pb).It also regulates toxic air pollutants and volatile organiccompounds (VOCs). Under the Act’s clean air mandate,EPA is to promulgate primary and secondary national ambi-ent air quality standards (NAAQS) for each of the six crite-ria pollutants.4 Each state must then within three years pre-pare and submit to EPA for approval its implementationplan, called a state implementation plan (SIP), for meetingNAAQS.5 In their SIPs, the states, including tribal lands andterritories, must demonstrate the timely attainment ofNAAQS or “reasonable further progress” toward the attain-ment of NAAQS in all areas under their jurisdiction, usingavailable monitoring data and modeling analyses.6 The EPAAdministrator must promulgate a federal implementationplan (FIP) if a state fails to submit a SIP by the statutorydeadline or if it submits an inadequate SIP, or fails to revise it

after EPA’s notice of disapproval.7 The EPA Administratorcan disapprove the entire SIP or part of it.8 Harsh sanctionsmay be imposed on states that fail to meet the statutorydeadlines for SIP submittal or NAAQS attainment.9 On theother hand, states have the wide discretion to choose mea-sures to comply with NAAQS as long as they can demon-strate timely attainment to EPA and make reasonable fur-ther progress. Each state, by adopting a SIP, is empoweredto determine which sources to regulate and which pollutioncontrol measures to employ to meet NAAQS.10 In short, theCAA’s basic scheme for accomplishing its goals is “cooper-ative federalism” with distinct roles for the states and thefederal government.

However, state authority to shape air management strate-gies and plans has its limits. Congressional dissatisfactionwith the 1970 CAA’s performance led to the enactment ofthe prevention of significant deterioration (PSD) andnonattainment programs in 1977. The main thrust of thePSD program is to protect and enhance the high air qualityof areas with clean air. Under the nonattainment program,states are required to implement more stringent SIP require-ments in return for more time for attainment in areas withintheir jurisdiction that have failed to meet the applicableNAAQS. States must impose emissions reduction require-ments based on reasonably available control technology(RACT) on existing major sources covered by EPA guide-lines.11 New and significantly modified major stationarysources that want to locate in PSD or nonattainment areasmust obtain preconstruction permits from state permittingagencies. For new sources in PSD areas, this usually meansthat they must go through air impact analyses and air qualitymodeling at the preconstruction stage, and meet post-con-

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5-2005 35 ELR 10317

2. See id. §§7470-7492, 7501-7515. The NSR regulations are found in40 C.F.R. §§51.165, 51.166, 52.21, 52.24, and pt. 51, app. S.

3. See, e.g., H.R. Rep. No. 95-294, at 13 (1977), reprinted in 1977U.S.C.C.A.N. 1077, 1091 (noting that “[t]his section is proposed as ameans of assuring realization of the dual goals of attaining air qualitystandards and providing for new economic growth”).

4. See 42 U.S.C. §7409.

5. See id. §7410.

6. Id. §7503(c)(2)(B). CAA §§110(a)(2)(A)-(M) provide for the basicrequirements for the SIP, which are to be used by EPA as criteria forthe approval of individual SIPs. Id. §7410(a)(2)(A)-(M); see 40C.F.R. §51.

7. 42 U.S.C. §7410(c)(1).

8. Id. §7410(c)(1)(B).

9. States may be subject to highway sanctions prohibiting approval andfunding by the Secretary of Transportation of highway projects, andto stringent offset requirements under the nonattainment NSR pro-gram of at least 2 to 1. Id. §7509.

10. Id. §7407(a), declaring that

[e]ach State shall have the primary responsibility for assur-ing air quality within the entire geographic area comprisingsuch State by submitting an implementation plan for suchState which will specify the manner in which national pri-mary and secondary ambient air quality standards will beachieved and maintained within each air quality control re-gion in such State.

See also, e.g., Train v. Natural Resources Defense Council, 421 U.S.60, 79, 5 ELR 20264 (1975) (concluding that “so long as the ultimateeffect of a State’s choice of emission limitations is compliance withthe national standards for ambient air, the State is at liberty to adoptwhatever mix of emission limitations it deems best suited to its par-ticular situation”); Union Elec. Co. v. EPA, 427 U.S. 246, 269, 6ELR 20570 (1976) (stating that the states have “the power to deter-mine which sources would be burdened by the regulations and towhat extent” in implementing their SIPs approved by EPA); EPA v.Brown, 431 U.S. 99, 103, 7 ELR 20375 (1977) (per curiam). There-fore, a state can demonstrate timely attainment to EPA in its SIP byrelying more on control measures that target area sources, such asdry cleaners and gas stations, and mobile sources than other states.

11. EPA has interpreted RACT to mean “the lowest emission limitationthat a particular source is capable of meeting by the application ofcontrol technology that is reasonably available considering techno-logical and economic feasibility.” The 1990 CAA Amendments in-corporated this RACT requirement, as interpreted by EPA guide-lines. Arnold W. Reitze Jr., Air Pollution Control Law:

Compliance and Enforcement 79 n.18 (2001).

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struction air quality monitoring requirements.12 Newsources in nonattainment areas must obtain an offset fromother sources in surrounding areas that is equal to or greaterthan the proposed increase in emissions at their facility.13

Once it is found by the permitting agency that NSR require-ments apply, new or significantly modified sources must in-stall BACT or LAER in PSD and nonattainment areas, re-spectively.14 This technology requirement is quite onerous

in that sources are required to pursue the right mix of controloptions to minimize air quality impacts to the maximum ex-tent possible.15 It also is comprehensive because the appli-cant for an NSR permit must consider all possible environ-mental impacts on the environment a particular technologywould have, in the technology selection process.16 Thus,NSR is quite similar to an environmental impact analysisunder the National Environmental Policy Act (NEPA) but,because of its substantive bite, NSR can be described as“NEPA with teeth.”17 Moreover, EPA has significant lever-age over state decisions to choose NSR technology.18 Aswith the O3 nonattaiment program, NSR is the product ofcongressional policy judgment favoring the Act’s clean airgoal at the expense of state sovereignty and industry’s oper-ational flexibility. It constitutes an integral part of the Act’sPSD and nonattainment programs and is one of the most im-portant tools in moving the nation toward attaining the goalof clean air for all Americans.

Attempting to balance the two competing interests of en-vironmental protection and accommodating economic and

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35 ELR 10318 5-2005

12. See 42 U.S.C. §7475(e)(3)(B) (stating that PSD regulations “shallrequire an analysis of the ambient air quality, climate and meteorol-ogy, terrain, soils and vegetation, and visibility” at the proposed con-struction site and in nearby areas); 40 C.F.R. §52.21(m)(1)(iv),52.21(m)(2), (m)(3).

13. 42 U.S.C. §7503(c)(1). The applicable offset ratio is different de-pending on the location’s nonattainment classification. CAA §182sets out offset ratios for O3 nonattainment areas. An applicable mini-mum ratio is from VOCs of 1.1 in marginal areas down to 1.5 in ex-treme areas (1.15 for moderate areas, 1.2 for serious areas, and 1.3for severe areas). See id. §§7511a(a)(4), 7511a(b)(5), 7511a(c)(10),7511a(d)(2), and 7511a(e)(1). In principle, the required emissionsreductions must come from a source in the same area. Id.§7503(c)(1). However, an exception applies when the offset is pro-vided by a source in another attainment area with an equal or highernonattainment classification (2) whose emissions from this area con-tribute to nonattainment in the area where the new source is sited. Id.This exception may apply in the context of transboundary pollutionin which the transport of a pollutant emitted from sources located inupwind areas contribute to nonattainment in downwind areas. Off-sets are often called emissions reduction credits (ERCs). Prior to the1990 CAA Amendments, ERCs were still used in offsets innonattainment areas, bubbles and netting, and banking. See gener-ally U.S. EPA, Emissions Trading Policy Statement; General Princi-ples for Creation, Banking, and Use of Emission Reduction Credits,51 Fed. Reg. 43814 (Dec. 4, 1986).

14. 42 U.S.C. §§7502, 7503. Note that an area can be in attainment forone criteria pollutant and in attainment for another pollutant. As a re-sult, both technology standards could apply to the same source andthe source applicant must prepare for both PSD and nonattainmentNSR, simultaneously. The nonattainment NSR requirements aremore stringent than the PSD NSR requirements. The applicantshould identify all technologies, including those listed inRACT/BACT/LAER Clearinghouse (RBLC), in which EPA hasmaintained a list of technologies on its website that have been dem-onstrated to be effective on similar sources. The applicant shouldalso consider a control technology that has successfully been ap-plied at other source categories. U.S. EPA, Draft New Source

Review Workshop Manual: Prevention of Significant De-

terioration and Nonattainment Area Permitting B.11(1990), available at http://www.epa.gov/region07/programs/artd/air/nsr/nsrmemos/1990wman.pdf (last visited Mar. 1, 2005) [herein-after Draft NSR Workshop Manual]. Pollution control technol-ogies that are being successfully applied to similar sources in foreigncountries are also potential candidates for BACT or LAER. Id. atB.5. While BACT is determined “on a case-by-case basis, [after] tak-ing into account energy, environmental, and economic impacts, andother costs,” LAER is a much more demanding one, without men-tioning costs and other related considerations in the relevant provi-sion. Compare 42 U.S.C. §7479(3); 40 C.F.R. §51.166(b)(12)(BACT), with 42 U.S.C. §7501(3) (LAER). This is mainly becausenonattainment areas must make reasonable further progress towardattainment, which is intended to ensure that air quality innonattainment areas must be improved continuously, while allowingfor economic growth. BACT is an emission limitation standard,which is set at the most stringent level that can be achieved by a simi-lar source in industry unless it is proved by the applicant as techno-logically or economically infeasible. Reitze, supra note 11, at 195.It usually requires the use of best available pollution control methodsand technologies. If emissions standards prove to be infeasible, de-sign, equipment, work practices, operational standards, or any com-bination thereof can be used. 40 C.F.R. §51.166(g)(12). LAER mayalso lack numerical emissions limitations because of “the technolog-ical or economic limitations on the application of measurementmethodology to a particular class of sources.” Id. §51, app. S. IV-An.4. (“Hereafter, the term emission limitation shall also include suchdesign, operational, or equipment standards.”) (emphasis in origi-nal). EPA has allowed states instead to prescribe a design, opera-tional, or equipment standard in the permits for these sources that

must contain enforceable conditions on design characteristics orequipment. The owner or operator of a major emitting facility is re-quired to perform BACT analysis independently of its analyses of itssource impacts on ambient air quality. The CAA requires EPA to is-sue guidance documents on BACT/LAER technology and to revisethese documents at least every two years. 42 U.S.C. §7508. Addi-tionally, EPA may consider incidental effects of emissions of toxicpollutants, which are not regulated under the PSD program, in mak-ing BACT determinations. See id. §7412(b)(6) (“The provisions of[the PSD program] shall not apply to [hazardous pollutants] under[§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“the net environmental impact of such emissions is eligible for con-sideration in making the BACT determination”) (emphasis added);see Draft NSR Workshop Manual, supra, at B.50-.53 (statingthat “the generation or reduction of toxic and hazardous emissions,including compounds not regulated under the Clean Air Act, areconsidered as part of the environmental impacts analysis[,]” citing Inre North County Resource Recovery Assocs., 2 E.A.D. at 229); see Inre Steel Dynamics, Inc., 9 E.A.D. 165, 189 n.29, 2000 WL 833062(EAB Apr. 23, 2000) (stating that state permitting agencies have“considerable discretion to evaluate HAPs emissions and potentialhealth impacts as part of its consideration of environmental impactsin general[,]” citing Draft NSR Workshop Manual, supra andIn re North County Resource Recovery Assocs., 2 E.A.D. at 229).

15. In practice, EPA has employed a “top-down” approach. Under thisapproach, all technologically feasible and available technology op-tions are identified and ranked on the basis of its stringency or effec-tiveness, and the permit applicant has the burden to reverse the pre-sumption in favor of the most stringent technology available, byshowing why this will not be appropriate for it. See Draft NSR

Workshop Manual, supra note 14. The NSR technology selectionprocess have traditionally focused primarily on end-of-pipe, post-combustion, controls. It, however, does not necessarily mean thatthe chosen technology is limited to a particular pollution controltechnology. It may include the use of a cleaner fuel or innovativeproduction processes, and, even, a combination of all available con-trol methods that can achieve the maximum degree of emissions re-ductions of the pollutant subject to NSR. See 42 U.S.C. §7479(3) (re-quiring that an applicable emission limitation be “based on the maxi-mum degree of reduction of the [covered] pollutant . . . through ap-plication of production processes and available methods, systems,and techniques, including fuel cleaning, clean fuels, or treatment orinnovative fuel combustion techniques for control of each such pol-lutant”) (emphasis added).

16. Draft NSR Workshop Manual, supra note 14, at B.26.

17. Gregory B. Foote, Considering Alternatives: The Case for LimitingCO2 Emissions From New Power Plants Through New Source Re-view, 33 ELR 10642, 10651 (July 2004).

18. See Alaska Dep’t of Envtl. Conservation v. EPA, 540 U.S. 461, 34ELR 20012 (2004) (holding that a state permitting agency must pres-ent a reasonable justification for its BACT determination to EPA’ssatisfaction in order to meet the Act’s NSR requirements).

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energy needs19 has led to a highly complicated regulatorysystem, which is often criticized by the regulated commu-nity as burdensome, complex, time-consuming and costly,inflexible, and even frustrating good-faith efforts to im-prove environmental performance in pollution control tech-nology.20 Given its technology-forcing nature and onerousrequirements, it is not surprising that industry has every in-centive to avoid NSR by taking advantage of the weak-nesses and loopholes in the NSR program. A spectrum ofstakeholders, including industry representatives, environ-mental nongovernmental organizations (NGOs), and stateand federal regulators, reached a broad consensus on theneed for NSR reform around the early 1990s. EPA thenembarked upon a process for NSR reform by authorizingthe formation of a subcommittee to the Clean Air Act Ad-visory Committee in 1993.21 Since then, especially EPA’snew NSR enforcement initiative in the late 1990s, the NSRprogram has been at the center of debate over how to reformthis system. The stated objectives of the NSR reformseemed promising.22 In reality, however, EPA is caught inthe middle of a tug of war between industries and environ-mentalists that want to shape the agenda to their own inter-ests and values.

The new NSR rule, which was promulgated in 2003, is noexception. It creates a new controversy on its legality underthe CAA, provoking another round of heated debate. Thenew rule is moving in the wrong direction because itstrengthens a new source bias and enlarges preexisting loop-holes in favor of old, dirtier sources, which have tradition-ally enjoyed significant cost advantages over cleaner, moreenergy-efficient sources under the grandfathering scheme.Allegedly minimal impacts on air quality and the nation’sdecade-long transition to a multi-pollutant approach in airpollution control should not be used as an excuse for relax-ing preexisting rules. NSR has been the center of the U.S.

legal system’s failure to attain the goal of sustainable en-ergy development. The correct direction to be taken in re-forming NSR should be to incorporate sustainability con-cerns into legal decisionmaking processes under the CAA,e.g., through the adoption of output-based emission stan-dards, repealing grandfathering, and/or the integration ofsustainable energy development goals into NSR permit-ting processes.

This Article aims to discuss the problems with NSR andanalyze the new NSR rule in detail. It argues that, while itsimpact will be minimal on electric utilities, the new NSRrule arguably violates the CAA’s “clean air” mandate be-cause: (1) a proposed physical or operational change thatwould increase emissions or result in collateral emissionsmust go through NSR preconstruction review; (2) emissionsincreases and decreases to be considered in NSR applicabil-ity determinations must be contemporaneous; and (3) onceNSR is triggered, the stringent technology requirement,BACT or LAER, must be applied to the sources.

Part I describes the elements of the CAA’s NSR programwith much focus on baseline determinations and NSR appli-cability. It partially compares the preexisting rule with thenew NSR rule. Part II explains why NSR has not worked aswell as expected at the time of its enactment in 1977, anddiscusses NSR reform moves by the U.S. Congress, somestates, and the previous and current Administrations. Part IIIexamines the new NSR rule and discusses what changes inEPA’s prior position took place and the rationales for thechanges given by the Agency. Part IV discusses grave con-cerns expressed by environmentalists and state agenciesabout the potential adverse impacts of the new rule on exist-ing air quality. It then critically analyzes EPA’s current legalposition and arrives at the presumptive conclusion that thenew NSR rule is violative of the CAA’s clean air mandate inview of congressional intent leading to the enactment ofNSR and the literal meaning of the statutory term “change.”The Article concludes with the argument that the overridinggoal in NSR reform is to create a level playing field forsources, whether new or old, by building sustainability con-cerns into existing environmental and energy law.

I. Discussion of the NSR Program

A. In General

The essence of the PSD and nonattainment NSR programs isthe requirement for preconstruction review. The owner oroperator planning to construct a new major stationarysource or to make a major modification to an existing majorstationary source must undergo a preconstruction permit-ting process. Preconstruction review is designed to selectproven modern pollution control technology as applied toeach regulated pollutant emitted from the facility, includingnew emissions of a collateral pollutant. In order to obtain apreconstruction permit, the facility must prove to the per-mitting agency that it would not result in a violation ofNAAQS or any applicable PSD regulations in local ordownwind areas currently in compliance with NAAQS.23

Because NSR involves a lengthy and complex process,much attention is paid to its applicability.


5-2005 35 ELR 10319

19. See Chevron, U.S.A., Inc. v. Natural Resources Defense Council,467 U.S. 837, 851, 14 ELR 20507 (1984) (observing that in the NSRprogram “Congress sought to accommodate the conflict between theeconomic interest in permitting capital improvements to continueand the environmental interest improving air quality”).

20. A relevant EPA report reads as follows:

For more than 10 years now, the Environmental ProtectionAgency (EPA) has been engaged in an effort to improve theNew Source Review (NSR) Program in response to wide-spread concerns from stakeholders who are concerned that itis too complex and burdensome, it introduces uncertainty inplanning, it inhibits industry’s ability to quickly make neededchanges, and it is not working as effectively as it could be toprotect air quality.

U.S. EPA, New Source Review Improvements: Supplemen-

tal Analysis of the Environmental Impact of the 2002Final NSR Improvement Rules 1 (2002), available athttp://www.epa.gov/nsr/documents/nsr-analysis.pdf (last visitedMar. 1, 2005) [hereinafter Supplemental Analysis of 2002 Fi-

nal NSR’s Impact].

21. U.S. EPA, Notice of Public Meeting, 58 Fed. Reg. 36407 (July 7,1993).

22. See, e.g., U.S. EPA, Prevention of Significant Deterioration (PSD)and Nonattainment New Source Review (NSR): Baseline EmissionsDetermination, Actual-to-Future-Actual Methodology, PlantwideApplicability Limitations, Clean Units, Pollution Control Projects,67 Fed. Reg. 80186, 80189 (proposed Dec. 31, 2002) (to be codifiedat 40 C.F.R. §§51, 52) (stating that the aim of NSR reform is to “re-duce burden, maximize operating flexibility, improve environ-mental quality, provide additional certainty, and promote adminis-trative efficiency”).

