Are Changes to Major New Source Review Permitting Requirements on the Way?

In November 2013, ALL4 began a series of 4 The Record articles addressing issues that facilities face when contemplating plant improvement projects that have the potential to trigger new source review (NSR) permitting requirements.  While we have published multiple articles since that time that relate to the underlying foundation of the NSR regulations (i.e., national ambient air quality standards or NAAQS) and how certain technical elements of NSR permit applications are changing (e.g.,  modeling revisions), we have not specifically addressed topics related to determining NSR applicability.  The reason for the lack of attention to NSR applicability is that the NSR applicability provisions are relatively static.  The last overall revisions to the NSR applicability provisions were associated with the NSR reform rules of 2002, when the fundamental applicability provisions were overhauled to allow all existing major stationary sources, not just electric generating units, to use projected actual emissions (PAE) to evaluate emissions increases associated with a source’s modification.

Now, there exists a distinct possibility that several pieces of the NSR applicability puzzle could change depending on the outcome of an ongoing NSR enforcement action filed by the U.S. Environmental Protection Agency (U.S. EPA) against a Michigan utility in August 2010.  This enforcement action involves the determination and use of “excludable” emissions in NSR applicability determinations (among other issues) for existing emission sources.  The enforcement action was taken against an electric utility, but the outcome could impact all existing major stationary sources in fundamental and game changing ways.  The enforcement action is still in the courts and remains unresolved for now.

Background

The NAAQS are the ultimate basis of the NSR programs.  The NSR programs were established to ensure that the NAAQS are attained and maintained as major new emissions sources are constructed and as existing emission sources are modified in a manner that increases their emissions as a part of facility expansion projects.

This U.S. EPA enforcement action involves the potential modification of an existing major stationary source, and more specifically involves the detailed math of determining how much of an emission increase will result from the modification.  Determining whether or not a project at an existing major stationary source will result in a “net significant increase” under the NSR rules at face value does not appear to be a difficult task.  However, it can be a very difficult task to quantify the actual emission increase that will result from the modification being proposed.  First, the modification can be either, or both, a physical change or a change in the method of operation.  The crafters of the Federal Clean Air Act (CAA) specifically state that increased operation of a source is not an emission increase for NSR purposes as long as the source was capable of that operation prior to the modification.  The intent is to not penalize the company simply because it did not have the demand, or need, to operate the source.  This is sometimes called the “demand growth exclusion.” The NSR regulations prescribe that an emission increase is determined by the calculation of the difference between the baseline actual emissions (BAE) and PAE, and allows for subtracting from this result those potential emission increases that are excludable because the emissions unit could have accommodated (or generated) those emissions prior to the modification except for the lack of demand to operate.  This is a fair practice since almost every emission source does not operate at maximum levels and maximum hours, and to use that difference as proof that the source underwent a major modification would make almost every physical modification of a major source subject to NSR permitting.

A key piece of the equation and apparently the key issue in U.S. EPA’s 2010 enforcement action is how “excludable” emissions are determined and used in an NSR applicability evaluation. The term excludable is not defined within the NSR rules but is used to describe the emissions that an emissions unit “could have accommodated” during the 24-month baseline period used to establish BAE for the unit in an applicability evaluation1.  For existing emissions units at an existing major stationary that are undergoing a change as part of a project, emissions that the unit could have accommodated during the baseline period can be subtracted from (i.e., excluded) from the PAE for that unit in Step 1 of the applicability analysis.

As previously stated, this provision is sometimes referred to as the “demand growth exclusion” in which projected emissions increases that are unrelated to the project are assumed to result from growth in product demand (and are therefore excludable). To prevent facilities from excluding emissions up to their allowable or potential to emit, the rule2 specifies that excluded emissions must be determined using actual operational data that occurred during the two (2)-year baseline period.  There are a number of ways to evaluate and document excludable emissions from an emissions unit that vary in complexity depending upon the nature of the unit.  Typically for an industrial process, the use of a peak month of production during the 24-month baseline period is selected and the production associated with that month is annualized, (i.e., multiplied by 12) and then adjusted to reflect realistic annual operating rates (i.e., accounting for “normal” maintenance downtime and outages).  As an extra measure of applicability, the facility making a physical change that was determined not to trigger NSR permitting must still keep records to show that either no emission increase occurred after the source modification for five (5) years, or in the case of an emission increase that is not large enough to trigger NSR permitting the facility must demonstrate that their PAE level is not exceeded for a period of 10 years.

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1 See 40 CFR Part 52.21(b)(41)(c)
2 Ibid.

2010 U.S. EPA Enforcement Action

A Michigan electric utility company initiated “maintenance work” at their facility in March 2010 after providing notice of the project to the Michigan Department of Environmental Quality (MDEQ) in accordance with Michigan State Implementation Plan (SIP) requirements.  The notice predicted that a post-project emissions increase would occur, but that the increase in emissions was unrelated to the project and should be excluded as the result of increased demand. The project was completed in June 2010, the units associated with the project restarted shortly thereafter, and the facility initiated post-project recordkeeping in accordance with the Michigan SIP requirements.  The U.S. EPA asserted that the facility was required to obtain a pre-construction permit from MDEQ because the project was a major modification under the Michigan NSR regulations and that the source’s notice to MDEQ was untimely and deficient, stating that the notice included no explanation of why emissions were excluded.  The utility asserted that the enforcement action was premature because less than one (1) year of actual emissions monitoring for the unit was available and the only way to definitely determine if the project was a major modification was to review at least one (1) year of post-project emissions monitoring. Regarding the notice, the utility asserted that it included all required information and explained that the excluded emissions were unrelated to the project and were as a result of market demand. The Court3 agreed with the utility’s analysis citing the function of the 2002 NSR reform rules, the Michigan SIP, and the lessening of the pre-construction burden on facilities as long as certain requirements are met and rejected U.S. EPA’s assertion that the utility’s notice was untimely and deficient. The Court went so far as to say in their decision:

“These rules, while still following the directives and intent of the CAA, provide source operators with greater flexibility by giving them a post-construction opportunity to fulfill their obligations under the CAA. They allow source operators to pursue necessary maintenance work without the expensive, burdensome and potentially unnecessary permitting requirements, while ensuring that Plaintiff will maintain its opportunity to pursue an enforcement action if post construction monitoring detects an increase in emissions of regulated pollutants that are a result of such projects.”

