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OFFICE OF INSPECTOR GENERAL
Evaluation Report
New Source Review Rule Change
Harms EPA's Ability to Enforce
Against Coal-fired Electric Utilities
Report No. 2004-P-00034
September 30, 2004
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Report Contributors:
Rick Beusse
Patrick Milligan
Frank Martinsky
Dan Howard
JeffMittelstadt
Abbreviations
DOJ Department of Justice
EPA Environmental Protection Agency
GAO General Accounting Office
CAIR Clean Air Interstate Rule
NAP A National Academy of Public Administration
NOx Nitrogen Oxide
NSR New Source Review
OAQPS Office of Air Quality Planning and Standards
OAR Office of Air and Radiation
OECA Office of Enforcement and Compliance Assurance
OIG Office of Inspector General
OGC Office of General Counsel
RMRR Routine Maintenance, Repair and Replacement
SIP State Implementation Plan
SO2 Sulfur Dioxide
WEPCO Wisconsin Electric Power Company
Cover Photo: Emissions from power generation. Source: U.S. Department of the Interior,
U.S. Geological Survey, Center for Coastal Geology, presentation for the
1999 South Florida Restoration Science Forum,
>;//s o fi a ,.uss
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
> WASHINGTON, D.C. 20460
THE INSPECTOR GENERAL
September 30, 2004
MEMORANDUM
SUBJECT: Evaluation Report: New Source Review Rule Change Harms EPA's Ability
to Enforce Against Coal-fired Electric Utilities
Report No. 2004-P-00034
TO: Stephen L. Johnson
Deputy Administrator
Thomas V. Skinner
Acting Assistant Administrator for
Enforcement and Compliance Assurance
Jeffrey R. Holmstead
Assistant Administrator for Air and Radiation
This memorandum transmits the results of an Office of Inspector General (OIG) evaluation of the
basis for the October 27, 2003, change in the New Source Review (NSR) rule, and the NSR rule
change's impact on EPA's enforcement policies, practices, and activities for coal-fired electric
utilities. This report contains findings that describe how the NSR rule change has seriously
hampered EPA settlement activities, existing enforcement cases, and the development of future
cases. This report also contains corrective actions the OIG recommends. This report represents
the opinion of the OIG and the findings contained in this report do not necessarily represent the
final EPA position. Final determinations on matters in the report will be made by EPA managers
in accordance with established procedures.
Action Required
In accordance with EPA Directive 2750, as the action official, you are required to provide this
Office with a written response within 90 days of the final report date. The response should
address all recommendations. For the corrective actions planned but not completed by the
response date, please describe the actions that are ongoing and provide a timetable for
completion. Where you disagree with a recommendation, please provide alternative actions for
addressing the findings reported.
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We appreciate the efforts of EPA officials and staff in working with us to develop this report. If
you or your staff have any questions regarding this report, please contact me at (202) 566-0847 or
Kwai Chan, Assistant Inspector General for Program Evaluation, at (202) 566-0827.
Nikki L. Tinsley
Attachment
cc: Pete Cosier, Audit Followup Coordinator, OAR
Greg Marion, Audit Followup Coordinator, OECA
Kwai Chan, Assistant Inspector General for Program Evaluation, OIG
Mark Bialek, Counsel, OIG
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Executive Summary
Purpose
The New Source Review (NSR) provisions of the Clean Air Act require that sources of
air pollution, such as utilities, take steps to install and operate lower-emitting pollution
control technologies at newly built major sources or modified major sources that
significantly increase emissions. Controversy has surrounded implementation of NSR
for years, including when the Environmental Protection Agency (EPA) issued a rule in
October 2003 regarding NSR's application to existing facilities. NSR applies to
stationary sources of air pollution, including the 1,032 coal-fired electric power-
generating units in the United States that produce 59 percent of all sulfur dioxide (SO2)
emissions and 18 percent of all nitrogen oxide (NOX) emissions nationwide. Both
pollutants are associated with adverse health effects, including respiratory disease and
infection, and premature mortality. As a result of Congressional interest, we evaluated
the basis for the rule change and the rule change's impact on EPA's enforcement
policies, practices, and activities for coal-fired electric utilities. Our objectives
considered the impacts on facilities that have had their enforcement cases resolved as
well as those that have not.
Results in Brief
While many sources within the electric utility industry have made substantial progress
in reducing emissions, some older sources have not. In 1996, EPA's Office of
Enforcement and Compliance Assurance (OECA) began targeting older, dirtier utilities
for compliance assessments, resulting in the identification of significant alleged
violations. EPA has been taking enforcement actions against these coal-fired utilities,
and this has proven to be an effective approach for requiring utilities to install pollution
control devices when they are making other modifications. This has also resulted in
significant reductions in harmful emissions. For example, settlements with 7
companies to date have already required owners to install emission control devices on
74 power-generating units over about a 10-year period, which is projected to reduce
annual SO2 emissions by more than 440,000 tons and NOX by more than 210,000 tons.
Further, if allowed to continue unimpeded, ongoing NSR enforcement actions may
garner even greater environmental benefits. For example, by requiring lower-emitting
controls on 97 power-generating units, the enforcement cases1 OECA is currently
pursuing could reduce SO2 emissions by 1,750,000 tons and NOX emissions by 629,000
tons annually.
EPA General Counsel and the Deputy Assistant Attorney General, Environment and Natural Resources
Division, U.S. Department of Justice, asserted that, in this instance, disclosure of the precise number of cases OECA
was pursuing at the time of our field work would have a detrimental impact on their ongoing investigations and
enforcement actions; as such, this number was redacted from the final report.
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The October 2003 NSR rule change has seriously hampered OECA settlement
activities, existing enforcement cases, and the development of future cases. This is due
largely to EPA's revised definition of routine maintenance, which allows utilities to
undertake projects up to 20 percent of the cost of the power-generating unit without
being subject to NSR requirements.2 After the rule was issued on October 27, 2003,
key officials from EPA's Office of Air and Radiation (OAR) (who wrote the 2003 NSR
rule) and key enforcement officials from OECA expressed widely disparate views of
the impact of the rule change.
OAR officials said the NSR rule change is not retroactive and therefore should not
impact OECA's ongoing litigation with utility companies alleged to have violated NSR
prior to October 2003. In OAR's opinion, the 20-percent threshold will allow utility
owners to replace components under a wider variety of circumstances, provide more
certainty to owners and to reviewing authorities, and enhance key operational elements
such as efficiency, safety, reliability, and environmental performance.
In contrast to OAR's view that the 20-percent threshold would not impact enforcement,
key OECA enforcement officials informed OIG that the exemption threshold for
utilities should be no higher than 0.75 percent. Since a new 1000 megawatt coal-fired
power plant could cost up to $800 million, using a 0.75-percent threshold could allow
up to a $6 million project for a coal-fired electric utility before triggering NSR, as long
as other NSR provisions are met, whereas a 20-percent threshold could allow as much
as a $160 million project before triggering NSR.
According to key enforcement officials, the NSR rule change is so dramatic that it has
impacted OECA's ongoing litigation, out-of-court settlements, and new enforcement
actions against coal-fired electric utilities. This is because, even though a court in
December 2003 issued a stay delaying implementation of the NSR rule, OECA's ability
to obtain appropriate controls through settlements or court-imposed remedies has been
weakened. Three of nine utilities in ongoing active litigation with EPA have asserted
that enforcement actions should cease or be significantly reduced based on the
contention that the maintenance activities in question would no longer be considered a
violation under the 2003 NSR rule. Similarly, soon after the NSR rule was made
public on August 27, 2003, a major utility ceased negotiations with EPA. Agency
officials attributed it to the announcement of the rule as well as an adverse court ruling
in an ongoing NSR enforcement case against a coal-fired utility. Similar to their views
on the NSR rule change's impact on NSR enforcement, Agency officials did not agree
on the extent to which the NSR rule change, as opposed to the adverse court ruling,
impacted these negotiations.
rule change exempts the replacement of components from NSR if (a) replacement is with identical
components or functional equivalents; (b) cost is below 20 percent of replacement value of the entire process unit;
(c) the replacement does not change the unit's basic design parameters; and (d) the unit continues to meet
enforceable emission and operational limitations. Replacement cost can be either an estimate of the fixed capital
cost of constructing a new process unit or the current appraised value of the process unit.
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No new enforcement actions have been taken against coal-fired utilities alleged to have
violated the old NSR rule due to the new rule's adverse impact on OECA's leverage in
settlements or court remedies. If the October 2003 rule is eventually implemented as
promulgated, OECA officials estimate that, of the utilities alleged to have violated
NSR in the past, only five smaller utilities, emitting a relatively small amount of SO2
and NOX, would still be in violation of NSR. All of OECA's other cases would be in
compliance with NSR under the 20-percent threshold and thus the installation of lower-
emitting controls made more difficult, whether in settlements or by way of injunctive
relief in court. As a result, nearly all of the projected emission reductions of
1.75 million tons of S02 and 629,000 tons of NOX would not be realized under NSR
enforcement efforts.
Fourteen States, several cities, and environmental groups sued EPA over the 2003 NSR
rule change, resulting in the December 2003 stay. Their concerns included insufficient
support for how the 20-percent threshold was selected and the adverse impact on
enforcement actions. We found little basis for the 20-percent threshold, and we saw no
evidence that the percent of routine maintenance in ongoing enforcement actions was
considered by OAR in determining the threshold. EPA recently announced its plans to
reconsider the 2003 NSR rule before the court stay is lifted. This is an excellent
opportunity for EPA to fully consider - in an open, public, and transparent manner -
the environmental impact of proposed NSR changes at varying levels, including the
impact on OECA enforcement activities.
Recommendations
Because coal-fired electric utilities produce nearly 60 percent of all SO2 and nearly
20 percent of all NOX emissions nationwide, it is important that NSR enforcement
against coal-fired electric utilities continue in the same manner and to the same extent
as before the 2003 NSR rule was issued. This would include both the pursuit of
ongoing cases and the development of new cases. As such, we recommend that:
• ITie EPA Administrator, through the reconsideration process of the NSR rule,
specifically address the impact on enforcement activities as it relates to coal-
fired electric utilities, including, if necessary, the issuance of a separate NSR
rulemaking for coal-fired electric utilities that specifically considers and takes
public comment on the resulting environmental impacts of a definition of routine
maintenance at any threshold above the desired OECA threshold of 0.75 percent
for coal-fired electric utilities, including:
+ Publishing the environmental and health impacts of different thresholds,
ranging from 0.75 percent (in 1 percent increments) up to 5 percent, and at
10 percent, 15 percent, and at the 20-percent threshold, along with explicit
assumptions underlying each threshold and the model inputs used for each
threshold; and
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+ Soliciting and accepting public comments on the proposed reconsideration
rule in an open, public, and transparent manner, and fully explaining the
basis for the Agency's eventual decision on any NSR rule changes as it
relates to utilities, including all steps taken to minimize the impact on
enforcement activities and cases.
• The Acting Assistant Administrator for Enforcement and Compliance Assurance
ensure that coal-fired electric utilities found in violation of NSR requirements
are brought into compliance expeditiously, and that the necessary pollution
control equipment is timely installed and operated, by:
+ Vigorously pursuing ongoing court cases and settlement negotiations,
including, where appropriate, prompt referrals of cases to the Department
of Justice; and
*• Identifying any additional coal-fired utilities in violation of the NSR
requirements prior to October 27, 2003, by fully using the site-specific
utility information obtained through Clean Air Act Section 114 information
collection requests and other compliance assessment activities, and ensuring
that these sources are brought into compliance in a timely manner.
Agency Comments and OIG Evaluation
EPA generally disagreed with our draft report, asserting that it contained several
major flaws and that it was inaccurate, misleading, incomplete, and superficial. We
met the Assistant Administrators for OAR and OECA, and obtained additional
information to support the Agency's viewpoints. Many of their comments centered
around other ways the Agency proposes to achieve emissions reductions from
utilities, which was outside the scope of this review. Our review focused on the
basis for the NSR rule change and the rule change's impact on EPA enforcement
policies, practices, and activities for coal-fired electric utilities. However, we
modified the report as appropriate based on the Agency's comments. The Agency's
responses (Appendices G and H) and our evaluation of those responses (Appendix I)
are included as appendices to the report.
We also received three sets of comments from EPA's Office of General Counsel
(OGC) asserting that portions of the report involved internal, deliberative
communications, and thus were exempt from disclosure under exemption #5 of the
Freedom of Information Act and should not be released because of the deliberative
process privilege. OGC also asserted that certain information in the draft report was
enforcement sensitive, and thus should not be included in the report. OGC
recommended that these portions be deleted from the report and protected from
public release. At the advice of OIG Counsel, we redacted some of the enforcement
information from the final report, and we redacted some of the information asserted
to involve internal deliberative communications. In other instances, upon the advice
IV
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of OIG Counsel, information asserted to be covered by the deliberative process
privilege remained in our report. The three sets of comments from EPA's OGC
asserting these exemptions and privileges were not included as appendices to the
report because to do so would involve disclosing exempt and privileged information.
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Table of Contents
Executive Summary i
Chapters ':W '¥. .'m- ;-;i;|; -/i .-:'f. -^ ''!:•• -'B ::-f'
1 Introduction 1
2 October 2003 NSR Rule Change Adversely Impacts
OECA Enforcement Efforts 8
3 EPA's NSR Enforcement Actions Are Reducing Emissions 22
Appendices
A Process for Generating Electricity 30
B Health Effects 31
C Highlights of the Chronology of NSR Program 34
D Details on WEPCO Case 36
E OIG Method For Estimating Emissions Impact 37
F Selected Other Regulations Impacting Power Plants 39
G EPA Summary Response to Draft Report 41
H Additional Information Submitted by EPA
Supplementing Summary Comments to Draft Report 45
I OIG Evaluation of Agency Responses to Draft Report 50
J Distribution 57
VI
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Chapter 1
Introduction
Purpose
The New Source Review (NSR) provisions of the Clean Air Act require that
sources of air pollution, such as utilities, take steps to install and operate lower-
emitting pollution control technologies at newly built major sources or modified
major sources that significantly increase emissions. Controversy has surrounded
implementation of NSR for years, including when the Environmental Protection
Agency (EPA) issued a rule in October 2003 regarding NSR's application to
existing facilities. After lawsuits were filed, this rule was stayed by the Court in
December 2003, yet concerns have been raised about the rule's impact on
enforcement of NSR violations.
As a result of Congressional interest, the Office of Inspector General (OIG)
evaluated the support for the rule change and the change's impact on EPA's
enforcement policies and practices. Specifically, for coal-fired electric utility
facilities alleged to have violated the Clean Air Act's requirements prior to
issuance of the 2003 NSR rule change, we compared and contrasted the level of
emissions for those facilities that have had their enforcement cases resolved
(either by court ruling or settlement) with those facilities that have not. The
objectives of our evaluation were to answer the following questions:
• For facilities that have had their enforcement cases resolved, what level of
emissions (a) did the facilities emit prior to enforcement action being taken by
EPA, (b) will facilities emit as a result of the enforcement action, and
(c) would facilities have emitted if an enforcement action had not been taken?
• For those facilities that have not had their enforcement cases resolved, what
level of emissions (a) did the facilities emit prior to enforcement action being
taken by EPA, (b) would facilities emit if the enforcement action is successful,
and (c) would facilities emit in the absence of the enforcement action?
Background
Coal-Fired Utilities Contribute to Air Pollution
The primary fuel source for electricity generation in the United States is coal.
According to the Department of Energy's Electric Power Annual Report for
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2000,3 there are 1,032 coal-fired, electric-generating units nationwide,
representing 77 percent of the 1,336 electric-generating units in the United States.
Electricity is usually generated by utilities that are public agencies or are privately
owned. Details on the process for generating electricity are in Appendix A.
While many sources within the electric utility industry have made substantial
progress in reducing emissions, some older sources have not. The coal-fired
electric utility industry produces about 59 percent of all sulfur dioxide (SOj)
emissions and 18 percent of all nitrogen oxide (NOX) emissions nationwide,
according to the Department of Energy (see Chart 1.1).
Chart 1.1: Emissions of SO2 and NOX in 2000
(in minions of tons)
S02
NOX
sm.
Totar.