23. For permit requirements, see generally 42 U.S.C. §7475(a); id.§7503(a) (nonattainment).

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B. New and Modified Major Stationary Sources

Under the CAA, stationary source means “any source ofan air pollutant except those emissions [from mobilesources].”24 CAA §111(a)(3) further defines the term sta-tionary source as “any building, structure, facility, or instal-lation which emits or may emit any air pollutant.”25 Thethreshold emission levels for qualification as a major sta-tionary source in nonattainment areas are set at a potential toemit (PTE) of more than 100 tons per year (tpy)26 of any pol-lutant subject to regulation under the CAA down to smalleramounts depending on the area’s nonattainment classifica-tion.27 In the case of PSD areas, the threshold is 100 or 250tpy of any regulated pollutant under the CAA, depending onthe source type.28 Under the NSR program, the amount ofemissions is calculated based on aggregating sources lo-cated on contiguous or adjacent properties that are undercommon control, having the same two-digit Standard Indus-trial Classification code.29 Note that states have imple-mented minor source programs. Thus, even if new or modi-fied sources do not qualify as major and, hence, are not sub-ject to NSR, they can still be subject to minor source require-ments imposed by states. A source’s emissions can includefugitive emissions.30

New source is defined as any stationary source that be-gins construction or modification after the promulgation ofproposed regulations for a source category.31 “‘[M]odifi-cation’ means any physical change in, or change in themethod of operation of, a stationary source which increasesthe amount of any air pollutant emitted by such source orwhich results in the emission of any air pollutant not previ-ously emitted.”32 These provisions are contained in theAct’s new source performance standard (NSPS) program,but the NSPS program has a purpose and scope that arewholly different from the NSR program. BACT or LAERare mass-based standards applicable only to major station-ary sources, depending on the area’s air quality, is deter-mined on a case-by-case basis, and is usually much morestringent than NSPS. On the other hand, generally speaking,NSPS is a national, uniform performance standard for ap-proximately 69 categories, which does not mandate the useof particular technologies.

C. NSR Applicability

1. Physical or Operational Change: The RoutineMaintenance Exception

The NSR program has been applicable only to major modi-fications that would “result in a significant net emissions in-crease,”33 and the NSR regulations establish significantemissions levels, which vary by pollutant.34 Therefore, de-termining whether a major modification has occurred is atwo-prong test. First, there must be a physical or operationalchange at the facility. Neither Congress nor EPA has pro-


35 ELR 10320 5-2005

24. Id. §7602(j). Actually, the term “major emitting facility” is used un-der CAA Subchapter I, Part C, Subpart 1. See id. §7479(1). Its defini-tion is similarly worded as that of a major stationary source.

25. Id. §7411(a)(3). Roughly speaking, a stationary source is a discretepoint from which one of any regulated air pollutants under the CAAis released, such as smokestacks. But note that fugitive emissionsmay be included for the purposes of calculating emissions from sta-tionary sources within the certain industrial categories covered byEPA regulations.

26. Id. §7602(z).

27. See id. §§7511a(c)-(e), 7511c(b)(2) (O3); id. §7512a(c)(1) (CO); id.§7513a(b)(3) (PM). This can be as low as 10 tpy of VOCs in an ex-treme O3 nonattainment area.

28. 42 U.S.C. §7479(1); 40 C.F.R. §52.21(b)(1). Usually the threshold is250 tpy, but the 100-tpy threshold applies to a list of 28 source cate-gories (industrial groupings such as petroleum refineries, fossilfuel-fired steam-generated electric power plants, pulp mills, and ironand steel mill plants). See 40 C.F.R. §52.21(b)(1)(a). See also U.S.

EPA, NSR 90-Day Review Background Paper 3 (2001), avail-able at http://www.epa.gov/air/nsr/documents/nsr-review.pdf (lastvisited Mar. 1, 2005) [hereinafter NSR Background Paper].

29. 40 C.F.R. §§51.166(h)(6), 52.21(b)(6).

30. CAA §302(j) reads:

Except as otherwise expressly provided, the terms “majorstationary source” and “major emitting facility” mean anystationary facility or source of air pollutants which directlyemits, or has the potential to emit, one hundred tons per yearor more of any air pollutant (including any major emitting fa-cility or source of fugitive emissions of any such pollutant, asdetermined by rule by the Administrator).

42 U.S.C. §7602(j) (emphasis added). However, there has been con-tinued controversy as to whether and how fugitive emissions will behandled under the NSR program. In Alabama Power Co. v. Costle,the U.S. District Court for the District of Columbia (D.C.) Circuitheld that fugitive emissions must be included in determiningwhether a source constitutes a major emitting facility under CAA§302(j). 636 F.2d 323, 10 ELR 20001 (D.C. Cir. 1979). The court ob-served that the wording of §302(j) was controlling in the definitionof a major emitting facility in §169(1), even though whether to in-clude fugitive emissions in calculating threshold emission levels formajor stationary sources should be determined by EPA. See id. at369-70. EPA then issued rules that listed the source categories cov-ered by PSD and NSPS rules that were required to consider fugitiveemissions. U.S. EPA, Requirement for Preparation, Adoption, andSubmittal of State Implementation Plans; Approval and Promulga-

tion of State Implementation Plans, 45 Fed. Reg. 52676, 52690(Aug. 7, 1980). There are 27 source categories covered by this regu-lation. See id. at 52692. EPA agreed to withdraw its position as partof a settlement with industry petitioners in Chemical Mfrs. Ass’n v.EPA after a series of legal challenges to the rules, but the Agencythereafter returned to the interpretation it initially adopted under the1980 regulations, a move encouraged by the judicial opinion of theD.C. Circuit in Duquesne Light Co. v. EPA. See No. 79-1112 (D.C.Cir. filed Jan. 26, 1979); 698 F.2d 456, 13 ELR 20251 (D.C. Cir.1983). Therefore, the Agency’s current position is that it will balanceall possible socioeconomic costs and benefits in determiningwhether fugitive emissions should be included in the calculation ofemissions in the context of PSD NSR. In light of the court ruling inthe Alabama Power case, it can be said that EPA has the discretion todetermine whether to require a source category to consider fugitiveemissions in the definition of a major source for the purposes of PSDand nonattainment NSR preconstruction review. For example, inOgden Projects, Inc. v. New Morgan Landfill Co., the U.S. DistrictCourt for the Eastern District of Pennsylvania concluded that “fugi-tive emissions may not be counted unless EPA has first conducted arulemaking” for listing a source category, as required by §302(j).911 F. Supp. 863, 878, 26 ELR 20843 (E.D. Pa. 1996). See also 40C.F.R. §51.165(a)(1)(C) (nonattainment NSR). In addition, on No-vember 27, 2001, EPA promulgated a rule, under which a sourcewithin a category subject to the NSPS or the hazardous air pollutants(HAPs) rule issued after August 7, 1980, is not required to includefugitive emissions of all regulated pollutants under PSD ornonattainment NSR for the purpose of determining whether it has amajor source status. See U.S. EPA, Change to Definition of MajorSource, 66 Fed. Reg. 59161, 59162 (Nov. 27, 2001) (codified at 40C.F.R. §70). However, sources are still required to include fugitiveemissions of all HAPs in determining whether they are majorsources under §112. Id.

31. 42 U.S.C. §7411(a)(2).

32. Id. §7411(a)(4); 40 C.F.R. §60.2.

33. See 45 Fed. Reg. at 52676; 40 C.F.R. §52.21(b)(2)(i).

34. 40 C.F.R. §52.21(b)(23).

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vided a clear definition of these terms. But EPA’s NSR reg-ulations recognize that certain types of projects are exemptfrom NSR and, among other things, allow for the exceptionfor routine maintenance, repair, and replacement.35

While creating certain categories of NSR-exempt activi-ties clearly makes sense, the obscurity surrounding the ques-tion of what types of projects should be considered routinemaintenance has been highly controversial between regula-tors and industry. Most of the past and current EPA- orstate-initiated NSR enforcement actions have targeted in-dustry’s strategic behavior aimed at maximizing the use ofthis exemption. The routine maintenance exception has cre-ated a loophole that, if abused, could inflict significant dam-age on the integrity of the entire NSR program. This is espe-cially so because a facility is not required to ask the permit-ting agency to determine whether the planned activity iswithin the scope of the routine maintenance exemption, al-though EPA will decide the applicability of the exemptionon a case-by-case basis when asked to do so.

The court’s ruling in Wisconsin Electric Power Co.(WEPCO) v. Reilly36 provides useful guidance in this regard.Responding to the utility petitioner’s argument that itsplanned replacement project was within the scope of theroutine maintenance exception, the U.S. Court of Appealsfor the Seventh Circuit ruled in favor of EPA that it was be-yond the exception and therefore was covered by NSPS andNSR, finding as a reasonable application of the relevant reg-ulations EPA-used factors, such as the nature, extent, pur-pose, frequency and cost of work, for determining the appli-cability of the exception.37 The court did not agree withWEPCO that the cost, magnitude, and nature of its projectwere irrelevant for purposes of the routine maintenance ex-ception to NSPS and PSD. Among others, the court re-garded the following facts as decisive: (1) the project was a“life-extension” project; (2) WEPCO admitted that a projectof such magnitude “would normally occur only once ortwice during a unit’s expected life cycle,” and it never oc-curred before; and (3) it would cost at least $70.5 million.38

Therefore, a strong presumption can be established from areading of the WEPCO decision that maintenance projectsintended to increase the life expectancy of an electric-gener-ating unit (or other industrial units) are considered a modifi-cation (not routine), thereby triggering NSR.

In 2000, EPA’s Environmental Appeals Board (EAB)heard a case involving life-extension projects at nine elec-tric-generating units owned by the Tennessee Valley Au-thority (TVA) in Kentucky, Tennessee, and Alabama.39 Thiscase also involved TVA as one of the nine electric utilitiesagainst which EPA took enforcement actions in 1999. Un-like other companies, for jurisdictional concerns, EPA is-sued an administrative order under §§113 and 167 of theCAA against TVA whose failure to comply with the ordercould independently lead to severe penalties. The EPA Ad-

ministrator directed the EAB to reconsider the administra-tive order and to issue a final order. The EAB applied afour-part test to determined whether the routine mainte-nance exception was applicable to the company’s projectsat issue: (1) the nature and extent of the change; (2) thepurpose of the change; (3) the frequency of the change;and (4) the cost of the change. It ruled that none of theTVA’s 14 life-extension projects qualified for the routinemaintenance exception, thereby violating the NSPS andNSR requirements.40

On July 26, 2002, the U.S. District Court for the SouthernDistrict of Indiana issued an important ruling on prelimi-nary motions in an ongoing lawsuit involving the SouthernIndiana Gas & Electric Company (SIGECO).41 The courtheld that EPA’s enforcement was not barred by the IndianaDepartment of Environmental Management’s (IDEM’s)previous determination that SIGECO’s plant upgrades con-stituted routine maintenance. SIGECO’s main argumentwas that the IDEM’s ruling was binding on EPA as a resultof its delegation of enforcement power to the state agency.42

The court rejected that argument, however, finding that EPAis not precluded from bringing an enforcement action, giventhe broad language of §113 of the Act, which provides thatEPA is authorized to enforce “any requirement or prohibi-tion” of “an applicable implementation plan or permit,” and§111(c)(2) that authorizes EPA to enforce “any applicablestandard of performance.”43 It held that the doctrine of equi-table estoppel does not apply unless EPA “knew the facts”relating to a state agency’s ruling and had engaged in “affir-mative misconduct.”44 This ruling was another victory forEPA which has been engaging in legal battles with largeelectric utility companies since 1999.

However, note that the definition of the term “signifi-cant” has been changed with respect to three newly createdmechanisms designed to promote the use of clean energytechnologies: plantwide applicability limits (PALs), theClean Unit exclusion, and pollution control projects (PCPs).For sources choosing to use PALs or the Clean Unit exclu-sion, allowable emissions, instead of actual emissions, be-come the basis for determining whether a significant emis-sions increase would result. A qualifying PCP is deemed notto result in an increase in collateral emissions if its net airquality benefits are judged as positive.

2. A Significant Net Increase in Emissions

a. An Emissions Increase: The Actual-to-Future-ActualTest

Once it is determined that a physical or operational changeto a major stationary source would occur, the next step is to


5-2005 35 ELR 10321

35. Id. §§52.21(b)(2)(iii) (PSD), 52.24(f)(5) (nonattainment). Thisexemption was added after a similar provision under the 1975NSPS regulations.

36. 893 F.2d 901, 20 ELR 20414 (7th Cir. 1990).

37. See id. 910-13.

38. Id. at 911-12.

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) (finalorder on reconsideration).

40. See id. pt. III.C.3. and app. A. But in 2003, the U.S. Court of Appealsfor the Eleventh Circuit struck down the administrative order on pro-cedural grounds. See Tennessee Valley Auth. v. Whitman, 336 F.3d1236 (11th Cir. 2003), reh’g en banc denied, 82 Fed. Appx. 220,2003 U.S. App. LEXIS 27278, 33 ELR 20231 (11th Cir. 2003), cert.denied sub nom. Leavitt v. Tennessee Valley Auth., 124 S. Ct. 2096(2004). As a consequence, the EAB’s decision lost much of itsprecedential value.

41. United States v. Southern Ind. Gas & Elec. Co., 2002 U.S. Dist.LEXIS 14039 (S.D. Ind. July 26, 2002).

42. Id. at **9-11, 14.

43. Id. at **13, 15.

44. Id. at **16-17.

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identify whether that change would produce a significantnet increase in emissions in order for the source to be subjectto NSR. The initial step for the permitting agency to take isto determine the baseline for the actual emissions before thechange, which is compared to the projected post-changeemissions to determine if there will be an increase in emis-sions before and after the modification.45 Under the old rule,the pre-change actual emissions were to be calculated basedon the average rate in tpy, actually emitted during the previ-ous two years, if those emissions were representative of nor-mal operations at the unit during this time.46 Therefore, thebaseline emissions meant a source’s actual emissionsshortly before the proposed modification begins. The per-mitting agency was allowed to use a different time period ifthe source shows that it is more representative of normal op-erations.47 If that is the case, the calculation of actual emis-sions must be based on “the unit’s actual operating hours,production rates, and types of materials processed, stored,or combusted during the selected time period.”48 The newNSR rule replaced the 2-year time period with a 10-yearlook-back period except for electric-generation units.49

Once the baseline is determined, the following step is tocalculate projected postmodification emissions. Under theold rule, which still applies to new sources, post-change pro-jected emissions must be equal to the PTE, which was de-fined as “the maximum capacity of a stationary source toemit a pollutant under its physical and operational de-sign.”50 While it was relatively easy to determine a newsource’s PTE, much of the controversy over NSR applica-bility had centered around this issue, which was the trickiestpart of NSR implementation. The PTE, as applied by EPA,was based on the presumption that the unit will run at full ca-pacity (namely, 24 hours a day year-round). This was theso-called actual-to-potential test. EPA had applied this testto modifications to existing sources since it is presumedthat they have not begun normal operations. This test wasquite onerous for most existing sources because they usuallydo not operate at their maximum capacity. Even after theWEPCO decision, the actual-to-potential test had been ap-plied to all sources with the exception of fossil fuel-firedelectric utilities51 until the new NSR rule was promulgatedin 2003. As will be discussed below, the actual-to-future-ac-tual test is in place for all sources.52

b. The WEPCO Rule: The Actual-to-Projected-Future-Actual Test and Its Extended Application

As mentioned above, under the preexisting rule, there wasan important exception that electric-generation units, calledelectric utility steam-generating units (EUSGUs), were sub-ject to a different standard other than the PTE: the ac-tual-to-projected-actual test that had been adopted in the1992 regulation, known as the WEPCO rule,53 as a result ofthe 1990 WEPCO ruling. In this case, the Seventh Circuitfaulted EPA for wholly disregarding past operating condi-tions at the facility for which an emission history could beestablished, so that “a more realistic assessment of its im-pact on ambient air quality levels is possible, and thus is di-rected.”54 The court required EPA to utilize a different cal-culation method for an electric steam-generating unit’slike-kind replacements of equipment if it is an establishedoperation. After the decision, EPA’s WEPCO rule adoptedan “actual-to-future-actual methodology” for changes atelectric utility plants except the construction of a new unit orreconstruction of an existing emissions unit.55 Under thisformula, the premodification actual emissions are comparedto the projected postmodification actual emissions, and thebaseline emissions are calculated based on the highesthourly emissions rate achievable in any two-year periodwithin a five-year period preceding the proposed change.56

For verification purposes, a utility must monitor actualemissions after the modification and report data and infor-mation to the permitting agency for the first five years.57 Insome cases, EPA or the state agency may extend a monitor-ing period up to 10 years if the 10-year period is determinedto be more appropriate.58 Also, the new regulations ex-empted emissions increases due to demand growth. In-creases in emissions caused by high market demand forelectricity may not be included in the calculation of pro-jected-future-actual emissions.59 Understandably, however,it is a very difficult task to distinguish between increasedemissions due to demand growth and those emissions in-creases from the physical or operational change. EPA con-ceded this problem and proposed to eliminate the demandgrowth exclusion in its 1998 Notice of Availability.60 How-


35 ELR 10322 5-2005

45. See Letter from Francis X. Lyons, Regional Administrator, to HenryNickel, Counsel for Detroit Edison Company, Detroit Edison Appli-cability Determination: Detailed Analysis 18 (May 23, 2000), avail-able at http://yosemite.epa.gov/r5/ardcorre.nsf/36ae8bf3212bb6b28625650c0079f5da/dde17f64f29e6a36862568ef0067cb13/$FILE/de_enclosure.pdf (last visited Mar. 1, 2005) [hereinafter Letter fromFrancis Lyons].

46. 40 C.F.R. §§52.21(b)(21)(ii), 51.165(a)(1)(xii), 51.166(b)(21)(pre-2002 NSR rule).

47. Id. §52.21(b)(21)(ii) (pre-2002 NSR rule). This provision washeavily influenced by the WEPCO decision.

48. Id.

49. Id. §§52.21(b)(48), 51.165(a)(1)(xxxv), 51.166(b)(47) (2003).

50. Id. §52.21(b)(4) (pre-2002 NSR rule).

51. See 893 F.2d at 901. EPA’s continued use of the actual-to-potentialtest was upheld by federal courts. See, e.g., Puerto Rican Cement Co.v. EPA, 889 F.2d 292, 20 ELR 20259 (1st Cir. 1989).

52. 40 C.F.R. §§52.21(b)(41), 51.165(a)(1)(xxviii), 51.166(b)(40)(2003).