2011 U.S. EPA Appeal to Sixth Circuit Court

On October 20, 2011 the U.S. EPA appealed the Court’s decision to the United States Court of Appeals for the Sixth Circuit and in a brief filed in February 2012, laid out a litany of issues regarding the project and stating that the district court rejected U.S. EPA’s suit without reviewing the agency’s substantive claims, stating that the decision disregarded the CAA structure, regulatory text, history, and the Court’s duty to defer to EPA interpretation of CAA regulations.  In the brief, U.S. EPA described how the utility cites 40 CFR §52.21(r)(6) as allowing an operator to choose to make and record a projection of post change emissions before starting construction, make a determination of PSD non-applicability, and not apply for a PSD permit. U.S. EPA also described how the utility could temporarily manage operation of the unit to keep emissions less than significant during the post-project monitoring period. U.S. EPA characterized the Court’s ruling as potentially “eviscerating” CAA enforcement in the Sixth Circuit.

The utility’s brief, filed in May 2012, argued that the district court correctly ruled that the U.S. EPA could not demonstrate that the projects were major modifications because emissions have not increased.  The utility asserts that the U.S. EPA’s position is inconsistent with the plain language of the 2002 NSR reform rule and with the CAA itself. The utility asserts that its actions are in accordance with the 2002 NSR reform rules and states that the U.S. EPA promulgated those rules in 2002 and defended them as consistent with the CAA.  If the U.S. EPA believes the rules to be “insufficiently stringent” it can seek to have the rules amended.

On March 28, 2013, the United States Court of Appeals for the Sixth Circuit three (3) judge panel ruled 2-1 that while the 2002 NSR regulations allow operators to undertake projects without U.S. EPA “second guessing” their projections, U.S. EPA is not categorically prevented from challenging violations of its regulations until long after the modifications are made and the district court’s reading of the regulations is at odds with the CAA. The decision was therefore reversed and remanded to district court.  A portion of the opinion addressed U.S. EPA’s concern that sources could manage emission to pre-construction projections for five (5) years and then increase emissions thereafter.  The court stated that the presumption that emissions increases after five (5) years are unrelated to the change could be overcome (e.g., by demonstrating that the pre-construction facility could not handle such an increase) as neither the statute nor the regulation has a time barrier and U.S. EPA could bring enforcement as long as the increase was traceable to the construction.

District Court Remand Decision

On March 3, 2014, the district court ordered that the utility’s motion for summary judgment was granted.  The case was on remand from the Sixth Circuit Court of Appeals with instructions to evaluate whether the utility followed U.S. EPA regulations regarding preconstruction emission projections prior to beginning renovations to an electric steam generating unit without obtaining an NSR preconstruction permit from MDEQ. The Court concluded that they did.  The Court also agreed that the U.S. EPA is entitled to a review of a source’s preconstruction projections to evaluate whether they comply with the rule and indicated that anything beyond a cursory review would be “second guessing”, contradicting the Sixth Circuit’s opinion.

U.S. EPA Appeal to Sixth Circuit Court

On October 6, 2014, both the Department of Justice (on behalf of U.S. EPA) and the Sierra Club filed appeals with the Sixth Circuit Court.  Both parties (U.S. EPA and the utility) have been submitting briefs in support of their positions and in response to each other.

So What’s at Stake?

There are several very important provisions of NSR applicability at stake pending in the decision of the Sixth Circuit Court as summarized below:

• Can major stationary sources rely, in part, on decisions regarding NSR applicability (or non-applicability) based on post-construction recordkeeping?
• Can major stationary sources use the strategy of managing post-change emissions to avoid triggering NSR applicability?
• How much authority, if any, does U.S. EPA have in evaluating a source’s pre-construction emission estimates?
• Did the 2002 NSR Reform Rules truly change NSR applicability evaluations from a pre-construction determination (with U.S. EPA oversight) to pre-project projection and post project recordkeeping?
• How will the outcome impact air permit requirements in states that have minor NSR construction permitting SIP requirements?
• Most importantly will the outcome of the Courts influence how NSR applicability will be determined with regard to “capable of accommodating” and documentation of excludable emissions at utility and other major air emission sources?

Non-governmental organizations (NGOs) have been targeting NSR permitting decisions, especially for electric utilities, but will the NSR revisions of 2002 also now become a target of the U.S. EPA to effectively undo those revisions?  The outcome of this important appeal could have serious and wide ranging implications for the existing NSR program, major stationary sources evaluating NSR permitting applicability, the U.S. EPA, and the various state and local regulatory authorities tasked with implementing the NSR program.  We will be tracking the proceeding very closely and will provide updates as they become available.  Please contact Roy Rakiewicz at (610) 933-5246 or at rrakiewicz@all4inc.com if you have any questions.