Opinion: EPA’s New Year’s Eve Surprise

Issue 2 and Volume 107.

By Brian K. Schimmoller,
Managing Editor

The revisions to the New Source Review program published in the Federal Register on Dec. 31 – EPA’s New Year’s Eve Surprise – represent a late stocking stuffer for some and a lump of coal for others. Fossil power plant owners gained regulatory certainty, and should have an easier time performing maintenance and improvement projects without triggering NSR review. A number of Northeast states, and a wide range of environmental groups, on the other hand, uniformly panned the revisions as a roll-back of the Clean Air Act, detrimental to human health and the environment. Nine states, in fact, filed suit against the Bush Administration in the U.S. Court of Appeals over its decision to modify the NSR program.

EPA’s New Year’s Eve Surprise consists of two major elements. The first codifies various provisions originally proposed by the Clinton Administration in 1996, but never finalized. These changes, which will become effective March 3, address Baseline Actual and Projected Actual Emissions, Plantwide Applicability Limits, Clean Unit Exclusions, and Pollution Control Projects. For example, with respect to Plantwide Applicability Limits (PALs), regulated emitters will be able to modify their facilities without triggering NSR provided emissions fall below the PAL. In return for this flexibility, participating entities will be required to monitor emissions from all emission units included under the PAL. For more information on these provisions, visit the NSR page on EPA’s Airlinks site: http://www.epa.gov/airlinks/airlinks8.html

The second element of EPA’s New Year’s Eve Surprise proposes changes to the routine maintenance, repair and replacement (RMRR) provisions – changes certain to invite considerable controversy. According to the NSR regulations, owners/operators of major stationary sources are required to obtain an NSR permit for any activity determined to be a “major modification.” The regulations, however, exclude RMRR activities from this requirement.

RMRR exclusions are evaluated on a case-by-case basis by “weighing the nature, extent, purpose, frequency, and cost of the work, as well as other factors to arrive at a common sense finding.” Over the past 20 years, however, facility owners have become increasingly uncertain about what lies within the RMRR universe. To remedy this shortcoming, the new NSR provisions propose two categories of activities that will be considered RMRR in the future: activities within an annual maintenance, repair and replacement allowance; and replacements that meet EPA’s equipment replacement criteria.

Under EPA’s allowance program, an annual maintenance, repair and replacement allowance would be established for each stationary source. The owner or operators would sum the costs of all relevant maintenance activities, from the least expensive to the most expensive. If the total costs fell within the annual allowance, the activities would be considered RMRR. If the total exceeds the allowance, the activities that pushed the total over the allowance level would be evaluated on a case-by-case basis to assess whether or not they constitute a major modification and trigger NSR. The allowance percentage would most likely be based on the Internal Revenue Service “Annual Asset Guideline Repair Allowance Percentages,” which currently stands at 5 percent for electric utilities.

The other ‘new’ RMRR category EPA proposed deals with the replacement of existing equipment with equipment that serves the same function and that does not alter the basic design parameters of a unit, such as fuel consumption or maximum heat input. Such replacements would qualify for the RMRR exclusion if the replacement cost did not exceed a certain percentage of the cost of the unit. In the published rules, EPA discusses a 50 percent capital replacement threshold, as used for New Source Performance Standards (NSPS) determinations, but will consider alternate levels as well.

EPA is inviting comment on every aspect of the proposed rules, and they’re sure to get many. Supporters of RMRR reform will push for greater certainty, higher allowance percentages, and higher capital replacement thresholds. Critics of RMRR reform will push for the opposite, and undoubtedly will point out some potential pitfalls with the proposed rules. For example, if the allowance is annual rather than multi-year, would operators simply plan more outages than are necessary just to make sure they don’t lose a portion of their allowance?

Tying RMRR to maintenance costs raises flags in many quarters. “Anyone who’s followed the Enron saga can’t seriously expect a financial or cost-based approach to run smoothly and without dispute,” said Jon Lagarenne, CEO of Hamon Corp. “Basing RMRR exclusions on cost will only ensure full-time employment for thousands of accountants.” Lagarenne, whose company supplies emission control equipment, favors an age-based approach to RMRR exclusions, which will provide a “bright line” for assessing applicability.

Lost amid all of these details is the possibility that the published rules may be rendered immaterial. Still hanging out there in legal hyperspace is a pending U.S. Circuit Court of Appeals ruling on EPA’s finding that TVA (and several other utilities) violated NSR by illegally expanding its generating capacity without permits and pollution controls. In the latter days of the Clinton Administration, EPA appeared to be close to agreement with a number of utilities on actions it deemed illegal under NSR. When the Bush Administration entered office, these legal actions were quickly put on hold.

“If the Bush Administration had pursued these legal actions, we might have had resolution by now,” said Lagarenne. “Instead, the proposed NSR provisions will simply stall progress for at least a year. While it is possible that the courts will determine the issue, I believe it is far more likely that EPA and the utilities being sued will settle these claims, and that these settlements will really determine how NSR review impacts installation of air pollution control equipment in the next five years.”

So plant owners shouldn’t count their chickens yet. While I believe some form of NSR reform should and will be implemented, EPA’S late Christmas gift can still be returned — or possibly exchanged.

As FERC has recently stepped back from its aggressive stance on standard market rules, a similar fate may await NSR.