53. See U.S. EPA, Requirements for Preparation, Adoption, andSubmittal of Implementation Plans; Approval and Promulgation ofImplementation Plans; Standards of Performance for New Station-ary Sources, 57 Fed. Reg. 32314 (July 21, 1992) (codified at 40C.F.R. §§51, 52, and 60).

54. 893 F.2d at 917 (quoting Alabama Power Co. v. Costle, 636 F.2d323, 379, 10 ELR 20001 (D.C. Cir. 1979) (emphasis in original).

55. 57 Fed. Reg. at 32326. See Memorandum from John Seitze, Directorof Air Quality Planning and Standards, U.S. EPA, to Air DirectorsRegions I-X, at 2 (July 1, 1994).

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

NSR’s Impact, supra note 20, at F-1.

57. 57 Fed. Reg. at 32325.

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).

59. 57 Fed. Reg. at 32326; 40 C.F.R. §52.21(b)(41)(ii)(c) (pre-2002NSR rule). See 893 F.2d at 918 n.13 (observing that market fluctua-tions in the electricity marketplace make it difficult for utilities to usesynthetic minor permits (quoting Puerto Rican Cement Co. v. EPA,889 F.2d 292, 298, 20 ELR 20259 (1st Cir. 1989))).

60. EPA said:

[A]ttempting to discern whether increased utilization andemissions should be attributed to physical or operational

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ever, the 2003 new NSR rule extends the WEPCO rule andthe demand growth exclusion to all other industries.61 Theonly difference between EUSGUs and other sources is thata 10-year look-back period applies to the latter in calculat-ing baseline emissions. The owner or operator of an exist-ing source is now allowed to project future-actual emis-sions based on historical data on its operations during anyone of the 5 or 10 years immediately preceding the pro-posed change.

c. A Significant Net Increase: Netting

The final element in determining NSR applicability is thatan increase in emissions must be a net increase. Therefore,the reviewing authority must determine if there will be a netincrease in emissions. Net emissions are determined afterconsidering “[a]ny other increases and decreases in actualemissions at the major stationary source that are contempo-raneous with the [proposed] change,” in addition to the pro-jected increase in emissions from the change.62 Under the

preexisting rule, any increase or decrease is deemed to becontemporaneous if it happened within the five-year periodimmediately before the change actually occurs.63 Thus amajor emitting facility can net out of NSR by subtractingany “creditable” decreases it caused to happen in the twoyears of the previous five-year period.64 Sources cannotclaim a change in emissions as offsets that it is otherwise ob-ligated to comply with under their permit conditions or otherapplicable laws.65 Any increase in emissions is creditable“only to the extent that the new level of actual emissions ex-ceeds the old level.”66 To be creditable, any emission de-crease must: (1) reflect emission reductions from the oldlevel of actual emissions or the old level of applicable allow-able emissions, whichever is lower; (2) be “enforceable as apractical matter” before the proposed modification actuallyoccurs; (3) have “approximately the same qualitative signif-icance for public health and welfare as that attributed to theincrease from [the proposed modification]”; and (4) not re-sult from the use of the “add-on control technology or appli-cation of pollution prevention practices” relied on by thesource in qualifying for the Clean Unit exemption.67 Theserequirements are designed to prevent “paper credits” frombeing used and to ensure that offset trading must representreal progress toward attainment of NAAQS.

In 1979, EPA proposed a premodification notification re-quirement with regard to netting, but it was never adopteddue to objection from industry.68 As a result, currently theowner or operator planning a change to his facility that hasthe potential to significantly increase net emissions mayforego NSR completely using a netting mechanism, and isnot required to notify EPA or the state permitting agency ofit. This lack of control over netting practices has been thetarget of criticism by environmentalists for creating anothersignificant loophole, along with the routine maintenanceexclusion, that has allegedly been taken advantaged of byindustry, especially grandfathered coal-fired electric utili-ties. There is little data available concerning how frequently


5-2005 35 ELR 10323

changes versus purely independent demand-satisfying in-creased capacity utilization will be much more difficult in thefuture, as restructuring in the electric power industry allowselectric-generating companies to compete for retail custom-ers. As a result, the marketplace will drive electric generatorsto function as any other consumer-driven industry, that is, toensure their ability to supply the market and collaterally to in-crease their revenues. In addition, as utilities respond to acompetitive market for the generation of electric power theycan no longer be expected to accurately predict their level ofoperations and post-change emissions. Each physical or op-erational change that makes it possible for a source to effi-ciently increase its level of utilization, then, will likely bepursued and turned into electricity for sale.

U.S. EPA, Notice of Availability; Alternatives for New Source Re-view (NSR) Applicability for Major Modifications; Solicitation ofComment, 63 Fed. Reg. 39857, 39860 (July 24, 1998).

61. 40 C.F.R. §§52.21(b)(41)(ii)(c), 51.165(a)(1)(xxviii)(B)(3),51.166(b)(40)(ii)(c) (2003) (demand growth exclusion).

62. Id. §52.21(b)(3) (emphasis added). The current regulations for net-ting was heavily influenced by the D.C. Circuit’s 1979 decision inAlabama Power Co. v. Costle, 636 F.2d 323, 402, 10 ELR 20001(D.C. Cir. 1979). The court stated: “The Agency retains substantialdiscretion in applying the bubble concept. First, any offset changesclaimed by industry must be substantially contemporaneous. TheAgency has discretion, within reason, to define which changes aresubstantially contemporaneous. Second, the offsetting changes mustbe within the same source, as defined by EPA.” (emphasis added).The use of netting was finally upheld by the Court in the famousChevron case. Chevron, U.S.A., Inc. v. Natural Resources DefenseCouncil, 467 U.S. 837, 14 ELR 20507 (1984). The Court observedthat the PSD and nonattainment NSR permit program “represented abalance between the economic interests in permitting capital im-provements to continue and the environmental interest in improvingair quality.” Id. at 851. It finally concluded that EPA’s policy deci-sion to adopt flexible mechanisms such as netting “represent[ed] areasonable accommodation of manifestly competing interests and[was] entitled to deference” in the absence of contrary clear congres-sional intent. Id. at 865. EPA has developed and implemented a pol-icy to promote emissions trading, including netting. See 51 Fed. Reg.43814. Netting is an internal trading mechanism in which increasedemissions in one point are used to offset decreased emissions in otherpoints as long as it is expected that there is no net increases in emis-sions within the entire plant. Bubble is a very similar mechanism be-cause all individual emission sources under the control of the sameperson are regarded as a single source for regulatory purposes, as ifthe total emissions combined were coming from a single imaginaryoutlet in the bubble. The bubble is what makes netting legal in thefirst place. But it is different in that it is used by existing sources topursue flexibility in complying with pollution control requirements,and that the use of bubbles is limited by the regulatory definition of asource. See Arnold W. Reitze Jr., A Century of Air Pollution Control

Law: What’s Worked; What’s Failed; What Might Work, 21 Envtl.

L. 1549, 1622-25 (1991).

63. 40 C.F.R. §52.21(b)(3)(ii). See also id. §§51.165(a)(vi),51.166(b)(3). Net emissions after the change are equal to the pro-jected emissions increases from the baseline plus plantwide cred-itable increases minus plantwide creditable decreases. Note thatstates may use a different time period in calculating a net emis-sions change.

64. In California, however, netting is not allowed, and NSR thresholdscan be as low as one pound per day. See Report by a Panel of the

National Academy of Public Administration (NAPA) for

the U.S. Congress and the U.S. EPA, A Breath of Fresh

Air: Reviving the New Source Review Program 31 (2003),available at http://209.183.198.6/NAPA/NAPAPubs.nsf/9172a14f9dd0c36685256967006510cd/ae53e82c36ab2f1985256d18004944b5/$FILE/Fresh+Air+Full+Report.pdf (last visited Mar. 1, 2005)(citing interview with California air officials) [hereinafter NAPA

NSR Report].

65. See 40 C.F.R. §52.21(b)(3)(iii)(a)-(b).

66. Id. §52.21(b)(3)(v).

67. Id. §52.21(b)(3)(vi)(a)-(d).

68. U.S. EPA, Requirement for Preparation, Adoption, and Submittal ofState Implementation Plans; Approval and Promulgation of StateImplementation Plans, 45 Fed. Reg. 51923 (Sept. 5, 1979). How-ever, EPA stressed that “owners and operators are hereby put onnotice that they should maintain sufficient records regarding con-temporaneous emission increases and decreases so as to verify nopermit was required.” See 45 Fed. Reg. at 52676. EPA added a sim-ilar requirement to the 1975 NSPS regulations, but it was subse-quently removed.

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netting actually is used. According to one study, approxi-mately 800 netting transactions took place in between 1974and 1989.69 An estimated cost savings were somewhere be-tween $25 million and $300 million, which mostly camefrom avoiding costs associated with permitting processesand installing modern pollution control.70

It is important to note, however, that the new NSR rulehas changed the preexisting netting policy in a significantway by adopting the new definition of baseline emissions(in other words, changing the prior definition of the statu-tory term “change”). Thus, the baseline year is not the yearwhen the proposed construction actually takes place, butany year in a 10-year look-back period during which thehighest emissions were ever recorded.

II. NSR Failures and the Movement to Reform theCurrent NSR Program

A. Grandfathering Under the CAA

The perceived failures of NSR are attributable to grand-fathering under the CAA. Old sources were exempted be-cause it was thought to be more economically efficient tomandate the installation of new pollution controls at thetime existing facilities would be upgraded, rather than re-quiring those facilities to be retrofitted immediately.71 Con-gress expected many of the existing plants would soon be re-tired and replaced with new ones, and that future technologi-cal breakthroughs would make the costs of state-of-the-artpollution control technologies significantly lower.72 UnlikeCongress’ expectations, however, the dichotomy betweennew and existing sources has allowed grandfathered majorsources to stay operational beyond their expected life cyclewithout being subject to NSPS and NSR requirements. No-tably, electric utilities have kept their old coal-fired electricunits operating beyond life expectancy.73 Few new coal-burning electric power plants have been constructed since1980, and preconstruction permits for major modificationshave rarely been issued to grandfathered coal-fired power

plants.74 Most of the new power plants have been gas-firedplants.75 Grandfathering facilitated gaming of the NSR pro-gram by the electric power industry which took advantageof the routine maintenance exception and netting to foregoNSR altogether. This has given huge cost advantages to old,dirty coal-burning power plants over oil- and gas-firedpower plants, and renewable energy facilities. It creates anuneven playing field in the energy sector and thus frustratesefforts to promote efficient use of energy and renewable en-ergy development.76 It apparently contravenes the “pol-luter-pays” principle enunciated in various international en-vironmental agreements, and is the most significant hurdlefor the United States to moving toward achieving the futureenergy policy goal of sustainability.

Electric utilities are by far the nation’s largest polluters.Old and energy-inefficient coal-fired power plants releaseinto the atmosphere significant amounts of SO2, NOx andPM, as well as CO2, disproportionately compared to otherstationary sources, even over 30 years after the passage ofthe 1970 CAA. In 1998, electric utilities were responsiblefor 25% of national NOx emissions, 67% of SO2 emissions,and 8% of PM10 emissions, respectively.77 Electricity gener-ation was responsible for approximately 40% of nationalCO2 emissions in 2001, which are believed to be associated


35 ELR 10324 5-2005

69. Robert W. Hahn & Gordon L. Hester, Where Did All the MarketsGo? An Analysis of EPA’s Emissions Trading Program, 6 Yale J.

on Reg. 109, 133 (1989). In this article, the authors observed:

From available data it appears that netting is the most com-monly used emissions trading activity by a wide margin. In1984, the only year for which detailed data are available, anestimated 900 sources used netting. This is about fifteentimes as often as offsets were used during the same year, andit is far more often than bubbles have ever been used.

Id. (citation omitted).

70. Id. at 136.

71. See H.R. Rep. No. 95-294, at 185-86 (1977), reprinted in 1977U.S.C.C.A.N. 1077, 1264-65.

72. See id.

73. Although EPA’s NSPS regulations were revised several times, oldelectric power plants are still running, thereby even avoiding NSPSrequirements. See Arnold W. Reitze Jr., State and Federal Com-mand-and-Control Regulation of Emissions From Fossil Fuel Elec-tric Power Generation Plants, 32 Envtl. L. 369, 380-83 (2002).Grandfathering is not limited to NSPS and NSR. Prior to the enact-ment of the 1990 CAA Amendments, grandfathered power plantswere allowed to disperse their emissions using tall smokestacks.They were subject to less restrictions when compared to new units.With the acid rain program being implemented, however, they maynot use that option, since it must reduce their SO2 and NOx emissionsto the levels set by the Act or the regulations.

74. In 2000, more than 50% of electricity was generated “by coal-firedpower plants, most of which were built between 1950 and 1980.”Byron Swift, Grandfathering, the New Source Review, and NitrogenOxide—Making Sense of a Flawed System, 15 Env’t Rep. (BNA)1538, 1538 (2000). According to EPA, of 274 PSD permits issuedsince 1995, over 250 have been issued to gas turbine electric powerplants, with only 10 going to coal-fired power plants. NSR Back-

ground Paper, supra note 28, at 9.

75. In addition to burdensome NSR requirements, the main reason isthat new gas-fired turbines can produce electricity more cheaplythan new coal-fired power plants. Natural gas power plants are lessexpensive and take less time to build, since they requires much lowerconstruction costs and are relatively small and modular, therebyminimizing capital expenditures and maintenance and other relatedcosts. See Environmental Law Institute, Cleaner Power:

The Benefits and Costs of Moving From Coal Generation

to Modern Power Technologies 21 n.17 (2001). In 2000, theEnergy Information Administration projected that 92% of newpower plants were expected to be fired by natural gas during the next20-year period. U.S. Energy Information Administration

(EIA), Annual Energy Outlook 2001 With Projections to

2020, at 73 (2000) (DOE/EIA-0383). However, construction of newcoal-fired power plants has recently been proposed in increasingnumbers. See Foote, supra note 17, at 10643. In recent years, naturalgas prices have gone up, as gas supply has become constrained due toincreased demand and limited stocks of natural gas in North Amer-ica. This volatility in gas prices have negatively impacted some ofthe combined-cycle gas turbines, whose competitiveness and thusattraction for investment money rest heavily on relatively low andstable gas prices. See Tom Woods, What Are the Prospects forCoal?; Unless Gas Prices Stabilize, Coal Prices Will Continue Ris-ing, Pub. Utils. Fortnightly, May 9, 2004, at 13.

76. Other factors are the low price of coal and the fact that the assets ofold power plants were fully amortized during their life span. The costof producing electricity in grandfathered electric power plantsranges between 1.5 and 3 cents per kilowatt hour (kwh). See BruceBiewald, David While & Tim Woolf, Grandfathering and En-

vironmental Comparability: An Economic Analysis of Air

Emission Regulations and Electricity Market Distortions

28, tbl. 5.1. (Prepared for the National Association of RegulatoryUtility Commissioners by Synapse Energy Economics. Inc., Cam-bridge, Mass. 1998), available at http://www.synapse-energy.com/publications.htm (last visited Mar. 1, 2005).

77. U.S. EPA, National Air Pollutant Emission Trends:

1900-1998, at 2-2, 2-3 (2000) (EPA 454-R-00-002), available athttp://www.epa.gov/ttn/chief/trends/trends98/trends98.pdf (lastvisited Mar. 1, 2005) [hereinafter 1998 National Air Pollutant

Emission Trends].

http://www.eli.org

with global climate change.78 The heavy use of coal for elec-tric generation significantly contributes to acid depositionand precipitation, ground-level O3 formation, reduced visi-bility in pristine areas, and global climate change.79 More-over, in today’s deregulatory environment in the electricitymarkets, there also is concern among the environmentalcommunity that coal-fired power plants with cost advan-tages will be more fully utilized. This implies that the na-tion’s air will be dirtier and greenhouse gas (GHG) emis-sions will increase. Given the fact that air pollution prob-lems root in the massive use of fossil fuels for electricityproduction, regulation of CO2 and NSR reform couldproduce synergistic effects.80 Inducing the retirement ofgrandfathered coal-fired power plants and promoting en-ergy efficiency and use of renewable energy sources shouldbe a top priority goal. It should be pursued through legal re-forms that aim to align energy production with environmen-tal goals.

B. Federal and State Efforts to Repeal Grandfathering

1. Congressional Efforts

Several bills were proposed in Congress that would have re-moved the grandfathering of old coal-fired power plants. OnOctober 9, 1990, one U.S. Senate bill, sponsored by Sen. Jo-seph Lieberman (D-Conn.), would have required some fos-sil fuel-fired electric-generating units constructed after Au-gust 17, 1971, to be subjected to the same emissions stan-dards those applied to new or modified units.81 Affectedunits would be fossil fuel-fired steam-generating units withthe capacity of 25 megawatt hours (Mwhs) and intercon-nected to the interstate electrical transmission grid for thewholesale sales of electricity.82 The bill would have allowed

five years for those affected units to comply with its man-date, and directed EPA to develop an emissions tradingmechanism to help affected units meet its deadline.83 OnNovember 7, 1997, a similar bill was introduced in the U.S.House of Representatives by Rep. Frank Pallone (D-N.J.).84

This House bill provided for a nationwide cap-and-tradeprogram for NOx and PM2.5.

85

2. State Action

Some states have moved to eliminate the grandfathered sta-tus of old electric power plants, and/or to adopt a multi-pol-lutant trading strategy which may include CO2 emissionscontrol. On May 17, 2000, the governor of the state of Con-necticut signed an Executive Order directing the Connecti-cut Department of Environmental Protection to developregulations no later than May 1, 2003, to reduce annual SO2

and NOx emissions from 61 major sources, including all fos-sil fuel-fired power plants, by 30-50% and by 20-30%, re-spectively.86 The final regulations, which were promulgatedon December 28, 2000, require covered facilities to takeNOx control measures throughout the year.87 The regula-tions extend the coverage of the SO2 acid rain program to 61from 28 units. They also require the 28 units to retire someof their SO2 allowances, which were initially allocated un-der Title IV.88 Emissions trading may be used to complywith the NOx and SO2 reduction requirements.89

In 2001, Texas enacted legislation to phase out grand-fathering of one-third of the state’s industrial facilities, un-der which those in East Texas must go through permitting by2007, and other facilities by 2008.90 The same year, Massa-chusetts promulgated a regulation requiring fossil fuel-firedboilers, including indirect heat exchangers with a nameplatecapacity of 100 Mwhs or more, to meet output-based emis-sion rate standards that would cut NOx emissions by 50%and SO2 emissions by 74%. This regulation covers mercury,CO2, and fine particle emissions from power plants and em-ploys a credit trading mechanism.91


5-2005 35 ELR 10325

78. U.S. EPA, Inventory of U.S. Greenhouse Gas Emissions

and Sinks: 1900-2001, at ES-15 (2003) (EPA 430-R-03-004),available at http://yosemite.epa.gov/OAR/globalwarming.nsf/UniqueKeyLookup/LHOD5MJQ6G/$File/2003final-inventory.pdf (lastvisited Nov. 22, 2004) [hereinafter 2003 U.S. GHG Emissions

and Sinks].

