New Source Review Update: Enforcement Dropped & Criticism Rejected
By Thomas R. Wood
11/15/2003

The US Environmental Protection Agency (EPA) recently made the news again in relation to New Source Review (NSR). Both on the regulatory reform and enforcement fronts the agency was the subject of renewed scrutiny and debate. Each of the two newest episodes in this unfolding saga are discussed below as well as the potential impact to Oregon sources.

The already heated controversy over NSR enforcement got a little hotter recently based upon reports of a shift in EPA's enforcement policy. On November 4th, 2003,EPA's Assistant Administrator for Enforcement, J.P. Suarez, met with EPA enforcement staff in Seattle. At that internal meeting, Suarez is credited with having announced that EPA would stop pursuing investigations into allegations of historic NSR violations. This announcement was promptly leaked, setting off a flurry of press releases and accusations across the country.

NSR requires that existing sources making major modifications undergo rigorous review and potentially install expensive new controls. Sources are exempt from NSR if these changes are routine maintenance, repair or replacement. However, it is often subjective whether a particular change is routine replacement or not. EPA has been investigating a number of sources to determine whether the agency agrees with the sources' determinations of past changes. If EPA did not agree, the assumption was that the agency would bring enforcement action that could result in costly fines and retrofit costs. Several of these enforcement actions have been bitterly fought by industry based upon the idea that the changes at issue were appropriately made in compliance with the law as it was interpreted by EPA at the time of the change. The courts have had mixed responses, holding for EPA in one key case involving Ohio Edison (see Wood, Insider #327) and holding for industry in another case involving Duke.

In August 2003, EPA published new rules regarding what constitutes "routine replacement" (see Wood, Insider #330). Under these new rules most, if not all, of the changes that EPA has investigated would be exempt from NSR. EPA and the Justice Department have publicly stated that the ongoing NSR enforcement initiatives would proceed regardless of the rule changes (see Wood, Insider #289).However, internal EPA memoranda indicated an understanding of how difficult it could become to litigate enforcement actions based upon rule provisions that were replaced due to lack of clarity.

As noted, Suarez is said to have announced that EPA will drop most of its NSR investigations. The only enforcement actions that are highly likely to continue are those cases where the Justice Department has already filed court actions. However, even those cases are likely to be significantly impacted by the EPA decision. As news of the announcement began to circulate, EPA sought to discredit the reports regarding Suarez's remarks--but not very forcefully. EPA spokesperson Lisa Harrison released a statement saying: "There has been no decision by the agency to drop all New Source Review (NSR) enforcement actions. Reports to that effect are simply not true. As the agency has consistently stated, we are vigorously pursuing all filed cases and we will evaluate each pending investigation on a case by case basis to determine whether it will be pursued or set aside." However, other agency officials are credited with having been told that only those changes that would have violated the revised NSR rules should be carried forward. The official EPA statement does not contradict the unofficial statements as the official statement can be read to say that only those cases actively in litigation will be pursued. Many consider this to lend credence to the original reports of Suarez's remarks.

Just days before the Seattle meeting, EPA chose to proceed with its NSR reform program notwithstanding the criticism which has been noted in the national media. EPA had substantially revised the NSR rules in a rulemaking published on December 31st, 2002--which took effect in March 2003 (see Wood, Insiders #309 & #310). In order to allow for further public dialog, EPA agreed on July 30th, 2003 to take comments on six particular issues related to the rule changes. On October 30th,EPA announced that it would not make any substantive changes in response to these comments--although it would clarify the rules in two respects.

The first clarification relates to how sources determine whether they trigger NSR if they replace an existing emissions unit. The December 2002 rules allow a source to determine whether NSR is triggered by replacement of an existing unit by using an "actual-to-projected-actual" applicability test. Comments objecting to this approach were rejected as part of the October 30thnotice. However, EPA decided to clarify how the exemption works. In this first clarification, EPA confirmed that the "actual-to-projected-actual" test is self-implementing and added a definition of "replacement unit" to the rules. An important aspect of this clarification is that replacement units that "significantly change the nature of the replaced unit" are not eligible for the "actual-to-projected-actual" test.

