2
Regulatory Overview

INTRODUCTION

The Clean Air Act (CAA) requires the U.S. Environmental Protection Agency (EPA) to set National Ambient Air Quality Standards (NAAQS) at levels that protect public health and welfare (see Table 2-1). These pollutants are known as criteria air pollutants because the NAAQS are based on “criteria documents” that describe the sources and effects of each pollutant.

The CAA seeks to control emissions of air pollutants to ensure that the NAAQS are attained and maintained and that air quality that is better than the NAAQS is protected. The statute’s mechanisms include a pair of programs that together are known as New Source Review (NSR). These programs establish requirements that must be met before a large stationary source of pollution (a source with a fixed location, such as a factory or an electricity-generating facility) may be constructed or modified. NSR thus covers modifications of existing large sources as well as construction of new ones.

One NSR program, Prevention of Significant Deterioration (PSD), applies to the construction or modification of any “major emitting facility” locating in an “attainment area”—an area whose air quality meets the NAAQS or is unclassifiable (CAA § 165(a), 42 USC § 7465(a)). The other, commonly called Part D NSR, applies to the construction or modification of “major stationary sources” (slightly different from “major emitting facilities”) in “nonattainment areas”—those classified as not meeting the NAAQS (CAA § 172(b)(5), 42 USC § 7502 (b)(5)). We provide an overview of both NSR programs later in this chapter.



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New Source Review for Stationary Sources of Air Pollution 2 Regulatory Overview INTRODUCTION The Clean Air Act (CAA) requires the U.S. Environmental Protection Agency (EPA) to set National Ambient Air Quality Standards (NAAQS) at levels that protect public health and welfare (see Table 2-1). These pollutants are known as criteria air pollutants because the NAAQS are based on “criteria documents” that describe the sources and effects of each pollutant. The CAA seeks to control emissions of air pollutants to ensure that the NAAQS are attained and maintained and that air quality that is better than the NAAQS is protected. The statute’s mechanisms include a pair of programs that together are known as New Source Review (NSR). These programs establish requirements that must be met before a large stationary source of pollution (a source with a fixed location, such as a factory or an electricity-generating facility) may be constructed or modified. NSR thus covers modifications of existing large sources as well as construction of new ones. One NSR program, Prevention of Significant Deterioration (PSD), applies to the construction or modification of any “major emitting facility” locating in an “attainment area”—an area whose air quality meets the NAAQS or is unclassifiable (CAA § 165(a), 42 USC § 7465(a)). The other, commonly called Part D NSR, applies to the construction or modification of “major stationary sources” (slightly different from “major emitting facilities”) in “nonattainment areas”—those classified as not meeting the NAAQS (CAA § 172(b)(5), 42 USC § 7502 (b)(5)). We provide an overview of both NSR programs later in this chapter.

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New Source Review for Stationary Sources of Air Pollution TABLE 2-1 National Ambient Air Quality Standards Pollutant or Indicator Averaging Times Primary Standard Secondary Standard Carbon monoxide (CO) 8 hra 9 ppm (10 mg/m3) None   1 hra 35 ppm (40 mg/m3) None Lead (Pb) Quarter (average) 1.5 µg/m3 Same as primary Nitrogen dioxide (NO2) Year (average) 0.053 ppm (100 µg/m3) Same as primary Particulate matter < 10 µm in aerodynamic diameter (PM10)f Year (average)b 50 µg/m3 Same as primary 24 hra 150 µg/m3 Same as primary Particulate matter < 2.5 µm in aerodynamic diameter (PM2.5)f Year (average)c 15 µg/m3 Same as primary 24 hrd 65 µg/m3 Same as primary Ozone (O3 )8 hre 0.08 ppm Same as primary Sulfur oxides (SOx) Year (average) 0.03 ppm —   24 hra 0.14 ppm —   3 hra — 0.5 ppm (1,300 µg/m3) aNot to be exceeded more than once per calendar year. bTo attain this standard, the expected annual average PM10 concentration at each monitor in an area must not exceed 50 µg/m3. cTo attain this standard, the 3-year average of the annual average PM2.5 concentrations from single or multiple community-oriented monitors must not exceed 15 µg/m3. dTo attain this standard, the 3-year average of the 98th percentile of 24-hr concentrations at each population-oriented monitor in an area must not exceed 65 µg/m3. eTo attain this standard, the 3-year average of the fourth-highest daily maximal 8-hr average O3 concentrations measured at each monitor in an area over each year must not exceed 0.08 ppm. fEPA has recently proposed to revise these standards (see 71 Fed. Reg. 2620 [2006]). SOURCE: EPA 2004a. The CAA defines a modification as “any physical change, or change in the method of operation of a stationary source” that significantly “increases” its emissions of air pollution (CAA §111(a)(4), 42 USC § 7411(a)(4)).1 That definition applies to both the PSD (CAA §169(2)(C), 42 USC § 7479(2)(C)) and Part D NSR (CAA § 171(4), 42 USC § 7501(4)) programs. The definition covers not only the addition of new emission points to existing sources 1 The CAA does not expressly exempt even very small increases in emissions. But EPA, with court approval, has exempted nonsignificant increases from NSR. Significance levels are set out in Box 2-1. Use of the term “physical change” in the rest of this report also includes a change in the method of operation of a stationary source.

