NSR Reforms

The Bush administration’s plans for reforming the “new source review,” or “NSR,” air permitting regime has come under fire from Senate Democrats and environmentalists. Senator John Edwards (D.-North Carolina) is reportedly prepared to offer an amendment to the 2003 US Environmental Protection Agency appropriations bill that would block the agency from spending any funds on changes it is proposing to the NSR program. The proposed rider to the EPA spending bill reportedly has the backing of the Senate majority leader, Thomas Daschle (D.-South Dakota), and Senator Joseph Lieberman (D.-Connecticut).The NSR permitting program requires air permits for new and modified major sources of pollution in so-called “nonattainment” areas (areas that do not meet federal ambient air quality standards) and for all major emitters in “attainment” or clean areas.In August, Senator Edwards and 43 other Senators sent a letter to EPA Administrator Christine Todd Whitman requesting further analysis of the environmental implications of EPA’s proposed NSR reform package. While such an inquiry is not expected to have any significant impact on the administration’s internal deliberations, the letter sends a signal that there may be sufficient support in the Senate for a rider to the EPA spending bill that would stop the NSR reform effort in its tracks.There are also reports that many appropriations bills, including the EPA spending bill, may be delayed until after the November elections. The delay may give cover to a number of members of Congress who would like to avoid a vote on a politically-changed environmental issue.The EPA proposals include five major reforms that are divided into two separate rulemakings. The first four reforms were originally proposed in 1996 by the Clinton Administration, and will be issued as part of a final rule. The first proposal would allow owners of facilities that emit pollutants to make changes to their plants without obtaining a major source NSR permit, provided their emissions do not exceed a specified limit. The second proposal would provide an exemption of up to 10 or 15 years from further NSR review for certain operational changes if a plant has recently installed state-of-the-art emission controls on new or modified emission units pursuant to an NSR permitting review. The third reform is a proposed expansion to other industries of EPA’s rule for calculating emission increases for power plants that have begun normal operations. Fourth, the reform package would formalize EPA’s policy of excluding pollution control and prevention projects from NSR permitting review where such projects result in a net beneficial impact on the environment.The fifth reform is intended to clarify what types of activities will qualify as “routine maintenance, repair and replacement.” Such activities are exempted from NSR permitting review. EPA is reportedly planning to propose a safe harbor test that would exempt certain maintenance, repair, and replacement activities that are below the cost threshold. This proposal will be issued in a separate proposed rule that will be subject to public notice and comment.The NSR reform package is currently undergoing a 90-day review by the US Office of Management and Budget, or “OMB,” to make sure it complies with federal guidelines that govern the issuance of new rules. After completion of the OMB review, EPA is expected to issue the NSR reform package in late October, or possibly just after this year’s elections in November.Efforts to reform the NSR permitting program began in 1992. The regulated community has long complained that the NSR program discourages the modernization of existing plants, and hampers the siting of new, more efficient, and less-polluting plants. Critics assert that the NSR permitting process is overly time-consuming, burdensome, and costly.On the state level, Maryland Governor Paris Glendening also recently expressed opposition to the administration’s NSR reforms. New Jersey Governor James McGreevey has also threatened legal action to block implementation of the NSR reforms. Both governors are Democrats. Attorneys general from several northeastern states have lined up against the EPA reforms, and are reportedly evaluating strategies to challenge the final NSR rule if and when it is issued.

Multi-Pollutant Legislation

The Bush administration’s “clear skies initiative” has been translated into comprehensive legislative language and the measure has been introduced in both the Senate and House of Representatives. If enacted, many older power plants would have to be retrofitted with costly pollution control technology or spend significant funds to purchase a sufficient number of allowances to ensure compliance.

Senator Robert Smith (R.-New Hampshire) and Rep. Joseph Barton (R.-Texas) introduced the “Clear Skies Act” at the end of July. The legislation would completely overhaul the current Clean Air Act provisions that apply to power plants and impose significant reduction requirements for emissions of nitrogen oxides, or NOx, sulfur dioxide, or SO2, and mercury. The legislation does not call for any cuts in CO2 emissions from power plants.