I Coal-fired Utilities E3 Non-coal Utilities El Other Sources
SO2 and NOX are the two primary pollutants targeted by EPA under the NSR
enforcement initiative. SO2 contributes to the formation of fine particles and acid
rain, and NOX contributes to the production of ozone. Both pollutants are
associated with adverse health effects, including respiratory disease and infection,
lung inflammation, premature mortality, and aggravation of preexisting diseases
such as asthma. In addition to SO2 and NOX, coal-fired electric utilities also
produce arsenic, chromium, fine particulates, hydrochloric acid, hydrofluoric acid,
lead, manganese, mercury, nickel, and other air toxics. According to EPA's 2003
National Air Quality Emissions Trends Report, approximately 146 million people
live in U.S. counties where monitored air in 2002 was unhealthy at times. Coal-
fired electric utilities contribute to ozone, acid rain, mercury deposition, haze, and
Electric Power Annual 2000, November 2002, DOEXEIA-0348
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other health and environmental problems. Appendix B provides more information
on the health effects of S02 and NOX.
New Source Review Established to Improve Air Quality
Congress established NSR in the Clean Air Act Amendments of 19774 to
strengthen measures available to States and the Federal government for improving
air quality. Congress required that newly built and modified sources must prevent
pollution, upgrade their equipment, or install pollution controls. In response to
the 1977 Amendments, EPA issued a final NSR rule in January 1979, and revised
that rule in August 1980 to specifically define emission limits, in response to the
court decision on Alabama Power. Despite several proposed and final revisions
and legal challenges over the intervening 24 years, the 1980 regulations are
basically the rules still governing the NSR program. For a detailed chronology on
NSR, see Appendix C.
The early years of the NSR program produced more judicial proceedings over the
validity and interpretation of the regulations themselves rather than specific
enforcement actions. It was not until the early 1990s that EPA began to focus
significant attention on existing facilities that had undertaken substantial
construction without obtaining NSR permits.
One of the most controversial NSR issues is the determination of what actions
qualify as modifications at existing facilities, particularly in applying the
exclusion for routine maintenance, repair and replacement (RMRR) activities.
For purposes of NSR, the Clean Air Act defines modification as:
... any physical change... of a stationary source which increases the amount
of any air pollutant emitted by such source or which results in the emission of
any air pollutant not previously emitted. . .
Prior to issuing the NSR rule in 1980, EPA received no significant comments on
its proposed routine maintenance exclusion and, therefore, promulgated the rule as
proposed, with no further description of what the exclusion meant. Over the
years, EPA used a case-by-case approach to determine whether modifications
were considered routine and thus excluded from NSR applicability, due largely to
differences in industries.
4The Act established the NSR preconstruction permitting program requiring that both new and modified
sources install lower-emitting pollution control technologies to ensure that advances in pollution control occur
concurrently with industrial expansion.
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Application ofNSR Within the Electric Utility Industry
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For the electric utility industry, clarification of the routine maintenance exclusion
within the electric utility industry came about as a result of a legal ruling based on
a suit filed by the Wisconsin Electric Power
Company (WEPCO). WEPCO proposed a "life
extension project" at a coal-fired power plant in 1988
and requested an NSR applicability determination by
EPA. In 1990, the U.S. Seventh Circuit Court of
Appeals, in WEPCO v. EPA, upheld EPA's
interpretation that, based on a testing of five factors
(see box), the modification taking place did not
qualify for the routine maintenance exemption and
thus was subject to NSR. EPA then used these five
factors - nature and extent, purpose, frequency, cost,
and other relevant factors - as the basis for making
future NSR decisions within the electric utility industry. As a result of the
WEPCO case, in 1992 EPA promulgated a special rule for estimating emissions
increases at electric utility steam-generating units, regarding NSR application for
utilities. Details on the WEPCO case are in Appendix D.
October 2003 NSR Rule Creates Equipment Replacement Provision
On October 27, 2003, EPA issued the Prevention of Significant Deterioration
(PSD) and Non-Attainment New Source Review (NSR): Equipment Replacement
Provision of the Routine Maintenance, Repair, and Replacement Exclusion; Final
Rule. Known as the NSR Equipment Replacement Provision, the 2003 NSR rule
specifies that the replacement of components of a process unit with identical
components or their functional equivalents will be considered routine
maintenance and thus exempt from NSR requirements if:
• the cost of replacing the component is below 20 percent of the replacement
value5 of the entire process unit;
• the replacement does not change the unit's basic design parameters; and
• the unit continues to meet enforceable emission and operational limitations.
Through this rule, EPA intended to provide a "bright line" regarding those
activities that would be considered routine maintenance and thus excluded from
NSR. According to the preamble in the new rule, EPA's case-by-case
Replacement cost can be either an estimate of the fixed capital cost of constructing a new process unit or
the current appraised value of the process unit.
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determinations had been criticized for giving the routine maintenance exclusion a
narrow scope that disallowed the replacement of significant plant components
with identical or functionally equivalent components. According to the preamble,
critics contend that this has discouraged plant owners from undertaking
replacement activities that are important to restoring, maintaining, and improving
plant safety, reliability, and efficiency. The critics further contend that the effect
is exacerbated by what they believe are the uncertainties inherent in the case-by-
case approach. In issuing the rule change, EPA stated that this October 2003 NSR
rule will allow owners to replace components under a wider variety of
circumstances; provide more certainty to owners and reviewing authorities; and
enhance efficiency, safety, reliability, and environmental performance.
Nevertheless, 14 States,6 several cities, and environmental groups filed a legal
challenge against this rule immediately after the rule was issued in October 2003.
Issues included how EPA defined routine maintenance (the percentage arrived at),
the legal basis for the rule, and the effect of the change on enforcement actions.
On December 24, 2003, the District of Columbia Court of Appeals stayed
implementation of the rule, and its status was still pending as of mid-September
2004.
NSR Enforcement Emphasized Starting in 1990s
During the mid-1990s, EPA began to concentrate its efforts on NSR compliance
for industry sectors that produced significant amounts of air pollution. After
nearly 25 years of Clean Air Act implementation, EPA compliance officials
became increasingly concerned with the sparse number of requests for NSR
permits by facilities in some industrial sectors. In particular, EPA focused its
compliance efforts on (a) industrial sectors operating with fewer facilities and at
the same time operating for many years at high emissions without any record of
NSR permits, and (b) those with increased demand and no or few NSR permits.
During this time, there was tremendous economic growth, and expanding
industries were making large capital investments. EPA became concerned that
some sources in these industries had made major modifications without obtaining
NSR permits and, as such, had not installed the required lower-emitting
technologies.
Initially, EPA targeted its NSR enforcement efforts on petroleum refineries, steel
mini-mills, chemical manufacturers, wood products companies, and the pulp and
paper industry. Most of the cases resulted in settlements, with companies
6
New York, California, Connecticut, Illinois, Maine, Maryland, Massachusetts, New Hampshire, New
Jersey, New Mexico, Pennsylvania, Rhode Island, Vermont, and Wisconsin.
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agreeing to pay penalties and to install new pollution control equipment. For
example, EPA reached settlements with three wood product manufacturers
wherein they agreed to pay $289 million in penalties and reduce more than
177,000 tons of pollutants.
Similarly, EPA's National Petroleum Refinery Initiative included many
enforcement actions against a number of the approximately 150 refineries in the
United States. At the same time, EPA embarked upon a series of innovative,
multi-issue/facility settlement negotiations with major petroleum refining
companies. Since March 2000, EPA has entered into 11 multi-issue/facility-wide
settlements with petroleum refiners that together represent approximately
40 percent of the domestic petroleum refining capacity in the Nation.
Beginning in 1996, EPA enforcement staff turned their attention to the coal-fired
electric utility industry, particularly the older, dirtier utilities. In May 2001, the
National Energy Policy Development Group asked the Department of Justice
(DOJ) to review EPA's NSR enforcement actions to ensure that they are consistent
with the Clean Air Act. In January 2002, DOJ reported that EPA's enforcement
actions have been consistent with the Clean Air Act. Details on the status and
success of EPA's enforcement initiative for electric utilities are in Chapter 3.
Scope and Methodology
We conducted our field work from December 2003 to June 2004, and did so in
accordance with Government Auditing Standards, issued by the Comptroller
General of the United States. We performed field work at EPA's Office of Air
and Radiation (OAR) locations in Washington, DC, and Research Triangle Park,
North Carolina, and at the Office of Enforcement and Compliance Assurance
(OECA) in Washington, DC. OAR is primarily responsible for developing the
NSR rules, and OECA is primarily responsible for enforcing them. We
interviewed staff from OAR and OECA to gain an understanding of the proposed
changes to the Equipment Replacement Provision rule, including the basis and
development of the 20-percent threshold, and whether and how the rule impacted
existing and future enforcement cases after the rule was issued on October 27,
2003. We also interviewed OAR and OECA staff to gain an understanding of the
assumptions used in developing projections of future emission reductions from
enforcement of the existing NSR rules, as well as to understand how NSR has
been enforced in the past.
To determine how EPA's October 2003 NSR rule impacted enforcement policies
and practices, and in turn the environment, we reviewed EPA's documentation
concerning NSR and the proposed revisions related to equipment replacement at
air-polluting facilities. This documentation included the October 27,2003 rule,
the Regulatory Impact Analysis supporting this rule, internal Agency
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documentation Leading up to the proposed changes, and applicable information in
EPA's rulemaking docket related to the 20-percent threshold.
We also reviewed documentation for NSR settlements with coal-fired power plant
owners, including the Complaints, Notices of Violations, Consent Decrees, press
releases, and other information. We also reviewed OECA's documentation for
ongoing court cases, including publicly available information and confidential
enforcement and enforcement sensitive information. For instances where NSR
enforcement actions were taken, we reviewed OECA estimates of future emission
reductions from known violators. We also reviewed information related to
selected air pollution regulations impacting coal-fired electric utility emissions;
enforcement policies, procedures, and past practices; effectiveness of selected
control technologies for coal-fired electric utilities for NOX and SO2 and health
effects studies.
We reviewed and discussed with OAR and OECA officials selected recent
reports related to NSR, including the following:
• National Academy of Public Administration report, A Breath of Fresh Air,
Reviving the New Source Review Program, April 2003.
• General Accounting Office Report #GAO-03-947, EPA Should Use Available
Data to Monitor the Effects of Its Revisions to the New Source Review
Program, August 2003.
• General Accounting Office Report #GAO-04-58, New Source Review
Revisions Could Affect Utility Enforcement Cases and Public Access to
Emissions Data, October 2003.
Limitations
We limited our review to coal-fired power plants identified by OECA as having
violated the NSR provisions of the Clean Air Act prior to issuance of the
Equipment Replacement Provision rule on October 27, 2003. We evaluated the
Equipment Replacement Provision rule's impact on enforcement of NSR
violations that occurred prior to the rule's issuance as well as the rule's potential
impact on future cases against coal-fired power plants that violated NSR prior to
October 27, 2003. We did not review other industry sectors, and only included
coal-fired power plants in our evaluation. We did not assess the impact of other
proposed reforms that may impact future utility emissions, such as the Clean Air
Interstate Rule (CAIR), the proposed Utility (Mercury) Maximum Achievable
Control Technology Standards, or the proposed Clear Skies legislation.
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Chapter 2
October 2003 NSR Rule Change Adversely Impacts
OECA Enforcement Efforts
The October 2003 NSR rule change has seriously hampered OECA settlement
activities, existing enforcement cases, and the development of future cases. This
is due largely to EPA's revised definition of routine maintenance, which allows
utilities to undertake projects up to 20 percent of the cost of the power-generating
unit without being subject to NSR requirements. OAR officials, who wrote the
2003 NSR rule, and OECA officials, who are responsible for enforcing NSR,
expressed widely disparate views of the impact of the rule change after EPA
issued the rule on October 27,2003.7
OAR officials said the rule is not retroactive and therefore should not impact
OECA's ongoing litigation with utilities alleged to have violated NSR prior to
October 2003. However, the change is so dramatic that even though a court in
December 2003 issued a stay delaying implementation of the rule, EPA's
underlying legal arguments may have still been weakened. For example:
• Three of nine utilities in ongoing litigation have asserted that their actions
would not be a violation under the new rule and that, as a result, enforcement
should cease or the court-imposed remedy be heavily reduced.
• Soon after the NSR rule was made public on August 27, 2003, a major utility
ceased negotiations with EPA. Agency officials attributed it to the
announcement of the rule change, as well as an adverse court ruling in an
ongoing NSR enforcement case against a coal-fired utility.
• No new enforcement actions have been taken against coal-fired utilities
alleged to have violated the old NSR rule due to the new rule's impact on
OECA's leverage in settlements or court remedies.
If the October 2003 rule is implemented as promulgated, OECA officials estimate
that of the utilities alleged to have violated NSR in the past, only five smaller
utilities, emitting a relatively small amount of SO2 and NOX, would still be in
violation of NSR. In fact, one of the five utilities (East Kentucky Power), has
been the only case filed since October 2003. All of OECA's other cases, with
7In December 2003 and January 2004, views of key OECA officials were expressed to us by the (then)
Assistant Administrator for Enforcement and Compliance Assurance and the (then) Director of OECA's Air
Enforcement Division responsible for enforcing NSR cases at utilities. Both officials have since left the Agency.
These views were also expressed by OECA staff; however, the Acting Assistant Administrator for Enforcement and
Compliance Assurance expressed support for the rule when we met with him in September 2004.
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significant emissions, would be in compliance with NSR under the 20-percent
threshold. As a result, nearly all of the projected emission reductions of
1.75 million tons of SO2 and 629,000 tons of NOX would not be realized under
NSR enforcement efforts (see Table 3.3 in Chapter 3). Both pollutants are
associated with adverse health effects, as discussed in Appendix B.
Key Reasons EPA Issued New Rule
On October 27, 2003, EPA issued the Equipment Replacement Provision rule for
NSR. The rule specifies that the replacement of components of a process unit
with identical components or their functional equivalents will be considered
routine maintenance, repair, and replacement and thus exempt from NSR
requirements. One of the provisions of the rule states that any projects costing
less than 20 percent of the cost of the unit would be considered routine and thus
not subject to NSR requirements. The NSR rule would allow sources to use any
of the following approaches to determine the replacement value of a new process
unit:
• replacement cost;
• invested cost, adjusted for inflation;
• the insurance value of the equipment, where the insurance value covers
complete replacement of the process unit; or
• another accounting procedure, based on Generally Accepted Accounting
Principles.
According to OAR officials, one of the key reasons that the routine maintenance,
repair, and replacement exclusion is needed is to better define what actions
constitute an NSR violation that would provide companies with a "bright line" for
making maintenance and repair decisions. OECA officials agreed that this bright
line needed to be defined. Prior to the new rule, the exclusion had been applied
on a case-by-case basis, which OAR believed caused confusion as to what actions
constituted an NSR violation and whether NSR applied.
The new rule was issued in draft for comment in a December 2002 Federal
Register Notice, along with other proposed NSR changes. However, at that time,
the proposed rule did not include a specific percentage; instead, EPA solicited
comments on what the percentage should be.
In August 2003, EPA issued a Regulatory Impact Analysis that was used for the
proposed rule. According to the analysis, NSR has discouraged plant owners or
operators from replacements that are important to restoring, maintaining, and
improving plant safety, reliability, and efficiency. Specifically, the analysis states:
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... Our experience suggests that under the current NSR program,
managers of coal-fired electric generating facilities take whatever actions
are necessary to avoid triggering NSR, primarily because of its very high
retrofit control costs and the substantial opportunity costs associated with
regulatory delays .. . where NSR would be triggered, the project will
generally not go forward... thus, to analyze the [impact of] the current
rule, EPA assumed that facilities undertake only limited maintenance, and
... take other actions to stay out of the program .. . this results in gradual
deterioration in performances, resulting in higher heat rates and lower
capacities. ..
Also, OAR maintains that the October 2003 rule is not about reducing emissions
by limiting production; instead, it is about the intent of NSR, which is installing
controls. OAR also stated that the new rule may produce better environmental
improvements than the old NSR rule by providing companies with greater
flexibility when making facility improvements.
Differing Views on Impact of New Rule
After the rule was promulgated, OECA officials disagreed with the rule change,
particularly because of the adverse impact of the 20-percent threshold on
coal-fired electric utilities. For example, since a new 1000 megawatt coal-fired
power plant could cost $800 million, the NSR rule change could allow up to a
$160 million project for a coal-fired electric utility without triggering NSR, as
long as other NSR provisions are met. Current and former OECA officials
suggested this level of expenditures could allow coal-fired utilities to operate for a
long time without triggering NSR. For the example above, OECA's desired
threshold of 0.75 percent for coal-fired electric utilities would allow up to a
$6 million project for a coal-fired utility without triggering NSR, or about
$154 million less than allowed under the NSR rule change.