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New Source Review for Stationary Sources of Air Pollution but also to at least some changes at existing emission points. (As discussed later, EPA has exempted changes that are “routine maintenance, repair, and replacement,” a term whose scope is in considerable dispute.) EPA regulations governing NSR (40 CFR 51.165-166 and 40 CFR 52.21) elaborate on the statutory definition of a modification.2 In 2002 and 2003, EPA amended those regulations. The alterations affect only existing sources whose operations are being altered; the treatment of new sources is unchanged. The first of the revisions, published December 31, 2002 (67 Fed. Reg. 80186 [2002]), changed the rules in five ways. These changes are mainly concerned with determining whether a proposed project would “increase” emissions and with exempting from NSR some kinds of projects that were subject to NSR prior to the rule change. Portions of the 2002 rule were vacated by the D.C. Circuit Court of Appeals in New York v. EPA, 413 F.3d 3 (D.C. Cir. 2005). EPA amended the rules again on October 27, 2003 (68 Fed. Reg. 61248 [2003]). This revision established what became known as the equipment replacement provision (ERP); it provided that some kind of replacements of equipment at existing major stationary sources would be considered routine maintenance, repair, and replacement and hence exempt from NSR. This rule never went into effect, due to a judicial stay, and was vacated by the D.C. Circuit Court of Appeals in New York v. EPA, 443 F.3d. 880 (D.C. Cir. 2006). (EPA’s petition for rehearing by the entire active membership of the circuit court is currently pending.) NEW SOURCE REVIEW PROGRAMS The two NSR programs—the PSD program and the Part D NSR program—have two special characteristics. First, each program requires that the allowable emission level of a proposed new or modified source be based on a case-by-case evaluation of how much emission reduction can be accomplished. Second, each program gives special attention to proposed new or modified sources in or near sensitive areas; the Part D NSR program emphasizes areas that violate air-quality standards, and PSD seeks to give special protection to national parklands, such as large national parks and wilderness areas, as well as areas that have experienced substantial growth in concentrations of sulfur dioxide (SO2), nitrogen oxides (NOx), and particulate matter (PM). 2 EPA’s regulations refer to a covered modification as a “major modification.” In this report, we use the statutory term “modification” interchangeably with the regulatory term “major modification.”

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New Source Review for Stationary Sources of Air Pollution Prevention of Significant Deterioration: Evolution and Summary The PSD program was born in the early 1970s after enactment of the CAA amendments of 1970 (Pub. L. 91-604). The amendments established the basics of today’s CAA. EPA was required to establish NAAQS, and the states were commanded to write state implementation plans (SIPs) to ensure that the NAAQS were attained and maintained. EPA was also obligated to develop New Source Performance Standards (NSPS), based on levels of emissions that can be achieved using the best demonstrated technology, for categories of new and modified stationary sources whose emissions might endanger public health or welfare. A source within a category for which there are NSPS must comply when the source is constructed or physically or operationally changed in a way that increases emissions. The 1970 amendments did not expressly stipulate whether states were required to establish measures to prevent the deterioration of air quality that is superior to the NAAQS. EPA administrator William Ruckelshaus ruled that states had no obligation to do so. However, the U.S. District Court for the District of Columbia overturned that interpretation of the Act (Sierra Club v. Ruckelshaus, 344 F. Supp. 253 [1972]). An equally divided U.S. Supreme Court eventually affirmed that decision without opinion (Fri v. Sierra Club, 412 U.S. 541 [1973]). As a result, EPA created the PSD program in 1974 to impose requirements on the construction or modification of major sources in clean air areas (39 Fed. Reg. 42510 [1974]). Congress altered and codified the program in the CAA amendments of 1977 (Pub. L. 95-95, § 127). Later, by technical amendment, Congress made clear that the PSD program, as in EPA’s 1974 rules, covers modifications (Pub. L. 95-190, § 14(a)(54) [adding CAA § 169(2)(C), 42 USC § 7479(2)(C) defining the term construction to include modifications]). In Section 160 of the CAA (42 USC § 7460), Congress articulated several goals for the PSD program, such as protection of national parks and the prevention of health and welfare effects that can occur at ambient concentrations allowed by the NAAQS (see Box 2-1). Some of these goals (e.g., to prevent transboundary air pollution) seem primarily focused on decreasing national or regional emissions loadings. Others, such as the prevention of health effects, are concerned also with local growth in emissions that may have little effect on broad regional or national emissions but which threaten the health of nearby individuals and the welfare of adjacent national parks or other national treasures. The PSD program requires a permit for the construction or modification of a “major emitting facility” in an area to which the program applies (CAA § 165(a), 42 USC § 7475(a)) (see Box 2-2). The program applies in every area that attains at least one of the NAAQS (Alabama Power v. Costle, 636 F.2d 323, 364-368 [D.C. Cir. 1980] [CAA

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New Source Review for Stationary Sources of Air Pollution BOX 2-1 Section 160 of the Clean Air Act The purposes of this part are as follows: to protect public health and welfare from any actual or potential adverse effect which in the Administrator’s judgment may reasonably be anticipate[d] to occur from air pollution or from exposures to pollutants in other media, which pollutants originate as emissions to the ambient air[,] notwithstanding attainment and maintenance of all national ambient air quality standards; to preserve, protect, and enhance the air quality in national parks, national wilderness areas, national monuments, national seashores, and other areas of special national or regional natural, recreational, scenic, or historic value; to insure that economic growth will occur in a manner consistent with the preservation of existing clean air resources; to assure that emissions from any source in any State will not interfere with any portion of the applicable implementation plan to prevent significant deterioration of air quality for any other State; and to assure that any decision to permit increased air pollution in any area to which this section applies is made only after careful evaluation of all the consequences of such a decision and after adequate procedural opportunities for informed public participation in the decision-making process. § 165(a), 42 USC § 7475(a)]). Because no area violates all the NAAQS, PSD applies nationwide. (It does not apply, however, to emissions of pollutants for which the source’s locale does not attain the NAAQS; the Part D NSR program applies to those.) If a source is in one of 28 named categories, it is a major emitting facility if its “potential to emit” any regulated air pollutant is 100 tons/year or more. Otherwise, the source is covered if its potential to emit is 250 tons/year or more (CAA § 169(1), 42 USC § 7479(1)). Potential to emit generally represents the source’s emissions if it is operated at maximum design capacity. A source may reduce its potential to emit by agreeing to a legally binding limit on its emissions (e.g., 40 CFR § 51.166(b)(4)). If the source agrees to a limit that reduces its potential to emit below the coverage thresholds, it is no longer a major emitting facility and is exempt from the program. Such a source is often called a synthetic minor.