The second clarification relates to how a source establishes a PAL. As established by the December 2002 rules, the process for computing the maximum allowable PAL is complicated and subtle. One element is that a source can add in the potential to emit of emission units constructed after the baseline year. However, the federal definition of "construction" includes modifications, not just new construction. The allowance for the use of potential to emit was intended to be limited to wholly new emission units. Therefore, as part of the October 30thrule package, EPA is clarifying that in establishing a PAL only wholly new emission units can make use of potential to emit.

These clarifications were signed on October 30th and released to the public at that time. They were published in the Federal Register on November 7th, 2003 (68 Fed. Reg. 63021) and will take effect on January 6th, 2004.

The dialog about NSR reform and enforcement is extremely polarized. Long before the current administration took over, people across the political spectrum acknowledged that NSR, as it applies to existing sources, was unduly complicated and unduly subjective. The call was for bright line rules that could be understood by all. As noted above, the need for clarification is only emphasized by the fact that two federal courts ruling on similar cases in August came to largely opposite conclusions about how the rules work. If the courts cannot agree as to how the rules work, how is a source supposed to conclude, with confidence, that it is in compliance with the law? However, this unified call for reform has been lost amid the current political maneuvering in Washington D.C. and elsewhere.

The impact of the rule reforms on ongoing enforcement matters is not surprising. Whenever rules change, it makes it more difficult for an agency to enforce based upon conduct allowable under the new regulatory regime. EPA and the Justice Department were keenly aware of this fact and it is no surprise that the EPA administration would suggest that the enforcement initiative should be rethought in the context of current regulatory reality.

Any decision by EPA to back off of its NSR enforcement initiative should have immediate impacts throughout the country. However, Oregon is one of the states that will seethe least impact for several reasons. First, Oregon has a NSR program that differs substantially from the federal program and that does not suffer from many of the subjective elements that led to the federal enforcement initiative. This means that compliance questions arising from past permitting decisions are not prevalent in Oregon the way that they are elsewhere in the country. Second, the primary targets of the current EPA NSR initiatives are industries that are largely absent in this state. The Environmental Integrity Project, an EPA watchdog group, compiled a list of 76 power plants, 15 refineries and 26 other facilities that it believes were under investigation by EPA for potential NSR violations as of October 29th, 2003. Only two of those facilities are in EPA Region 10 and none are in Oregon. EPA did take enforcement action relating to facilities in Oregon as part of one of its earliest NSR enforcement initiatives, the wood products initiative, but that initiative has largely run its course (only one source out of the 117on the Environmental Integrity Project list appears to be in the wood products sector). This suggests that even a decision to halt enforcement of every source under investigation would have little immediate impact upon Oregon. However, because a number of Oregon sources were enforced against under the old regulatory program and have implemented costly control programs in response to that enforcement initiative, any EPA about face arguably puts those industries at a competitive disadvantage.

The retention of the December 31st, 2002 rules largely intact should have little immediate effect on the majority of Oregon sources either. As noted above, the Oregon NSR program is fundamentally different from the federal program. Our state program is memorialized in the Oregon State Implementation Program (SIP)and so is not directly affected by any changes at the federal level. However, by March 2006 DEQ must demonstrate to EPA that its program is no less strict than the federal program. EPA has insisted that all of the changes it has made to the federal rules, when considered as a package, will result in a net emissions decrease nationwide. This statement has left some concerned that EPA could seek a change to Oregon's NSR program to make it more consistent with the federal program. Most Oregonians, across the political spectrum, agree that this is not what is best for Oregon. So long as EPA does not require any significant changes to the Oregon program, the December 31st, 2002rule changes and the November 7th, 2003 clarification rulemaking should not directly affect sources in Oregon subject to the DEQ or LRAPA rules. However, the rejection of the majority of hostile comments about the December 31st rule changes and the perception that NSR enforcement has substantially changed course may further enflame the rhetoric and litigation surrounding NSR reform.

FOR ADDITIONAL INFORMATION, CONTACT: Tom Wood, (503) 294-9396, Stoel Rives LLP