Longstanding, Unresolved Differences About NSR Rule
One of the more troubling aspects of the new rule is the length and level of
disagreement among EPA officials regarding how the new rule will impact
enforcement of the NSR requirements of Ihe Clean Air Act at coal-fired utilities.
OECA officials stated that the new rule will seriously undermine OECA's efforts
in enforcing NSR requirements against coal-fired utilities and would result in
significant amounts of lost emissions reductions. For example, in December
2003, the Director of OECA's Air Enforcement Division, told us that OECA
performed an impact analysis and distributed the routine maintenance threshold at
levels of 0.5 percent, 1.0 percent, 2.0 percent, and 5.0 percent. In their analysis,
they found that at a level of 2.0 percent most of the cases would be gone, and at a
5.0 percent level all the enforcement cases would be shut down. Based on the
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results of the OECA impact analysis, a routine maintenance threshold not to
exceed 0.75 percent was considered to be appropriate for coal-fired electric
utilities.
Also, in January 2004, the Assistant Administrator for Enforcement and
Compliance Assurance - generally known as EPA's top enforcement official -
told us that a 3-percent routine maintenance threshold for coal-fired electric
utilities would result in about 90 to 95 percent of theNSR enforcement cases
disappearing, and that even more cases would disappear when the level is set
higher than 3 percent. He said that, in his view, there is not a person in OECA,
given the choice, who would agree with the new rule.
OAR officials did not agree and stated that the rule change would not have a
negative impact on NSR enforcement cases. According to OECA officials we
contacted, the opposite is the case for coal-fired electric utilities. For example, on
January 13, 2004, the Assistant Administrator of OECA told the OIG that, while
NSR needed some reforming, this new rule - expanding the routine maintenance
threshold to 20 percent - will "eviscerate the air enforcement program,"
particularly as it impacts coal-fired utilities. He said that he had expressed this
opinion to others within the Agency on several occasions. He said that it became
clear to him, after talking with the EPA Administrator's office in September 2003,
that OECA would not be able to file new NSR cases under the old rule, and thus
he made the decision not to enforce the old NSR rule. Otherwise, OECA staff
would have been working on cases that they would have difficulty enforcing.
This decision was publicly announced in a November 20, 2003, presentation to
the District of Columbia Bar Association, which was closely followed by OECA
staff. He explained that the NSR rule change was not simply a policy change. In
his view, it was a fundamental change in NSR enforcement and interpretation that
harmed OECA's enforcement of NSR violations.
Views about the potential impact on enforcement activities were also expressed by
EPA Administrator Christine Whitman to Vice President Cheney in a May 4,
2001, memorandum. In commenting on the draft of the Nation's Energy Report
in 2001, the EPA Administrator provided comments on several parts of the report,
including NSR.
We were unable to discern the exact time frame, but at some point between the
Administrator's stated position in May 2001 and October 2003 when the NSR rule
was issued, EPA changed its position on issuing the "routine maintenance" rule.
As stated in the NSR rule's preamble, the Agency believed that the new rule
would not result in emissions increases, nor would it adversely affect NSR
enforcement. OAR used the Integrated Planning Model to conduct its analysis
and concluded that the rule "will not have a significant impact, up or down, on
emissions from the power sector," and would only improve safety, reliability, and
other relevant operational parameters. One assumption is critically important in
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understanding OAR's analysis. In projecting the emissions impact of its NSR
actions, OAR assumed that industry wilt avoid NSR requirements at all costs, and
as such, OAR did not consider NSR enforcement in its analyses. Table 2.1 shows
some of the more significant differences in views expressed by key OAR and
OECA8 officials after issuance of the NSR rule on October 27, 2003.
Table 2.1: Differences In OAR and OECA Views on Enforcement Impacts
After Issuance of the Final Rule on October 27, 2003
gnforcsment
Ongoing
Enforcement
Cases
New Enforcement
Cases
Enforcement
Leverage in
Settlements
Impact on
Emissions
Reductions
Reasonableness of
20-percent routine
maintenance
threshold; tor
utilities :
Views of Selected
OAROfflcWs
No impact on ongoing
enforcement cases because new
rule is prospective only.
No impact on OECA's ability to
bring new enforcement cases for
violations occurring before
10/27/03 because rule is
prospective only.
No impact on OECA's leverage in
settlement negotiations because
rule is prospective only.
\MII not have a significant impact,
up or down, on emissions from the
power sector.
20 percent reasonable; provides
ability to replace components
under wider circumstances, more
certainty, allows utilities to
enhance efficiency, safety,
reliability, and environmental
performance.
Views of Selected
OECA Officiate
Adversely impacts ongoing cases
in that industry will use RMRR to
seek a lesser remedy because, if
the conduct was performed after
implementation of the NSR rule
change, the conduct would be
legal and there would be no basis
for requiring pollution controls.
Adversely impacts new cases
because industry will use RMRR
provision to seek lesser remedy in
court as it would no longer be in
violation. In fact, thus far, EPA has
chosen to only pursue new cases
that violate the 20-percent
threshold."
Reduced incentives to reach
settlement with OECA because,
even if violations proven in court,
injunctive relief is likely to consider
that, under the new RMRR
provision, the utility would not be in
violation.
Would result in significant amount
of lost emissions reductions.
Unreasonable for utilities; the
threshold should not exceed 0.75
percent; likely to "eviscerate the air
enforcement program" against
coal-fired utilities.
'As evidenced in November 20, 2003 presentation to the District of Columbia Bar Association
(by Assistant Administrator for OECA).
See footnote #7 for description of key OECA officials contacted about their views. Some of these officials
have since left the Agency. The Acting Assistant Administrator for Enforcement and Compliance Assurance
expressed support for the rule when we met with him in September 2004.
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OAR Maintains Other Rules Will Achieve Environmental Goals
OAR officials believe other programs are or will be more effective than NSR at
achieving emissions reductions, including the Acid Rain Cap-and-Trade Program,
the NOX State Implementation Plan (SIP) Call, the planned Clean Air Interstate
Rule (CAIR), and the Clear Skies Initiative being debated in Congress. In the
Regulatory Impact Analysis dated August 2003, EPA projects the impact of the
October 2003 rule based on the assumption that a combination of other programs
will keep emissions from utilities in check. Specifically, the analysis states:
New Source Review is one of many programs created by the Clean Air Act
to limit emissions of air pollutants emitted from a wide variety of sources
which have an adverse impact on human health and the environment.
Other key programs include: the title IVAcid Rain Program which has
reduced SO2 emissions from the electric utility industry by more than
7 million tpy [tons per year] and will ultimately result in reductions of
approximately 10 million tpy; the Tier 2 motor vehicle emissions
standards and gasoline sulfur control requirements which will ultimately
achieve NOX reductions of 2.8 million tpy; standards for highway heavy-
duty vehicles and engines which will reduce NOX emissions by 2.6 million
tpy; standards for non-road diesel engines which are anticipated to reduce
NOX emissions by about 1.5 million tpy; and the NOX "SIP call" which
will reduce NOX emissions by over 1 million tpy. Altogether, these and
other similar programs achieve emissions reductions that far exceed those
attributable to the major NSR program and dwarf any possible emissions
consequences attributable to the final rule.
However, our estimates of emission reductions from future cases (see Chapter 3)
already account for benefits derived from the Acid Rain Cap-and-Trade Program
and the NOX SIP Call (see Appendix F for further details). While making
projections for emission reductions from other initiatives, OAR did not include
emission reduction estimates achieved from settled cases or projected for ongoing
cases. OAR asserted that plant managers take whatever actions are necessary to
avoid triggering NSR, even though the basic premise of the ongoing enforcement
actions is that the companies did in fact violate NSR and thus should have been
considered in the analysis.
In our September 2004 meeting with EPA's Assistant Administrator for Air and
Radiation and the Acting Assistant Administrator for Enforcement and
Compliance Assurance, they further emphasized that EPA believes the emissions
reductions at coal-fired utilities would be better achieved through a more market-
based approach, such as the CAIR rule, rather than enforcement of NSR. They
also told us they expect to have a draft final CAIR rule completed by mid-
October 2004, and that the EPA Administrator has stated in both internal Agency
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meetings and in public speeches that he plans to finalize the CA1R rule by the end
of calendar year 2004.
In the same meeting, the Assistant Administrators emphasized to us that a far
better approach for reducing emissions from coal-fired electric utilities would be
to implement the C AIR rule. Similar to the Acid Rain Program and the NOX SIP
Call, CAIR is a broad cap-and-trade approach, which the Assistant Administrators
believe is the most cost-effective approach for reducing emissions from the power
sector. When comparing an NSR-type approach to CAIR, the Assistant
Administrators also stated that they believe emissions reductions would be
realized sooner and that the emissions reductions would be greater than under the
NSR approach. They also said that the emissions reductions under the CAIR rule
would be more certain, since a similarly proposed rule (NOX SIP Call) has already
been upheld in the District of Columbia Circuit Court. Appendix H provides
additional details about the many benefits of the proposed CAIR approach to
addressing emissions from utilities.
We recognize that there are multiple regulatory approaches available to EPA for
controlling emissions at coal-fired electric utilities, and commend EPA's efforts to
address pollution from coal-fired electric utilities in as many approaches as the
Agency deems necessary to achieve clean air goals. However, in our view the
CAIR rulemaking is separate and distinct from the NSR rule change, and has no
bearing on either the basis for the NSR rule change or the rule change's impact on
EPA's enforcement policies, practices, and activities for coal-fired electric
utilities - the objectives of our evaluation. If EPA's CAIR rulemaking is
successfully promulgated, EPA will expect and desire its implementation to be
enforced just as vigorously as the NSR rule was prior to the October 2003 rule
change.
There are uncertainties with whatever course(s) of action EPA decides upon,
including NSR, CAIR, and other proposals. Because EPA is still drafting the
CAIR, it is not certain whether it will be challenged, and what controls would be
required. When CAIR is implemented, it is not yet known what level of controls
will be required nor the length of time permitted for utilities to install the controls.
Further, when CAIR is implemented, there will still need to be an enforcement
mechanism in place to identify and enforce against those facilities not complying
with the requirements. Similarly, because the Clear Skies Initiative has not been
passed by Congress, its impact is also uncertain.
Many Express Concerns Regarding New Rule
Many interested and affected parties expressed concerns with the issuance of the
new rule. The National Academy of Public Administration (NAPA), the
Environmental Integrity Project, and others disagree with OAR's contention that
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there will be minimal increases in emissions in the future. By assuming that
electric utilities will avoid NSR at all costs, OAR concluded that the October
2003 rule would result in no increase in S02 emissions and, depending on
assumptions used in the model, either a decrease or a small relative increase in
NOX OAR used the Integrated Planning Model to conduct its analysis and
concluded that the rule "will not have a significant impact, up or down, on
emissions from the power section," and would only improve safety, reliability,
and other relevant operational parameters. Several key aspects of the rule were
questioned, which ultimately resulted in the rule being stayed in the District of
Columbia Court of Appeals. Some of the concerns are described below.
GAO Cites Lack of Support For EPA's Decision to Issue New Rule
The General Accounting Office (GAO) expressed concern with an assumption
similar to one used in the Regulatory Impact Analysis for the new rule that
companies have and will continue to do whatever it takes to avoid NSR, including
only performing minimum maintenance. Further, while the analysis states that
uncertainty under NSR has resulted in delays or cancellation of beneficial
projects, GAO notes no support is given other than anecdotal evidence. As GAO
noted in its August 2003 report:9
EPA relied primarily on anecdotal information from the industries most
affected by NSR in concluding that (prior to the final rule) the program
discouraged some energy efficiency projects, including some (hat would
have reduced air emissions. EPA staff responsible for this analysis said
they relied on anecdotal information from industry sources such as
electricity producers, chemical and forest products manufacturers, and
petroleum refiners because they lacked comprehensive data on the number
of projects that did not go forward as a result of NSR, such as upgrades to
industrial boilers. .. . Because EPA based its conclusion that NSR
discouraged some energy efficiency projects on anecdotal information
rather than a comprehensive survey or representative sample of industries
subject to the program, its findings are not necessarily representative of
the program's effect on energy efficiency projects throughout the
industries subject to the program.
OECA's compliance assessments of coal-fired power plants have found
significant noncompliance with NSR rules over the years, suggesting that some
utilities have been doing capital projects without obtaining the necessary permits.
9CLEAXAIR ACT: EPA Should Use Available Data to Monitor the Effects of Its Revisions to the New
Source Review Program, U.S. GAO, Rpt. No. GAO-03-947, August 2003.
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State and Local Agencies Question Support, Legal Basis, and
Impact of New Rule
OAR officials acknowledged a number of cornmenters disagreed with its analysis,
asserting that emissions would be significantly higher. For example, one
commenter said that the proposal lacks any reference to the gains accomplished by
NSR enforcement, the ongoing enforcement actions, settlements reached, or the
potential gains from the cases now pending. During November and December of
2003, the October 2003 rule met resistance from 14 States, several local agencies,
and environmental groups, who sued EPA over the NSR rule change. Among
their chief concerns were:
• Insufficient support for how the 20-percent threshold was selected;
• The legal basis for the rule; and
• The adverse effect of the rule on past enforcement actions.
The Court of Appeals for the District of Columbia stated that the petitioners had
demonstrated the "likelihood of success" and "irreparable harm" necessary to
grant a stay of the rule. As a result, the October rule was stayed by the court on
December 24, 2003, just prior to its effective date of December 26, 2003.
On June 30, 2004, EPA announced its plans to reconsider three aspects of the
2003 NSR rule before the court issues its opinion on the stayed rule. The three
aspects include the legal basis for the rule, the basis for the 20-percent cost
threshold, and whether EPA provided adequate notice for an administrative
change to correct cross references in the codified rules.
NAPA's Assessment Cited Concerns With NSR Rule Change
Recognizing the controversy surrounding implementation of NSR, Congress
asked NAPA to perform "an independent evaluation" of NSR and publish a report
of its findings and recommendations to EPA and the Congress on how to better
manage or reform the NSR program. The April 2003 study concluded that the
NSR program is not working as Congress intended when it passed the 1977 Clean
Air Act and, as a result, public health is being adversely affected. However, in
opposition to OAR's solution, NAPA concluded that NSR should be strengthened
by retaining the NSR provisions from the 1977 Act, strengthening its impact by
ending grandfathering over a 10-year period, vigorously enforcing NSR's
permitting requirements for existing facilities during the interim 10-year period,
and improving EPA and State information systems and public accountability. The
NAPA study resulted in recommendations directed to both EPA and Congress
which, if implemented, would result in emission reductions even higher than
estimated by OECA, and much higher than OAR's analysis suggested.
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NAPA criticized the draft NSR proposed rule that preceded EPA's October 2003
rule. Specifically, NAPA reported that:
EPA's enforcement actions since 1988 against facilities that have made major
investments in modifications without obtaining NSR permits have highlighted
industry abuses of EPA's routine maintenance exclusion. Yet, EPA has
recently proposed farther expanding this exclusion ... The Panel believes that
simply allowing more modifications to be excluded from NSR will not solve
the problems with NSR, nor will it improve environmental protection. . .
One recommendation made by NAPA was for EPA to continue enforcing NSR
vigorously and that these actions would:
. . deter future violations, and encourage other modified facilities to
comply with NSR until Congress has adopted the Panel's other recommended
reforms.
NAPA also recommended that Congress end "grandfathering" in the next 10 years
by requiring all major sources that have not obtained an NSR permit since 1977 to
upgrade their emissions control equipment and lower emissions. EPA responded
that it believes the 10-year horizon to be unrealistic for full implementation.
If the recommendations in NAPA's report are adopted, substantial emission
reductions far greater than those estimated by OECA would occur. In response to
the NAPA report, EPA stated that the NAPA report misstates Congressional
intent for NSR, and that NAPA's recommendations would require significant
statutory revisions and could result in costly, inefficient requirements that are
difficult to implement.
Little Basis for 20-Percent Threshold
According to the preamble to the October 2003 NSR rule, commenters suggested
a wide range of percentages, from 0.1 percent to 50 percent. Also in the
preamble, OAR noted the 20 percent was less than half of the 50 percent
applicability threshold for triggering New Source Performance Standards10
reconstruction, and thus within the range of the commenters' suggestions.
However, OAR provided little support for why the 20-percent figure, in particular,
was appropriate.