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New Source Review for Stationary Sources of Air Pollution BOX 2-2 Major Requirements for Obtaining a PSD Permit A public hearing has been held on the application. The owner or operator has shown that the proposed project would not contribute to a violation of the NAAQS or the PSD increments. The proposed project is subject to the best available control technology for each pollutant emitted in more than de minimis amounts. Effects of the proposed project on the air-quality-related values of Class I areas have been analyzed. The applicant agrees to monitor the source’s effects. SOURCE: Adapted from CAA § 165(a), 42 USC § 7475(a). A modification of a major emitting facility requires a PSD permit if it would increase the net emissions of a pollutant by a “significant amount” (see Box 2-3). Significance levels are based on the levels at which, in EPA’s view, the benefits of regulation would be de minimis or where administrative necessity dictates an exemption. An applicant for a PSD permit must show BOX 2-3 EPA Significance Levels of Emission of Criteria Pollutants Carbon monoxide: 100 tons/year Nitrogen oxides: 40 tons/year Sulfur dioxide: 40 tons/year Ozone: 40 tons of volatile organic compounds per year Lead: 0.6 tons/year PM10: 25 tons/year PM2.5: 15 tons/year SOURCE: 40 CFR § 51.166(b)(23)(i).

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New Source Review for Stationary Sources of Air Pollution that the new or modified facility will, for each regulated pollutant emitted in significant amounts, limit emissions to the level achievable through use of the best available control technology (BACT). The BACT determination is made on a case-by-case basis and must be at least as stringent as whatever NSPS exist for the source’s category (CAA § 169(3), 42 USC § 7479(3)). Since 1987, EPA has stated that BACT must be set with a top-down approach; that is, BACT should be set at the most stringent level achieved by a source in the same category unless the applicant can show that level to be unachievable (61 Fed. Reg. 38250, 38272-38273 [1996], which proposes to incorporate this approach formally into EPA’s rules). The applicant also must show that the new or modified source, in combination with emission increases from other sources, will comply with a system of increments that limit permissible growth in air pollution above the baseline concentrations—the concentrations that existed in an area when the first application was filed for a PSD permit there (CAA § 169(4), 42 USC § 7479(4)). Increments exist for NO2, SO2, and PM (see Box 2-4).3 The size of the increments varies with an area’s classification as Class I, II, or III. The largest increments, and hence the least stringent restrictions on growth, apply in Class III areas. The tightest increments apply in Class I areas. This tends to encourage new sources to stay away from these areas or to install strict control technology if they wish to locate near Class I areas. Congress designated 158 large national parks and wilderness areas existing in 1977 as mandatory Class I areas. Most Class I areas are west of the Mississippi River; nearly one-fourth of them are in Utah, Arizona, New Mexico, or Colorado (Oren 1989). The remainder of the nation initially was classified as Class II. States and Indian tribes are allowed to redesignate areas as Class I or (except for some parklands) as Class III. The states have not redesignated any areas. To date, several Indian tribes have designated their reservations as Class I. No areas have been designated as Class III, and the many national parks and wilderness areas created since 1977 (e.g., those created by Congress in 1980 in Alaska) have remained Class II areas. About 39 states have incorporated the PSD program into their SIPs. In some of the remainder (such as New York), EPA runs the program itself but delegates its responsibility to the state for most day-by-day decisions; in the rest, EPA runs the program directly. In 2001, EPA estimated that PSD control-technology determinations from 1997 to 2001 eliminated a potential increase of 1.4 million tons of air 3 The SO2 increments are stated in the CAA. The statute also established increments for total suspended particulates (TSP). EPA, pursuant to Congressional direction, has since replaced those increments with equivalently strict increments. The statute imposes an obligation on EPA to establish increments or equivalent measures for other criteria pollutants (CAA § 166, 42 USC § 7476). This mandate has been used to force EPA to set increments for NOx, but there has been no effort to compel the agency to meet section 166 for other pollutants.

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New Source Review for Stationary Sources of Air Pollution BOX 2-4 PSD Increments Class I Increment (µg/m3) SO2   Annual arithmetic mean 2 24-hr maximum 5 3-hr maximum 25 NO2   Annual arithmetic mean 2.5 PM10   Annual arithmetic mean 4 24-hr maximum 8 Class II   SO2   Annual arithmetic mean 20 24-hr maximum 91 3-hr maximum 512 NO2   Annual arithmetic mean 25 PM10   Annual arithmetic mean 17 24-hr maximum 30 Class III PSD increments   SO2   Annual arithmetic mean 40 24-hr maximum 182 3-hr maximum 700 NO2   Annual arithmetic mean 50 PM10   Annual arithmetic mean 34 24-hr maximum 60 SOURCE: 40 CFR § 51.166(c).

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New Source Review for Stationary Sources of Air Pollution pollution per year. About 822,000 tons of these reductions, or about 60%, were NOx, and about 420,000 tons, or about 30%, were SO2. Some 90% of such benefits are believed to have occurred at new electricity-generating facilities (EPA 2001). These estimates do not take into account benefits that occur when source operators limit emissions so that the PSD permit process will not apply. Part D New Source Review The 1977 CAA amendments included an NSR program for nonattainment areas (those whose air quality does not meet the NAAQS). The program also applies to major stationary sources of volatile organic compounds (VOCs) in the ozone (O3) transport region in the Northeast even if they are in attainment areas (CAA § 184(b)(2), 42 USC § 7511c(b)(2)), because emissions of VOCs contribute to violations of the O3 ambient standards. In 1970, Congress required attainment of the primary standards no later than 3 years after approval of a state’s SIP, with a possible 2-year extension. It became clear that timetable would not be met, and in late 1976, EPA published an interpretive ruling that outlined conditions under which new and modified major sources would be allowed in areas that failed to attain the air-quality standards on schedule (41 Fed. Reg. 55524 [1976], codified as 40 C.F.R. § 51, Appendix S). The purpose of the ruling’s conditions was to allow economic growth while minimizing the effect of new and modified sources on air quality in areas that had failed to meet the standards. Congress codified the program (known as Part D NSR because it is included in that part of the CAA) in 1977 as part of a renewed effort to bring about attainment of the NAAQS (Pub. L. 95-95, § 129). Part D NSR requires that an operator obtain a permit before construction or modification of a major stationary source (see Box 2-5). Generally, a major stationary source is defined as one that emits or has the potential to emit any air pollutant at more than 100 tons/year (CAA § 302(j), 42 USC § 7602(j)). (The quantity is lower for NOx and VOCs in O3 nonattainment areas that are classified as in “moderate,” “serious,” “severe,” or “extreme” violation [e.g., CAA §182(c), 42 USC § 7511a (c)]). A major source is covered only to the extent that its emissions would contribute to nonattainment of a NAAQS. Thus, if a proposed source would emit two pollutants and the area violates the NAAQS for only one, the source is covered by Part D NSR for that pollutant and by PSD for the other. As under the PSD permit, a modification is covered if it would result in an increase in pollutants that is “significant”—that is, at least exceeding the levels in Box 2-1. To obtain a permit to construct or modify, the applicant must show that the new or modified source will emit at the lowest achievable emission rate (LAER), defined in the statute as the more stringent of the tightest emission