79. In the United States, 90% of coal is consumed in the electricity sec-tor. Id. at 2-13. More than 90% of electric utility NOx and SO2 emis-sions came from coal-fired power plants, two-thirds of whose emis-sions took place during bituminous coal combustion. 1998 Na-

tional Air Emission Trends, supra note 77, at 2-2. Coal combus-tion represented approximately 85% of CO2 emissions from fossilfuel-fired electric generation. See 2003 U.S. GHG Emissions and

Sinks, supra note 78, at 2-4, tbl. 2-3. This is so because the carboncontent of coal per unit of energy produced is much higher than thatof petroleum or natural gas. Petroleum and natural gas contain 25%and 45% less carbon than coal, respectively. Id. at ES-14. Coal con-tains carbon content of 95 teragrams CO2 equivalent per quadrillionBritish thermal unit (Tg CO2 Eq./QBtu), while natural gas’ carbonintensity is about 53 Tg CO2 Eq./QBtu. Id. at 2-14. Note that Tg CO2

Eq./QBtu is a weighted value of each fuel type’s global warming po-tential (GWP).

80. Regulation of CO2 requires the reduced usage of fossil fuels. This inturn would bring “ancillary benefits” to society in the form of re-duced emissions of other persistent air pollutants. See DallasBurtraw et al., Ancillary Benefits of Reduced Air Pollution in theUnited States From Moderate Greenhouse Gas Mitigation Policiesin the Electricity Sector (Resources for the Future, Discussion PaperNo. 01-61, 2001), available at http://www.rff.org/rff/Documents/RFF-DP-01-61.pdf (last visited Mar. 1, 2005). Strong and effectiveNSR enforcement would lead to upgrading grandfathered old facili-ties, making them more energy efficient and thus saving energy.Good for the environment. Good for the U.S. economy.

81. S. 2610, 105th Cong. (1998).

82. Id.

83. Id.

84. H.R. 2909, 105th Cong. (1998).

85. Id. The introductory part of the bill expressed concerns about the an-ticipated harmful effects on the nation’s air quality of electricity de-regulation pushed by the Federal Energy Regulatory Commission inrecent years after the passage of the 1992 Energy Policy Act, espe-cially in nonattainment areas suffering from transboundary pollu-tion. It said that the nation and the general public would not benefitmuch from competition in the electricity marketplace “if some com-petitors enjoy an advantage resulting from externalization of envi-ronmental or other costs, permitting them to charge prices for elec-tricity that do not reflect the full economic and environmental cost ofproduction.” Id.

86. Exec. Order No. 19 (May 19, 2000). Connecticut chose to targetthese sources to comply with the 1998 NOx SIP call.

87. Regulations of Connecticut State Agencies (RCSA) §22a–174-22.

88. Id. §22a–174-19a.

89. The SO2 program is to be implemented in two phases. In Phase I, av-eraging is only allowed. For basic information about the final regula-tions, see Bureau of Air Management, Connecticut Depart-

ment of Environmental Protection, The Implementation of

Executive Order No. 19: RCSA Sections 22a–174-19a & 22(2001), available at http://www.dep.state.ct.us/air2/siprac/2001/sec19.pdf (last visited Mar. 1, 2005).

90. S.B. 493, H.B. 356 (2001).

91. See Emissions Standards for Power Plants, 310 C.M.R. §7.29, athttp://www.mass.gov/dep/bwp/daqc/files/regs/729final.doc (lastvisited Mar. 1, 2005).

http://www.eli.org

New Hampshire’s Clean Power Strategy placed caps onemissions of four covered air pollutants from three coal-fired power plants owned by Public Service Company ofNew Hampshire.92 It expects to cut 75% of SO2 and mercuryemissions and 70% of NOx emissions from baseline levels.This strategy also required a 7% reduction of CO2 emissionsby 2010, which is the same as the reduction target for theUnited States under the Kyoto Protocol.93 The state of NewHampshire employs a cap-and-trade approach, in which thecompany is allowed to comply with these requirements us-ing credits earned by purchasing from outside sources orbanking its future emissions, and offers several other incen-tives designed to lower compliance costs and encourage thetimely attainment by the company of the reduction goals.94

The state of Illinois directed the Illinois EPA to issue find-ings about the need for controlling emissions from powerplants by September 30, 2004, and, if needed, to proposerules containing options to reduce those emissions to be fi-nalized by the Illinois Pollution Control Board.95 On June20, 2002, North Carolina enacted its Clean Smokestacks billrequiring 14 coal-fired power plants to reduce NOx emis-sions 77% by 2009, and SO2 emissions 73% by 2013, from1998 baseline levels.96

C. EPA’s Enforcement Initiative

As a response to perceived failures of the NSR program dis-cussed above, EPA mounted enforcement actions againstcoal-fired power plants owned by seven large electric utili-ties in midwestern and southeastern regions during theClinton Administration.97 This enforcement initiative tar-

geted the industry’s decade-old practice in which electricutilities made component replacements incrementally forthe purpose of maintaining reliability, efficiency, and safetyof electric-generating plants. It also included enforcementactions against the refinery, wood products, and other indus-tries.98 EPA’s changed position was based on its 1998 NSRguidance, which adopted a more stringent definition ofmodifications.99 According to the NSR guidance, there weretwo scenarios in which NSR requirements could be in-voked: (1) when a stationary source exceeded an applicablemajor source threshold level without obtaining a precon-struction permit; and (2) when a stationary source with asynthetic minor permit exceeded an applicable major sourcethreshold level in violation of the permit limitation.100 Inboth situations, violating sources would be required to un-dergo the NSR process. EPA’s theory of liability was three-fold: (1) utility life-extension projects replacing major com-ponents of the unit are not considered routine; (2) the re-duced hours of operation during interim shutdowns or cur-tailments are excluded when the physical construction is in-volved; and (3) component repair or replacement projectsthat caused forced outages or deratings can always be pro-jected to increase the utilization of the unit after the pro-ject.101 EPA intended to narrow or close a loophole in theNSR program that it believed was being taken advantage ofby regulated industries to forego NSR using the routinemaintenance exception. While many electric utilities al-leged that EPA’s new interpretation constituted a rulemak-ing without fair notice as required by the Administrative


35 ELR 10326 5-2005

92. New Hampshire Clean Power Act, H.B. 284 (2002). See Environ-

mental Services Department, the State of New Hampshire,

Clean Power Strategy: An Integrated Strategy to Reduce

Emissions of Multiple Pollutants From New Hampshire’s

Electric Power Plants 69-71 (2001), available at http://www.des.state.nh.us/ard/pdf/NHCPS.pdf (last visited Mar. 1, 2005).

93. Id. at 71, tbl. 11-2.

94. Id. at 71-80.

95. Michael Bologna, Governor Signs Law Seeking to Limit PollutionFrom “Grandfathered” Power Plants, 32 Env’t Rep. (BNA) 1602,1602 (Aug. 10, 2001).

96. Air Quality/Electric Utilities Bill, S.B. 1078 (2002). This bill pro-vides for a two-phase reduction of SO2 emissions from the powerplants, which must reduce 49% of their SO2 emissions by 2009. Keyfacts of the bill are available in the official website of the Division ofAir Quality, North Carolina Department of Environment & NaturalResources, at http://daq.state.nc.us/news/leg/stackfacts.shtml (lastvisited Mar. 1, 2005).

97. Reitze, supra note 73, at 389-90; see Office of Legal Policy, U.S.

Department of Justice (DOJ), New Source Review: An

Analysis of the Consistency of Enforcement Actions With

the Clean Air Act and Implementing Regulations 13-14(2002), available at http://www.usdoj.gov/olp/nsrreport.pdf (lastvisited Mar. 1, 2005) [hereinafter DOJ NSR Report]. The initiallist included: (1) American Electric Power Company; (2) Ohio Edi-son and First Energy; (3) Cinergy Corporation; (4) Southern IndianaGas & Electric Company; (5) Illinois Power Company; (6) SouthernCompany affiliates (including Alabama Power Company and Geor-gia Power Company); and (7) Tampa Electric Company. Id. at 14.The same day, EPA Region IV issued an administrative complianceorder under CAA §§113 and 167 against nine coal-fired powerplants owned by the TVA. See id. 16. In September 2000, the EABruled that none of the TVA’s 14 rehabilitation projects did not qual-ify for the routine maintenance exception under the NSR and NSPSregulations. TVA then filed a lawsuit challenging the administrativecompliance order in the Eleventh Circuit. After several jurisdictionalissues had been resolved, the three-judge panel in the Eleventh Cir-cuit finally held that it lacked jurisdiction to review the order since

the order was “legally inconsequential” and thereby did not consti-tute final agency action within the meaning of the AdministrativeProcedure Act (APA). The panel reasoned that, notwithstanding ex-plicit congressional intent, the statutory scheme was unconstitution-ally drafted that authorizes EPA to impose penalties for failure tocomply with an administrative order without any provision for af-fording challengers due process rights. It concluded that, since amere failure to comply with an administrative order cannot be al-lowed to deprive any person of his property or liberty, the order at is-sue was not final agency action subject to judicial review. See supraPart I.C.1. and text accompanying note 40. On December 22, 2000,EPA sued Duke Energy in the U.S. District Court for the Middle Dis-trict of North Carolina. DOJ NSR Report, supra, at 15.

98. See id. at 17-19 and 43, app. II; Christopher W. Armstrong, EPA’sNew Source Review Enforcement Initiative, Nat. Resources &

Env’t, Winter 2000, at 203, 203-04. EPA’s NSR enforcement beganin the late 1980s. The early enforcement actions were filed againstthe wood products industry. The WEPCO decision was an ignitionpoint for enforcement actions against large electric utilities. Begin-ning in the mid-1990s, EPA’s Petroleum Refinery Initiative ad-dressed possible NSR violations in the refinery industry. See DOJ

NSR Report, supra note 97 at 11-19.

99. Memorandum from Eric V. Schaeffer, Director, Office of Regula-tory Enforcement, Guidance on the Appropriate Injunctive Relieffor Violations of Major New Source Review Requirements (Nov.17, 1998), available at http://www.epa.gov/Region7/programs/artd/air/nsr/nsrmemos/nsrguida.pdf (last visited Mar. 1, 2005).

100. See id. at 3-6. EPA said that “as part of an EPA settlement, the Con-sent Decree should require a minimum level of control which theAgency believe[d] ensures BACT/LAER-equivalent emission re-ductions.” Id. at 3. To avoid the NSR requirements, a new source oran existing source opting in to the old actual-to-potential test can vol-untarily choose to become a “synthetic minor source” by agreeing toa permit condition setting a federally enforceable emission limit onthe changed unit, which imposes restrictions on its operations, suchas hours of operation less than full capacity, the use of pollution con-trols, and changes in production. See NSR Background Paper,supra note 28, at 6-7; Letter from Francis Lyons, supra note 45,at 18.

101. Makram B. Jaber, Utility Settlements in New Source Review Law-suits, Nat. Resources & Env’t, Winter 2004, at 22, 23.

http://www.eli.org

Procedure Act (APA),102 some of the offending powerplants facing EPA enforcement actions agreed to the instal-lation of control equipment or implementation of processchanges that were equivalent to NSR requirements throughsettlement with EPA.103

D. The Overhaul of EPA’s Enforcement Initiative

1. The National Energy Policy Group’s Report to thePresident

EPA’s enforcement campaign was subject to a possiblechange when the current Bush Administration took office.In late January 2001, the Bush Administration convened aNational Energy Policy Development Group (NEPD) to beheaded by Vice President Dick Cheney. The NEPD submit-ted its 170-page report to the president on May 16, 2001.104

The NEPD recommended in its report that the president di-rect federal agencies to review the NSR program.105 Ac-cordingly, President George W. Bush ordered EPA to con-duct a 90-day review of the NSR regulations and asked theU.S. Department of Justice (DOJ) to independently deter-mine whether EPA’s enforcement campaign was consistentwith the CAA or its implementing regulations, or whether itconstituted administrative rulemaking within the meaningof the APA.106 Shortly thereafter, Eric Schaeffer, EPA Direc-

tor of the Office of Regulatory Enforcement, resigned in aprotest to the new Administration.107 In his resignation let-ter, he strongly criticized the Bush Administration for itshostility to the Agency’s NSR enforcement campaign.108

2. The DOJ’s NSR Report

On January 15, 2002, the DOJ published its NSR report. TheDOJ’s NSR report almost exclusively focused on the rou-tine maintenance exception. It asked: (1) whether the en-forcement actions constitute “a substantive change in EPA’sinterpretation of the CAA and its regulations that would re-quire APA-compliant notice-and-comment rulemaking”;and (2) whether, despite a lack of administrative rulemak-ing, EPA’s interpretation of the routine maintenance excep-tion is “reasonable” in light of the Act and its implementingregulations, and prior guidance documents.109 Based on areading of the applicable case law, the DOJ found adminis-trative rulemaking procedures unnecessary because it be-lieved that EPA’s legal position in the enforcement actionsagainst large electric utilities could be categorized as beinginterpretive and “did not constitute a departure from a priorauthoritative interpretation of ‘routine maintenance.’”110

Moreover, the report emphasized that EPA was entitled toChevron deference111 in its interpretation of the CAA, andthat it deserved utmost deference as announced in Bowles v.Seminole Rock & Sand Co.112 in the interpretation of its ownimplementing regulations.113 It finally concluded that itwould continue to pursue the enforcement actions pendingin federal courts.114

In this regard, on October 24, 2002, the Southern Districtof Indiana held that EPA’s interpretation did not constitutea rulemaking in violation of the APA.115 Therefore, thereexists an authoritative judgment that EPA’s enforcementactions are not unlawful. However, the reason why the paceof the litigation has been slow thus far is that EPA has toprove facts which often spanned more than two decades.Most of the reviewing courts did not enter summary judg-ment for EPA.116

3. EPA’s 90-Day NSR

For its part, EPA finalized its 90-day review of the NSR pro-


5-2005 35 ELR 10327

102. 5 U.S.C. §§551 et seq., available in ELR Stat. Admin. Proc.

103. As of the end of 2003, the DOJ settled litigation with the followingcompanies: Tampa Electric Company, PSEG Fossil Limited Liabil-ity Company, Virginia Electric Power Company, Wisconsin Elec-tric, Southern Indiana Gas & Electric Company, and Alcoa, Inc.(electric utilities); Chevron, U.S.A., Inc., Conoco, Premcor, NavajoRefining Company, Montana Refinery, Murphy Oil, Cenex, Ergon,Coastal Eagle Point, Koch Petroleum Corporation, BP Exploration& Oil Company, Motiva/Equilon/Shell, and Marathon Ashland Pe-troleum Limited Liability Company (refineries); Willamette Indus-tries, Inc. and Boise Cascade Corporation (wood products compa-nies). On October 6, 2004, EPA announced that it had reached settle-ment with Citgo Petroleum Corporation, one of the nation’s largestrefineries. Under the settlement, Citgo agreed to spend an estimated$320 million to install state-of-the-art emissions control technolo-gies, to pay a $3.6 million civil penalty, and to invest in $5 millionworth of a supplemental environmental project at one of its six refin-ing facilities. EPA estimated that the settlement would reduce NOx

and SO2 emissions by more than 7,184 and 23,250 tpy, respec-tively. U.S. EPA, Press Release, U.S. Announces Clean Air Agree-ment With CITGO Petroleum Corp.; Petroleum Refiner to Reduce AirEmissions at Refineries in Five States (Oct. 6, 2004), available athttp://yosemite.epa.gov/opa/admpress.nsf/b1ab9f485b098972852562e7004dc686/db2aa8edb865a54485256f2500534222!OpenDocument(last visited Mar. 1, 2005); see also Juliet Eilperin, Citgo Reaches$323 Million Emissions Settlement, Wash. Post, Oct. 7, 2004,at A12.

104. Report of the National Energy Policy Development Group,

National Energy Policy: Reliable, Affordable, and Envi-

ronmentally Sound Energy for America’s Future (2001),available at http://www.whitehouse.gov/energy (last visited Mar. 1,2005).

105. It recommended to the president that EPA, in consultation with theSecretary of Energy and other federal agencies, “review New SourceReview regulations, including administrative interpretations andimplementation, and report to the president within 90 days on the im-pact of the regulations on investment in new utility and refinery gen-eration capacity, energy efficiency, and environmental protection.”It also recommended that the DOJ “review existing enforcement ac-tions regarding New Source Review to ensure that the enforcementactions are consistent with the Clean Air Act and its regulations.” Id.at 7-14.

106. David G. Mandelbaum, Thoughts on the Bush Clean Air “Strategy”So Far and a Suggestion for What Might Work, 21 Temp. Envtl. L.

& Tech. J. 1, 6 (2002).

107. See Steve Cook, Departing EPA Official Issues Broadside at BushAdministration’s Clean Air Programs, 33 Env’t Rep. (BNA) 462(Mar. 1, 2002).

108. See Letter of Resignation, Eric V. Schaeffer, Director Office ofRegulatory Enforcement (Feb. 28, 2002), available at http://www.Mindfully.org/Reform/2002/Resignation-SchaefferEPA28feb02.htm (last visited May 25, 2004).

109. See DOJ NSR Report, supra note 97, at 24.

110. Id. at 25-33.

111. See 467 U.S. 837, 842-43, 14 ELR 20507 (1984).

112. See 325 U.S. 410 (1945).

113. See DOJ NSR Report, supra note 97, at 35-36. It argued that theChristensen case decided by the Supreme Court in 2000 reaffirmedthe Seminole Rock’s holding. DOJ NSR Report, supra note 97, at36; see Christensen v. Harris Country, 529 U.S. 576, 588 (2000).

114. DOJ NSR Report, supra note 97, at 39-40.

115. United States v. Southern Ind. Gas & Elec. Co., 2002 WL 31427523(S.D. Ind. Oct. 24, 2002); see also United States v. Ohio Edison Co.,276 F. Supp. 2d 829, 33 ELR 20253 (S.D. Ohio 2003).