The preamble also noted that the 20-percent threshold was below the cost
percentage in the WEPCO v. EPA case, based on EPA's interpretation that
10The New Source Performance Standards provision of the Clean Air Act requires owners to install air
pollution controls when capital costs exceed 50 percent of the cost of the unit.
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modifications made by WEPCO amounted to 22 percent of the total unit cost.
The court found that these modifications triggered NSR (see Appendix D for
details on the WEPCO decision). However, the fact that the WEPCO case
involved modifications that amounted to 22 percent of the total unit cost at that
particular facility does not preclude NSR from being triggered for other
companies undertaking modifications involving a lesser percentage. Although the
preamble states that the 20-percent threshold is supported by available data for the
electric utility sector, and that EPA has a detailed set of information available on
maintenance, repair, and replacement activities for the electric utility sector, OAR
was unable to provide further support to us as to how the 20-percent threshold was
determined.
After reviewing documents provided by OAR and interviewing Office of Air
Quality Planning and Standards (OAQPS) officials knowledgeable of how the
RMRR percentage was determined, the only documented reason we could find for
the Agency's 20-percent threshold was the WEPCO ruling. We saw no evidence
that the percent of RMRR in ongoing enforcement actions was considered by
OAR in determining the RMRR percentage. The WEPCO ruling, in effect,
established a ceiling or limit, above which it would have been difficult for EPA to
reasonably justify a threshold exemption. However, as some OEC A officials
pointed out, this did not provide a basis for why the threshold should be
established at 20 percent versus 0.75 percent, as both are under the 22-percent
threshold decision in WEPCO. The OAQPS official in charge of developing the
20-percent threshold told us that he was never told to justify the 20-percent figure,
but that he was well aware of the Assistant Administrator for OAR and his
Special Assistant's desire for that amount.
EPA has reached settlements with companies that were below the 20-percent
threshold. According to OEC A officials, 88 percent of the pending enforcement
cases11 are below this 20-percent threshold. Regarding future cases not yet
initiated, if companies perform similar activities as those performed in pending
enforcement cases, their activities would not violate NSR requirements.
New Rule Hampering Enforcement Despite Court Stay
As noted above, the October 2003 rule affected ongoing cases since, on
November 20, 2003, the Assistant Administrator for OECA announced to his
enforcement staff that they should "stop enforcing" NSR unless the utility violated
the "new" rule. Moreover, three of the nine utilities charged with violations are
citing the new rule as grounds for dismissing their cases. Settlement activity has
slowed down, and one company ceased negotiations with OECA. This essentially
halted progress with nearly all of OECA's NSR case development.
11 The precise number of pending enforcement cases was considered enforcement sensitive and has been
redacted from the report.
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In contrast to the OECA Assistant Administrator's statements, in January 2004,
the EPA Administrator announced that EPA is still enforcing NSR under the
"old" existing NSR guidance, pending the outcome of the court stay. However, in
tracking OECA's work from November 2003 to June 2004, we found that the only
new NSR enforcement efforts involved those few facilities that violated the new
rule. The one case recently filed, in February 2004, was against a company that
violated the 20-percent threshold. In June 2004, some progress was made with an
ongoing case against a utility alleged to have violated the pre-October 2003 NSR
guidance. For the ongoing court case, EPA identified new violations that were not
part of the original lawsuit, and amended the complaint to include these power
units. This is an encouraging sign that EPA intends to pursue existing cases.
However, we have seen no evidence that EPA has continued to pursue new NSR
enforcement actions against coal-fired electric utilities in the same manner and to
the same extent as it did prior to October 27, 2003. OECA officials stated that
discussions have recently resumed with some companies.
National Academy of Sciences' Ongoing Evaluation of NSR Changes
In addition to NAP A, the National Academy of Sciences/National Research
Council's Board on Environmental Studies and Toxicology is expected to provide
by January 2005 an interim report on potential air quality, public health, and other
impacts of the October 27, 2003 rule change. The National Academy of Sciences
is also expected to address the impact of EPA's other NSR rule changes proposed
December 31, 2002. Their final report is expected by December 2005. To the
extent possible, the National Academy of Sciences' study, sponsored by EPA, will
evaluate the increases or decreases in efficiency of facility operations, including
energy efficiency, at new and existing facilities covered by the NSR rule, as well
as the resulting increases or decreases in emissions of pollutants regulated under
the NSR program, among other things.
Conclusions
The October 2003 NSR rule change has seriously hampered OECA settlement
activities, existing enforcement cases, and the development of future cases.
Although OAR has stated that the NSR rule change is not retroactive, the dramatic
nature of the change has seriously undermined EPA's ability to effectively enforce
longstanding NSR requirements. OECA staff reported less willingness among
utilities to settle cases, and direct use of the new rule as a basis for significantly
reducing any court-approved remedy for past violations, even when violations
have been legally proved.
Industry should be allowed and encouraged to improve the efficiency and
effectiveness of its operations, but not at continued cost to the environment.
OAR and OECA need to work together closely in developing a new definition of
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routine maintenance that allows for plant efficiency improvements while
adequately safeguarding the public and the environment against excess emissions
from coal-fired electric utilities. EPA's decision to reconsider the October 2003
NSR rule change provides an excellent opportunity for the Agency to fully
consider - in an open, public, and transparent manner - the environmental impact
of proposed NSR changes at varying levels, including the impact on OECA
enforcement activities.
As it relates to utilities, because of their unique nature among U.S. air pollution
sources, full consideration needs to be given to the impact on enforcement
activities if OAR goes beyond OECA's 0.75 percent threshold. Further, reports
and recommendations by NAPA and the National Academy of Sciences should be
adequately considered and addressed before an NSR reconsideration rule is
proposed. Lastly, when proposing the NSR reconsideration rule specifically for
utilities, EPA should publish the environmental and health impacts of different
thresholds, ranging from 0.75 percent (in 1 percent increments) up to the 20-
percent threshold, along with explicit assumptions underlying each threshold and
the model inputs used for analyses of each threshold. Then, the Agency should
solicit and accept public comments on the proposed reconsideration rule in an
open, public, and transparent manner, and fully explain the basis for the Agency's
eventual decision on any NSR rule reconsideration as it relates to utilities.
Recommendations
Because coal-fired electric utilities produce nearly 60 percent of all SO2 and
nearly 20 percent of all NOX emissions nationwide and are unique among U.S. air
pollution sources, we believe it is important that NSR enforcement against coal-
fired electric utilities continue in the same manner and to the same extent as
before the 2003 NSR rule was issued. As such, we recommend that:
2-1 The EPA Administrator, through the reconsideration process of the NSR
rule, specifically address the impact on enforcement activities as it relates
to coal-fired electric utilities, including, if necessary, the issuance of a
separate NSR rulemaking for coal-fired electric utilities that specifically
considers and takes public comment on the resulting environmental
impacts of a definition of routine maintenance at any threshold above the
OECA desired threshold of 0.75 percent for coal-fired electric utilities,
including:
(a) specifically addressing the reports and recommendations of NAPA
and the National Academy of Sciences before an NSR reconsideration
rule is proposed;
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(b) when proposing the NSR reconsideration rule for utilities, EPA
should publish the environmental and health impacts of different
thresholds, ranging from 0.75 percent (in 1-percent increments) up to
5 percent, and at 10 percent, 15 percent, and at the 20 percent
threshold, along with explicit assumptions underlying each threshold
and the model inputs used for each threshold; and
(c) soliciting and accepting public comments on the proposed
reconsideration rule in an open, public, and transparent manner; and
fully explaining the basis for the Agency's eventual decision on any
NSR rule changes as it relates to utilities, including all steps taken to
minimize the impact on enforcement activities and cases.
Agency Comments and OIG Evaluation
EPA generally disagreed with our draft report, asserting that it contained several
major flaws and that it was inaccurate, misleading, incomplete, and superficial.
We generally disagreed with Agency's response. Many of the Agency's
comments centered around ways the Agency proposes to achieve emissions
reductions from coal-fired utilities by means other than NSR, such as the
proposed CAIR rule. However, a comparison of alternative approaches to
achieving emissions reductions from coal-fired electric utilities was not the
objective of our review. Our review focused on the basis for the NSR rule change
and the rule change's impact on EPA enforcement policies, practices, and
activities for coal-fired electric utilities. CAIR and NSR enforcement are two
distinct efforts intending to achieve the same goal. We do not believe that the
Agency must select one approach over the other, but instead should pursue both
courses of action. In addition to not comparing CAIR and NSR enforcement, we
did not perform a cost-effectiveness analysis between the two initiatives, or other
ongoing or planned actions to address pollution from coal-fired electric utilities.
We modified the report as appropriate based on the Agency's comments.
We disagreed with the Agency's comment that the 20-percent threshold is not
relevant to the issue of whether the NSR rule change is having an impact on coal-
fired utility enforcement cases because the rule is prospective. To the contrary,
we continue to believe that the NSR rule promulgated on October 27, 2003 -
which set a 20-percent threshold for routine maintenance - has substantially
impacted ongoing NSR enforcement. For example, three of nine utilities in
ongoing litigation have asserted that their actions would not be a violation under
the new rule and that, as a result, enforcement should cease or the court-imposed
remedy be substantially reduced.
21
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Chapter 3
EPA's NSR Enforcement Actions
Are Reducing Emissions
EPA's NSR enforcement actions against coal-fired electric utilities have proven to
be an effective approach for requiring utilities to install pollution control devices.
Settlements with 7 companies to date have required owners to install and operate
emission control devices on a total of 74 power-generating units, which is
projected to reduce SO2 emissions by more than 440,000 tons and NOX by more
than 210,000 tons annually. Although there are also uncertainties involved with
OECA's ongoing NSR enforcement initiative for coal-fired electric utilities, NSR
enforcement actions have resulted in proven environmental benefits and, if
allowed to continue unimpeded, may garner even greater results. If successful, the
enforcement cases'2 OECA is currently pursuing could reduce SO2 emissions by
1,750,000 tons and NOX emissions by 629,000 tons by requiring lower-emitting
controls on 97 power-generating units. However, as discussed in Chapter 2, the
October 27, 2003, NSR rule change has seriously hampered OECA's future
enforcement efforts.
Status of Coal-Fired Electric Utility Enforcement Actions
OECA has focused its attention on the coal-fired electric utility sector because
officials suspected that the owners of the aging coal-fired power plants made large
capital investments by replacing or repairing key components of the power plants'
equipment without obtaining NSR permits. Enforcement officials estimate that
these projects have enabled electric power generation from coal-fired power plants
to nearly double since Congress enacted the NSR requirements in 1977. EPA
began its efforts basically by reminding the utility sector to comply with the NSR
rules; however, over time, as EPA pursued this effort, violations were identified
throughout the sector that supported the utility enforcement initiative. EPA
currently has categorized compliance assessment activities into the five stages,
which are presented in Table 3.1 in the chronological order typically followed by
OECA in developing a case. The process can take years due to: the size of
utilities; the amount and complexity of historical information involved; the type of
utility expertise needed to effectively develop an NSR case; and the limited EPA,
State, and local agency enforcement resources. Senior EPA officials told us that
the Agency launched its power plant initiative in 1998, and has been aggressively
I2EPA General Counsel and the Deputy Assistant Attorney General, Environment and Natural Resources
Division, U.S. Department of Justice, asserted that, in this instance, disclosure of the precise number of cases OECA
was pursuing at the time of our field work would have a detrimental impact on their ongoing investigations and
enforcement actions; as such, this number was redacted from the final report.
22
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pursuing it since that time. They further stated that the power plant NSR
enforcement cases have occupied the largest share of OECA's resources for the
last several years, and we [EPA] understand that DOJ is also devoting substantial
resources to these cases.
Table 3.1: Steps Taken by EPA to Develop a Case
Case Aettvfty
Section 114
Requests . ..T:. ;
Negotiations
Could Be Referred f
Within 30 Days of :
;EPA Approval !:
Referrals to DOJ
Filed Cases :
Description
Under Section 1 14 of the Clean Air Act, EPA may obtain information to determine
whether violations have occurred. The information obtained suggested that facilities in
some sectors might have been making major modifications without obtaining NSR
permits. The information requested includes detailed cost information of capital
construction projects suspected by OECA to be NSR violations.
violations have occurred, and will notify facility owners. EPA will explain the violation and
suggest resolutions, generally encouraging the facility to install the required pollution
control devices. Because enforcement proceedings to this point are informal, EPA has
not yet issued a notice of violation. It is EPA's intent to initially try to resolve the
violations through settlement and thus save a significant amount of cost and time. Also,
through settlement, EPA is more likely to achieve controls company-wide.
If settlement negotiations with the company are unsuccessful, EPA will determine
whether enough evidence exists to refer the case to DOJ for potential litigation. At this
stage, EPA only needs about 30 days to prepare the referral to DOJ.
In prioritizing which cases to refer, EPA projects the extent of violations and the
emissions impact, and generally refers the most substantial cases to DOJ first EPA
officials said DOJ is selective in choosing cases to take to court due to its limited
resources.
After receiving a NSR case from EPA, DOJ will review the accumulated evidence to
determine whether there is merit to file suit against the utility. Before filing the case in
court, DOJ generally discusses the matter with the utility in a further attempt to settle.
"Steps developed by OIG based on discussions with OECA officials.
EPA Settlements With Coal-Fired Electric Utility Companies
As of May 2004, EPA has entered into settlements with seven companies that
operate coal-fired power plants. OECA projected that these settlements will result
in SO2 reductions of over 444,000 tons and NOX reductions of over 213,000 tons
per year. Specifically, the settlements require owners to install and operate
pollution controls costing a total of $2.9 billion on 74 electric-generating units at
23 power plants. In addition, companies are required to pay civil penalties of
$17.4 million and fund additional environmentally beneficial projects. These
emission reductions are to be phased in over an agreed-upon time frame, usually
10 years. Table 3.2 provides details regarding these settlements.
23
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Table 3.2: NSR Settlement Summary
Company
Tampa Electric Power
PSE&G Fossil
Alcoa'
Virginia Electric Power
Wsconstn Electric
Power*
SIOECO
Santee Cooper"
Settfettrcn*
Oat* ;
February 2000
January 2002
March 2003
April 2003
April 2003
June 2003
June 2004
Totals
PwrtaJtha
{millions}
$3.5
$1.4
$1.5
$5.3
$3.1
$0.6
$2.0
$17.4
ft*6uettoa« {?<**&}
SO, ;
70,000
35,937
52,899
176,545
65,053
6,384
37,500
444,320
**>* :
53,000
18,273
15,482
61,651
31,770
4,232
29,500
213,908
Sites*
Units
2/10
2/3
1/3
8/20
5/23
1/3
4/12
23/74
' Not a utility, but operates large coal-fired generators to supply power for its operations.
" Consent Decrees for these two settlements have been filed but not approved by the Court.
These estimated reductions are based on requirements in the agreements that
companies install control equipment on the units identified in the settlement
negotiations. The agreements will result in control equipment being installed on
an average of 84 percent of the total system-wide production capacity of the seven
utilities for NOX, and 80 percent of the total system-wide production capacity of
the seven for SO2 The range of controls was from 66 to 100 percent of the
system-wide production capacity. Five of the settlements were company-wide
settlements - Virginia, Wisconsin, Tampa, PSE&G, and Santee Cooper. For
these settlements, the companies agreed to put controls on units comprising most
of their production capacity. In return, the companies are provided with long-term
regulatory certainty of compliance into the next decade.
When controls are installed, excess allowances of SO2 emissions are created, and
it is vital that these allowances not be used. Consequently, all seven settlement
agreements included an Emissions Trading Clause requiring the company not to
use or sell any emission reductions. Also, all the settlement agreements required
the surrender of allowances, except for Tampa Electric Power, which prohibited
the selling and trading of S02 allowances. If a facility is able to use allowances
elsewhere at a plant or sell them to another facility, there will be no environmental
benefit achieved.
24
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Projected Emission Reductions From Potential Enforcement Cases
In addition to the emission reductions achieved through settlements, OECA has a
number of cases13 that, if fully pursued, could result in additional emission
reductions of 1,750,361 tons of SO2 and 628,865 tons of NOX (see Table 3.3). We
developed these estimates by taking into consideration the impact of existing
regulations on coal-fired electric utilities - such as the NOX SIP Call and the Acid
Rain Cap-and-Trade regulation (see Appendix F for details) - but not proposed
regulations or proposed legislation. We also assumed that OECA would seek to
require companies to surrender emission allowances based on its ability to do so
in the seven settlement cases. (For details of our calculation methods, see
Appendix E.) Table 3.3 presents a summary of the number of NSR enforcement
cases currently being brought forth by EPA's enforcement staff and the potential
emission reductions as a result of these actions, as calculated by the OIG.