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New Source Review for Stationary Sources of Air Pollution BOX 2-5 Part D NSR Permit Requirements The applicant must obtain emission offsets (or, in an area in an economic development zone, fit within a margin for growth specified in the SIP). The applicant must show that all sources it owns or operates in the state are in compliance. EPA must not have found that the area is not implementing its SIP. The benefits of the proposed source significantly outweigh the environmental and social costs. SOURCE: Adapted from CAA § 173, 42 USC § 7503. limit achieved in practice or the tightest SIP limit for that category of source (unless the operator can show that level not to be achievable) (Section § 173 (a)(2), 42 USC § 7503(a)(2)). The applicant must also (except in a few cases) obtain emission offsets—reductions in emission from other sources that are enforceable and not otherwise required—so that the construction or modification will not disrupt progress toward attaining the NAAQS. In areas classified as in serious, severe, or extreme nonattainment of the O3 standard, the offset must be greater than 1-to-1. The Part D NSR program has been incorporated by the states into their SIPs for all nonattainment areas. Thus, in contrast with the case of PSD, there is no area where EPA runs the program. NEW SOURCE REVIEW IN THE FRAMEWORK OF THE CLEAN AIR ACT The role of NSR can best be appreciated by outlining the other mechanisms in the act that control emissions from stationary sources: Under section 110 (42 USC § 7410), each state must prepare and enforce a SIP for the NAAQS pollutants. The SIP must demonstrate that it will result in attainment and maintenance of the primary NAAQS by a given deadline and of the secondary standards as expeditiously as practicable. If an area is in attainment, its SIP must show that the standards will be maintained. SIPs are required to include “minor” NSR programs that control emissions from the construction and modification of sources that

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New Source Review for Stationary Sources of Air Pollution are too small to be covered by the NSR programs. SIPs may regulate new and modified major stationary sources of air pollution more strictly than NSR, although this does not happen often. Under Section 111 (42 USC § 7411), EPA establishes NSPS for categories of stationary sources that emit air pollution that may endanger public health or welfare. NSPS emission limits are based on the degree of emission limitation that can be achieved by a source in a category through use of the best demonstrated technology. NSPS (with an exception not relevant here) apply only to sources that commence construction or modification after the NSPS for the category are proposed (CAA § 111(a)(2), 42 USC § 7411(a)(2)). As summarized above, BACT and LAER emission limits under the NSR programs must be at least as stringent as NSPS. Thus, NSPS generally do not require control in excess of NSR.4 Section 112 (42 USC § 7412) requires EPA to establish categorywide standards to limit emissions of hazardous air pollutants (HAPs). Those standards are known as National Emissions Standards for Hazardous Air Pollutants (NESHAPs). Because some HAPs are subsets of PM and VOCs (precursors to ozone formation), this requirement results in regulation of pollutants covered by the NAAQS. The requirement can potentially lead to regulation of new and modified sources that is stricter than NSR. Section 169A (42 USC § 7491) establishes a national goal of eliminating human-caused degradation of visibility in mandatory Class I areas (national parks and similar areas) where visibility is an air-quality-related value. (Out of the 158 mandatory Class I areas, 156 fall into this category.) The program requires EPA to establish requirements for implementing this goal and to mandate the installation of the best available retrofit technology (BART) on some categories of large sources constructed in the period of 1962 and 1977. In 1980, EPA established rules for regulating visibility degradation that can be reasonably attributed to one or a few large stationary sources (40 CFR § 51.302). The program includes regulation of major new sources that are in nonattainment areas (and are therefore exempt from PSD) but might damage visibility in Class I areas (40 CFR § 51.307). The rules in effect fill a gap in NSR as it had been interpreted by the courts. The agency has also promulgated rules for combating regional haze, which is caused by many sources. These rules set out criteria for states to use in making BART determinations. States need not make BART determinations to the extent their programs are “better than BART.”5 There are two main categories of such programs. The first consists of programs in states subject to the Clean Air Interstate Rule (CAIR) summarized below. In these states, 4 There can be exceptions. NSPS can cover sources that are not large enough to be “major sources” covered by NSR. 5 The “better than BART” provisions are presently being challenged in court.

