By Roy Belden

New Source Review

The Bush administration lost a major round in court in its effort to create a “bright-line test” for letting power companies avoid expensive environmental permitting requirements for some work on existing power plants.

The US court of appeals for the District of Columbia put on hold indefinitely the implementation of a final rule the US Environmental Protection Agency issued that would clarify the types of “routine maintenance, repair, and replacement” of equipment that can be done at existing power plants without the need for a “new source review” or “NSR” permit. The rule will now be held in abeyance until the court makes its decision, which could come as late as 2005.

EPA issued the final equipment replacement rule on October 27, 2003. It had been scheduled to take effect on December 26, 2003. The US appeals court said — when it put the rule on hold — that the opponents “demonstrated the irreparable harm and likelihood of success on the merits required for issuance of a stay pending review.” The court signaled that it has significant doubts about the rule. There is a reasonable probability that at least portions of the rule will be overturned. The same appeals court stayed implementation of another EPA rule (the “NOx SIP call rule”) in 1999, but ultimately allowed most of the rule to become law.

The new rule was issued to settle conflicting EPA guidance on the scope of the “routine maintenance, repair, and replacement” exemption under the NSR program. Under this exemption, a power plant or other industrial facility does not need to apply for a modification of its existing NSR air permit if it is replacing equipment at the plant in the course of “routine maintenance, repair or replacement.” If the replacement does not fit within this definition, then a modified NSR permit typically must be obtained. EPA said it would not insist on NSR permits where three conditions are present. First, the owner must be replacing an existing component of a unit (for example, a boiler or turbine) with identical components or components that serve the same purpose. Second, the fixed capital cost of the replaced component and any other costs associated with the replacement activity must not exceed 20% of the current replacement value of the unit. Third, the equipment replacement must not alter the basic design of the unit or cause it to exceed any emission limitations.

Opponents of the rule charge that the new EPA definition of routine maintenance is a radical departure from 25 years of prior agency and judicial interpretations and the agency lacks authority under the Clean Air Act to implement it. A decision in the case is not expected until late 2004 or early 2005.

In a related development, the EPA administrator, Mike Leavitt, announced that the agency would continue to bring enforcement actions against utilities that have allegedly failed to comply with NSR permitting requirements. In late January, the agency filed a complaint against East Kentucky Power Cooperative seeking both civil penalties and injunctive relief for alleged NSR permitting violations due to three modifications at the company’s coal-fired plants during the 1990s. EPA also recently issued a notice of violation to a Westar Energy facility in Kansas alleging that the coalfired plant undertook activities at the plant between 1992 and 1999 that resulted in increased air emissions without undergoing an NSR permitting review before the modifications took place. The recent enforcement actions signal an intention by the Bush administration to continue to pursue alleged NSR permitting violations, particularly in instances that appear clearly not to qualify for the new “routine maintenance, repair, and replacement” exemption.

Air Permitting

The US Supreme Court issued a decision in mid-January upholding the ability of the federal government potentially to second-guess NSR air permitting decisions by states. The case is Alaska Dept. of Environmental Conservation v. EPA. In it, the court affirmed that EPA has authority to halt construction at a plant that is fully permitted at the state level. The decision was 5 to 4.

The case involved a mine owner called Teck Cominco. It had applied for a “prevention of significant deterioration,” or “PSD,” permit under the NSR program to increase operation of an existing standby diesel generator and to install a new diesel generator at its zinc mine. The PSD program requires that the permitting agency undertake a review to establish permit limitations based on the “best available control technology” for the affected units.

Teck Cominco proposed to install low nitrogen oxide, or “NOx,” combustors — instead of selective catalytic reduction systems — on the standby generator and the new generator, asserting that the low NOx combustors represented the best available control technology for these units. The Alaska Department of Environmental Conservation agreed with Teck Cominco that selective catalytic reduction systems would be too expensive. The low NOx combustors were expected to achieve a 30% reduction in NOx emissions. The selective catalytic reduction systems would cut NOx emissions by about 90%. EPA took issue with the Alaskan action and issued an order “prohibiting the construction or modification” of a major source which fails to comply with the NSR program.

Alaska argued before the US Supreme Court that the Clean Air Act does not give EPA the authority to secondguess a state PSD permitting decision where the state’s PSD program had been fully approved by the agency. The federal government responded that it retains the power to “check” state permitting decisions that are unreasonable.

The Supreme Court said EPA can only overrule a state when a state’s permitting decision is “not based on a reasoned analysis.” It did not say how long EPA may take before it issues a “stop work” order. The Clean Air Act does not specify any time limits on this authority. As a practical matter, EPA probably could not stop a project that was already built or where construction was well underway; however, there is nothing in the Clean Air Act or the Supreme Court’s decision that would prevent EPA from acting several months after a PSD permit is issued to halt construction where construction was not already started or was not otherwise underway. EPA has issued only a small number of “stop work” orders in the past.