Table 3.3: Estimated Emissions Reductions From Active Cases
Case Activity
Filed Cases
Referred to DOJ But Not Filed '
Could Be Referred Within 30 Days of
EPA Approval But Not Filed*
Totals
*o.0T
Companies ;
9
Noteb
Noteb
Noteb
SQj Raduet(eiw
ften*)
1 ,534,236
113,657
102,468
1,750,361
NO* Reductions
{PwwJ
479,185
93,231
56,449
628,865
a Emissions projections based on power-generating units cited in OECA enforcement case files;
projections do not assume company-wide settlements although five of seven OECA settlements to
date have involved company-wide settlements that obtained even greater emissions reductions.
bEPA General Counsel and the Deputy Assistant Attorney General, Environment and Natural
Resources Division, U.S. Department of Justice, asserted that, in this instance, disclosure of the
precise number of cases OECA was pursuing at the time of our field work could have a detrimental
impact on their ongoing investigations; as such, this number was redacted from the final report.
Based on the seven settlements EPA has already reached with utility companies,
OECA officials said there is a high likelihood of success with the NSR
enforcement cases shown above. Generally, OECA officials attribute a utility
company's willingness to settle due to a reluctance to engage in litigation and the
associated costs, the company's desire to have long-term assurance from EPA that
the company is operating in compliance with the Clean Air Act, and the
company's desire to make efficiency and other improvements. Conversely, OAR
officials maintain that estimated reductions from enforcement cases are uncertain,
and that while some settlements have been reached, none of the court cases have
yet reached the remedy phase. OAR officials questioned whether litigants will be
required to install controls to the level prescribed in the lawsuit. It is OAR's
13
See footnote 10 for discussion of redacted information.
25
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opinion that the utility industry historically has done whatever it takes to avoid
making modifications that would trigger or make them subject to NSR
requirements, and will continue to do so. However, in contrast to OAR's view,
OECA's compliance assessments suggest that some coal-fired power plants have
been making modifications and doing capital projects that trigger NSR without
obtaining the necessary permits.
Since 1997, EPA has sent 143 Section 114 information requests to over 75 coal-
fired electric utilities for purposes of identifying potential NSR violations.
Enforcement officials stated they are confident that, if pursued, this information
will lead to the official identification of numerous NSR violations. In December
2003, the Director of the OECA Air Enforcement Division told us that as many as
100 more cases could be successfully brought against these other utilities, given
enough time and enforcement resources. Similarly, in January 2004 the EPA
Assistant Administrator for OECA said he believed many more cases could be
successfully brought against these other utilities. Again, limited EPA and DOJ
enforcement resources were cited as a key factor that more progress had not been
made to date.
OECA's Litigation Against Coal-Fired Electric Utility Companies
On November 3, 1999, DOJ filed seven lawsuits against utility companies and one
administrative compliance order against the Tennessee Valley Authority charging
these companies with NSR violations (shown in Table 3.3 as "Filed Cases"). The
lawsuits seek to require the facilities to install the necessary air pollution controls
and pay significant civil penalties. The 9 filed cases, involving 49 plants, are at
varying stages of progress and are summarized in Table 3.4.
26
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Table 3.4: Status of Ongoing Litigation With Coal-Fired Electric Utilities
Company
Alabama Power (subsidiary of
Southern Company)
American Electric Power
Service Corp. (AEP)
Cinergy
Duke Energy
East Kentucky Power
Georgia Power & Savannah
Electric & Power (subsidiaries
of Southern Company)
Illinois Power and Oynegy
Ohio Edison
Tennessee Valley Authority
(TVA)
«te,<*
Plants
5
14"
6
8
2
3
1
1
g
Status
In January 2004 DOJ requested court stay be
lifted; court stay lifted June 16, 2004; OECA
actively in discovery, trial date pending.
Trial January 2005. Awaiting preliminary motion
decisions and discovery. In July 2004, prior to
trial, court has ordered mediation.
Liability trial scheduled for June 2005.
Summary judgment granted in part and denied in
part in August 2003. Judge accepted joint motion
to terminate case in April 2004 to allow
Government to prepare its appeal. Government
filed notice of appeal case in June 2004 to the
4th U.S. Circuit Court of Appeals.
Government filed complaint in January 2004.
Company responded in June 2004 requesting
court to dismiss complaint; decision pending.
On hold pending outcome of Tennessee Valley
Authority case
Liability phase of trial ended in June 2003.
Awaiting decision.
Court ruled against company, saying it violated
NSR program's routine maintenance exemption
and also that the projects led to a significant
increase in emissions. Remedy phase scheduled
for January 2005.
Administrative Order case dismissed by District
Court, and Supreme Court denied certiorari
petition in May 2004, leaving DOJ with option of
dropping case or filing it in Federal district court.
In June 2004, EPA issued a Notice of Violation that identified 26 new claims against the
company. While some claims identified violations at previously identified plants, three new
plants were cited (number in table includes the three new plants).
Two of the nine NSR cases have reached liability decisions. If found liable, the
remedy phase will set forth actions that the utility will be required to take to
rectify these violations. To date, the two cases have reached conflicting decisions
on essentially identical claims:
• The court found Ohio Edison14 liable for NSR violations and has scheduled a
remedy trial for January 2005. The court accepted EPA's arguments and
concluded that the 11 activities did not fall under the regulatory exemption for
4U.S. v. Ohio Edison, No. 2:99-CV-l 181 (S.D. Ohio. August 7, 2003)
27
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routine maintenance, and decided the company was in violation of theNSR
requirements with respect to all 11 activities. In this case, the Court agreed
with EPA's use of the five factors - nature and extent, purpose, frequency,
cost, and other relevant factors - to determine that the utility had made
physical changes that triggered NSR, and that emissions increases had
resulted.
• A summary judgment was granted in the U.S. v Duke Energy matter15 in favor
of Duke Energy. At issue in the Duke Energy summary judgment motions
was the methodology EPA used in calculating a net significant emissions
increase. Duke Energy's method was to calculate the maximum hourly rate of
emissions, whereas EPA's method was to calculate annual emissions. The
court in this case favored Duke Energy's methodology and judged that EPA
had not proven a net significant emissions increase. On June 10, 2004, DOJ
appealed the judgment to the 4th U.S. Circuit Court of Appeals.
The divided rulings illustrate the uncertainty with EPA's litigation efforts.
Nonetheless, to date, these litigated cases represent a promising course of action
for EPA to take in dealing with aging power plants and should continue to be
pursued.
Conclusions
EPA's NSR enforcement actions against coal-fired electric utilities have proven
effective in requiring some aging utilities to install needed pollution control
devices when they are making other modifications that increase emissions. This
was Congress' intent when it added the New Source Review provisions to the
1977 Clean Air Act. There continues to be some uncertainty associated with
EPA's litigation efforts. However, the Agency's settlements with seven
companies requiring owners to install emission control devices on 74 power-
generating units over about a 10-year period is projected to reduce annual SO2
emissions by more than 440,000 tons and NOX by more than 210,000 tons. If
allowed to continue unimpeded, ongoing NSR enforcement actions may gamer
even greater environmental benefits. However, the October 2003 NSR rule
change diminishes the likelihood that OECA's NSR enforcement activities would
have increasingly resulted in aging utilities installing lower-emitting control
technologies as they decided to make efficiency and other improvements. EPA's
issuance of the October 2003 NSR rule has now cast doubt on OECA's
enforcement activities.
15U.S. v. Duke Energy, Civ. No. 1 :OOCV01262 (M.D.N.C. August 26,2003);
28
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Recommendations
3-1 We recommend that the Acting Assistant Administrator for Enforcement
and Compliance Assurance ensure that coal-fired electric utilities found in
violation of NSR requirements are brought into compliance expeditiously,
and that the necessary pollution control equipment is timely installed and
operated, by:
(a) Vigorously pursuing ongoing court cases and settlement negotiations,
including prompt referrals of cases to DOJ; and
(b) Identifying any additional coal-fired utilities in violation of the NSR
requirements prior to October 27, 2003, by fully using the site-
specific utility information obtained through Clean Air Act
Section 114 information collection requests, and other compliance
assessment activities, and ensuring that these sources are brought into
compliance in a timely manner.
Agency Comments and OIG Evaluation
EPA stated that a number of factors affect the decision to file a case, including
resource commitments by EPA and DOJ to the ongoing prosecution of existing
cases. The Agency further stated that it believed more emphasis should be placed
on these other factors, particularly resources committed by EPA and DOJ to the
ongoing prosecution of existing cases, and the effect these limited resources have
on filing cases. We agree that there are factors other than the rule change
influencing the pursuit of enforcement cases, such as resource constraints on the
part of EPA and DOJ, and we pointed out to EPA officials that we had already
referred to these limited resources three times in our draft report. Nonetheless, we
have modified the final report to add even more emphasis to the resource issue
influencing the development of NSR enforcement cases.
In its response, EPA recognized that NSR enforcement is an important tool, and
asserted that the Agency is vigorously pursuing the existing NSR enforcement
cases and pursuing new cases as appropriate. While we agree that NSR
enforcement is an important tool, we did not see evidence that EPA was
continuing to pursue enforcement of NSR in the same manner and to the same
extent as before the October 27,2003, rule was promulgated. Since the new rule
was stayed in court on December 24, 2003, there have been no new enforcement
actions taken against coal-fired utilities alleged to have violated the old NSR rule.
The only additional case filed by EPA is against a utility alleged to have violated
the new rule, exceeding the 20-percent threshold.
29
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Appendix A
Process for Generating Electricity
The diagram below illustrates the basic steps in the process of generating electricity by
combustion in boilers. First, some form of fossil fuel (e.g., coal, petroleum, natural gas,
biomass) is burned in a combustion unit or boiler to produce steam. The steam turns a large
turbine, which then powers an electric generator. The electricity produced from the generator is
then distributed to switchyards and, from there, electricity is transmitted to homes and
businesses.
Whether the unit is gas or steam, waste heat is emitted from the plant into the atmosphere or
through a cooling system (e.g., cooling tower). Air pollution occurs in the first stage of making
electricity, when the fuel is burned in the boiler to make the steam. Air pollution control
equipment is installed between the boiler and the stack to capture the pollutants before they are
released into the atmosphere. The primary fuel source for electricity generation in the United
States is coal. According to the Department of Energy's Electric Power Annual Report for 2000,
there are 1,032 coal-fired electric-generating units nationwide, representing 77 percent of the
1,335 electric-generating units in the United States.
30
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Appendix B
Health Effects
Power plants are a major contributor of both SO, and NOX pollution. S02 and NOX contribute to
the formation of fine particles and acid rain, and NOX contributes to the production of ozone.
High concentrations of SO2 can result in temporary breathing impairment for asthmatic children
and adults who are active outdoors. Short-term exposures of such individuals to elevated SO2
levels during moderate activity may result in breathing difficulties that can be accompanied by
symptoms such as wheezing, chest tightness, or shortness of breath. Other effects that have been
associated with longer-term exposures to high concentrations of SO2, in conjunction with high
levels of particulate matter, include aggravation of existing cardiovascular disease, respiratory
illness, and alterations in the lung's defenses. Population subgroups that may be affected by SO2
include individuals with heart or lung disease, as well as children and the elderly.
Nitrogen oxides, or NOX, is a generic term for a group of highly reactive gases that contain
nitrogen and oxygen in varying amounts, and play a major role in the formation of ozone,
particulate matter, haze, and acid rain. Short-term (1- to 3-hour) and prolonged (6- to 8-hour)
exposures to ambient ozone have been linked to a number of health effects. For example, ozone
exposure can lead to increased respiratory symptoms (chest pain, cough), increased susceptibility
to respiratory infection, lung inflammation, aggravation of preexisting respiratory diseases such
as asthma, and significant decreases in lung function. Also, increased hospital admissions and
emergency room visits for respiratory problems have been associated with ambient ozone
exposures. These effects generally occur while individuals are actively exercising, working, or
playing outdoors. Ozone also adversely impacts vegetation and ecosystems, leading to reductions
in agricultural crop and commercial forest yields; reduced growth and survivability of tree
seedlings; and increased plant susceptibility to disease, pests, and other environmental stresses.
Together, SO2 and NOX are the major precursors to acidic deposition (acid rain), which is
associated with the acidification of soils, lakes, and streams, and accelerated corrosion of
buildings and monuments. SO2 also is a major precursor to fine particulate matter, which is a
significant health concern and a main contributor to poor visibility. In addition to SO2 and NOX,
coal-fired electric utilities also produce arsenic, chromium, hydrochloric acid, hydrofluoric acid,
lead, manganese, mercury, nickel, and other air toxics. Many of these pollutants are known or
suspected carcinogens, and adversely impact various systems of the human body, including the
respiratory and nervous systems and the brain.
There have been several studies performed to estimate the emissions generated from the electric
utility industry and the associated health impacts of those emissions. According to the former
Director of the OECA Air Enforcement Division, for every dollar spent on controls, four to five
dollars would be saved in health costs. He also noted that this data does not include the cost of
missed work time, so the savings could be higher. Similar monetized benefits were included in
OECA's August 2002 Clear Skies briefing for the Assistant Administrator, which noted that for
this particular proposal, annualized costs would total $3.69 billion, while benefits would total
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$44 billion annually. These estimated costs and benefits include the reduction of SO2, NOX,
Paniculate Matter, and Mercury from utilities. There have also been studies to estimate the
health impact of SO2 and NOX emissions. Although the specific results of these studies differ, as
illustrated below, they nonetheless suggest that significant adverse health effects are associated
with emissions from electric utilities.16 The studies are listed in chronological order from most
recent to oldest.
U.S. Public Interest Research Group Education Fund, Lethal Legacy, A Comprehensive Look at
America's Dirtiest Power Plants, October 2003
• Nationwide, the 548 dirtiest plants emitted 10,1 million tons of SO2 in 2002. This is about
64 percent of total SO2 emissions (about 15.8 million tons) from all sources in the United
States in 2001. Of this pollution, 70 percent (7.1 million tons) was "excess," or could be
eliminated if the plants met modern emissions standards.
• Nationwide, these 548 plants emitted 4.4 million tons of NOX in 2002. This is nearly
20 percent of total NOX emissions (about 22 million tons) from all sources in the United
States in 2001. Of this pollution, 62 percent (2.7 million tons) was "excess," or could be
eliminated if the plants met modem NOX emission standards.
• Millions of tons of soot- and smog-forming emissions each year will go unchecked. This
pollution will cause as many as 400,000 asthma attacks and 20,000 premature deaths each
year.
Abt Associates, The Particutate Related Health Impacts of Emissions in 2001 from 41 Major
US Power Plants, November 2002
Power plants were responsible for about two-thirds of the SO2 emissions and one-quarter of
the NOX emitted in the year 2001.
• Between 4,800 and 5,600 premature deaths in 2001 are associated with emissions from
41 major power plants.
• Over 3,000 hospital admissions or emergency room visits, 930,000 work loss days, 111,000
asthma attacks, and other health effects are associated with the emissions from the
41 power plants.
American Lung Association, Electric Utilities, April 2000
• Nationwide, electric utilities produce 66 percent of all SO2 emissions and 29 percent of all
NOx emissions.
• The 50 dirtiest power plants are responsible for 78 percent of all SO2 emissions produced
by the electric power industry.
!6EPA performed two other studies of the adverse impact of SO2 and NOX emissions: (1) Analysis of the
Acid Deposition and Ozone Control Act, July 2000; and (2) Regulatory Impact Analysis for the Final Section 126
Petition Rule, July 2000.
32
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In its response, EPA took exception to our characterizing the above as "health/science studies,"
noting that in their view these groups simply applied EPA's own health and benefits data to an
estimated amount of emissions reductions, which typically comes from EPA. In response to the
cost benefit statements of the OECA Air Enforcement Division Director, EPA stated that these
were "advocacy pieces" that apply other data to make a point, and suggested that better analyses
would include: (1) Section B of the 2003 Clear Skies Technical Package; (2) Technical
Addendum: Methodologies for the Benefit Analysis of the Clear Skies Act of 2003; and
(3) Benefits of the Proposed Interstate Air Quality Rule (January 2004). These and other health
effects analyses and studies are publicly available on the EPA web site.