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New Source Review for Stationary Sources of Air Pollution A source that is not an electricity-generating facility is allowed to calculate annual emissions after a proposed physical change by projecting its actual emissions after the change. The projected emissions are compared with emissions before the change to see whether there would be a significant increase, so this method is known as the actual-to-projected-actual approach. The source need not obtain a permit that limits it to the projected emissions. (Electricity-generating facilities were already permitted by the WEPCO rule to use this approach.) Increases in emissions that result from increased demand, rather than from the change itself, can be excluded in calculating postchange annual emissions if the emission increase would have been physically possible during the 24-month period for calculating prechange emissions. If using the new method would exempt the project from NSR and it is reasonable to believe that the project might result in a significant emission increase, the source must track its postchange emissions for 5 years (10 years in some cases).10 The previous rules, as described earlier, had used the source’s postchange potential to emit (its maximum design emissions reduced in accordance with any legal limit on its emissions) as the measure of its postchange emissions; this method is now required only for new units at existing facilities.11 Sources are allowed to seek permission to establish a plantwide applicability limitation (PAL)—a limit on emissions from the plant as a whole—to determine whether an individual physical or operational change increases emissions and therefore constitutes a modification. A PAL runs for 10 years and is renewable. Physical changes at a plant do not require an NSR permit so long as the PAL is not exceeded. The PAL’s size for each pollutant is calculated by adding the appropriate “significance level” (see Box 2-1) to the source’s average annual emissions (calculated under the 2-years-in-10 methodology described above for calculating prechange emissions). The previous rules had no similar provisions.12 Physical changes at a “clean unit”—one that meets emission limits that are equal in stringency to those required under the NSR programs— were exempted from needing an NSR permit if the changed unit continues to meet its maximum-allowable emission rate. The unit need not have passed through NSR if its operator presents analyses of its air-quality effects that 10 The D.C. Court of Appeals, in June 2005, remanded this requirement to EPA for explanation of why the agency does not apply it to all sources using the actual-to-projected-actual test (New York v. EPA, 413 F.3d 3 [D.C. Cir. 2005]). 11 Many industries believe that NSR should apply only to a change that increases a source’s potential to emit. EPA in 1982 promised to propose this approach in what is known as Exhibit B to the settlement in Chemical Manufacturers Association v. EPA. EPA proposed and rejected this approach in the 2002 rule making, and the New York court upheld the agency. 12 This provision was modeled after a program that has been in effect in Oregon for a number of years.

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New Source Review for Stationary Sources of Air Pollution are like those required by NSR. The exemption lasts for 10 years after pollution controls are brought into operation and is renewable if the pollution controls continue to be as strict as those required by NSR. This change was vacated in New York v. EPA, 413 F.3d 3 (D.C. Cir. 2005) as beyond EPA’s authority under the CAA. The existing exemption from NSR for PCPs was expanded. This exemption applies when a permitting authority deems the project to be environmentally beneficial, even if it would significantly increase emission of an air pollutant other than the pollutants reduced by the project. Sources no longer must show that reducing air pollution is the primary purpose of the PCP. In addition, the rule listed a number of projects presumed to be eligible for the exemption.13 For more detail, see pages 20-22 of our interim report (NRC 2005). This change was vacated in New York v. EPA, 413 F.3d 3 (D.C. Cir. 2005) as beyond EPA’s authority under the CAA. To support those revisions, EPA conducted an analysis for each of the changes being made and concluded that either varying levels of emission-reduction benefits or no significant effects would result from the 2002 changes. However, EPA indicated that it did not have sufficient data to quantify with specificity the emission changes that might result from the NSR rule changes. EPA also said it could not reliably determine the anticipated locations of any emission changes to estimate the rule’s effects on public heath (EPA 2002c). GAO (2003) reviewed EPA’s analysis and concluded that because the information used is anecdotal, EPA’s findings do not necessarily represent the NSR program’s effects across the industries subject to the program. In response to petitions for reconsideration, EPA announced in the middle of 2003 that it would take further comments on its conclusion (EPA 2002c) that the new rules would benefit air quality (68 Fed. Reg. 44620 [2003]). Later that year, EPA decided to clarify some portions of the 2002 rule change but to otherwise leave them in place (68 Fed. Reg. 63021 [2003]). EPA justified that partly on the basis of a supplemental statement arguing that the rule changes were unlikely to affect the environment adversely. Uncertainties About the 2002 Rules There are a number of uncertainties about the meaning and impact of the 2002 changes: 13 For nonlisted projects, the rule established detailed requirements that go well beyond previous policy on PCPs for demonstrating project eligibility.

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New Source Review for Stationary Sources of Air Pollution The change in calculation of prechange emissions. EPA has argued that, since a source must use today’s emission limit to calculate its prechange emissions, the change in rules will have a practical effect only when the source was experiencing a drop in market demand or a forced outage in the 2 years prior to the change. In these situations, EPA contends, it is reasonable to assume that the source would have been able to persuade the permitting authority to use a more representative period than the 2 years prior to the source’s permit application. It appears, however, that there was a substantial division among states in their willingness under the prerevision rules to allow a source to substitute a more representative period for the 2 years immediately preceding the change. There does not appear to be a relevant database on use of the “more representative” provision. Hence, it is difficult to appraise the impact of the change. The actual-to-projected-actual test. EPA suggests that the change would not increase emissions. Under the previous approach of comparing prechange actual emissions to postchange potential emissions, a source could avoid NSR by making a binding promise that it would never increase emissions by more than a significant amount over its prechange emissions. Allowing the source instead to compare its actual with its projected-actual emissions is, according to EPA, a simpler method of accomplishing the same result. Environmental groups dispute this, saying that the new methodology contains enforcement loopholes that could in practice allow an altered source to increase its emissions without being detected. For instance, environmental groups point out that a source must report its emissions only when there is a reasonable possibility of a significant increase, and argue that this test is vague enough to create a substantial gap in enforcement. Projecting the magnitude of these enforcement effects is very difficult. Moreover, EPA suggests that the actual/potential test discouraged projects that, while theoretically increasing emissions under the test, would in reality lead to decreases in emissions. The validity of this position depends on the frequency of such projects and on the extent to which NSR applicability makes a difference to businesses in considering whether to undertake a project that would decrease emissions. This is difficult to determine. Similar difficulties are posed by EPA’s decision that increases in emissions due to factors other than the physical or operational change (e.g., growth in demand for the source’s product) need not be included in the projection. There is little information about whether excluding these emissions has a substantial impact on whether the increase in emissions would be great enough to be significant. EPA suggested in 1998 that a demand growth exclusion would be difficult to enforce, possibly inviting abuse (63 Fed. Reg. 39857 [1998]). Nor is it clear how easy it will be for sources to convince permitting authorities that an increase in emissions is due to factors other than the change.