Mercury

The New Jersey Department of Environmental Protection proposed a new regulation to cut mercury emissions from power plants, municipal solid waste incinerators, and iron and steel smelters. The draft rule imposes a cap on the 10 coal-fired power plants in New Jersey and calls for up to a 90% reduction of mercury emissions from the affected power plants. The mercury emission reductions from the coal-fired plants must be achieved by the end of 2007; however, the draft rule provides the option of meeting the standards by 2012 if a plant makes major reductions in sulfur dioxide, nitrogen oxide, and fine particulate emissions. Under the proposed rule, the five municipal solid waste incinerators in the state must not exceed 28 micrograms per dry standard cubic meter of mercury emissions by 2011. Alternatively, municipal solid waste incinerators can reduce mercury emissions by 85% below 1990 levels within one year after the rule becomes effective and achieve a 95% reduction by 2011. The draft rule also limits mercury emissions from New Jersey’s six iron and steel smelters to 35 milligrams per ton of steel production by 2009, or a 75% reduction by 2009.

New Jersey criticized a proposal by the Bush administration to reduce mercury emissions at power plants nationwide. (See the related story of page 1.) In touting its command-and-control approach to regulating mercury, New Jersey said “the cap-and-trade form of mercury controls [that the Bush administration proposed] would allow several times more emissions than a Clinton-era plan that called for a technology based standard.”

The draft rule was issued on January 5, 2004, and is currently subject to a 60-day public comment period.

Greenhouse Gas Updates

Work on developing detailed guidance to implement the Kyoto protocol continues, despite continued uncertainty over whether Russia will ratify the protocol and trigger implementation. The protocol requires approximately a 5.2% reduction in greenhouse gas emissions by all signatories to the treaty from 2008 to 2012. Right now, all hopes for implementation hinge on whether Russia ratifies the agreement.

In December, 2003, a subsidiary body of the “UN framework convention on climate change” adopted clarifying guidelines on how to quantify carbon dioxide or CO2 emission reduction credits from carbon sequestration activities. At recent meetings in Milan, Italy, the group developed model tables for reporting all land use, land-use change and forestry activities undertaken to sequester carbon. Carbon sequestration refers to the idea that carbon is captured and stored in forests and agricultural lands. Trees, plants, and soil absorb carbon dioxide, release the oxygen, and store the carbon.

Under the guidelines, credits toward greenhouse gas emission reduction targets could be available for carbon sequestration activities in connection with “clean development mechanism” projects. Such projects would be sponsored by developed countries.

The Kyoto protocol will enter into effect if it is ratified by 55 or more countries (including both industrialized “Annex I” nations and developing “Annex II” countries) whose combined emissions levels represent at least 55% of the carbon dioxide emissions from Annex I countries in 1990. So far, 120 nations accounting for 44.2% of the 1990 CO2 emissions have ratified the treaty. At this point, implementation of the Kyoto protocol hinges on Russia, which accounts for 17.4% of the emissions. In December 2003, a senior aide to Russian President Vladimir Putin cast serious doubt on whether Russia will ratify the treaty. Russia is not expected to announce a formal position until after the March 2004 presidential elections.

In related developments, 10 US corporations recently pledged to reduce greenhouse gas emissions under a “climate leaders” program sponsored by the US government. Companies agreeing to implement voluntary greenhouse gas emission reduction targets include: 3M, Advanced Micro Devices, Inc., International Paper, Interface, Inc., American Electric Power, Cinergy Corp., Eastman Kodak, FPL Group, PSEG and United Technologies Corp. The climate leaders program now has 54 companies as participants. Participating companies agree to report greenhouse gas emissions from all major on-site sources and emissions related to the electricity they purchase. A number of climate leader participants have taken the additional step of pledging to meet specific greenhouse gas emission reduction targets. EPA projects that commitments by climate leaders will prevent a total of 7.5 million metric tons of CO2-equivalent emissions per year.

The World Bank reported in December 2003 that the amount of greenhouse gas emission reduction credits traded worldwide during the first 10 months of 2003 was more than double the amount traded in all of 2002. The report, titled “State and Trends of the Carbon Market 2003,” states that approximately 70 million metric tons of CO2-equivalent emission reduction credits were traded from January to the beginning of November 2003. The figures on trades in past years were approximately 30 million metric tons of CO2- equivalent emission reductions in 2002 and 13 million metric tons in 2001. Most of the trading in CO2-equivalent emission reductions occurred in project-based transactions. The motivations for CO2-equivalent emissions trading reportedly fell into four categories: immediate compliance with national markets, for example, the United Kingdom emissions trading regime, Kyoto pre-compliance, voluntary compliance and retail schemes (that is, companies without significant greenhouse gas emissions that desire to be climate-neutral in their activities). The report notes that buyers of greenhouse gas emission reduction credits include governments, public-private partnerships and, increasingly, private companies, especially from Japan.