33
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Appendix C
Highlights of the Chronology of NSR Program
Date
December 1970
1972
1977
Angoftl980
1990
1992-1994
1993
1996
1998
1999
February 2000
May 2001
Description
Clean Air Act of 1970 became law (P.L. 91-604) and newly created EPA
was authorized to cany out the provisions of the Act.
EPA created the Prevention of Significant Deterioration Program by
rulemaking. This program implemented NSR in areas that meet air quality
standards.
Clean Air Act Amendments of 1977 enacted, establishing the NSR
preconstruction permitting program requiring that both new and modified
sources install lower-emitting pollution control technologies to ensure that
advances in pollution control occur concurrently with industrial expansion.
EPA revised the NSR rule to specifically define emission limits, in
response to the court decision in Alabama Power.
Clean Air Act Amendments of 1990 became law.
EPA issued notices of violation to companies in the plywood and wood
products industry.
EPA convened a federal advisory committee to address policy and
technical issues associated with revising NSR.
EPA issued NSR Simplification Proposal to streamline permitting, relieve
regulatory burden, and provide States with flexibility. EPA also began
enforcement initiatives targeting coal-fired electricity producers,
petroleum refiners, and pulp and paper industry for violations of NSR
rules.
EPA solicited further public comment on proposed NSR revisions.
DOJ filed lawsuits against seven electricity producers charging that
17 coal-fired power plants made major modifications without installing
required pollution control equipment.
EPA settles first NSR case with Tampa Electric Power Company for
$3.5 million in civil penalties, and over $10 million in permanent
emissions-control equipment to meet stringent pollution limits, projected
to reduce SO2emissions by 70,000 tons and NOX by 50,000 tons annually.
The administration's proposed energy policy called for EPA and the
Department of Energy to review the implementation of NSR regulations,
34
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June 2001
January 2000 -
March 2004
June 2002
December 2002
January 2003
July 2003
October 27,2003
October 27,2003
November 20,2003
December 24,2003
January 9,2004
June 30, 2004
and for DOJ to review existing NSR legal actions. DOJ later reported that
the actions were consistent with the Clean Air Act.
EPA issued NSR background paper as a partial response to
recommendations in the energy plan.
EPA settled multiple NSR cases with petroleum refiners and electricity
producers (six coal-fired utilities agreed to pay $13.9 million in fines, and
to spend nearly $2.9 billion to install lower-emitting controls on 74 power-
generating units, projected to reduce SO2 emissions by more than 370,000
tons and NOX by more than 150,000 tons annually).
EPA issued New Source Review: Report to the President, and
recommendations for improving the NSR program.
EPA issued the NSR final rule and nine northeast States filed suit
challenging the final rule.
A tenth northeast State filed suit challenging the rule, and these 10 States,
along with California and four California air quality agencies, petitioned
EPA to reconsider the final rule.
EPA announced that it would reconsider parts of the NSR final rule.
EPA issues Equipment Replacement Provision of the routine maintenance,
repair, and replacement exclusion for the NSR rule (the 20-percent
threshold amount is specifically stated for the first time).
Fourteen States, several cities, and environmental groups sue EPA over the
Equipment Replacement Provision of the 2003 NSR rule.
Assistant Administrator for OECA announced Agency's policy stopping
all enforcement activity with the exception of only enforcing violations of
the new rule's 20-percent threshold.
U.S. Court of Appeals for the District of Columbia Circuit ruled that
opponents to EPA's rule changes "demonstrated the irreparable harm and
likelihood of success" of their case, thereby meeting the legal tests
required to stop a regulation from taking effect.
EPA Administrator announced that the Agency would pursue new NSR
cases using the previous interpretation of the law.
EPA announced that it would reconsider three aspects of the NSR
Equipment Replacement Provision rule published on October 27,2003,
including the legal basis for the rule, the basis for the rule's 20-percent
cost threshold, and whether EPA provided adequate notice for an
administrative change to correct cross references in the codified rules.
35
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Appendix D
Details on WEPCO Case
In 1988, Wisconsin Electric Power Company (WEPCO) proposed a "life extension project" at a
coal-fired power plant and requested an NSR applicability determination by EPA. The Agency
determined that the project did not qualify for the routine maintenance exclusion and, as such,
NSR requirements were applicable. WEPCO sued EPA, but the court upheld EPA's
applicability determination. When the Seventh Circuit Court of Appeals issued its decision in
WEPCO v. EPA in 1990, it addressed two important issues involving NSR.
First, the court was asked to determine whether renovations at a coal-fired steam-generating unit
were "modifications" triggering compliance with NSR. WEPCO asserted that its replacement of
large steel drums and air heaters was simply routine maintenance and did not qualify as a
modification, making it exempt from NSR. EPA had used a set of five factors - including the
nature and extent, purpose, frequency, and cost of the work - to determine that WEPCO's large
"life extension" project did not qualify for the routine maintenance exemption. The court upheld
EPA's interpretation that the renovation was a modification covered by NSR. Since that time,
EPA has informed the electric utility industry numerous times of the five factors - nature and
extent, purpose, frequency, cost, and other relevant factors - against which physical changes at
power plants would be gauged.
The second issue addressed by the Court in the WEPCO case was whether the modification
produced a significant emissions increase. EPA had compared WEPCO's pre-change actual
emissions to its post-change potential emissions (round-the-clock maximum capacity) to
determine that a significant increase would occur, even though WEPCO had never operated its
electric-generating unit that way. The court held that EPA could not assume post-change
continuous operation, but instead had to base predicted future emissions on the unit's emissions
history. The court required WEPCO to make pollutant-specific data available to EPA and
remanded the case to EPA for further proceedings. EPA subsequently determined that WEPCO
increased its emissions. In 1992, EPA promulgated a special rule for electric utility steam-
generating units, wherein the utility compares its actual annual emissions before the change with
projected annual emissions after the change to determine if the change would result in a
significant increase in emissions that will trigger NSR. This rulemaking clarified NSR
application for utilities by providing them the opportunity, beforehand, to specify their intended
operation of the unit once the desired changes had been made.
The preamble also noted that the 20-percent threshold was below the cost percentage in the
WEPCO v. EPA case, based on EPA's interpretation that modifications made by WEPCO
amounted to 22 percent of the total unit cost.
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Appendix E
O/G Method For Estimating Emissions Impact
In calculating potential emissions reductions, we consulted with OECA and OAR officials to
determine the proper approach to develop these estimates. In doing so, we determined that the
estimates must consider a number of factors involved in achieving these reductions and project
how these factors influence the end result of reducing pollution. For example, the estimates
consider:
• the type and effectiveness of pollution control equipment installed;
• the level of controls when compared to the facility's overall production capacity;
• the amount of time needed to install the controls; and
• emission reductions of other environmental regulations intended to reduce the amount
of SO2 and NOX emitted from the electric utility industry.
When considering these factors, we made certain assumptions that affected the emission
estimates, and ultimately how successful and effective the enforcement case will be. These
factors and assumptions are listed below.
Type and Effectiveness of Control Equipment - There is general agreement about the
type of control equipment that would be installed to control SO2 and NOX emissions from
electric utilities. A Selective Catalytic Reduction unit would be used to reduce NOX,
while a Flue Gas Desulfurization unit, or scrubber, would be installed to lower SO2
emissions. For any piece of control equipment, there is an assumed level of operating
efficiency. For example, based on discussions with OECA and OAR officials, we
assumed that a Selective Catalytic Reduction unit would achieve 90-percent removal of
NOX, and that a Flue Gas Desulfurization unit will achieve a 95-percent removal of SO2
emissions. Our projections assume these removal efficiencies.
Level of Controls Versus Production Capacity - For the seven settlements EPA has
reached with coal-fired electric utilities, controls were placed on 66 to 100 percent of the
company's production capacity. The average level of controls from these settlements has
been 80 percent for SO, and 84 percent for NOX. Our projections were calculated using
these averages.
Schedule for Installing Controls - As part of the terms and conditions of the settlement
or lawsuit, a facility is given a pre-determined schedule for obtaining, installing, and
operating the required pollution-control devices. For those cases where EPA and the
electric utility companies have reached settlement, the agreements have called for the
pollution control equipment to be fully installed and all of the estimated reductions to be
achieved no later than 2012. Our projections also assume full implementation by 2012.
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Impact of Other Environmental Regulations • Coal-fired utilities are required to
reduce emissions based on other environmental regulations. Appendix F provides more
details on these other regulations. The impact on our emissions analysis follows.
• NOX SIP Call - Each year during the ozone season (May 1 to September 30), the
NOX SIP Call requires utilities in prescribed States to increase controls, or buy
allowances for NOX emissions from a fixed pool of allowances, thereby reducing
emissions. In estimating potential emission reductions from pending enforcement
cases, we reduced beneficial emissions reductions by the amount of emission
reductions that would already be achieved through the requirements of the NOX
SIP Call.
Acid Rain Program - The Acid Rain Program introduced an allowance trading
system that uses the incentives of the free market to reduce pollution. Under mis
system, affected utility units are allocated allowances based on their historic fuel
consumption and a specific emissions rate. The net effect of the Acid Rain
Program is a reduction in S02 emissions. Different than how they handle the NOX
SIP Call, OECA does not account for the Acid Rain Program, which resulted in a
slight overstatement when estimating potential emission reductions from pending
enforcement cases. We accounted for the Acid Rain Program emissions reductions
in our estimates.
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Appendix F
Selected Other Regulations Impacting Power Plants
In addition to NSR. two other environmental regulations presently impacting coal-fired electric
utilities are the NOX SIP Call and the Acid Rain Cap-and-Trade Program.
NOX SIP Call
The rule, Finding of Significant Contribution andRulemakingfor Certain States in the
Ozone Transport Assessment Group Region for Purposes of Reducing Regional
Transport of Ozone, commonly known as the NOX SIP Call, was issued final on
October 27,1998. This regulation required 22 jurisdictions (21 States and the District of
Columbia) in the eastern half of the United States to revise their SIP to help ensure that
NOX emissions reductions are achieved to mitigate the regional transport of ozone
precursors across State boundaries, The NOX SIP Call rulemaking requires that these
22 jurisdictions adopt and submit SIP revisions that contain provisions adequate to
prohibit sources from emitting NOX in amounts that can contribute significantly to non-
attainment of the 1-hour and 8-hour ozone national ambient air quality standards. The
States were required to tighten controls on NOx-emitting facilities during the ozone
season, which covers a 5-month period from May 1 through September 30 each year.
States had to be in compliance by May 31, 2004, with the exception of Georgia and
Missouri, which must comply by May 1, 2005. The coal-fired electric utility industry was
one of the industrial sectors that was required to comply with the NOX SIP Call.
Acid Rain Cap-and-Trade Program
As part of a two-phased approach, the Clean Air Act set a goal of reducing annual SO2
emissions by 10 million tons below 1980 levels by placing a cap on the total emissions
from a select group of the nation's largest fossil fuel-fired power plants. Phase I began in
1995 and affected 263 units at 110 mostly coal-burning electric utility plants located in
21 eastern and Midwestern States. An additional 182 units joined the first phase of the
program as substitution or compensating units. Emissions data for 1995 indicate that SO2
emissions at these units were reduced nearly 40 percent below their required level.
Phase II, which began November 2000, tightened the annual emissions limits imposed on
these large, higher-emitting plants and also set restrictions on smaller, cleaner plants fired
by coal, oil, and gas, encompassing over 2,000 units in all. The program affects existing
utility units serving generators with an output capacity greater than 25 megawatts, as well
as all new utility units.
The Acid Rain Program introduced an allowance trading system that uses the incentives
of the free market to reduce pollution. Under this system, affected utility units are
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allocated allowances17 based on their historic fuel consumption and a specific emissions
rate. Allowances may be bought, sold, or banked. Anyone may acquire allowances and
participate in the trading system. This second phase set a permanent ceiling of
8.95 million allowances for total annual allowance allocations to utilities.
17
Each allowance permits a. unit to emit 1 ton of SO2 during or after a specified year.
40
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Appendix G
EPA Summary Response To Draft Report
September 7, 2004
MEMORANDUM
SUBJECT: Comments on Draft Evaluation Report Entitled "New Source Review Change
Harms EPA's Ability to Enforce Against Electric Utilities"
To: Nikki Tinsley
Inspector General, U.S. Environmental Protection Agency
From: Jeffrey R. Holmstead
Assistant Administrator for Air and Radiation
Thomas V. Skinner
Acting Assistant Administrator for Enforcement and Compliance Assurance
Thank you for giving us the opportunity to review the draft report referenced above.
Unfortunately, the draft contains several major flaws that must be addressed before the report is
finalized. If these flaws are not corrected, the report will be inaccurate, misleading, incomplete,
and superficial. This memorandum briefly summarizes our major concerns. We will also provide
your staff with more detailed comments under separate cover.
1. The draft report is misleading because it ignores the Clean Air Interstate Rule,
which will mandate substantial reductions in power plant emissions. The Report
asserts, without any explanation, that NSR enforcement is the "most promising" course
of action for reducing power plant emissions and that the emission reductions that could
be achieved through enforcement actions "would not be realized" under other programs. These
assertions are simply not true - and can hardly be made without an evaluation of the other tools
the Agency has used, and is now using, to reduce power plant emissions. The draft report is
dismissive of the Agency's proposed Clean Air Interstate Rule (CAIR) because it is not yet final,
even though Administrator Leavitt has publicly announced that it will be finalized before the end
of the year (and even though it is closer to being finalized than most enforcement actions
evaluated in the draft report).
The draft report estimates that all settled, filed, and referred NSR cases against power plants, as
well as other cases that could be referred within 30 days, would eventually reduce power plant
emissions of S02 by 2.2 million tons and NOX by 0.8 million tons if the government prevails in
all the cases. These reductions fall far short of the mandatory reductions required under CAIR:
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6.7 million tons of SO2 and 2.4 million tons of NOX. In fact, compared to theNSR enforcement
actions evaluated in draft report, the Clean Air Interstate Rule will achieve emissions reductions
that (1) are greater; (2) are more cost-effective; (3) are more certain to occur; (4) will likely be
realized sooner; and (5) can be achieved at far lower cost to the government. We would be
happy to provide you with information and analysis on each of these points.
2. The draft report does not accurately characterize EPA's enforcement efforts.
We also recognize that NSR enforcement is an important tool, and we are vigorously
pursuing the existing NSR enforcement cases and pursuing new cases as appropriate.
The report mistakenly concludes that the absence of new enforcement cases is solely the
result of the ERP rule. In reality, a number of factors - not discussed at all in the draft report -
affect the decision to file a case, including resource commitments by EPA and DOJ to the
ongoing prosecution of existing cases. The final report must accurately characterize the state of
EPA's NSR enforcement efforts and the factors that influence our ability to pursue them.
See Appendix I
Note 2
3. The central conclusion of the draft report is not supported by any data or
analysis. The draft report's conclusion that the ERP rule has "seriously impacted" the
enforcement cases is based almost entirely on interviews with a limited number of former
EPA officials. The draft report makes no effort to analyze or validate the views
expressed in these interviews. Although the draft report notes that several companies have
pointed to the ERP rule as part of their defense to NSR enforcement actions, no court has given
any weight to these defenses, and to date there is no evidence that the ERP will actually diminish
EPA's ability to prevail on the merits or to obtain satisfactory remedies. In fact, DOJ has argued
otherwise in court filings (although these filings are not mentioned in the report).
The draft report either fails to mention or glosses over other evidence that is not consistent with
its conclusion. It asserts, for example, that the ERP rule has caused a number of companies to
withdraw from settlement discussions with EPA, without even considering other factors that
likely have affected the willingness of companies to engage in such discussions. There is no
discussion at all of the Duke Power decision (which was issued the day before the ERP rule was
signed) on subsequent decisions by companies to withdraw from settlement discussions. Nor
was there any attempt to compare companies that have settled with those that have not settled to
evaluate all the factors that have affected their willingness to engage in settlement discussions -
e.g., their business plans, their need to obtain permits for new plants, the pollution control
strategies that they were pursuing even before the NSR enforcement actions were taken, and the
settlement positions taken by the government in each case.
The report also fails to distinguish between the possible impact of the ERP rule on courts'
decisions on the merits of the NSR cases and the possible impact on remedies imposed by the
courts. In contrast, the GAO carefully made this distinction in its report, concluding that the ERP
rule should have no impact on the merits of the cases, but that it "may affect" judges' decisions
regarding remedies. The draft report does not contain any basis for disagreeing with the GAO
report in this regard.