116. See, e.g., United States v. SIGECO, 2003 WL 21024595 (S.D. Ind.Apr. 17, 2003).

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gram in June 2002.117 EPA’s final report borrowed largelyfrom the findings of its pervious study of NSR118 and com-ments from various stakeholders, including members of thegeneral public. It addressed the impacts of the NSR programon capital investment in the energy sector, especially forelectric utilities and refineries. This issue had important im-plications for the adequacy and reliability of the nation’s en-ergy supplies. EPA’s findings were twofold. For new powerplants and refineries, EPA found that

the NSR program has not significantly impeded invest-ment in new power plants or refineries. For the utility in-dustry, this is evidenced by significant recent and futureplanned investment in new power plants. Lack of con-struction of new greenfield refineries is generally attrib-uted to economic reasons and environmental restrictionsunrelated to NSR.119

For existing power plants and refineries, EPA concludedthat

the NSR program has impeded or resulted in the cancel-lation of projects which would maintain and improve re-liability, efficiency and safety of existing energy capac-ity. Such discouragement results in lost capacity, as wellas lost opportunities to improve energy efficiency and re-duce air pollution.120

EPA’s findings appeared to favor more to industry’s domi-nant view that the NSR program “discourage[s] investmentin both preserving and maintaining utility and refinery gen-erating capacity as well as in improving energy efficiencyand expanding capacity.”121 Furthermore, whereas it saidthere is no question that the NSR program has made a signif-icant contribution to improving the nation’s air quality,122

EPA stated that

[it] also believes, however, that for particular industrysectors the benefits currently attributed to NSR could beachieved much more efficiently and at much lower costthrough the implementation of a multipollutant nationalcap and trade program. In particular, the President’sClear Skies initiative is a much more certain and effec-tive way of achieving emissions reductions from thepower generation sector.123

There may be some truth in these findings in view of thetime delays and costs associated with the NSR process it-self. Perhaps, NSR may have “failed to accommodate ade-quately industries with short product cycles and large-scalebatch production, affecting them in ways that may reducetheir competitiveness.”124 But the findings and industrycomments seemed to reaffirm the common understandingthat the NSR program has not worked as intended at the timeof its enactment. They also implied that the CAA’s NSRscheme may have been gamed by some industries. The lownumber of NSR permits issued to old, dirtier electric powerunits and cost disparities between grandfathered and newpower plants dictate this conclusion. Therefore, it is onething to say that NSR reform is needed, and it is another toargue that NSR itself is to blame for its alleged failures to in-duce clean energy development. The challenge is how to re-design the regulatory structure in a way that distinguishesgood- and bad-faith players and rewards the former. Therealso is a need to level the playing field for alternative energyresources, which, thus far, have been disadvantaged underthe current regime.

E. A Multi-Pollutant Trading Approach at the FederalLevel

1. Four-Pollutant Bills

There have been legislative efforts to introduce multi-pol-lutant bills primarily targeting the electric utility industry.This move is inspired largely by the relatively successfulperformance of the acid rain program under the 1990CAA.125 On the other hand, it derives in part from the wide-spread recognition that it is much more economical to con-centrate regulatory energy and efforts on the electric utilityindustry often characterized by inefficiencies. The so-calledfour-pollutant bill, called the Clean Power Act, was intro-duced in the Senate to mandate reductions in SO2, NOx, mer-cury, and CO2 emissions from electric power generators us-ing a cap-and-trade approach on a pollutant-by-pollutantbasis.126 This Senate bill would require the electric-genera-tion industry to cut 75% of its SO2 and NOx emissions, 90%of its neurotoxin mercury emissions, and 20% of its CO2

emissions, respectively, and calls for implementation ofpolicies such as strengthened efficiency standards for build-ings and appliances, and incentives for development of re-newable energy sources.127 But it is now being stalled in the


35 ELR 10328 5-2005

117. U.S. EPA, New Source Review: Report to the President

(2002), available at http://www.epa.gov/nsr/documents/nsr_report_to_president.pdf (last visited Mar. 1, 2005) [hereinafter EPA 90-

Day NSR].

118. See NSR Background Paper, supra note 28. An interagencygroup composed of several federal agencies and a private consult-ing firm, ICF Consulting Inc., participated in the preparation ofthis preliminary report. See EPA 90-Day NSR, supra note 117,at 2-3.

119. Id. at 1.

120. Id.

121. See id. at 8-21. However, it did not make any definitive findings sup-ported by fresh data and rigorous analysis. EPA based its findingsmore on general perceptions among industry than on hard evidence.Its NSR Background Paper did find that “capital expenditures forair pollution control as a percentage of total capital expenditures onnew plant construction are significantly lower than those expendi-tures on existing plants.” NSR Background Paper, supra note 28, at18. It noted that it could not answer the question of “whether or notNSR had affected the economic behavior of new plant owners or de-velopers.” Id. at 21. It then illustrated a number of factors that maycontribute to cost increases, such as the costs of pollution costs, andtime delays, complexity and regulatory uncertainty, commonly as-sociated with NSR. Id. at 21-23. It did state, however, that these costswere difficult to quantity, and referred to comments and studies thatargued economic factors, not environmental regulations, are deci-sive in making siting and expansion decisions. Id. at 24. As for the re-finery industry, it found that pollution control costs constituted asmall portion of capital investment. Id. at 41-42. Then EPA rathersummarily concluded that NSR has impeded or resulted in the can-cellation of projects that would maintain or improve reliability, effi-ciency or safety of existing power plants and refineries.

122. It conceded the difficulty of quantifying the benefits in the report,but its NSR Background Paper did estimate that as a result of NSR4.1 million tons of all regulated air pollutants per year were avoided

or 1.4 million tons of criteria pollutants per year. It noted that 90% ofthose reductions were thought to be from electric utilities. EPA 90-

Day NSR, supra note 117, at 9.

123. Id. at 2 (emphasis added).

124. NAPA NSR Report, supra note 64, at 100-03.

125. See 42 U.S.C. §§7651-7651o.

126. S. 556, 107th Cong. (2001).

127. Id.

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face of opposition to the inclusion of CO2 as one of the cov-ered pollutants.128

2. Three-Pollutant Bills: The Bush Administration’s ClearSkies Initiative

President Bush has pushed the Clear Skies Initiative (three-pollutant bill),129 and, on February 27, 2003, S. 485 and H.R.999, known as the Clear Skies Act of 2003, were introducedin both houses of Congress, which would create a cap-and-trade program for SO2, NOx, and mercury for electric utili-ties, with a possibility of future downward cap adjustments,and deadlines of 2008, 2010, and 2018.130 This bill wouldexempt all changes at existing sources, called “affectedunits,” from NSR requirements, and would require that newsources meet NSPS rather than BACT or LAER. A station-ary source qualifies as an affected unit if it satisfies the re-quirement that its operational changes not “increase themaximum hourly emissions of any air pollutant achievableat the unit during the last five years.”131 Therefore, the pro-posed bill tried to amend the current law concerning NSRpreconstruction review. EPA’s recent NSR reform effortshave been based on this bill’s basic scheme.132 On the otherhand, the Clear Skies Initiative is designed to reduce carbonintensity by encouraging electric power plants to developclean coal technologies with regard to CO2 emissions and bysupporting other programs to enhance energy efficiency andto develop renewable energy resources and clean fuels.133

Carbon intensity is “the ratio of [GHG] emissions to eco-nomic output,” and President Bush’s plan aims to reducecarbon intensity by 18% in the next 10 years.134 This effortcould be promising, given the fact that energy-related CO2

emissions contribute over 80% of national GHG emis-sions.135 But it appears that the plan will not greatly help thenation to achieve the Kyoto Protocol target, or even the sta-bilization goal of the Climate Change Convention, becauseit does not impose any legal obligations on industry to re-duce CO2 emissions, and because the U.S. economy is ex-

pected to continue to grow. In its 2002 report to the UnitedNations, the U.S. Department of State projected that GHGemissions would increase by 42.7% until 2020.136 It is ex-pected that political support would increase for addressingglobal warming through regulation of CO2 as an air pollut-ant, but, as of now, the lack of political enthusiasm remains asignificant obstacle to establishing a nationwide globalwarming strategy.

After a series of energy bills had been defeated in Con-gress, EPA announced that it would pursue a regulatory ap-proach until a White House-sponsored three-pollutant bill ispassed.137 On March 15, 2005, it promulgated regulations,which would adopt an emission trading mechanism for util-ity SO2, NOx, and mercury emissions.138 Under the finalizedrules, the current SO2 cap emissions would be further tight-ened and NOx control would become more stringent.139

However, the exclusion of CO2 may increase the long-term costs of CO2 control by postponing the issue of regu-lation of CO2 to a future day, and could have chilling ef-fects on voluntary efforts by the private sector and somestates to reduce CO2 and other GHG emissions.

III. The 2002 New NSR Rule

On December 31, 2002, EPA promulgated new NSR rule,which took effect on March 3, 2003.140 The same day, it pub-lished a proposed rule for changing a regulatory definitionfor the “routine maintenance, repair, replacement exemp-


5-2005 35 ELR 10329

128. This bill was reintroduced in 2003. S. 366 and H.R. 2042, 108thCong. (2003). This bill had a “birthday” provision that would requireexisting power plants to meet NSR and NSPS requirements 30 yearsfrom either the date of the plant began operation or 10 years after pas-sage of the bill, whichever is later. For updated information aboutcongressional activity, see Pew Center on Global Climate Change,108th Congress Proposals, at http://www.pewclimate.org/what_s_being_done/in_the_congress/108th.cfm#Clean_Coal (last visitedMar. 1, 2005).

129. See Steve Cook, Bush’s Clear Skies Plan Moving Slowly in BothHouses; Senate Markup Planned, 34 Env’t Rep. (BNA) 2009(2003).

130. S. 485 and H.R. 999, 108th Cong. (2003).

131. See U.S. EPA, Summary of the Clear Skies Act of 2003, at 4-5(2003), available at http://www.epa.gov/air/clearskies/CSA2003shortsummary2_27_03_final.pdf.

132. See, e.g., Hearings Before the Clean Air Subcomm. of the Comm. onEnvironment and Public Works (Apr. 8, 2003) (testimony of Chris-tine Todd Whitman, Administrator, EPA), available at http://www.epa.gov/air/clearskies/testimony.html (last visited Mar. 1, 2005).

133. See News Release, White House, Global Climate Change PolicyBook (Feb. 2002), available at http://www.whitehouse.gov/news/releases/2002/02/climatechange.html (last visited Mar. 1, 2004).

134. Id.

135. U.S. EPA, Inventory of U.S. Greenhouse Gas Emissions

and Sinks: 1990-2000, at 2-1 (2003) (EPA 236-R-02-003), avail-able at http://yosemite.epa.gov/oar/globalwarming.nsf/UniqueKeyLookup/SHSU5BMQAR/$File/2002-inventory.pdf (last visitedNov. 22, 2004).

136. U.S. Department of State, Climate Action Report 2002, at 73(2002), available at http://yosemite.epa.gov/oar/globalwarming.Nsf/content/ResourceCenterPublicationsUSClimateActionReport.html (last visited Mar. 1, 2005).

137. Press Release, U.S. EPA, New Power Plant Rule to Achieve LargestEmission Reductions in a Decade (Dec. 4, 2003), available at http://yosemite.epa.gov/opa/admpress.nsf/b1ab9f485b098972852562e7004dc686/17302e197330932585256df200686549?OpenDocument (last visited Mar. 1, 2004).

138. U.S. EPA, Rule to Reduce Interstate Transport of Fine ParticulateMatter and Ozone (Interstate Air Quality Rule); Revisions to AcidRain Program; Revisions to the NOx SIP Call, 70 Fed. Reg. __ (Mar.15, 2005) (codified at 40 C.F.R. §§51, 72, 73, 74, 77, 78, and 96);U.S. EPA, Standards of Performance for New and Existing Station-ary Sources: Electric Utility Steam-Generating Units, 70 Fed. Reg.__ (Mar. 15, 2005) (codified at 40 C.F.R. §§60, 63, 72, and 75).

139. Eric Pianin, EPA Aims to Change Pollution Rules: Utilities CouldBuy Credits From Cleaner-Operating Power Plants, Wash. Post,Dec. 5, 2003, at A2. The final rules are based on proposed rules datedJanuary 30, 2004. Under the proposed interstate air quality rules, acap on SO2 emissions would be further tightened in the eastern halfof the United States beyond the current level required under theAct’s acid rain program. 69 Fed. Reg. at 4617. This was possible byapplying a new PM2.5 standard in view of the fact that SO2 emissionsare main precursors to fine particle pollution and regional haze. And,more areas and sources would have to comply with more stringentNOx control requirements under the new eight-hour O3 standard.EPA proposed to find that NOx emissions from sources in 25 statesand the District of Columbia significantly contribute to thenonattainment of the new eight-hour O3 NAAQS in downwind ar-eas. Id. at 4570. Since NOx emissions are also precursors to the for-mation of fine PM, NOx reduction requirements would be imposedthroughout the year in areas found to significantly contribute NOx

emissions to PM2.5 NAAQS nonattainment downwind. See id. at4633. In the final rules, EPA made relatively minor changes to theproposed rules by reducing the number of covered states subject tonew fine particle-related SO2 and Nox reduction requirements basedon new modeling results, by adding such new features as opt-in re-quirements, and by deciding to apply new NOx reduction require-ments one year earlier. For a concise summary of the final rules, seeU.S. EPA, Basic Information (2005), available at http://www.epa.gov/cair/basic.html.

140. 67 Fed. Reg. at 80186.

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tion” to NSR.141 After reviewing the comments received onproposed changes to the routine maintenance exemption,EPA issued a final rule in October 2003.142

A. A 10-Year Look-Back Period and the Actual-to-Projected-Future-Actual Test

Generally speaking, the December 31, 2002, rule was basedon the 1996 NSR reform proposal.143 Its key provisions canbe summarized as follows. The actual-to-projected-future-actual test is extended to all source categories. The new ruledid not adopt the potential-to-potential test proposed bysome members of the electric utility industry.144 Sourceshave the option to choose between the preexisting actual-to-potential test and the new actual-to-future-actual test.145

Sources choosing the former are not subject to recordkeep-ing requirements that otherwise apply to sources using theactual-to-future-actual test.146 The actual-to-future-actualtest allows source owners to project future actual emissionsbased on projected capacity and usage, historic trends andemissions from the unit before the modification, and otheremissions factors, during any one of the 5-10 years immedi-ately preceding the proposed change.147

Different time periods for determining the baseline emis-sions apply: a 10-year look-back period for all industries,except for EUSGUs that is still subject to the WEPCO rule’sfive-year period. Sources, except EUSGUs, may use anyconsecutive 24-month period in the past 10 years.148 Theymay consider “the utilization rate of the equipment, fuelsand raw materials used in the operation of the equipment,and applicable emission factors.”149 However, past emis-sions that are not allowed under “the most current legallyenforceable limits” applicable to the changed unit must not

be included.150 For EUSGUs, the baseline emissions are theaverage emission rate, in tpy, of any regulated pollutant dur-ing any two years within the five-year period shortly beforethe proposed construction begins.151

The new rule not only retained the demand growth exclu-sion, which had been applied to electric utilities as part ofthe WEPCO rule, but also extended the exclusion to allsources. Therefore, sources “could exclude emissions re-sulting from increased utilization due to demand growth thatthe unit could have accommodated before the change” incalculating projected future emissions or establishingPALs.152 This was in stark contrast to EPA’s position in its1998 Supplemental Notice.153 Furthermore, the sourceowner is not subject to rigorous reporting requirements.

B. PALs

PALs can only be established through a public commentprocess.154 A PAL is one option that sources can use to avoidNSR. It establishes a plantwide emissions cap for any regu-lated pollutant, which is similar to a bubble concept.155 Aslong as a PAL is not exceeded, a source can increase itsemissions without triggering NSR, thereby affording maxi-mum flexibility.156 If PALs are set in an environmentallyfriendly manner and can actually be successful in giving in-centives for source owners to install state-of-the-art pollu-tion control equipment or processes, they could make a sig-nificant contribution to achieving the dual goals of NSR re-form: environmental protection and economic growth. EPAused the term “baseline actual emissions” instead of “actualemissions” that it had used in its 1996 NSR reform pro-posal.157 While in its 1998 notice it had said that it consid-ered requiring facilities to consider contemporaneous emis-sion decreases and increases, EPA stated that “there is noneed [ ] to quantify contemporaneous emissions increasesand decreases for individual emissions units.”158


35 ELR 10330 5-2005

141. Id. at 80290.

142. U.S. EPA, Prevention of Significant Deterioration (PSD) andNonattainment New Source Review (NSR): Equipment Replace-ment Provision of the Routine Maintenance, Repair, and Replace-ment Exclusion, 68 Fed. Reg. 61248 (Oct. 27, 2003). The purpose ofthis new rule is to maintain and improve safety, reliability, and effi-ciency. Id. at 61252. It contains two key features, which all aim tosimplify the applicability of the routine maintenance exception,thereby offering regulatory certainty. First, it established the costthreshold at 20% of the cost to replace the entire process unit. Toqualify, replacement equipment must be “functionally equivalent,”which means it serve the same function and basic design parametersas the old one, such as heat input and fuel consumption. Id. Second,activities whose cost are below an annual maintenance allowance tobe set by EPA on an industry-by-industry basis would be exemptfrom NSR. Id. Because of a lot of controversy about this second op-tion, EPA did not finalize it in issuing the final rule. Id. (“We havedecided, for now, not to take final action on the proposed annualmaintenance, repair and replacement allowance approach.”). As aresult of this final rule, many of the changes to existing sources thatwould otherwise trigger NSR under the CAA will be out of NSR al-together. EPA’s position on the routine maintenance exception iswell reflected in its pronouncement of NSR recommendations,which had been published immediately before the 2002 new NSRrule was proposed. See U.S. EPA, New Source Review, New

Source Review Recommendations 4-6 (2002).

143. U.S. EPA, Prevention of Significant Deterioration and Nonattain-ment New Source Review; Proposed Rules, 61 Fed. Reg. 38249(proposed July 23, 1996) (to be codified at 40 C.F.R. §§51 and 52).

144. 67 Fed. Reg. at 80189.

145. Id.

146. Id.

147. Id.

148. Id. at 80196.

149. Id. at 80195.

150. Id.

151. Id. at 80189.

152. Id. at 80192.

153. See 63 Fed. Reg. at 39860-61 (stating that the exclusion “ignore[d]the realities of a deregulated electric power sector,” and that its“self-implementing and self-policing” mechanism created enforce-ment problems).

154. 67 Fed. Reg. at 80206. The applicant must go through all applicableprocedural requirements, under the state’s minor NSR permit pro-gram or the Title V operating program. “Where the PAL is estab-lished in a major NSR permit, major NSR public participation proce-dures apply.” Id. at 80208.

155. As a practical matter, PALs can be established for more than one pol-lutant. See id.

156. Id. at 80206.

157. See id. n.26.

158. Id. at 80206-07; see also 63 Fed. Reg. at 39863 (pointing out thatPALs could function as another loophole for avoiding NSR if thecontemporaneity requirement as dictated by the Alabama Powercourt is not applied). EPA noted:

We believe that the concept of contemporaneity, as articulatedin Alabama Power and as set forth in the regulations governingthe major NSR program, does not apply to PALs. The PALprogram differs in certain important respects from our currentregulations and from the 1978 regulations at issue in AlabamaPower. The Alabama Power court was not presented with thePAL approach for determining whether there was an increasein emissions and did not consider whether the principles it setforth in its opinion would apply to such an approach.