The bill would create a mandatory “cap and trade” emission allocation program similar to the federal acid rain program. It would implement the emission reductions in two steps starting with nationwide caps of 4.5 million tons of SO2 in 2010, 2.1 million tons of NOx in 2008, and 26 tons of mercury in 2010. These caps would decline in 2018 to 3.0 million tons of SO2, 1.7 million tons of NOx, and 15 tons of mercury. Current US emission levels of these pollutants are approximately 11 million tons of SO2, 5 million tons of NOx, and 48 tons of mercury. The legislation would also create a “backstop” ceiling price for allowances of $4,000 for each ton of SO2 or NOx and $2,187.50 for each ounce of mercury. These “backstop” allowances would be available directly from EPA.

Pollution sources that are subject to the new legislation would be exempted from having to comply with other, similar programs such as the “new source review” permitting program and the “best available retrofit technology (or “BART”) standards that apply to older sources near national parks and wilderness areas. The new bill, if enacted, overlaps with these existing programs, but is more stringent. Covered sources would also be exempted from certain air toxics standards.

Environmental groups and some member of Congress were quick to criticize the legislation; however, the introduction of the measure is an indication that the Bush administration is serious about attempting to reform the Clean Air Act. There is no time to make any further progress on multi-pollutant legislation this year; Congress is expected to adjourn for the year in early October. However, the issue will probably be a priority next year.

Chemical Security

The issue of security at chemical and power plants is gaining increasing attention within the Bush administration, Congress and the regulated community.

The Bush administration is searching for an approach that will not impose additional burdens on companies that are already moving forward with voluntary enhanced security programs. However, the EPA’s plan to release a proposed rule to require enhanced security at chemical plants and other facilities, including some power plants, has reportedly been sidetracked over questions about EPA’s statutory authority to issue such a rule.

On the legislative front, Senator Jon Corzine (D.-New Jersey) has introduced a bill that would mandate the preparation of vulnerability assessments and response plans and require that they be submitted to EPA for evaluation and approval. The Corzine bill would apply potentially to the 15,000 facilities that are required currently to prepare and submit risk management plans to EPA under section 112(r) of the Clean Air Act. Section 112(r) applies to accidental releases of hazardous chemicals and not to intentional terrorist acts of sabotage. The risk management plans address a worst-case analysis of potential accidental releases of listed hazardous chemicals. Power plants storing anhydrous ammonia for use in selective catalytic reduction systems are typically subject to the 112(r) requirements.

The provisions of the Corzine bill would potentially require affected plants to prepare detailed vulnerability assessments, which are expected to lead to costly plant upgrades to enhance security, particularly for plants near populations centers. Senator Corzine hopes to offer his bill as an amendment to the homeland security bill that is currently under debate in Congress.

The Bush administration is reportedly working with a bipartisan group of senators to develop an alternative to the Corzine bill. It is also in favor of placing oversight for chemical security within the new Department of Homeland Security instead of with EPA. It is unclear whether Senate Republicans will try to offer an administration-backed alternative to the Corzine approach or work with Senator Corzine to develop a bill that will recognize the voluntary efforts of companies that have already put security improvements in place.

Business groups are becoming actively involved in the process as well. Earlier this year, the American Chemical Council unveiled a voluntary enhanced chemical security measure that all ACC member companies must meet. The ACC requirements call for its 180 member companies to conduct vulnerability assessments at their facilities and to prepare comprehensive release response plans. Approximately 1,000 chemical plants are subject to the voluntary ACC requirements.

Kyoto Protocol

In September, both Russian Prime Minister Mikhail Kasyanov and Canadian Prime Minister Jean Chretien indicated that their respective countries are on target to ratify the Kyoto protocol by the end of the year. If the Russian and Canadian parliaments agree to ratify, the treaty would enter into force by the end of the year.

Ninety four countries had ratified the Kyoto protocol by September 17. Twenty-five of those countries are so-called “Annex I” industrialized countries. The Kyoto protocol will enter into effect after it is ratified by 55 or more countries (including both Annex I and Annex II developing countries) whose emissions represent at least 55% of the carbon dioxide, or CO2 emissions, from Annex I countries in 1990. So far, countries representing 37.1% of the CO2 emissions have ratified the protocol. China ratified the treaty in early September. It is classified as an Annex II party even though the country emits approximately 11% of the world’s carbon emissions.

Once in effect, the Kyoto protocol will require approximately a 5.2% reduction in greenhouse gas emissions during the first commitment period — 2008 to 2012 — compared to 1990 emission levels. The US, which emitted approximately 36.1% of 1990 CO2 emissions, has rejected the Kyoto protocol and is instead focusing on voluntary efforts to reduce greenhouse gas emissions by US companies.