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New Source Review for Stationary Sources of Air Pollution Establishment of PALs. The new rules authorize sources to obtain plantwide applicability limits—that is, caps on total emissions from the plant. A source with a PAL needs an NSR permit under the new rules only if the PAL is exceeded. It is difficult to estimate how many sources are likely to adopt PALs. EPA suggests that use of PALs will be confined to sources that need to make rapid operational changes and for which it is therefore worthwhile to go through the process of establishing a PAL. In addition, it is unknown how sources with PALs would behave. EPA has been allowing the use of PALs in pilot projects. Based on that experience, EPA believes there is considerable potential for emission reductions. This occurs in part because a PAL can tighten the limit on a source’s maximum allowable emissions. Without a PAL, a source’s maximum allowable emissions are based on its potential to emit, taking into account legal limits on its emissions. A source operating under a PAL, however, is limited to actual emissions plus a margin for de minimis increases. Because sources typically operate below theoretical maximum capacity, a PAL considerably limits emissions from sources. Moreover, sources with PALs have an incentive to keep their emissions below PAL levels in order to avoid NSR. Environmental groups, on the other hand, point out that EPA is allowing actual emissions to be calculated by using the highest 24 months in the last 10 years, thus eliminating some of the reduction in maximum emissions. Status of the 2002 Rules In proposing a predecessor version of these rules in 1996, EPA stated that it would allow states to choose between following the old and the new rules. In contrast, EPA’s 2002 rule requires that all states adopt these changes or changes that are at least as stringent. The agency considers its revised rules to be environmentally more beneficial than the prerevision rules; thus, states do not have the option of continuing to follow the prerevision rules (67 Fed. Reg. 80241 [2002]). Some state and local air-program officials strongly disagree with that position (STAPPA/ALAPCO 2002, 2003). EPA gave the states until January 2, 2006, to submit SIP revisions adopting the new or equivalently stringent measures. If a state does not submit an approvable revision, EPA may, after notice and public comment, insert its rules into the state’s SIP. As of the writing of this report, EPA has taken no action to insert its rules into the SIPs of states that have not adopted the 2002 rules. The agency reports that it is evaluating its options for dealing with these states, including incorporating the 2002 changes directly into their plans or proposing sanctions for these states. EPA indicated that, as of mid-April 2006, it has proposed approval

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New Source Review for Stationary Sources of Air Pollution of revisions by 5 states adopting the new rules, and that another 20 states have submitted revisions adopting the new rules or asking EPA to approve them as part of the SIP. According to the State and Territorial Air Pollution Program Administrators, 11 states have indicated that they will not adopt the new rules, and some states have not indicated their intentions. In some areas, the PSD program is not part of the SIP. In those areas, changes went into effect on March 3, 2003. That occurred in about 50 jurisdictions (14 states and territories, 30 air-quality districts in California, such as those covering Los Angeles and San Francisco, and several localities such as Philadelphia, Pittsburgh, Phoenix, and Tucson) in which the PSD program is run by EPA directly or through a delegation agreement. Fourteen states and several environmental groups filed suit in the D.C. Circuit Court of Appeals to overturn the 2002 rule. (Industry groups intervened to challenge the rule on several points.) In New York v. EPA, 413 F.3d 3 (D.C. Cir. 2005), the industry challenge was rejected, as were several of the state and environmental challenges. For instance, the court upheld EPA’s new approach of allowing sources, in general, to determine prechange annual emissions by averaging the highest 24-month period of emissions during the immediately previous 10 years. By contrast, the court vacated the “clean unit” and pollution-control-project portions of the rule as beyond EPA’s authority under the CAA.14 It also remanded to the agency for further explanation its decision not to require reporting by all sources using the actual-to-projected-actual methodology. It is not clear how or when the agency will respond. 2003 Rule Change: Routine Maintenance, Repair, and Replacement On the same day that EPA promulgated the 2002 NSR revisions, EPA proposed changes in its definition of “routine maintenance, repair and replacement.” This rule was promulgated in August 2003 and published in October 2003 (68 Fed. Reg. 61248 [2003]). The change—known as ERP—defines certain kinds of equipment replacements as “routine maintenance, repair, and replacement” and as therefore not constituting “physical changes or changes in the method of operation.” Hence, these replacements do not need NSR permits, even if a significant emission increase can be expected to occur.15 Under the rule, the replacement of components of a process unit with 14 The court’s decision vacating the PCP exclusion also invalidates the PCP exemption previously made under the WEPCO rule discussed above. 15 Sources often emit less than their maximum level of allowable emissions. Therefore, it is often possible for a source to increase emissions without exceeding its maximum allowable emissions.

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New Source Review for Stationary Sources of Air Pollution identical components (or their functional equivalents) is exempt from NSR if The cost of replacing the component (including the fixed capital cost and costs of the replacement activity, such as construction) is less than 20% of the replacement value of the process unit. The replacement does not change the unit’s basic design parameters. The unit continues to meet enforceable emission and operational limitations—that is, the unit, while possibly emitting more than in the past because of greater utilization, does not emit more than is legally allowed. Under the previous rules, EPA used a case-by-case approach in determining which equipment replacements constituted routine maintenance, repair, or replacement. The ERP provided that the case-by-case approach continued to be available for a source whose project does not qualify under the categorical exemption. EPA evaluated the possible emission consequences of the ERP through computer model analysis of the electricity-generating industry and six case studies of industrial sectors other than electricity generation. EPA concluded that the ERP would have little impact on future emission reductions. (Chapter 6 of this report discusses the use of industrial-sector modeling for assessing emission impacts of the ERP.) On June 30, 2004, EPA announced a 180-day period for reconsideration of the rule. The agency requested comment on the rule’s legality and on the choice of the 20% threshold (69 Fed. Reg. 40278 [2004]). The agency decided to adhere to the rule as promulgated (70 Fed. Reg. 33838 [2005]). This rule never went into effect. In December 2004, the D.C. Circuit Court of Appeals issued a stay at the request of a coalition of some states and environmental groups on the grounds that the petitioners had shown irreparable harm and the likelihood of success on the merits. In March 2006, the D.C. Court of Appeals vacated the rule as beyond EPA’s authority under the CAA (New York v. EPA, 443 F.3d 880 [D.C. Cir. 2006]). Further Developments EPA, as discussed in more detail below, proposed in 2005 adoption of an hourly emission test for determining whether a physical or operational change at an electricity-generating facility would increase emissions. This proposed change would compare the maximum achievable hourly emissions at a source before and after a physical or operational change. This is like the approach used in the NSPS program. Such a test would exclude from coverage those projects that, although not increasing the source’s hourly