67 Fed. Reg. at 80215.

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A PAL is the sum of the baseline actual emissions plus anamount equal to the applicable significant level for the cov-ered pollutant.159 The formula for establishing a PAL iscomplicated. The calculation of the baseline emissions dis-tinguishes between existing units with more than a two-yearoperating history and new units with less than a two-year op-erating history.160 The first step is to calculate the baselineactual emissions based on the average emission rates, in tpy,of existing units for the covered pollutant that existed duringany consecutive 24-month period chosen by the applicantwithin the 10-year period immediately preceding thechange.161 The second step is to add emissions equal to PTEsof existing and new units that were constructed since the24-month period and then to subtract the emissions of anyunits that was “permanently shut down” or dismantled sincethat time period.162 Baseline emissions must reflect cur-rently available technology requirements.163 A PAL’sfacilitywide emissions cap should consider fugitive emis-sions to the extent it is quantifiable.164 The permittingagency must include a PAL in a federally enforceable per-mit.165 It must specify in the permit that a reduced PAL levelwould be imposed at the time any applicable federal or staterequirements that it is aware of prior to issuing the permit.166

A PAL will be valid for 10 years.167 It would be renewedfor another 10 years if there is a timely request for renewaland the reviewing authority approves it.168 At renewal time,the PAL must be revised in consideration of newly applica-ble requirements.169 Where a source’s PTE has declined be-low the PAL, the new PAL must be readjusted at a level thatdoes not exceed its PTE.170 Besides these requirements, ingeneral, the reviewing authority has great discretion tochoose the new PAL. It can approve the application withoutany adjustments to the original PAL if the sum of the base-line actual emissions plus an amount equal to the applicablesignificant level for the covered pollutant is equal to orgreater than 80% of the PAL level.171 If it is less than 80%,

the authority may create a new PAL level that is more repre-sentative of the source’s actual emissions, or taking into ac-count other relevant factors.172 Despite emissions increasesexceeding the plantwide emissions cap, the PAL may be ad-justed upward without triggering NSR requirements if it isdemonstrated that the owner is unable to reduce emissionslevels below the PAL even with BACT-equivalent technol-ogy being applied to units that have a PTE greater than theapplicable significant level.173 Otherwise, all exceedancesabove the PAL must go through NSR.174 Readjustment de-cisions during the 10-year term are largely at the discretionof the reviewing authority with some exceptions.175

Any monitoring system must be “based on sound scienceand must conform to generally acceptable scientific proce-dures for data quality and manipulation.”176 Any monitoringsystem contained in the permit must satisfy the minimum re-quirements as required by the rule.177 Monitoring systemsmust be able to precisely quantify the emissions from eachunit on a 12-month rolling basis.178 But this does not meanthat the use of a continuous emissions monitoring system(CEMS) or other rigorous monitoring requirements is man-dated. The source may employ emission factors to monitoractual emissions at each unit.179 Sources must use “currentemissions or other current direct measurement data.”180 Thereevaluation of the data must occur “at least once every 5years” for the PAL term, using “a performance evaluationtest or other scientifically valid means [ ] approved by the re-viewing authority.”181 Then the final rule provided for mini-mum recordkeeping requirements.182 The facility ownermust submit a semiannual emissions report to the authority,


5-2005 35 ELR 10331

159. 67 Fed. Reg. at 80208. The 1996 NSR reform proposal used the lan-guage “a reasonable operating margin less than the applicable signif-icant emissions rate.” 61 Fed. Reg. at 38265. The final rule has in-stead chosen “the applicable significant amount” as specified in theNSR regulations or the CAA. For explanation on the part of EPA, see67 Fed. Reg. at 80218-19.

160. 67 Fed. Reg. at 80218-19.

161. Id. EPA said that “you will have broad discretion to select any con-secutive 24-month period in the last 10 years to determine the base-line actual emissions.” Id.

162. Id. at 80208-09. For EUSUGs, however, a different formula is ap-plied. Whether nor not a shutdown is considered permanent is de-cided on a case-by-case basis considering all relevant facts and cir-cumstances. The foremost consideration is the intention of the owneror operator of the unit at issue. There is a rebuttable presumption that“[s]hutdowns of more than 2 years, or that have resulted in the re-moval of the source from the State’s emissions inventory,” are per-manent. Id. at 80209 n.30.

163. Id. at 80209.

164. Id. at 80208.

165. Id.

166. Id. at 80209.

167. Id.

168. See id. at 80209-10. At least 6 months prior to, but not earlier than 18months from, the expiration date of the PAL, the facility owner oroperator must submit a complete application. Id. at 80209.

169. Id.

170. Id.

171. Id.

172. Id.

173. Id. at 80210.

174. Id.

175. Id. The final rules explained the reasons for mandatory adjustments:

(1) To correct typographical/calculation errors made in set-ting the PAL or to reflect a more accurate determination ofemissions used to establish the PAL; (2) to reduce the PAL ifthe owner or operator of the major stationary source createscreditable emissions reductions for use as offsets; or (3) to re-vise a PAL to reflect an increase in the PAL.

Id.

176. Id. at 80211.

177. See id. at 80212-13. See also 40 C.F.R. §60, app. B.

178. 67 Fed. Reg. at 80211. Compliance with the PAL is determinedbased on a consecutive 12-month period, rolled monthly. Id. at80214.

179. The monitoring system must be one of the following methods or anycombination thereof:

(1) Mass balance for processes, work practices, or emissionssources using coatings or solvents; (2) Continuous EmissionsMonitoring System (CEMS); (3) Continuous ParameterMonitoring System (CPMS) or Predictive Emissions Moni-toring System (PEMS) with Continuous Emissions Rate Mon-itoring System (CERMS) or automated data acquisition andhandling system (ADHS), as needed; or (4) emission factors.

Id. at 80211.

180. Id.

181. Id.

182. Id. at 80213. Emissions data during periods of startup, shutdown,maintenance, and malfunction must be collected even though theymay not be considered part of the emissions in determining compli-ance with the PAL. The reviewing authority has the discretion to ap-prove different monitoring for various operating conditions for eachunit. However, the facility owner is still subject to the same mini-mum monitoring requirements. Id.

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and must record “all periods of deviation, including the dateand time that a deviation started and stopped and whetherthe deviation occurred during a period of startup, shutdown,or malfunction.”183

C. The Clean Unit Exclusion

The Clean Unit exclusion applies to units that installedBACT or LAER through recent NSR.184 A unit can stillqualify as a clean unit if it is demonstrated that its emissionscontrol level is comparable to BACT or LAER.185 The newNSR rule adopted a new applicability test. The Clean Unitstatus gives its owner operational flexibility to make anychange to the designated clean unit without triggering NSRif a change to the unit does not alter the emissions limitationsor work practice requirements imposed in the permit in con-junction with BACT or LAER, or physical or operationalcharacteristics that formed the basis of the BACT or LAERdetermination, or if it does not result in a significant netemissions increase in violation of the CAA.186 The compa-rability requirement is satisfied when the candidate pollu-tion control technology is BACT or LAER chosen for othersimilar sources in the RACT/BACT/LAER Clearinghouse(RBLC), or when it is demonstrated on a case-by-case basisthat it is “substantially as effective” as BACT or LAER.187

The Clean Unit status will be valid up to 10 years.188 Thenew applicability test was a departure from the 1996 NSRreform proposal, which stated that the new rule would basethe Clean Unit status on the unit’s pre-change hourly poten-tial emissions rate.189 In 1996, EPA proposed that therewould be three routes to be used for the Clean Unit designa-tion. The first and second would be through major or minorNSR, which took place within the last 10 years.190 As for thethird, to be comparable BACT or LAER, the pollution con-trol technology’s performance level must be: “(1) the aver-age of the BACT or LAER for equivalent sources over a re-cent period of time (such as 3 years); or (2) [ ] within somepercentage (such as 5 or 10) of the most recent, or average ofthe most recent, BACT or LAER levels for equivalent orsimilar sources.”191 For the units within the third category,the 1996 proposed rule provided that the Clean Unit statuswould last for five years.192

As a result of these changes, stringency required for qual-ifying technologies is greatly reduced, and thus it would bemuch easier for major sources to use the clean unit option.Furthermore, its longer term (10 years other than 5 years)would have potential to offset much of the beneficial effectsthat the Clean Unit exclusion might otherwise have. Unitsthat have gone through major NSR automatically qualify.193

Other units must go through a SIP-approved permittingprocess.194

A unit may requalify for the Clean Unit status after the10-year period, subject to the above-mentioned applicabil-ity test. In other words, it must go through major NSR or aSIP-approved permitting process once again and meet tech-nology requirements for pollution control to be adopted atthe unit, reflecting advances in technology and changes tothe existing unit during the effective period.195 Where theunit’s location has been reclassified as a nonattainment areaduring the term, it must install LAER or LAER-comparablepollution control at the time of expiration to requalify.196

The required emissions reductions under the Clean Unitexclusion are not allowed to be used for netting purposes oras offsets.197 But those reductions below the emissions limi-tation that qualifies the unit as a clean unit can be used in anetting analysis or as offset credits if the general require-ments applicable to netting or offsetting are met.198 In prin-ciple, the Clean Unit exclusion is pollutant-specific with theexception that “simultaneous Clean Unit status [may begranted] for other pollutants at those emissions units that aresufficiently controlled to independently qualify as ‘clean’for each pollutant.”199 The Clean Facility exclusion, whichwas proposed in the 1996 proposed rule, was omitted.200

D. PCPs

The new NSR rule extended the utility-specific PCP exclu-sion to all types of sources.201 Listed PCPs are automaticallyexempted from NSR if there is no violation of a NAAQS orany of the PSD requirements, such as PSD increments andvisibility.202 PCPs that are not listed must pass the “environ-mentally beneficial” test on a case-by-case basis.203 ThePCP exclusion offers flexibility while giving incentives forsources to install modern pollution control. Therefore, itssuccess depends in large part on the effectiveness of thetechnology selected.


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183. Id. at 80213-14.

184. Id. at 80189.

185. Id. at 80190.

186. Id. at 80189-90.

187. Id. at 80222.

188. Id. at 80190.

189. Id. at 80222.

190. Id. at 80222-23.

191. Id. at 80223.

192. Id.

193. Id.

194. Id.

195. Id. This means that they are subjected to the control technology de-termination, air quality review, public participation and other re-quirements under state-administered permit programs, which are de-signed to ensure that no violation of a NAAQS or any of the PSD re-quirements (increments or visibility) would not occur.

196. Id. at 80226. Note that the new rule stated:

However, we will not necessarily require you to meet an ad-ditional investment test to re-qualify for Clean Unit status forthe same controls. That is, unless the controls used to estab-lish Clean Unit status are no longer BACT/LAER or compa-rable, there will be no requirement for an investment to re-qualify for Clean Unit status.

Id.

197. Id. at 80227.

198. Id. at 80228.

199. Id.

200. If adopted, the clean facility exclusion would have exempted fromNSR requirements major stationary sources that have undergoneNSR for the entire source within the last 10 years. 61 Fed. Reg. at38258.

201. 67 Fed. Reg. at 80233.

202. Id. at 80190. There is a rebuttable strong presumption that listedPCPs and technologies, and other standards are environmentallybeneficial. See id. at 80233-34.

203. Id. at 80190. For non-listed PCPs and technologies, the reviewingauthority must consider the case-specific factors and employ a pub-lic notice-and-comment process. Id. at 80234.

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One of the concerns about the PCP exclusion is that PCPsmay result in emissions increases of any collateral pollutant,which triggers NSR under the CAA. The 1996 proposal em-bodied the “primary purpose” test, which said that the pri-mary function of a PCP is to reduce pollution.204 It alsostated that the listed add-on technologies and switch to lesspolluting fuels may qualify as a PCP that would be pre-sumed to be environmentally beneficial.205 Other PCPs notlisted must be environmentally beneficial, and new add-ontechnologies must be demonstrated in practice.206

The new rule eliminated the primary purpose test and ex-panded the scope of listed PCPs and add-on technologies.207

It included as potential PCPs energy efficiency projects,the replacement, reconstruction, and modification of exist-ing pollution control equipment, and work practice stan-dards.208 Upgraded or rebuilt control equipment mustachieve a more stringent level of emissions reductions thanthe original one in terms of input- or output-based emissionsrate or must have the same level of performance, providedthat it is more energy-efficient.209 It clarified that non-airpollution impacts would not be considered in the environ-mentally beneficial determination.210 It limited the applica-bility of the PCP exclusion to existing sources.211

One of the most significant changes to the 1996 NSR pro-posal was that the environmentally beneficial test is con-ducted based on the determination as to whether a PCPwould have net environmental benefits.212 Net environmen-

tal benefits result when the emissions reductions of the pri-mary pollutant(s) are anticipated to outweigh any potentialincreases in collateral pollutants.213 The new actual-to-fu-ture-actual test is applied to the calculation of any collat-eral emissions increase.214 PCPs are available both in PSDand nonattainment areas.215 Only where any collateral pol-lutant contributing to nonattainment increases by a signifi-cant amount as a result of the PCP can the offset require-ment apply.216

Another significant change was that the applicant for thePCP exclusion is not required to conduct air quality model-ing if he determines no air quality-related values (AQRVs)exists in a nearby Class I area that could be impacted by ex-pected collateral emissions increases.217 The applicant canmake this determination after checking information, whichis publicly available on the Internet about whether anyAQRVs such as visibility have been identified for that areaby the federal land manager.218 Even if an AQRV exists thathave been identified by the federal land manager, the appli-cant also is not required to conduct a modeling analysis ifthere is no likely correlation between the AQRV and the pol-lutants emitted as a result of the PCP, including the casewhere collateral emissions will not increase by a significantamount.219 Then the applicant is merely required to submitsuch determination to the reviewing agency.220 In general,the reviewing authority has the discretion to request morespecific information about adverse impacts on AQRVs innearby Class I areas and, if it determines it as necessary, torequire the applicant to conduct air quality modeling.221

These changes aim to streamline the PCP process for pro-viding major sources with incentives to undertake environ-mentally beneficial projects.222

IV. Another Round of Heated Debate Over the NewNSR Rules

The new NSR rules provoked uproar among many stake-holders. Nine northeastern states brought suit in the U.S.


5-2005 35 ELR 10333

204. Id. at 80232; see 61 Fed. Reg. at 38261.

205. 67 Fed. Reg. at 80232; see 61 Fed. Reg. at 38260.

206. 67 Fed. Reg. at 80232; see 61 Fed. Reg. at 38261.

207. 67 Fed. Reg. at 80233.

208. Id.

209. Id. at 80234.

210. Id. EPA explained:

[C]ross-media tradeoffs are difficult to compare, so it is diffi-cult to weigh their importance in appraising the overall envi-ronmental benefit of a PCP. We solicited comments in theproposal on how to compare cross-media pollution, but wereceived no suggestions on how to design such a system. As aresult, we have determined that it is inappropriate to considernon-air impacts when considering whether projects, activi-ties, or work practices qualify for the PCP Exclusion.

Id. at 80236.

211. Id. at 80235. EPA reasoned:

Installing or implementing a project on an existing source ismore likely to improve the environment than is the construc-tion of a new source, since one can reasonably expect a PCPto reduce overall emissions, barring a considerable utilizationincrease. New sources, however, introduce new emissions tothe air without reducing existing emissions, and conse-quently should be as clean as possible. Furthermore, newemissions units are among the major capital investments inindustrial equipment, which are the very types of projects thatCongress intended to address in the NSR provisions whensuch projects result in an overall emissions increase from themajor stationary source. Thus, when emissions from a newsource exceed the significant level, they are subject to NSR,and all emissions that are generated from the new projectshould be addressed in the major NSR permit evaluation forthe major stationary source.

Id.

212. 61 Fed. Reg. at 38262 (soliciting comment on whether applicants forthe PCP exclusion should be required to consider cross-media im-pacts on any of the applicable CAA requirements; stating that only“de minimis” increases in the emissions of a collateral pollutant

could be exempted from the application of the environmentally ben-eficial test).

213. 67 Fed. Reg. at 80232.

214. Id.

215. Id. 80237.

216. Id. EPA said, however, that “a less than significant emissions in-crease may be subject to a State’s minor NSR requirements.” Id.

217. Id.

218. Id.

219. Id.

220. Id.

221. Id.

222. In this regard, EPA said:

The new, broader PCP Exclusion will ensure equitable treat-ment of all source categories and remove any disincentive forcompanies that wish to install pollution control and pollutionprevention projects, to the extent allowed by the CAA . . . .Despite today’s rule revisions addressing a broader array ofpollution control and pollution prevention projects at a largervariety of sources, we feel that the rule’s procedures are lesscomplex than and are clearer than the WEPCO PCP Exclu-sion and the July 1, 1994 policy guidance. We are satisfiedthat the final PCP Exclusion best achieves the goals of mini-mizing regulatory burden and reducing procedural delays forprojects that ensure net overall environmental protection.

Id. at 80233.

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Court of Appeals for the District of Columbia (D.C.) Circuitseeking an order staying the new proposed rule on Decem-ber 31, 2002, the day it was promulgated.223 They contendedthat “the changes to the preexisting NSR regulations devi-ated from CAA requirements and also that EPA’srulemaking process was procedurally flawed.”224 On March6, 2003, however, the D.C. Circuit refused to grant the mo-tion for the stay.225

A. Criticisms of the New NSR Rule: EnvironmentalGroups’ Arguments

A coalition of environmental groups also filed a petition forreconsideration with EPA. Environmental groups arguedthat EPA must begin a new rulemaking process for threereasons: (1) EPA had relied on “materials and recommen-dations that were developed after the 1996 and 1998 com-ment periods,” thereby precluding informed public com-ment; (2) changed circumstances after 1998 justified newrulemaking, such as electricity deregulation and a better un-derstanding of the public health and environmental effectsof power plant emissions; and (3) the December, 31, 2002,NSR rule violated the substantive provisions of the CAA,and EPA failed to adequately explain why the deviations inthe new rule from the 1996 and 1998 proposals were war-ranted.226 Environmental groups challenged almost everyaspect of the final rule, alleging that it creates too manyloopholes and, hence, would seriously compromise the en-vironmental protection goal of the CAA’s NSR program.