Canada’s road to ratification of the treaty will probably be rocky. While Canada’s prime minister has pledged that the Kyoto protocol will be ratified by Canada, some of the Canadian provinces are raising strong objections. Alberta has reportedly threatened to mount a legal challenge. A significant amount of Canada’s energy industry is based in the province of Alberta. Further, Canada continues to press for acceptance of its request for a “clean energy export credit” that would credit Canada for its exports of natural gas and hydroelectric power to the US. This proposal has met strong opposition from the EU countries. It is unclear if the Europeans will ultimately recognize such a credit, particularly if Russia and other Annex I nations ratify the treaty before Canada, thus triggering its implementation.

Air Toxics

The US Environmental Protection Agency has agreed to reduce the time frame for preparing new air permit applications for major air toxic emitters in source categories where EPA has not yet issued standards. Under the 1990 Clean Air Act amendments, EPA was required to issue air toxic standards for all major emitter categories by May 15, 2002 — the so-called “MACT hammer” deadline. Since EPA missed the deadline, the Clean Air Act provided that state and local air permitting agencies would be required to step in and issue case-by-case standards for these major emitters. The air toxic standards require sources to meet maximum achievable control technology, or “MACT,” levels.

Knowing that it would miss the MACT hammer deadline for over 60 source categories and subcategories, EPA issued a rule (known as the “112(j) rule”) earlier this year that requires each major air toxic emitter in these categories to submit a simple notification to its state or local air permitting agency by May 15, 2002. The notification states that the plant is subject to the rule. EPA gave sources an additional 24 months — to May 15, 2004 — to submit more detailed air toxic permit applications.

Environmentalists challenged EPA’s rule, alleging that the agency did not have the authority to extend the application deadline for two years. In August, EPA and environmental groups agreed to settle the case by reducing the application submittal date by 12 months. The new deadline for the expanded applications is May 15, 2003. Facilities that may be subject to the 112(j) air toxics rule include plants with combustion turbines where the plant omits more than 10 tons a year of any one of the 188 listed hazardous air pollutants or over 25 tons of any combination of such pollutants. Electric utility units are currently not yet subject to the 112(j) rule because the deadline for issuing MACT standards for the category has not yet expired.

Plants subject to the 112(j) rule should begin preparing their applications now since it takes several months to pull together the detailed information on air toxic emissions from the facilities and other information relevant to establishing a case-by-case MACT standard. Failure to file the requisite 112(j) air permit applications would constitute a violation of the Clean Air Act, and penalties could run as high as $27,500 per violation.

Once the detailed permit application is submitted, the state and local air permitting agencies will have 18 months to issue a case-by-case determination. EPA anticipates that it will be able to propose and finalize most, if not all, of the MACT standards by the deadline for issuing case-by-case determinations. Nevertheless, many major air toxic emitters will bear the costs of preparing comprehensive permit applications that are due within eight months.

Brief Updates

The Chicago Climate Exchange, which has been touted as the first voluntary greenhouse gas trading program in the US, is scheduled to initiate trading in early 2003. The exchange has signed up several Fortune 500 companies that are committed to achieving greenhouse gas reductions, including American Electric Power, Calpine, Cinergy, DuPont, Ford Motor Company, International Paper, and PG&E National Energy Group.

In August, the federal land manager for the Mammoth Cave National Park lifted his objections to the proposed Thoroughbred generating station in Kentucky. The Thoroughbred project is a 1,500 megawatt coal-fired plant that will use coal supplied by a nearby mine. The federal land manager removed his objection after reviewing revised air modeling data submitted by the project. Despite the removal of a significant hurdle, the project still faces opposition from several local and national environmental groups, and Indiana has also raised concerns about the plant’s cross-border impact.

A July order in United States of America v. Southern Indiana Gas and Electric Company recognized that EPA lacked authority to seek civil penalties for air permitting violations more than five years old, and determined that the failure to obtain an NSR permit authorizing the construction of a major modification was a one-time violation. However, the court sided with EPA in agreeing that the agency could seek injunctive relief for an alleged violation of failing to obtain a pre-construction permit.

The New Jersey Department of Environmental Protection has adopted new regulations providing tax credits to power plants and certain industrial facilities that use recycled wastewater known as “gray water” from publicly-owned treatment plants. Companies purchasing equipment to treat gray water for use as makeup water can qualify for up to a 50% credit against the state’s corporate business tax and the purchase of the equipment would also be exempted from state sales taxes.