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New Source Review for Stationary Sources of Air Pollution emissions, raise annual emissions by increasing the number of hours the source can, in practice, operate each year. EPA has also invited comment on other approaches, such as comparing actual pre- and postchange hourly emissions. EPA expects to publish proposed regulatory language and an updated environmental assessment in the summer of 2006 and to take final action by the end of the year. In September 2005, the House Committee on Energy and Commerce reported out H.R. 3853. As reported to the floor, the bill would have codified the ERP as well as the hourly-increase approach to whether an increase in emissions has occurred. These provisions were removed from the bill before it reached the floor of the House. EPA also intends to propose in the summer of 2006 a rule dealing with debottlenecking and aggregation. Debottlenecking deals with the situation in which a change at an emission unit would make it possible for a source to increase production, and hence emissions, at units upstream or downstream of the changed unit. Questions have arisen about whether the upstream or downstream emission increases count in determining whether the source has increased emissions significantly. EPA, in promulgating its 2002 rule, promised action on the debottlenecking issue. The issue of aggregation involves deciding whether unrelated changes at a source should be combined in deciding whether there would be a significant increase in emissions. Both topics have long been issues in the NSR program. Future Prospects for the Enforcement Initiative As recounted earlier, the enforcement initiative led to a number of settlements in which electricity-generating facilities committed to cut emissions and surrender allowances. Whether this continues to occur depends on several factors. One important question is whether the courts will accept EPA’s argument that the projects in question constitute “physical or operational changes” that “significantly increase emissions” and are therefore modifications that require PSD permits. Both quoted terms have been at issue.16 In EPA’s enforcement initiative, the agency has argued that the definition of routine maintenance has three hallmarks: First, the exemption applies to a narrow range of activities, in keeping with EPA’s limited authority to exempt activities from the [CAA.] Second, the exemption applies only to activities that are routine for a generating unit. The exemption does not turn on whether the activity is prevalent within the industry as a 16 There is also the additional issue of whether the regulated companies had fair notice of the interpretation of routine maintenance that is the basis for the enforcement initiative. The one case on point, U.S. v. Southern Indiana Gas & Elec. Co., 245 F. Supp. 2d 994 (S.D. Ind. 2003) has held that there was such notice.

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New Source Review for Stationary Sources of Air Pollution whole. Third, no activity is categorically exempt. EPA examines each activity on a case-by-case basis, looking at the nature and extent, purpose, frequency, and cost of activity (U.S. v. Southern Indiana Gas & Elec. Co., 245 F. Supp. 2d 994, 1008 [S.D. Ind. 2003]). The courts have thus far split on whether to follow this interpretation. Two published district court decisions (U.S. v. Southern Indiana Gas & Elec. Co., 245 F. Supp. 2d 994 [S.D. Ind. 2003] and U.S. v. Ohio Edison Co., 276 F. Supp. 2d 819 [S.D. Ohio 2003]) have upheld EPA’s multifactor reading as reasonable. Two other decisions disagree and have consequently dismissed enforcement actions (U.S. v. Duke Energy Corp., 278 F. Supp. 2d 619 [M.D. N.C. 2003] aff’d on other grounds, 411 F.3d 539 [4th Cir. 2005], cert. granted sub. nom.; Environmental Defense v. Duke Energy Corp., No. 05-848 [May 15, 2006]; and U.S. v. Alabama Power Co., 372 F. Supp. 2d 1283 [N.D. Ala. 2005]). The latter decisions hold that the key question is whether similar plants undergo the same project.17 Thus, under the enforcement initiative’s view, a project that is likely to occur only once in a plant’s life would generally not qualify as routine maintenance; the disagreeing courts hold that such a project can be routine maintenance if it is routine in the industry to carry it out. The Ohio Edison and Duke Energy decisions also split on which party has the burden of showing that a particular project constitutes routine maintenance; the former holds that the burden is on the source to show that the project is routine maintenance, and the latter concludes that the burden is on the government to show that it is not. The recent decision in New York v. EPA invalidating the ERP provision may affect future judicial interpretations. There the D.C. Circuit held that EPA may exempt physical or operational changes only if an exemption has a de minimis effect on the environment or is administratively necessary. Arguably, under such a test, the scope of the routine-maintenance exemption is restricted. But because the decision is so recent, it is difficult to predict its consequences. The cases also disagree on how to define whether an increase in emissions has occurred. A project at an existing source may be intended to allow the source to run more often (and thus emit more over the course of a year), rather than to increase its emissions during any given hour of operation. There is debate about whether such a project has increased emissions within the CAA’s meaning and thus requires an NSR permit. EPA has argued in the enforcement initiative litigation that NSR covers a source that significantly increases annual emissions even if there is no increase in 17 The recent decision in U.S. v. Cinergy Corp. (S.D. Ind. slip opinion, Feb. 16, 2006) seems to adopt an intermediate view. It agrees with EPA’s view of the scope of the routine-maintenance exemption but allows industry practice to be considered as a factor in judging whether a particular project constitutes routine maintenance.