First, they argued that EPA’s business cycle rationale forthe 10-year look-back period is unfounded in light of thestudy it relied on,227 and that basing the calculation of thebaseline actual emissions on a source’s highest emissionsrate in any year within a 10-year period would nullify thesimple mandate of the CAA, which requires NSR whenevera proposed change is expected to result in an emissions in-crease, and violates the contemporaneity requirement as ar-ticulated by the D.C. Circuit in the 1979 Alabama PowerCo. v. Costel228 case. According to environmental groups,allowing netting transactions in addition to a 10-year base-line period and the use of a different time period for eachregulated pollutant confirmed the conclusion that EPA’smethodology violates the CAA’s requirement that NSR bebased on contemporaneous emissions increases and de-creases as part of the proposed change.229 Also, they warnedthat allowing inclusion of fugitive emissions in baselineemissions calculation would inflate baseline emissions, onthe one hand, and overestimate projected emissions, on theother hand, making it easy for existing sources to escapeNSR.230 Environmental groups contended that the newNSR rule lacks meaningful limitations on the discretion of

a permitting authority to approve the source’s quantifica-tion of fugitive emissions.231 This concern may be ad-dressed by applying conservative assumptions about quan-tifiable fugitive emissions. But verification systems willvary in terms of stringency from state to state. Given the factthat fugitive emissions are extremely difficult to quantify,inclusion of fugitive emissions will likely create enormousenforcement problems or big loopholes, depending on thewill or the financial resources of a state or local air qualitymanagement agency.

A recent report, published by the Environmental IntegrityProject (EIP), shows that large quantities of fugitive emis-sions in “upset” conditions are being released from regu-lated stationary sources.232 This report analyzed upset re-ports submitted by 57 facilities in 5 states, which includeCalifornia, Louisiana, Ohio, Pennsylvania, and Texas.These facilities include oil refineries, chemical plants, natu-ral gas-fired power plants, and one carbon black plant.233 Ofthese facilities, relatively accurate information about fugi-tive emissions was available only with regard to 37 facilitiesfrom Texas and Louisiana.234

The EIP found that these facilities, in 2003, emitted fugi-tive emissions in an amount that is many times greater theirreported 2002 annual emissions. Of six natural gas plants,four released significant amounts of VOCs and SO2.

235 Tenof the 18 refineries included in the study had annual emis-sions of at least one pollutant, SO2, CO, or VOCs, that weremore than one-quarter of reported emissions.236 Chemicalplants and the one carbon black plant emitted significantquantities of VOCs and CO during upsets. Benzene and bu-tadiene, toxic air pollutants subject to regulation under CAA§112, were released in massive amounts from some of thechemical plants.237 VOC and CO emissions from the carbonblack plant were 85 and 8 times greater the reported emis-sions, respectively.238

In overall, these 37 facilities released 63,411,603 poundsof air pollutants in 2003, which included 167,133 poundsof benzene and 142,754 pounds of butadiene.239 Morethan one-half of these emissions were CO emissions, andthe other one-half were split almost equally by VOCs andSO2 emissions.240

This report demonstrates two things. First, many station-ary sources may have gamed upset provisions under theCAA and facility-specific permit variances under stateSIPs.241 Second, most states have not yet developed a highlydeveloped fugitive emissions reporting system. Even incase a relatively reliable reporting system is in place, such asone in Texas, regulated sources underreported their fugitiveemissions. Therefore, environmental groups’ argument


35 ELR 10334 5-2005

223. David Mastroyannis-Zaft, EPA’s Revised New Source Review Regu-lations Take Effect, 30 Ecology L.Q. 805, 805 (2003).

224. Id. at 805-06.

225. New York v. EPA, No. 02-1387, 2003 U.S. App. LEXIS 19029(D.C. Cir. Mar. 6, 2003).

226. Earthjustice, Petition for Reconsideration 1-8 (2003), avail-able at http://www.earthjustice.org/backgrounder/documents/NSRpetition.pdf (last visited Mar. 1, 2005).

227. Id. at 16.

228. 636 F.2d 323, 10 ELR 20001 (D.C. Cir. 1979).

229. Earthjustice, supra note 226, at 21-25.

230. Id. at 9.

231. Id. at 8-9.

232. EIP, Gaming the System: How Off-the-Books Industrial

Upset Emissions Cheat the Public Out of Clean Air (2004)available at http://www.environmentalintegrity.org/pubs/EIP_upsets_report_FULL.pdf (last visited Mar. 1, 2005).

233. Id. at 5.

234. Id. at 5, 20-21.

235. Id. at 7-8; see also id. at 8, fig. 2.

236. Id. at 8-9; see also id. at 8, tbl. 2.

237. Id. at 9.

238. Id.

239. Id. at 5, 9; see also id. at 6-7, tbl. 1.

240. Id. at 5, fig. 1.

241. See id. at 13-17.

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raising serious concerns about inclusion of fugitive emis-sions in the calculations of baseline emissions and futureprojected actual emissions should be paid attention to byEPA and state and local air officials.

Second, environmental groups contended that EPA failedto reasonably explain why it had decided to retain the de-mand growth exclusion and even to extend it to other indus-tries, because it did not come up with a new rationale for jus-tifying the significant departure from its prior position.242

Specifically, the lack of procedural safeguards “would placean unduly large burden on [state] permitting authorities,”deny the public access to emissions data, and transformNSR into post-construction review.243 Also, state-by-statevariations in NSR enforcement would weaken the effective-ness of the NSR program.244

Third, they argued that EPA’s decision not to subjectPALs to the contemporaneity requirement violated the CAAand were arbitrary and capricious because of the Agency’sfailure to explain the reason for the change to prior propos-als.245 Under the final rule, the term of a PAL is 10 years.And, despite the bubble concept underlying PALs, a sourceowner is allowed to raise the PAL level without undergoingNSR, provided that the existing major emissions units cur-rently subject to a BACT or LAER requirement that was im-posed within the last 10 years are not contributing to theemissions increase.246 Automatic renewal is granted to thesource whose average emissions in any 2 years within thepreceding 10 years are at least 80% of the PAL. Environ-mental groups argued that, combined with a 10-year look-back period used for setting a PAL, this would allow for net-ting during an extended period of time, deprive the publicof a meaningful opportunity to participate in establishingPALs, and does not create any incentive to install modernpollution control.247 They also alleged that the final rulepermits the use of alternate monitoring without providingany meaningful check on the discretion of a state permit-ting authority and includes emissions factors with inherentinaccuracies as one of the four monitoring approaches, de-spite the fact that “a PAL necessitates superior monitoring”to be effective.248

Fourth, environmental groups criticized EPA for choos-ing the net emissions benefits test to be used for determininga qualifying PCP in violation of the statutory requirementthat NSR be triggered whenever a proposed physical or op-erational change would “result[ ] in the emission of any airpollutant not previously emitted.”249 More specifically, theyargued that EPA had not provided an opportunity for publiccomment on the inclusion of the replacement or reconstruc-tion of an emissions unit as a PCP, or offered any new justifi-cation for the departure from its prior position that, howeverbeneficial, “major capital investments in industrial equip-ment are the very types of projects that Congress intended toaddress in the new source modification provisions.”250

Finally, environmental groups contended that, unlike theprior proposals, the final rule sets the effective term of theClean Unit exemption at 10 years and allows the exemptionto be renewed for another 10 years without the unit beingsubject to new technology requirements.251 They basicallyargued that EPA’s chosen method for the Clean Unit desig-nation “flatly contravenes the statutory requirement[s] [ ]that a modification be determined based on changes that in-crease emissions,”252 and that the chosen technology shouldbe BACT or LAER, the most stringent one of its kind.253

B. Concerns About the Revised Routine MaintenanceException Rule

Many stakeholders expressed concerns about EPA’s pro-posed rule for the routine maintenance exception, because itwould allow sources to avoid NSR indefinitely by makingchanges to their facilities in an incremental manner, therebyresulting in increased pollution. They argued that EPA’s cat-egorical approach failed to consider “the large diversity ofindustries and situations,” because even sources with thesame industry have different maintenance needs “based onsuch factors as age, prior maintenance history, intensity ofuse, raw materials used in production processes, climate,and local labor costs.”254 They also alleged that the costthreshold and the minimum annual budget allowance to beestablished by EPA violated the statutory requirement thatNSR be conducted whenever emissions increases would re-sult from a proposed change.255 According to them, states,especially downwind states, would face more difficulty en-suring compliance with NAAQS, since “the proposed per seexemptions deprive states of one of the strongest tools theyhave in controlling emissions: federally uniform restrictionson modifications to existing sources.”256 This is becausecost-based exclusions may “allow sources to operate indefi-nitely without implementing state-of-the-art control tech-nology.”257 Furthermore, the cost-based approach wouldnot eliminate uncertainty altogether, in that even an activitywhich falls within the annual budget but is in essence not aroutine maintenance is considered a major modification.258

Establishing annual maintenance allowances “invites ma-nipulation of expenditure.” Sources would likely engage increative, but bad, accounting practices in an attempt tospread costs in a multiyear period.259 This in turn will lead toconflict and litigation over the cost calculation, and therebycreate another administrative complexity and resultingcosts and time, which might otherwise be spent on othermore important legal issues.260

In June 2002, EPA promised to reconsider the rules. OnOctober 27, 2003, however, it promulgated the final regula-


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242. Earthjustice, supra note 226, at 27-31.

243. Id. at 31-42.

244. Id. at 33-34.

245. Id. at 46-55.

246. Id. at 55-58.

247. Id. at 58-67.

248. Id. at 70-85.

249. Id. at 112-21.

250. Id. at 121-35.

251. Id. at 94-96.

252. Id. at 94.

253. Id. at 96-104.

254. Victor B. Flatt et al., Let the People Speak: Notice-and-CommentRulemaking (Lessons From the Controversial New Source ReviewProposal of the Clean Air Act), 34 ELR 10115, 10119, 10122 (Feb.2004).

255. See id. at 10119-20, 10124, 10126-27.

256. See id. at 10129-30.

257. Id. at 10123.

258. See id. at 10119.

259. See id. at 10122.

260. See id. at 10125.

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tion for the routine maintenance exception without much ofa change.261 The only exception was that EPA decided not tofinalize the annual budget allowance proposal.262 EPA alsodecided to implement the NSR rule as finalized on Decem-ber 31, 2002.

C. The U.S. Government Accountability Office (GAO)Studies on Stakeholders’ Views on the New NSR Rules

In response to objections to the new rules, Congress com-missioned the GAO to conduct surveys of key stakeholders’views on the revisions. In a October 2003 report, the GAOfound that federal and state enforcement officials and otherstakeholders were concerned that some of the revisions, es-pecially the proposed changes to the routine maintenancerule, would negatively impact ongoing federal and state en-forcement actions and settlement negotiations with indus-try.263 It also found that certain provisions in the December2002 final rule would limit the public’s access to emissiondata, because “[u]nder the rule, fewer facility changes maytrigger NSR and thus the need for permits and related re-quirements to notify the public about changes and to solicitcomments—unless state and local air quality agencies havetheir own permit and public outreach rules.”264 Further-more, the GAO pointed out that the lack of clarity about thedefinition of “reasonable possibility” and its “self-policing”nature in NSR determinations with regard to the demandgrowth exclusion “could potentially hinder enforcementand monitoring activities.”265

The October 2003 GAO report prompted some congres-sional members to ask EPA’s Inspector General to investi-gate the Administration’s claims that the new regulationswould not affect the ongoing NSR enforcement actions.266

A study conducted by a Rockefeller Family Fund projectand Council of State Governments found that changes to thepreexisting NSR rules could lead to an almost combined 1.4million tons more of persistent air pollutants in 12 northeast-ern states.267

In another report published in February 2004, the GAOgave a survey result, which showed that a majority of thestate officials expected the new rules to increase air emis-sions.268 According to the report, some state officials wereconcerned that the revisions would rather complicate theirjobs and thereby increase their workloads, since weakenedNSR enforcement would give fewer options for states tocomply with NAAQS.269

D. The Stay of the Routine Maintenance Exception Ruleand the Uncertain Future for NSR Reform

On December 24, 2003, the D.C. Circuit ordered the stay ofthe routine maintenance rule.270 However, the court onceagain denied the motions for the stay of the December 2002NSR rule on the grounds that “[p]etitioners [had] not dem-onstrated sufficient changed circumstances to justify revis-iting the [May 6] order.”271 On July 1, 2004, EPA formallyissued an administrative stay,272 and announced that itplanned to reconsider three issues concerning the routinemaintenance rule: (1) whether the rule as originally final-ized is allowable under the CAA; (2) the legal basis for se-lecting the 20% cost threshold; and (3) a simplified proce-dure for incorporating a FIP into SIPs to accommodatechanges to the NSR rules.273 Many observers expected theresult of the presidential election to decide the fate of theNSR rules, and several observers have predicted that theU.S. Supreme Court will ultimately hear the NSR debategiven splits in the various circuits.274 Because PresidentBush was reelected last November, it is expected that EPAwill continue to push its NSR initiative, and that the Courtwill ultimately resolve the ongoing controversy surround-ing the new NSR rule in coming years.

E. The Legality of the New NSR Rule

The new NSR rule will not have much national impact untilstates with an approved NSR program complete the SIP re-visions and implement their revised NSR regulations uponEPA’s approval. Currently, the new NSR rule has been im-plemented in 11 states that do not have an approved NSRprogram and other some states with a delegated NSR pro-gram.275 Hence, it is somewhat too early to tell how the newNSR rule will change the behavior of regulated industry inany significant manner.

When reading its brief submitted recently to the D.C. Cir-cuit, EPA’s legal position hinged primarily on two grounds.First, relevant CAA provisions are ambiguous such thatEPA is entitled to Chevron deference for the new definitionof the statutory term “change.”276 Second, the environmen-tal impacts of the new rule would be positive or zero, since itwould give regulated sources the incentive to engage in en-


35 ELR 10336 5-2005

261. 68 Fed. Reg. at 61248.

262. Id. at 61252 (“We have decided, for now, not to take final action onthe proposed annual maintenance, repair and replacement allow-ance approach.”).

263. U.S. GAO, New Source Review Revisions Could Affect Utility En-forcement Cases and Public Access to Emissions Data 15-21 (2003)(GAO-04-58), available at http://www.gao.gov/new.items/d0458.pdf (last visited Mar. 1, 2005).

264. Id. at 21-25.

265. Id. at 25-26.

266. 2 Studies Contradict EPA on New Rules; Changes to Boost Pollu-tion, They Say, Associated Press, Oct. 23, 2003, at A2.

267. See id.

268. U.S. GAO, Key Stakeholders’ Views on Revisions to the New SourceReview Program 13-23 (2004) (GAO-04-274), available athttp://www.gao.gov/new.items/d04274.pdf (last visited Mar. 1,2005).

269. Id. at 23-24.

270. New York v. EPA, 2003 U.S. App. LEXIS 26520 (D.C. Cir. Dec. 24,2003).

271. Id.

272. U.S. EPA, Prevention of Significant Deterioration (PSD) andNonattainment New Source Review (NSR): Equipment Replace-ment Provision of the Routine Maintenance, Repair, and Replace-ment Exclusion; Stay, 69 Fed. Reg. 40274 (July 1, 2004) (codified at40 C.F.R. §§51 and 52).

273. Id. at 40278.

274. Darren Samuelsohn, Clean Air: Court Schedule Indicates NSRRules’ Fate Rests on Next Presidential Administration, Green-

wire, Feb. 26, 2004, Air, Water & Climate, Vol. 10, No. 9, availableat LEXIS, Nexis Library, Greenwire File.

275. Mastroyannis-Zaft, supra note 223, at 809.

276. See Brief for the United States and EPA at 69-72, New York v. EPA,No 02-1387 (D.C. Cir. Dec. 31, 2002), available at http://www.epa.gov/nsr/documents/respondentbrief.pdf (last visited Mar. 1, 2005).EPA relied heavily on the Chevron and Alabama Power cases. Withrespect to PALs, EPA argued that the Alabama Power case gives itthe authority to set a plantwide emissions cap. According to EPA,deciding on the length of the contemporaneous period is also a “mat-ter [ ] left to its discretion.” See id. at 93-95.

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vironmentally beneficial projects without the fear of beingsubject to NSR.277 Adverse environmental impacts on exist-ing air quality that could otherwise result from rule changeswould be reduced to a minimum by implementation of anumber of safeguards provided under the new rule.278

Throughout the brief, EPA stressed the fact that it has theduty to balance the CAA’s clean air goal and economicgrowth needs in implementing the Act’s NSR program.279

Put differently, the reason for revising the prior rule was mo-tivated by the Agency’s belief that it deprived existingsources of operational flexibility to meet increased marketdemand or failed to give them incentives to invest in pollu-tion control technologies or energy efficiency projects,which would otherwise have produced air quality improve-ments. EPA made it clear that the primary goal of the newNSR rule is not to unduly inhibit economic growth, by stat-ing that “the purpose of the NSR provisions is not to compelemissions reductions from existing sources, but to limitemissions increases resulting from physical or operationalchanges.”280 In other words, in EPA’s view, the new NSRrule aims to return the previous state of affairs tilting towardenvironmental considerations to the right balance betweenair quality protection and economic development needs.

I would like to respond to EPA’s position by making twopoints. First, even if it is conceded that EPA has the authorityto interpret the NSR provisions in order to balance theNSR’s two equally important goals, the overriding goal ofthe CAA is to improve air quality on a continual basis for thebenefit of the general public. The NSR program has func-tioned as one of the valuable tools for accomplishing thatnoble goal. Throughout the Act’s history, Congress has con-tinued to increase the Act’s stringency by adding new pro-

gram requirements or by tightening preexisting standardsand requirements that it deemed necessary to move the na-tion toward meeting clean air goals. There is no doubt thatcongressional intent in enacting the NSR program in 1977,was to bring more and more sources into its coverage overtime. Congress did not anticipate that NSR would becomean end run game played by grandfathered sources, in partic-ular those in the energy industry. As a result, contribution toair quality improvements from industry has come mainlyfrom new sources or existing sources’ compliance with re-quirements under other programs under the CAA.

Moreover, EPA’s new definition of the term “change” isagainst its common sense understanding. The primary pur-pose of NSR should be to improve existing air quality. Anyimaginative interpretation of the term “change” cannot gotoo far so as to violate this simple mandate. It is thereforeclear that the enactment of the NSR program was the nation’schoice to emphasize clean air goals rather than economicgrowth. To paraphrase, the purpose of the NSR program is tocompel emission reductions from existing sources wheneverthey propose a change that will increase their actual emis-sions in a way that adversely impacts existing air quality.Thus, the first prong of EPA’s legal position is untenable.