See Appendix I
Note 3
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4. The draft report includes a premature and inappropriate discussion of the basis
for the 20 percent cost test. The draft report devotes several pages to discussing
whether the selection of 20 percent as the cost threshold for the ERP is supported as a
legal and policy matter. Any discussion of this issue is both premature and inappropriate
because the Agency has granted administrative reconsideration on this issue and has not yet
completed those proceedings. This discussion is also unnecessary, since it is not relevant to the
issue of whether the ERP is having an impact on the cases. We recommend deleting this entire
discussion. If such a discussion is included, it should be significantly revised because the
discussion in the draft report is inaccurate and incomplete. For example, the draft report states
that 20 percent threshold is based entirely on the WEPCO case, even though the preamble for the
rule discusses other key factors, including the NSPS preconstruction test, project and cost data
from the utility sector (including enforcement cases), case studies from other industry sectors,
and comparisons with control cost data.
See Appendix I
Note 4
Again, thank you for the opportunity to review the draft report. We understand that your
office does not have a deadline for issuing the final report, but we would be happy to work with
you and your staff to ensure that you promptly receive all the information and analysis you need
to finalize the report. The final report must include a discussion of (1) the mandatory emission
reductions that the Clean Air Interstate Rule will achieve; (2) the substantial resources we are
devoting to NSR enforcement actions against power plants; and (3) the various factors that
influence the willingness of companies to enter into settlement discussions. Otherwise, the final
report will be inaccurate, misleading, incomplete, and superficial.
Note: On September 9, 2004 EPA submitted 3 additional summary comments.
Summary of Additional Major Issues
September 9, 2004
The following supplements the list of major issues described in the preliminary comments
submitted to the OIG on September 7:
5. The Report Reflects an Inaccurate Understanding of the Final ERP Rule and of
NSR in General. In several instances, the report inaccurately describes how the final
rule \vorks (e.g., ignoring its requirement that projects must be identical or functionally
equivalent replacements, or ignoring the additional safeguards in the rule), or confuses it
with the proposed facility maintenance allowance that was never finalized. Similarly, it misstates
the basic intent of the overall NSR program and mistakenly describes key elements of the
program. For example the report fails to acknowledge that NSR only applies when a physical or
operational change results in a significant net emissions increase. And, in several places, the
report suggests that NSR is an emissions reduction strategy for grandfathered sources. This
unsupported opinion is in direct conflict with the position adopted by the U.S. Government in
litigation before the D.C. Circuit.
See Appendix I
Note 5
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6. The Report Reflects Serious Misunderstandings about the Development of the
ERP within EPA. The report incorrectly states that OAR issued the ERP rule. The
ERP rule was signed by the Administrator and issued by EPA after a full intra-agency
process. OECA, OAR, and other offices participated in this process, advocated their
positions, and provided input into the Administrator's decision. The report also makes much of a
June 2002 memo from OECA to OAR. This memo is a deliberative agency document that
should not be disclosed in this report. In any event, the report mischaracterizes its content. The
report also implies in several places that the rule was not developed using an "open, public, and
transparent" process, which is simply not the case. These major errors create a vastly different
picture of the ERP rulemaking process than the one that actually occurred, and must be corrected.
See Appendix I
Note 6
liv I I
7. The Report confuses the issue of enforcement against pre-ERP conduct with the
question of how to structure the NSR program for future purposes. For example, the
preamble to the proposed ERP rule includes a discussion of how power plant operators
are expected to behave when given the choice of submitting to NSR or choosing one of
several lawful alternatives. EPA concluded that power plant operators would avoid NSR in
virtually all circumstances given the substantial operational and economic ramifications of
retrofitting state of the art air pollution control devices. Yet, in several places, the Report
mistakenly cites this conclusion as evidence that EPA had failed to consider the possible impact
of the ERP on pending and possible enforcement cases against past activities. In fact, EPA's
projection of future behavior under a revised NSR program has no bearing whatsoever on EPA's
ability to enforce against pre-ERP conduct. Similar analytical mistakes appear throughout the
Report.
See Appendix I
Note?
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Appendix H
Additional Information Submitted By EPA
Supplementing Summary Comments to Draft Report
Thanks again for taking the time to meet with Tom and me on the 14th to discuss OIG's
draft report on the Equipment Replacement Rule. Listed below is the additional information you
requested at the meeting. Please feel free to call me if you have more questions about the ERP or
our comments on the draft report.
1. Additional Information on Clean Air Interstate Rule (CAIR):
(a) Emissions reductions under CAIR will be greater. The draft report
Y 1
estimates that all settled, filed, and referred NSR cases against power plants, as occ /*w««"
well as other cases that could be referred within 30 days, would eventually
achieve the following emission reductions, assuming that the government prevails
in all the cases or settles them on favorable terms:
• 2.2 million tons of SO2 per year
• 0.8 million tons of NOX per year.
These reductions fall far short of the mandatory reductions required under CAIR:
• 6.7 million tons of SO2 per year
• 2.4 million tons of NOX per year.
(b) Emissions reductions under CAIR will be more cost-effective. As I
demonstrated by the Acid Rain Program and the NOX SIP Call, a cap-and-trade ^£1******
approach is the most cost-effective approach for reducing emissions from the I
power sector. We have learned that, among other things, a cap-and-trade
approach generally results in emission controls being installed at the largest plants. On
the other hand, an enforcement approach is generally limited to plants at which NSR
violations have occurred - and not necessarily the plants that are most cost-effective to
control. Settlements may allow EPA and an individual company to focus on achieving
the most cost-effective reductions available from that company. But by definition, an
NSR-type approach cannot be as cost-effective as a broad cap-and-trade approach like
CAIR.
(c) Emissions reductions under CAIR are more certain. The legal basis for
CAIR is same as the legal basis that the Agency employed in the NOx SIP Call.
This approach has already been upheld by the D.C. Circuit - the only Court in
which CAIR can be challenged. Because we have closely followed theNOx SIP
See Appendix I
Note 1
-------
Call precedent, we are highly confident that CAIR will be upheld in Court, and that the
projected emission reductions will be achieved as scheduled.
For a number of reasons, there is much more uncertainty about the emission
reductions that will be achieved through NSR enforcement actions. First, the
enforcement actions are being litigated in several different courts around the
country, and most of them are far from being resolved. Thus far, only two district
courts have made substantive rulings in power plant NSR enforcement cases - one siding
strongly with EPA (against Ohio Edison) and the other siding strongly with the defendant
(Duke Power). Even in the Ohio Edison case, the emission reductions that will occur are
uncertain. Although the Court found in favor of EPA on liability, the Court has
scheduled a second trial to determine what the remedy will be. Even this second trial is
not necessarily the end of the matter. Both the finding of liability and the decision on
remedy are subject to further judicial appeals.
See Appendix I
Note 3
See Chapter 3 of
Report - section
titled "EPA
Settlements With
Coal-Fired Electric
Utility Companies"
Another major issue in the NSR cases is the relationship between NSR and the
Acid Rain program. In NSR enforcement cases, the courts clearly have
authority to order a power company to install emission controls at any plant
that was modified without obtaining the necessary NSR permit. However, no
court has addressed the issued of whether, as a remedy in an NSR enforcement
case, it can eliminate or "retire" SO2 allowances that Congress has granted
under another section of the Act - allowances that companies, by statute,
continue to receive every year. Unless these allowances are retired, total
emissions from the power sector will remain the same. Although the affected plants may
be required to reduce their emissions, an equivalent amount of emissions will be emitted
elsewhere else in the U.S.
A similar issue arises under the NOX SIP Call, which created a cap-and-trade program to
reduce summertime Nox emissions in the eastern U.S. It is patterned after the Acid Rain
Program, so the number of summertime Nox allowances in the SIP Call region remains
the same, regardless of whether certain plants are required to go through NSR. It likewise
could mean that if an enforcement action requires Nox reductions at one plant, the same
amount of Nox will be emitted somewhere else in the SIP Call region - at least during the
five-month ozone season.
(d) Emission reductions under CAIR will likely be realized sooner. The
timing of the emission reductions from the NSR cases is very case-specific, so it
is difficult to compare CAIR to NSR enforcement on this metric. It is clear that
the settled NSR cases will result in earlier wintertime Nox reductions than would
occur under CAIR, because the defendants in these cases have agreed to operate
their SCRs year-round several years earlier than would be required under CAIR. As for
the NSR cases still in litigation, both the timing and magnitude of further Nox reductions
are uncertain.
See Appendix I
Notel
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With respect to SO2, NSR enforcement actions do not reduce SO2 emissions from the
power sector until the targeted company is required to retire some of its Acid Rain
allowances. In the settled cases, companies have agreed to retire a specific number of
allowances, but not until 2012 in most cases. Because CAIR provides for "banking" of
early reductions, our analysis shows that actual reductions in SO2 emissions will occur
shortly after the rule is finalized - and that substantial emission reductions will occur well
before 2012.
(e) Emission reductions under CAIR can be achieved far lower cost to the
government. It would take time to gather comprehensive data on this issue, but
there is no doubt that the development and implementation of CAIR will be less
costly for the government than the NSR enforcement initiative has been. The
Agency launched its power sector NSR enforcement initiative in 1998, and has been
aggressively pursuing it since that time. The power plant NSR enforcement cases have
occupied the largest share of OECA's resources for the last several years, and we
understand that DOJ is also devoting substantial resources to these cases. Even though
OAR has been devoting substantial resources to the development of CAIR, case-by- case
litigation (especially district court litigation with substantial discovery on both sides) is
much more resource intensive than rulemaking.
See Appendix I
Notel
2. Update on the Status of finalizing CAIR: As you noted in the meeting, the
Administrator has stated both in internal Agency meetings and in public speeches that he
plans to finalize CAIR by the end of calendar 2004. OAR is on track to have a draft final
rule completed in the next few weeks.
3. Support for the 20 Percent Rule Other Than the WEPCO Ruling: I am sending
you hard copies of excerpts from two Federal Register notices that explain the basis for
selecting 20%. Section III.C. of the final rule preamble identifies five separate factors
that we relied upon in selecting 20%. 68 Fed. Reg. 61248,61255-8 (Oct. 27, 2003). A
more concise explanation of these factors is provided in the notice granting administrative
reconsideration on the basis for the 20% threshold. 69 Fed. Reg. 40278,40282. The analysis in
both of these documents relies on additional materials that can readily be retrieved from the
docket for the ERP rulemaking.
See Appendix I
Notel
See Appendix I
Note 4
As noted in our comments on the draft report, it is very important to remember
that the 20% threshold is only one of four criteria for determining whether an activity
qualifies for the ERP. Most important, a project can only qualify for the ERP if it
involves the replacement of equipment with equipment that is identical or functionally
equivalent and if the project does not change the basic design parameters of the emissions unit.
See Appendix I
NoteS
4. GAO Report and Page Number Cited in EPA Comment #3: Again, I am sending
you a copy of the cover page of the relevant GAO report, along with the particular page
cited in Comment #3. The entire report can be downloaded from GAO's website
(www.gao.gov).
See Appendix I
Note 3
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5. Court Case Cited In EPA Comment #5:1 am sending over the cover page and
relevant text pages from the brief the U.S. Government recently filed in the D.C.
Circuit litigation over the December 2002 NSR improvement rules. Subsection b,
which begins on the bottom of page 73, explains that NSR is not a program intended
or designed to reduce emissions from existing sources. Rather, it is a program to
control emissions increases from the construction of new major emitting facilities and
the modification of existing major emitting facilities where the modification would
result in a significant net emissions increase.
6. Explanation of How Report Mischaracterizes June 2002 Memo From OECA to
OAR Cited in EPA Comment #6: Contrary to its characterization in the draft report,
the June 2002 memo does not address what has come to be called the Equipment
Replacement Provision. Instead, it addresses a different approach called the "Annual
Maintenance Allowance." We proposed an Annual Maintenance Allowance rule as part of the
package that included the Equipment Replacement Provision proposal; however, the
Administrator decided not to finalize the Annual Maintenance Allowance, hi short, the
comments and recommendations in the June 2002 memo do not relate to the Equipment
Replacement Provision.
See Chapter 1 of
Report - section
titled "New Source
Review Established
to Improve Air
Quality"
See Appendix I
Note 6
7. Explanation of How the Future Effect of Rule Changes is a Distinct Issue From
the Possible Impacts of a Rule on Past Activities: This is a fundamental point and one
that is confused in the draft report. When OAR analyzes a rule, we assume that sources
covered by the rule will comply with the rule in the most cost-effective way possible. We
do not assume that a significant number of affected sources will choose not to comply - or that
they will choose to comply in ways that are more costly than required. In our analysis of the
NSR program, we used this same approach.
As explained in both the preamble and the RIA to the proposed ERP rule, we concluded
that, in virtually all cases, power plants that currently do not have state-of-the-art pollution
controls will employ legally permissible strategies to avoid triggering NSR when planning for
future changes of their facilities. The reason is easy to understand. If they were to trigger NSR,
they would be required (in most cases) to install pollution controls costing tens to hundreds of
millions of dollars, depending on the size of the affected unit. Few, if any, projects provide the
economic return to the company that would justify such expenditures. Thus, rather than choosing
to trigger NSR, they will choose other legally permissible ways to comply with the program
(such as taking a "permit limit").
This conclusion is consistent with our experience with the NSR program. We are not
aware that any existing power plant has chosen to go through the NSR program when replacing
equipment or components at its plant. (In other words, no existing power plant has voluntarily
gone through the NSR program and, as a result, installed modern pollution controls.)
It appears that, in the past, many power plants chose not to comply with the program.
Instead, they went ahead with equipment replacement projects without going through NSR and
installing modem pollution controls. Their argument is that these projects were simply "routine
48
See Appendix I
Note?
-------
maintenance" and thus did not trigger NSR. These issues are at the heart of the current NSR
enforcement initiative against the power sector.
However, because of the high profile enforcement initiative, it is no longer feasible for
power plants to choose not to comply with the NSR program. Again, the reason is easy to
understand. In the past, perhaps they thought that EPA would not bring enforcement cases for
NSR violations in the power sector. Because it is now clear that we are willing to bring such
cases, it would be extremely unwise for power plants to choose not to comply with NSR -
because the expected result of that choice would be very costly to the company. Again, our
analysis found that, rather than choosing to trigger NSR or not to comply with it, they will choose
other legally permissible ways to comply with the program.
Thus, when analyzing the ERP rule, we used the same assumption that we always use
when conducting regulatory analysis: that affected sources will comply with the NSR program
(ether the pre-existing NSR program or the program as revised by the ERP rule) and that they
will choose the most cost-effective way of doing so.
It is important to distinguish this type of analysis from the analysis that OIG was called
upon to conduct. We analyzed the NSR program (and the ERP rule) as an ongoing regulatory
program that will affect decisions companies make in the future. This is very different from the
analysis that is needed to determine how the ERP (or any other change to the existing NSR
program) might affect the Government's ability to prosecute (or settle) claims related to activities
that companies have undertaken in the past.
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Appendix I
O/G Evaluation of Agency Responses
to Draft Report
Note 1 - We reviewed the Agency's comments on the proposed CAIR initiative and
appreciate EPA's efforts to finalize this rule. The draft report did not address
EPA's other proposed and implemented reform initiatives to reduce emissions at
coal-fired utilities including CAIR (previously known as the Interstate Air Quality
Rule) because it was not the objective of this review. Our review assessed the
rule change's impact on EPA's enforcement policies, practices, and activities for
coal-fired electric utilities. The Agency response provided a detailed comparison
between the merits of NSR enforcement compared to CAIR, which we included in
Appendix G. CAIR and NSR enforcement are two distinct efforts intending to
achieve the same goal of emissions reductions. We do not believe mat the
Agency must select one approach over the other, but instead should pursue both
courses of action. In addition to not comparing CAIR and NSR enforcement, we
did not perform a cost-effectiveness analysis between the two initiatives, or other
ongoing or planned actions to address pollution from coal-fired electric utilities.
Nonetheless, we have revised our report to more fully describe the CAIR rule and
the current status of EPA's efforts to issue it.
We have revised the report to reflect EPA's comment regarding the use of the
phrase "most promising" when referring to NSR enforcement. We recognize that
there are uncertainties with whatever approach the Agency employs to achieve
emissions reductions. We changed the final report to state that, to date, NSR
enforcement is "a promising" course of action.
We disagree with the Agency's comment that our draft report suggests that
emissions reductions "would not be realized" under programs other than NSR
enforcement. Again, our evaluation did not compare NSR enforcement to
projected emissions reductions from "other programs." We did, however, modify
our report to clarify this statement.