Solid Waste

Time is running out for companies to comment on how EPA proposes to define “solid waste” for purposes of the “Resource Recovery and Conservation Act,” or “RCRA.” The deadline is February 25. The agency is proposing to redefine “solid waste” to exclude from regulation under RCRA certain hazardous secondary materials, byproducts and sludges that now qualify as hazardous wastes, but are otherwise reclaimed or recycled in a continuous process within the same industry. Certain types of reclamation and recycling activities would no longer qualify as the “discarding” of these materials, and consequently would no longer be considered “hazardous wastes.”

The regulated community is expected to reap savings from reduced disposal costs as more secondary material is reclaimed or recycled. Reduced recordkeeping and reporting requirements are also expected to result in substantial savings. The proposed rule has been criticized by environmental groups and some members of Congress as a rollback of the environmental protections under RCRA’s cradle-to-grave hazardous waste management program. The idea of revising the RCRA definition of “solid waste” has been debated within EPA for more than 10 years. The agency argues that reclamation and recycling of hazardous wastes should be encouraged.

The government projects that the proposed rule would exclude approximately 1.5 million tons of hazardous waste annually from regulation under RCRA. Under the proposed rule, four criteria must generally be satisfied in order to escape such regulation. The secondary material to be reclaimed or recycled must be a valuable commodity, make a useful contribution and yield a valuable product, and it cannot contain significant amounts of hazardous constituents. EPA is not expected to issue a final rule until sometime in 2005.

Brief Updates

New Jersey Governor James McGreevey signed two new laws in mid-January that are supposed to encourage the remediation and development of contaminated properties known as brownfields. The first measure provides for the reimbursement by the state of up to 75% of the cost of redeveloping a contaminated property. Tax revenues generated in part by a new sales tax on materials used to clean up or redevelop a brownfield site will be used to fund the measure. The second new law provides for a business tax credit that would allow reimbursement of up to 100% of the cost of remediating a contaminated property, but only if the New Jersey tax department determines that new business activity at the site will generate tax revenue at least equal to the value of the tax credit within three years. A developer may qualify for up to a $4 million tax credit during the period 2004 to 2006, but the credit is limited to 50% of his tax liability.

The US Supreme Court said in January that it will review a lower court decision on whether a Superfund lawsuit may be brought by a private party seeking a share of cleanup costs from other private parties absent an initial enforcement action from the US Environmental Protection Agency. The case is Aviall Services Inc. v. the Cooper Industries Inc. A US appeals court ruled that private Superfund cost-sharing actions may be brought without having to wait first for the federal government to issue a cleanup or consent order. The US government takes the position that an enforcement order is required first.

The US Environmental Protection Agency issued guidance in December regarding the use of “supplemental environmental projects” in settlement agreements. Examples of such projects are programs to fund local community group activities or to develop community projects like new parks. Companies are often allowed to undertaken such activities to offset a portion of a civil penalty in enforcement actions. The guidance document modifies EPA’s previous position that generally prohibited supplemental environmental projects where a company will benefit financially from such projects. Under the new guidance document, the agency will allow such projects as an offset to penalties, provided they do not generate revenue for the alleged violator sooner than three years for small businesses and no sooner than five years for other companies.

The South Coast Air Quality Management District in California is allowing power plants to reenter the regional clean air incentives market, known as “RECLAIM,” in 2004. Plants will be limited initially to trading NOx RECLAIM credits with other power plants until full reentry into the program becomes effective on September 1, 2004. The regulators pulled power plants out of the RECLAIM program in May 2001 when the energy crisis in California led to extremely high prices for NOx RECLAIM credits.

Finally, EPA issued guidelines in January explaining what “contiguous property owners” must do to be protected from Superfund liability. Under the new guidelines, landowners whose property is contaminated by releases of hazardous materials from neighboring properties must show that they did not cause, contribute to, or consent to the release and that they are not potentially liable for response costs at the neighboring facility. They must also show that they comply with any land use restrictions, and that they will take steps to stop any continuing releases or future releases from the neighboring site and limit exposures to humans and the environment. The new guidelines are of marginal utility to entities purchasing property near known or suspected contaminated sites, because a property is shielded from liability only if it is bought without knowledge or reason to know that a contiguous property is contaminated.