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New Source Review for Stationary Sources of Air Pollution hourly emissions. This interpretation, which the agency has long followed, contrasts with the NSPS program, in which a project is covered only if it would increase maximum hourly emissions. Ohio Edison and the recent district court decision in U.S. v. Cinergy Corp., 384 F. Supp 2d 1272 (S.D. Ind. 2005) (permission to appeal granted by the 7th Circuit Court of Appeals, Jan. 3, 2006), agree with the agency’s view, while Duke Energy holds that an increase in the hourly emission rate also must have occurred. The latter holding was affirmed in U.S. v. Duke Energy Corp., 411 F.3d 539 (4th Cir. 2005). The recent New York v. EPA decision by the D.C. Circuit on the 2002 EPA rules, however, disagrees with this approach. The U.S. Supreme Court recently decided to hear an appeal by environmental groups of the Duke Energy decision (Environmental Defense v. Duke Energy Corp., No. 05-848 [May 15, 2006]). Given the disputes over the scope of NSR, it is difficult to estimate what emission reductions would be brought about by EPA’s enforcement theory. There is an additional reason for this. EPA proposed in October 2005 to adopt the U.S. v. Duke Energy approach for electricity-generating facilities (70 FR 61081 [2005]). Existing electricity-generating facilities would, as in the NSPS program, compare the maximum hourly emissions achievable at that unit during the past 5 years to the maximum hourly emissions achievable at that unit after the change to determine whether an emissions increase would occur. The agency said that the proposed change was needed to assure uniformity between the nation as a whole and the states within the 4th Circuit. EPA argued in addition that the proposed approach would allow electricity-generating facilities to make changes that promote their safety, reliability, and efficiency and that the change was desirable in view of the substantial emissions reductions from programs more efficient than NSR. These latter rationales resemble those put forth for the 2003 rule establishing the now-invalidated ERP, although the legal theory behind the proposed hourly emission rule is different from that underlying that rule. EPA’s proposal of this rule may cause difficulty in applying the enforcement initiative to past projects that violated the theory underlying the initiative. Legally speaking, the proposal or adoption of a new rule is not retroactive, and therefore, enforcement actions based on the previous rules may proceed. But, as a practical matter, a court might be reluctant to find liability or to impose a substantial penalty for violating rules that are no longer in force. (This concern was voiced by EPA enforcement officials when the ERP was adopted in 2003 [EPA 2004c] and more recently when the hourly emission test was proposed [Eilperin 2005]). Indeed, the U.S. v. Alabama Power case, summarized above, used the promulgation of the ERP as an argument against EPA’s enforcement theory. Hence, the proposed rule changes could diminish the size of future settlements. Estimating the magnitude of this effect is difficult.

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New Source Review for Stationary Sources of Air Pollution The potential of the enforcement initiative to reduce emissions also depends on the number of lawsuits brought under the initiative and the aggressiveness with which they are prosecuted. According to press reports, 22 electricity-generating facilities could face new NSR enforcement lawsuits if the Bush administration decided to advance them (Samuelsohn 2004). None, however, have been brought. In October 2005, EPA administrator Stephen Johnson announced that no new enforcement actions would be pursued under the enforcement initiative’s theory (Greenwire 2005). If EPA holds to this position, the only future enforcement actions will be those brought by states or individuals under the CAA’s citizen suit provision. It is uncertain how many such suits there will be; the lengthy trials that have occurred so far in enforcement cases indicate that these cases are quite resource-intensive. This is especially important because only enforcement actions against violators result in the surrender of allowances. By contrast, a source that complies with EPA’s NSR rules need not surrender allowances. Instead, compliance would reduce an electricity-generating facility’s need to find additional allowances to accommodate the emission increase at the facility that would be caused by the change. These allowances would then be available to other sources, perhaps resulting in increases in emissions from those sources that might offset, in part or in whole, the effect of compliance by the source seeking an NSR permit. This has special significance because there will likely be fewer enforcement actions once the definition of routine maintenance becomes more certain as cases are decided; it is reasonable to expect that operators of electricity-generating facilities will adjust their conduct to meet the requirements of that definition. It is therefore quite difficult to estimate the changes in emissions—whether local or national—that would be brought about by the enforcement initiative and therefore to gauge the effects of alterations in the NSR program. The situation is further complicated by the establishment of CAIR subsequent to the adoption of the 2002 and 2003 rule changes. As discussed above, CAIR tightens the Title IV cap for SO2 and requires reductions in NOx emissions in the East and Midwest. To be useful, any analysis of changes in the NSR rules must take into account the potential implementation of CAIR. This makes the analysis more complex. We address this later in our report. Because CAIR covers only the East and Midwest, it has little or no effect on emissions outside that region and will have little impact on emissions from plants that are not electricity-generating facilities. Moreover, the CAIR program does not cover emissions of carbon monoxide (CO), PM, and VOCs. Hence, the program does not compensate for whatever changes in emissions of these pollutants that might be caused by EPA’s position on the coverage of NSR. For instance, the changes in Part D NSR coverage may reduce the number of projects in the northeastern Ozone Transport

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New Source Review for Stationary Sources of Air Pollution Corridor that are subject to NSR. Any resulting emission increases are not guaranteed to be offset by other programs such as CAIR. On the other hand, the CAIR program, by encouraging reductions in SO2 and NOx emissions, might lead to the retrofitting of controls that would also reduce CO, PM, and VOC emissions. CLOSING COMMENTS The regulatory background has continued to evolve during the period of our study. New settlements have been reached, new regulatory initiatives have been unveiled, and court decisions that affect the NSR programs have been handed down. We have tried to take into account all those changes in our report. However, we caution the reader that matters have not yet come to rest and that NSR will probably be affected by future and unpredictable events. Three matters are particularly significant: The 2002 rules are partly in effect in a few states; the remaining portions were struck down. The 2003 rules never went into effect and have been invalidated. It is unclear at this writing how much emission reduction will be brought about by the enforcement initiative. That is partly because the courts have split over whether the enforcement initiative is in accord with the CAA. This makes it difficult to analyze the effects of changes to the NSR programs. As we have stressed, the CAIR rule (whose fate in the courts is undetermined) may have a substantial effect on the consequences of the NSR reforms.