Note 2 - We agree that there are factors other than the rule change influencing the pursuit
of enforcement cases, such as resource constraints on the part of EPA and DOJ.
As such, we note that we had already referred to these limited resources three
times in our draft report. In its response, the Agency believed that more emphasis
should be placed on these other factors, particularly resources committed by EPA
and DOJ to the ongoing prosecution of existing cases, the effect these limited
resources have on filing cases, and the potential for other factors to affect the
decision to file a case. We have modified the report to add even more emphasis to
the resource issue influencing the development of NSR enforcement cases.
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EPA responded that it is enforcing the old NSR rule. However, the one new
enforcement case filed (East Kentucky) since issuance of the October 27, 2003,
rule violates the ERP limit of 20 percent (the new rule). Therefore, we continue
to believe that our observation that no new enforcement actions have been taken
against coal-fired utilities alleged to have violated the old NSR rule is accurate.
Note 3 - We have revised Table 2.1 to more accurately reflect the specific sources of the
views of OAR and OECA officials, as well as when these viewpoints were
expressed to us. However, we disagree with the Agency's comment that the
interviews represented a limited number of former EPA officials and did not
constitute support for our conclusions. Our interviews were with EPA staff who
were current EPA employees at time of the interviews. More importantly, these
were key officials and some of the most knowledgeable individuals of EPA's air
enforcement efforts against coal-fired electric utilities. In December 2003 and
January 2004, views of key OECA officials were expressed to us by the (then)
Assistant Administrator for Enforcement and Compliance Assurance, and the
(then) Director of OECA's Air Enforcement Division responsible for enforcing
NSR cases at utilities. Both officials have since left the Agency. These views
were also expressed by OECA staff. The views of the Acting Assistant
Administrator for Enforcement and Compliance Assurance were different when
we met with him in September 2004 in that he expressed support for the rule.
Nonetheless, we have modified our report to clarify these distinctions.
Interviews were just one of many sources of data we used to support our report
and the conclusions we formed. This data included enforcement records for cases
in litigation, settled, and being developed. We also performed extensive work in
understanding how potential emissions reductions were calculated by both OECA
and OAR. For example, as described in Appendix E of the report, our
calculations accounted for emission reductions achieved by both the NOX SIP call
and the Acid Rain Program. Also, we reviewed OAR's and OECA's impact
analyses of the new rule.
We disagree with the Agency's assertion the "draft report either fails to mention
or glosses over evidence that is not consistent with its conclusion." Our draft
report included a discussion of the U.S. v Duke Energy ruling, as well as the
U.S. v Ohio Edison ruling. Our draft report stated these two divided rulings
illustrate the uncertainty with EPA's litigation efforts. We agree with EPA's
response that, in settlement negotiations, it is not always clear why companies
cease negotiations, and that the Duke summary judgment may have been a
contributing factor to the breakdown in negotiations with the utility in question, as
well as with other utilities. However, enforcement experts in OECA stated that
they believe this company withdrew primarily because of the NSR rule change,
also known as the ERP rule.
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Note 4 -
The Agency commented that page 26 of GAO report No. GAO-04-58 concluded
that the ERP rule will have no impact on the merits of ongoing cases, and "may
affect" judges' decisions regarding remedies. We also acknowledge EPA
reference to DOJ's opinion on the impact of the new rule, which is stated on page
27 of the same GAO report: "DOJ also reiterated that its position as to the
potential impact of the NSR rule announced in August 2003 has always been
consistent and is reflected in its court filings -'that the rule only governs
prospective conduct and should not impact the liability of companies who violated
the law in the past.'"
However, we note that on page 26 of the report where GAO concluded that there
may be an impact on ongoing cases, the report subsequently stated that:
Furthermore, the announced August 2003 rule exempting the replacement
of certain equipment from NSR requirements - the fundamental basis for
most of the coal-fired utility cases - also likely will discourage utilities
from settling at least some of the remaining cases. The rule may also
affect judges' decision regarding whether the companies have to install
pollution controls, jeopardizing the expected emissions reductions.
It is also important to note that GAO's report was issued before the rule was
finalized on October 27, 2003, and thus represented GAO's best estimate of what
might occur. Our work began after the rule was issued and as a result, was based
on what occurred as compared to what might occur.
We disagree with the Agency's comment that the 20-percent threshold is not
relevant to the issue of whether the ERP is having an impact on enforcement
cases. To the contrary, we continue to believe that the new rule finalized on
October 27, 2003 - which set a 20-percent threshold for routine maintenance -
has substantially impacted NSR enforcement. In response to the Agency's
recommendation that we delete the entire discussion of the 20-percent threshold, it
is the responsibility and duty of the OIG to report on information used to develop
Agency policy, including EPA's decision to establish a 20-percent threshold.
In addition, EPA had recommended that we also consider findings from case
studies performed in other industry sectors. However, case studies from other
industry sectors were not included in our review because EPA's enforcement
practice is predicated upon an industry-specific strategy, and, as noted earlier,
other industry sectors were not included in the objectives of this evaluation and
thus were outside the scope of our review.
Our report acknowledges that the preamble to the ERP rule states that other key
factors were used in setting the threshold. We requested detailed information
supporting the choice of a 20-percent level and were provided with the WEPCO
ruling. Although we sought to obtain the basis for the 20-percent threshold from
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Note 5 -
many EPA sources during the course of our work, and were promised additional
documentation supporting the 20-percent threshold during our September 2004
meeting with the Assistant Administrators for Air and Radiation and Enforcement
and Compliance Assurance, no new information was provided. Rather, we were
pointed to the preambles of the Federal Register notices we had already reviewed
and discussed in depth with Agency officials in our attempts to obtain the data or
analyses that underpinned the statements in the preamble. Our report notes that,
"Although the preamble states that the 20-percent threshold is supported by
available data for the electric utility sector, and that EPA has a detailed set of
information available on maintenance, repair, and replacement activities for the
electric utility sector, the Agency was unable to provide further support to us for
how the 20-percent threshold was determined." Our report further notes that,
"After reviewing documents provided by OAR and interviewing OAQPS officials
knowledgeable with how the ERP percentage was determined, the only
documented reason provided to us for the 20-percent threshold was the WEPCO
ruling." The report explains further that we were not provided with any "evidence
that the percent of ERP in ongoing enforcement actions was considered by
Agency in determining the ERP percentage."
Our report addresses the relationship of the New Source Performance Standards
preconstruction provisions in Chapter 2 (and in Footnote 10) and further defines
New Source Performance Standards by staling that "the New Source Performance
Standards provision of the Clean Air Act requires owners to install air pollution
controls when capital costs exceed 50 percent of the cost of the unit."
We do not agree with the Agency's comment that the report inaccurately describes
how the final rule works. We recognize that there are other provisions to the ERP
rule beyond the (20-percent) cost threshold and we had previously described those
provisions in chapter 1 of the draft report. Specifically, our draft report already
discussed the requirement that projects must be identical or functionally
equivalent replacements in the first paragraph under the heading October 2003
NSR Rule Creates Equipment Replacement Provision. Additionally, this section
of our draft report already listed the three "additional safeguards in the rule" that
EPA is commenting on here. Further, our draft also had addressed the issue of
replacement with identical components or their functional equivalents a second
time in chapter 2.
We do not agree with the Agency's comment that our report "misstates the basic
intent of the overall NSR program and mistakenly describes key elements of the
program." The report does acknowledge that NSR only applies when a physical
or operational change results in a significant net emissions increase. Chapter 1 of
our draft report provided the definition (in italics) of modification according to the
Clean Air Act: ".. . any physical change ... of a stationary source which increases
the amount of any air pollutant emitted by such source or which results in the
emission of any air pollutant not previously emitted..." Chapter 1 also states
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"Congress required that newly built and modified sources must prevent pollution,
upgrade their equipment, or install pollution controls." However, it should be
noted that the enforcement actions that OECA has been pursuing against coal-
fired utilities involve utilities that are alleged to have significantly increased their
emissions.
Our report does not state, nor do we infer, that NSR is an emissions reductions
strategy. However, emissions reductions are, and will continue to be attained
through NSR enforcement actions. Our report has provided information on the
substantial emissions reductions from NSR settlements and projected the potential
reductions from possible future settlements.
Note - 6 We revised the report to state that EPA issued the rule and, at the advice of OIG
Counsel, removed references to the June 2002 memorandum. In the December
2002 proposed NSR rule, the Agency requested public comment on the
appropriate percentage for defining routine maintenance. Commentors suggested
percentages ranging from. 1 to 50 percent, clearly showing that there were varying
opinions on what the percentage should be. Because the proposed rule did not
cite 20 percent as the threshold, there was no opportunity for the public to
comment on the appropriateness of setting the threshold at 20 percent.
In its comments, EPA also asserts that the comments and recommendations in the
redacted June 2002 memorandum relate only to the "Annual Maintenance
Allowance" and not to the Equipment Replacement Provision. However, in our
many discussions with OECA officials, when describing projects at coal-fired
utilities, the terms "maintenance" and "replacement" were used interchangeably to
describe these projects. In many instances, when describing the projects to us in
detail, the activities being referred to as maintenance were actually the
replacement of power-generating equipment. Regardless of whether EPA refers
to the activities as annual maintenance or as equipment replacement, the end
result is likely to be the same - the life of the equipment is extended to gain lost
capacity, which results in increased emissions, and NSR is avoided.
Note - 7 We disagree with the Agency's suggestion that our report "mistakenly cites" the
fact that EPA assumed that "power plant operators would avoid NSR in virtually
all circumstances" as evidence that EPA had failed to consider the possible impact
of the ERP on pending and possible enforcement cases against past activities. As
evidenced by the number of ongoing enforcement cases against coal-fired electric
utilities, these power plant operators are undertaking projects that trigger NSR,
but are not notifying EPA.
EPA's Regulatory Impact Analysis concluded that the rule "will not have a
significant impact, up or down, on emissions from the power sector." However,
EPA did not include emission reduction estimates achieved from settled cases or
projected for ongoing cases. Had EPA considered NSR enforcement
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accomplishments to date, we believe the impact analysis would have projected an
increase in emissions from future NSR enforcement cases that would be lost due
to the 20-percent threshold.
We also disagree with the Agency's contention that EPA's projection of future
behavior under a revised NSR program does not affect EPA's ability to enforce
against pre-ERP conduct. In a January 2004 interview with the Assistant
Administrator of OECA (while he was still in that position), he stated that the new
rule made it hard to enforce NSR violations that occurred under the old rule. In
addition, three of nine utilities in ongoing litigation have asserted that their actions
would not be a violation under the new rule and that, as a result, enforcement
should cease or the court-imposed remedy be heavily reduced. Also, since
October 27,2003, there have been no new enforcement actions taken against
coal-fired utilities alleged to have violated the old NSR rule. The only additional
case filed is against a utility alleged to have violated the new rule, exceeding the
20-percent threshold.
OIG Evaluation of Additional Agency Responses
EPA Detailed Comments
The Agency also provided us with line-by-line detailed comments to our draft
report. We made changes to our report based on these comments as appropriate.
These comments included technical clarifications, as well as requests to remove
certain information in our report which the Agency believed to be outside the
stated scope of our assignment. For example, the Agency did not believe that we
should include information from the prior GAO and NAPA reports in our
discussion related to the justification for the 20-percent threshold. We did not
make this change; however, we agreed to add the Agency's response to the NAPA
report in this section of our report. The Agency also suggested that in Appendix
B, we delete the reference to the studies that estimated health effects from NOX
and S02 emissions from power plants. The Agency asserted that it was
misleading to call these studies, that we did not have a comprehensive listing of
studies dealing with the health effects, and that this list was biased towards those
groups that opposed the NSR change. While we did not delete reference to these
studies, we added the citations provided by the Agency to this appendix, along
with their views, and we also noted, as suggested in their comments, that health
effects information is available on EPA's web site.
EPA Office of General Counsel Comments
EPA's Office of General Counsel (OGC) also provided three sets of comments
asserting that portions of the report involved internal, deliberative
communications, and thus were exempt from disclosure under exemption #5 of
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the Freedom of Information Act and should not be released because of the
deliberative process privilege. OGC also asserted that certain information in the
draft report was enforcement sensitive, and thus should not be included in the
report. OGC recommended that these portions be deleted from the report and
protected from public release. At the advice of DIG Counsel, we redacted some
of the enforcement information from the final report, and we redacted some of the
information asserted to involve internal deliberative communications. In other
instances, upon the advice of OIG Counsel, information asserted to be covered by
the deliberative process privilege remained in our report. Specifically, we
redacted information that had appeared in the July 23, 2004 draft report, Chapter
2, in the section entitled Differing Views on Impact of New Rule. The redacted
materials in Chapter 2 included a May 4, 2001 memorandum from (then) EPA
Administrator Christine Whitman to Vice President Cheney; a June 2002
memorandum from the (then) Principal Deputy Assistant Administrator for
OECA to the Assistant Administrator for Air and Radiation; and a July 31,2003,
e-mail from the (then) Director - Air Enforcement Division, OECA, to the
Assistant Administrator for Enforcement and Compliance Assurance. The
redacted materials in Chapter 3 included all references to the precise number of
active utility enforcement cases that EPA and DOJ were pursuing at the time of
our work. These numbers appeared in several places in Chapter 3, including
Table 3.3. To the extent that information redacted from Chapters 2 and 3
appeared in the Executive Summary, it was also redacted.
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Appendix J
Distribution
Administrator (1101 A)
Deputy Administrator (1102A)
Assistant Administrator for Air and Radiation (6101 A)
Assistant Administrator for Enforcement and Compliance Assurance (2201 A)
Deputy Assistant Administrator for Air and Radiation (6101 A)
Principal Deputy Assistant Administrator for Enforcement and Compliance Assurance (2201A)
General Counsel, Office of General Counsel (401OA)
Agency Followup Official (the CFO) (2710A)
Agency Foliowup Coordinator (2724A)
Audit Followup Coordinator, Office of Air and Radiation (6102A)
Audit Followup Coordinator, Office of Enforcement and Compliance Assurance (2201 A)
Associate Administrator for Congressional and Intergovernmental Relations (1301 A)
Associate Administrator for Public Affairs (1101 A)
Director, OECA Air Enforcement Division (2242A)
Director, Office of Air Quality Planning and Standards (C404-04)
Deputy Director, Office of Air Quality Planning and Standards (C404-04)
Audit Liaison, Office of Air Quality Planning and Standards (C404-2)
Inspector General (2410)
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I • " >
%, ,<*••
Environmental Protection Agency For Immediate Release
Office of Inspector General September 30,2004
Washington, DC Contact: John Manibusan
PSIG 04-01 Phone: (202) 566-2584
WASHINGTON, D.C. - Statement of Nikki L. Tinsley, Inspector General, U.S. Environmental
Protection Agency, on Office of Inspector General report New Source Review Rule Change
Harms EPA's Ability to Enforce Against Coal-fired Electric Utilities, dated September 30, 2004:
"Implementation of New Source Review (NSR) has been controversial for many years. EPA has
made substantial progress in reducing emissions within the coal-fired electric utility industry
through its NSR enforcement efforts. NSR settlements with 7 companies to date, involving 74
power-generating units, are projected to reduce annual sulfur dioxide emissions by more than
440,000 tons and nitrogen oxide by more than 210,000 tons. Both pollutants are associated with
adverse health effects, including respiratory disease and infection. Agency officials believe the
Clean Air Interstate Rule being considered will be more cost effective than NSR enforcement at
reducing emissions at coal-fired utilities, and will achieve greater emission reductions at a faster
rate.
Many have raised concerns about the impact on enforcement efforts of EPA's October 2003 NSR
rule change, which allows utilities to undertake projects up to 20 percent of the cost of the power
generating unit without being subject to NSR requirements. As a result of legal challenges, a
District of Columbia Court issued a stay in December 2003 delaying implementation of the NSR
rule. EPA has announced its intention to reconsider the rule.
In response to Congressional interest, the Office of Inspector General reviewed EPA's
October 2003 NSR rule to determine the basis for the rule change and the change's impact on
EPA enforcement policies and practices for coal-fired electric utilities. We found little basis for
the 20-percent threshold. Further, the NSR rule change has impaired EPA's settlement activities,
current enforcement cases, and potential cases.
The NSR provisions of the Clean Air Act are a critical tool to ensure that sources install lower-
emitting control technologies as they make efficiency and other improvements. I urge EPA to
fully consider the impact of any proposed NSR changes on enforcement and public health as it
reconsiders the October 2003 NSR rule."
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