Second, EPA’s argument that the new NSR rule wouldlead to air quality improvements because, in its view, moreexisting sources are expected to have incentives to invest inclean energy technologies cannot withstand analysis. Expe-rience with implementation of a variety of environmentalstatutes tells us that industry responds to the economicsrather than act on its environmental awareness. More oftenthan not, it is clear market signals, usually in the form of un-ambiguous statutory or regulatory mandates, that have suc-ceeded to motivate regulated sources to become cleaner ormore energy efficient. Under the new rule, existing sourcescan avoid NSR more easily than in the past. It is hard to be-lieve that they will have incentives to install state-of-the-artpollution control technologies or inherently cleaner energytechnologies that they had little incentive to use under theprevious rule. The opposite will be more true. Given this,PALs, the Clean Unit exclusion, and PCPs will likely beunderutilized. Otherwise, their frequent use will lead tomore and more existing sources escaping NSR for an ex-tended period of time. If it is assumed that their use will besubject to adequate public scrutiny, as EPA argues, industrywill find it cumbersome and hence not worthy of pursuit toopt in to such mechanisms. Furthermore, EPA seems to ne-glect the fact that new sources, which have been the drivingforce for technological innovation, will experience more ofan economic disadvantage under the new NSR rule. The no-tion of a level playing field or environmental comparabilityhardly found its way into the new rule.

Conclusion

To summarize, the new NSR rule is another example ofEPA’s failure to reconcile two conflicting goals: environ-mental protection and economic development. While alleg-edly providing increased simplicity and flexibility to indus-try, the rules aggravate the problems with the preexistingrules such as a bias against new sources and, most impor-tantly, compromise the clean air goals of the NSR program.

It appears that the issuance of the new NSR rules is out-side the scope of EPA’s delegated authority under the CAA.


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277. See id. at 65-66, 76-82. For example, in justifying its argument thatthe Clean Unit exclusion would produce air quality benefits, EPAcited the result of its review of a flexible permit pilot program, whichshows that five of the six participating facilities reduced their emis-sions beyond emissions limits contained in their permits. Id. at 109and n.61.

278. EPA argued that only a small percentage of sources, 3% of totalemissions, might be able to take advantage of a higher baseline usingthe new methodology used for calculating baseline emissions. Seeid. at 78-79. EPA reiterated its statements in the preamble of the 2002NSR rule. First, the demand growth exclusion is implementable, andstate minor NSR and Title V operating permit programs will be suc-cessful in incorporating into permits monitoring requirements ade-quate to prevent its abuse. See id. at 95-101. Second, in order to usethe Clean Unit exclusion, sources that have not gone through NSRmust comply with all the requirements of the NSR program. Further-more, renewal is not an automatic one, and to requalify, an existingclean unit must meet all the criteria as if it applied for the Clean Unitexclusion for the first time. The public has a right to participate in theprocess for designating a clean unit under the state minor NSR or theTitle V operating permit program, except for units that have recentlygone through NSR. At renewal time, an existing unit can requalifyonly if it complies with the requirements applicable in the area re-classified as nonattainment or more severe nonattainment. See id. at112-16. Third, to qualify for the PCP exclusion, a source may installone of the listed pollution control technologies presumed to be envi-ronmentally beneficial, and in its application must provide detailedinformation showing the environmental benefits of a control tech-nology it plans to use. If the proposed project does not belong to oneof the presumptively beneficial PCPs, it must be approved by the re-viewing authority in a state minor NSR or a Title V operating permit-ting process that provides for public notice-and-comment before theapplying source begins construction. A qualifying source has an on-going legal duty to operate its PCP in a manner that continues to pro-duce net environmental benefits, while minimizing emissions of col-lateral pollutants. See id. at 122-26.

279. Id. at 28, 75, 76, 95, 112.

280. Id. at 73-74, 75, 94-95 (emphasis in original).

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The Act contains three simple but clear requirements in itsNSR program: (1) a proposed physical or operationalchange that would increase emissions or result in collateralemissions must go through NSR preconstruction review;(2) emissions increases and decreases to be considered inNSR applicability determinations must be contemporane-ous; and (3) once NSR is triggered, the most stringent tech-nology requirement, BACT or LAER, must be applied to thesource. In issuing the new NSR rules, EPA seemed to be sopreoccupied with one of the two NSR goals, i.e., easing theregulatory burdens on industry, that it forgot the clear man-dates of the CAA.

Although it has becomes less important in controllingemissions of large coal-fired power plants, which hasincrementally been brought under the multi-pollutant trad-ing approach, NSR is still a valuable tool that can be used asa backstop to impose more stringent requirements ongrandfathered plants. Moreover, NSR enforcement repre-sents one of the most significant options available for statesto utilize in compelling other source categories, such as re-fineries, smelters, wood products industries, to update exist-ing pollution control. EPA should reconsider the December2002 NSR rule. NSR reform should not result in a rollbackof preexisting rules. Rather, it should be aimed at improve-ments in the nation’s air quality and laying the foundationfor creating the clean energy path.

In pursuing these goals, it is advisable for the nation to lis-ten to the following recommendations of the National Acad-emy of Public Administration in its EPA-commissionedreport, which, among others, include: (1) repealing grand-fathering; (2) retaining NSR for new sources; (3) the contin-uation of vigorous NSR enforcement; (4) the replacement ofNSR for existing source with a compulsory three-tier sys-tem (cap-and-trade for industrial sources with reliable mon-itoring records, cap-and-net, or unit-cap for other sources);and (5) requiring all new and existing sources to regularlyreport their emissions data to regulatory agencies and thepublic in order to enhance accountability.281 To add to theserecommendations, netting also should not be allowed. In thealternative, reporting requirements should be imposed onthose sources seeking credits for contemporaneous netemissions decreases at their facility. Another alternative ap-proach to NSR is to adopt output-based emissions standardsand to put more of an emphasis on energy efficiency andconservation goals in NSR permitting processes, in order tofacilitate sustainable energy development.282

EPA has justified changing the preexisting NSR rule onthe basis of the findings of its 90-day NSR report to the pres-ident, which said that the old NSR rule impeded the energydevelopment and environmentally beneficial projects of ex-isting power plants and refineries, while its adverse impacts

on new sources were minimal. Even if it is assumed that thefindings were correct, EPA seems to overlook the fact thatits new NSR rule would have the effect of skewing the pre-existing unlevel playing field toward old, grandfatheredsources more than in the past, however insignificant it mightbe. In other words, EPA stands on the wrong foundation.Because the status quo has been changed in a way that wouldaggravate intersource and regional disparities in emissionreduction requirements, the new NSR rule may not deliverits goal of economic efficiency unless it provides for addi-tional mechanisms that would zero out all the advantages itmay give to existing sources, in order to maintain the pre-existing status quo. The fundamental solution for resolv-ing the inequities in NSR implementation should be to re-peal grandfathering and to adopt uniform output-basedemission standards that are equally applicable to new andexisting sources.

When implementing environmental and energy law, sus-tainable development takes the form of environmental com-parability. Environmental comparability generally refers toa general policy approach that is designed to fully internal-ize the negative externalities of energy production and con-sumption.283 Its central strategy is to incorporate sustain-ability concerns into the current law under which all sourcescan compete on an equal footing with one another solely onthe basis of environmental performance, regardless of theirage.284 Available policy tools to this end include, amongother things, the phaseout of grandfathering, the adoption ofoutput-based emissions standards, and providing subsidiesfor accelerating the commercial deployment of cleaner,more energy-efficient sources such as renewable energy.285

They essentially symbolize sticking to the principle of sus-tainable development in the energy law field.

Environmental regulation discriminates against new andcleaner energy sources. In most instances, it imposes on newsources more stringent emission reduction requirements ona percentage, input basis, even though these sources often-times are much cleaner than old, grandfathered sources be-cause of the inherent nature of fuels or combustion technol-ogies actually used.286 “In 1996, coal plants had average


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281. See NAPA NSR Report, supra note 64, at 133-37.

282. See Foote, supra note 17. In this article, the author, who is currentlyEPA’s Assistant General Counsel in the Air and Radiation Division,argued that the NSR program can be implemented to promote cleanenergy technologies and energy conservation using a hierarchicalapproach, under which permitting agencies apply: (1) conservation;(2) renewable energy; (3) energy efficiency; and (4) add-on controltechnologies in descending order, with some help from states’ inte-grated resource planning (IRP) and demand-side management(DSM) policy. See id. at 10648, 10657-62. Notably, he argued thatCO2 emissions, which EPA has concluded is not an air pollutant,should be considered in NSR permitting decisions. See id. at10662-69.

283. See generally David R. Wooley, Environmental Comparability, 12Nat. Resources & Env’t 276 (1998).

284. Id. at 279.

285. For a discussion of various policy tools, see Bruce Biewald et al.,supra note 76, at 46-55.

286. Technology-based standards take the form of “emission rate” stan-dards, which are typically expressed in terms of the amount of emis-sions of a regulated pollutant based on heat input, such as pounds permillion Btu (lbs./mm Btu). More demanding emission rates are re-quired of clean fuel-burning sources under the name of BACT. Es-tablishing emission reduction requirements on a percentage, inputbasis penalizes new clean fuel-burning sources in two respects. First,clean fuel-burning sources usually employ highly energy-efficientfuel combustion technologies. For example, the maximum thermalefficiency of state-of-the-art combined-cycle, natural gas-firedplants is nearly 60%, whereas the most energy-efficient coal-burn-ing technology currently in dominant use has a thermal efficiency of33% at best. See Steven Ferrey, The New Rules: A Guide to

Electric Market Regulation 4 (2000). Thus, input-based emis-sion standards disregard energy efficiency aspects, producing thepractical effect of rewarding old, energy-inefficient energy sources,which are primarily grandfathered coal-fired power plants. Second,clean fuel-burning sources embodying energy-efficient technolo-gies are subject to percentage reduction requirements. Though beingless polluting, more energy efficient, these sources must install ex-pensive modern post-combustion control equipment whose effi-ciency gains are questionable in terms of effectiveness in pollutioncontrol compared to incurred investment monies. See Swift, supra

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emission rates that were [thirty] or [fifty] times higher thannew gas units with low-NOx combustion and SCR con-trols.”287 Midwest electric utilities’ average NOx emissionsmay be 10 times higher than those in the Northeast regioneven on a per Mwh basis.288

Although implementation of both the CAA’s NOx acidrain program289 and EPA’s NOx 1998 SIP call290 have had theeffect of addressing these disparities in emissions reductionrequirements to some extent, they fall short of achieving theenvironmental comparability goal. The SIP call’s emissionslimit of 0.15 pounds per million British thermal units291 is“still roughly [ten] to [twenty] times less stringent than typi-cal NOx emission rates required of new natural gas com-bined-cycle units in nonattainment areas.”292

Moreover, both CAA’s SO2 allowance trading and theEPA’s NOx Budget Trading (NBP) program293 designed toimplement its 1998 NOx SIP call each allocate SO2 and NOx

allowances based on historical operating data such as fuelinput.294 This allocation method penalizes new and cleaner

sources in two ways. First, grandfathering of allowancesconstitutes “scarcity rents” for large existing sources, be-cause new sources have to purchase allowances in the trad-ing market to begin operation. Second, input-based allow-ance allocation is another form of discrimination againstnew and cleaner, more energy-efficient sources, becausethese sources need more allowances under an input-basedallocation formula than under an output-based one.

Nine northeastern states and the District of Columbia un-der the Ozone Transport Commission (OTC) NOx cap-and-trade program295 or other states opting-in to EPA’s NBPhave not set aside allowances for new sources, or even ifthey did, the number of set-aside allowances were “not largeenough to cover all the new power plants seeking to enterthe market.”296 These inequities can be addressed ade-quately by establishing a cap-and-trade program, which in-corporate the following three features: (1) the adoption of anoutput-based allowance allocation method; (2) periodicalupdating of allowance allocations; and (3) the application ofthe same emission rate to new and existing sources.297 Theway in which the method for making allowance allocationson an output basis, called the Uniform Generation Perfor-mance Standard, can be implemented as follows. First, therelevant authority calculates the amount of total allowableemissions. Second, it establishes the same emission rate,which is applicable to all new and existing sources on a perkilowatt hour or Mwh basis, “by dividing the cap by the ex-pected generation for that region over a set period oftime.”298 Additionally, an output-based cap-and-trade pro-gram can be designed to allow renewable energy sources todirectly participate in trading. In this way, more efficientsources, regardless of their age and the chosen energy tech-nology, can gain a competitive advantage. This in turn pro-vides strong incentives for generation sources to becomecleaner, more energy-efficient.


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note 74, at 1539 (observing that new gas-fired plants subject to rigor-ous NSR control requirements would have to incur the cost of $2,500to $10,000 per ton of NOx removed, while grandfathered, coal-fired plants could reduce NOx emissions “at prices as low as $300per ton”).

287. Tim Woolf & Bruce Biewald, Electricity Market Distortions Associ-ated With Inconsistent Air Quality Regulations, Elec. J., Apr. 2000,at 44.

288. Ellen Roy, The Uniform Generation Performance Standard: Con-necting Electric Industry Restructuring and Air Quality Improve-ment, Elec. J., Jan./Feb. 1998, at 59.

289. 42 U.S.C. §7651f. Section 407 subjects affected coal-fired units withSO2 reduction requirements under other provisions of the acid rainprogram to the emissions rate standards for NOx. These units mustachieve new emission rates set by the EPA Administrator, whichwere to be implemented at the same pace as the SO2 emission limita-tions under Subchapter IV. See id.

290. Relying on its authority under CAA §110(k) to force states to amendtheir SIPs upon a finding of “significant contribution” to anotherstate’s NAAQS attainment or maintenance, called a SIP call, EPA in1998 made a NOx SIP call against 22 eastern states and the District ofColumbia. See id. §7410(k)(5); U.S. EPA, Finding of SignificantContribution and Rulemaking for Certain States in the Ozone Trans-port Assessment Group Region for Purposes of Reducing RegionalTransport of Ozone; Final Rule, 63 Fed. Reg. 57356 (Oct. 27, 1998)(codified at 40 C.F.R. §§51, 72, 75, and 96).

291. In its 1998 NOx SIP call, EPA made a finding that “highly cost-effec-tive” controls on large electric-generating units included both com-bustion and post-combustion control techniques that could be usedto achieve an emission rate of 0.15 lbs./mm Btu based on the unit’s1995-1996 average utilization rate. Id. at 57378. In fact, the chosenemission rate standard is the NSPS for NOx emissions applicable tocoal-fired units that has existed since 1979. See 40 C.F.R. §60.44a.

292. Woolf & Biewald, supra note 287, at 47.

293. The NOx SIP call gave the states the flexibility to choose whichsources to target and mix of control measures needed to achieve therequired NOx emissions reductions. Its most significant feature,however, was its requirement that the states allocate a budget for fos-sil fuel-fired electric steam-generating units, with the option to par-ticipate in an EPA-administered regional cap-and-trade program.EPA’s NBP was launched on May 1, 2003, in eight northeasternstates and the District of Columbia acting under the Ozone TransportCommission (OTC), thereby replacing the OTC’s NOx trading pro-gram with respect to these states. Beginning on May 31, 2004, 11other states subject to the NOx SIP call joined the program. See U.S.

EPA, NOx Budget Trading Program: 2003 Progress and

Compliance Report (2004) (EPA 430-R-04-010), available athttp://www.epa.gov/airmarkets/cmprpt/nox03/noxreport03.pdf(last visited Mar. 1, 2005).

294. Under CAA Subchapter IV, SO2 allowances were allocated usinghistoric 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-

ginning operation after December 31, 1995, must purchase allow-ances in EPA-administered auctions or from existing sources whohave allowances to sell in the secondary market. Id. §7651d(g)(3)-(4). Under EPA’s NBP, a state’s baseline inventory for large elec-tric-generating units is based on “the higher of the 1995 or 1996ozone season heat input values.” 63 Fed. Reg. at 57407. Coveredlarge nonelectric-generating units, which are defined as nonutilityindustrial boilers and turbines units with a capacity greater than250 mm Btu per hour or with NOx emissions greater than one tonper day, are required to achieve a 60% reduction of their preexist-ing NOx emissions. Id. at 57378, 57415. But note that participat-ing states have the discretion to apportion allowances betweencovered units.

295. Under CAA §§176A and 184, northeastern states comprising theOTC, except Virginia, agreed to implement a regional NOx cap-and-trade program in 1994 and finalized a model rule for NOx allow-ance trading in 1996, which would be implemented by participatingstates beginning in 1999. See 42 U.S.C. §§7506a, 7511c; Memoran-dum of Understanding Among the States of the Ozone TransportCommission on the Development of a Regional Strategy Concern-ing the Control of Stationary Source Nitrogen Oxide Emissions(Sept. 27, 1994); Laurel J. Carlson, Northeast States for Co-

ordinated Air Use Management/Mid-Atlantic Regional

Air Management Ass’n NOx Budget Model Rule (1996),available at http://www.epa.gov/airmarkets/otc/otcrule.zip (lastvisited Mar. 1, 2005); OTC, NOx Budget Program: 1999-2002Progress Report 5 (2003) (EPA 430-R-03-900), available athttp://www.epa.gov/airmarkets/otc/otcreport.pdf (last visited Mar.1, 2005).

296. Woolf & Biewald, supra note 287, at 45-46.

297. Id. at 47.

298. Roy, supra note 288, at 57.

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It is important to note, however, that implementation ofoutput-based allowance allocation or NSPS proves difficultin practice. At one time, EPA pursued output-based NSPSfor NOx control applied to electric utility boilers built, modi-fied, or reconstructed after July 9, 1997, but it withdrew theproposal after the D.C. Circuit’s vacatur.299 Massachusetts,one of the OTC states that had agreed to implement the OTCNOx cap-and-trade program in 1994, adopted an output-based allocation formula in November 1997. But it still setdifferent emission rate standards for four different catego-ries of affected sources, and new sources were allocated al-lowances based on their permit limits.300 Worse, new

sources had to surrender up to 50% of their allowances ifthey left over unused allowances.301

Climate change policy may be the most effective way ofpromoting clean energy development, given that there arecurrently no commercially available carbon capture and se-questration technologies. Thus, it has the effect of restrict-ing fossil fuel usage. Because old, dirtier sources usually usemore carbon-intensive fuels, it rewards cleaner, more effi-cient energy sources, without relying on output-based stan-dards. Put differently, well-designed climate change policyhas the potential to send price signals to energy producersand consumers that adequately reflect environmental exter-nalities of energy-related products and activities.

Most of these and other reform proposals require actionon the part of Congress. It will take time to gain political cur-rency. The United States badly needs the leadership of bothchambers of Congress to clear the way for achieving thegoal of sustainable development.


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299. U.S. EPA, Revision of Standards of Performance for Nitrogen OxideEmissions From New Fossil Fuel-Fired Steam-Generating Units;Revisions to Reporting Requirements for Standards of Performancefor New Fossil Fuel-Fired Steam-Generating Units, 63 Fed. Reg.49442 (Sept. 16, 1998); Lignite Energy Council v. EPA, No.98-1525, 1999 U.S. App. LEXIS 26263, *2, 30 ELR 20279 (D.C.Cir. 1999).

300. Roy, supra note 288, at 62. 301. Id.

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