oversight

Clean Air Act: New Source Review Revisions Could Affect Utility Enforcement Cases and Public Access to Emissions Data

Published by the Government Accountability Office on 2003-10-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Report to Congressional Requesters




October 2003
               CLEAN AIR ACT
               New Source Review
               Revisions Could
               Affect Utility
               Enforcement Cases
               and Public Access to
               Emissions Data




GAO-04-58

                                               October 2003


                                               CLEAN AIR ACT

                                               New Source Review Revisions Could
Highlights of GAO-04-58, a report to the       Affect Utility Enforcement Cases and
Ranking Minority Member, Committee on
Environment and Public Works, U.S.             Public Access to Emissions Data
Senate, and another requester




Recent Environmental Protection                EPA staff assessed the potential impact of the NSR revisions on the utility
Agency (EPA) revisions to the New              enforcement cases and, according to current and former EPA enforcement
Source Review (NSR) program—a                  officials, determined that some of the revisions could affect the cases. EPA
key component of the federal                   staff discussed the potential effects of the revisions with DOJ. In part as a
government’s plan to limit harmful             result of the assessments, EPA changed some of the revisions before issuing
industrial emissions—have been
under scrutiny by the Congress,
                                               them as final and proposed rules in December 2002. Specifically, EPA
environmental groups, state and                changed the content and wording of some of the provisions included in the
local air quality agencies, the                final rule and determined that the rule would not affect the cases. However,
courts, and several industry groups.           EPA enforcement officials were very concerned that the proposed rule—
The revisions more explicitly                  addressing when a company could consider a facility change “routine
define when companies can modify               maintenance, repair, or replacement” and exempt from NSR—could have a
their facilities without needing to            negative impact on the cases. The concern was that proposing one specific
obtain an NSR permit or install                definition for this exclusion that differed from the way the agency had
costly pollution controls, as NSR              applied it in the past could affect the cases’ outcome. Consequently, EPA
requires. GAO was asked to                     instead proposed several alternative definitions—different cost thresholds
determine (1) whether EPA and the              below which a company could make a change that is exempt—for public
Department of Justice (DOJ)
assessed the potential impact of
                                               comment. Nevertheless, some of the enforcement officials and stakeholders
the revisions on the ongoing                   believe that industry’s knowledge that EPA could be defining the exclusion
enforcement cases against coal-                in terms more favorable to industry delayed some settlements while the rule
fired utilities and, if so, what the           was being developed, jeopardizing expected emissions reductions.
assessments indicated; and (2)
what effect, if any, the revisions             Subsequently, in August 2003, despite seven ongoing cases, EPA announced
might have on public access to                 a final rule specifying a 20 percent cost threshold below which a company
information about facility changes             could make certain changes and consider them routine replacement and
and their resulting emissions.                 exempt from NSR. EPA and DOJ maintain that the rule will not affect the
                                               cases because it applies only to future changes. But some EPA enforcement
                                               officials and stakeholders are concerned that even if judges find companies
To ensure monitoring of NSR                    to be in violation of the old rule, judges could be persuaded, when setting
compliance, GAO recommends that                remedies, to not require the installation of pollution controls—limiting
EPA specify (1) what constitutes a             emissions benefits—because under the 20 percent threshold, most of the
“reasonable possibility” that a                facility changes in dispute would now be exempt.
facility change is subject to NSR,
(2) that companies maintain data               Certain provisions in the December 2002 final rule could limit assurance of
on reasonable possibility decisions,           the public’s access to data about—and input on—decisions to modify
and (3) how the public can access              facilities in ways that affect emissions. This would make it more difficult for
companies’ on-site information on
                                               the public to monitor local emissions, health risks, and NSR compliance.
these decisions. EPA took no
position on the first two actions; it          Under the rule, fewer facility changes may trigger NSR and thus the need for
is reconsidering the reasonable                permits and related requirements to notify the public about changes and to
possibility test through October               solicit comments—unless state and local air quality agencies have their own
2003. EPA agreed with the third                permit and public outreach rules. However, the scope of these state and
recommendation.                                local rules varies widely. Also under the rule, companies will now determine
                                               whether there is a “reasonable possibility” a facility change will increase
www.gao.gov/cgi-bin/getrpt?GAO-04-58.
                                               emissions enough to trigger NSR—in effect policing themselves. But EPA
To view the full report, including the scope   has not defined “reasonable possibility,” required that companies keep data
and methodology, click on the link above.      on all of their reasonable possibility determinations, or specified how the
For more information, contact John
Stephenson at stephensonj@gao.gov.
                                               public can access the data companies do keep on site.
Contents 



Letter                                                                                1
             Results in Brief 
                                                       4
             Background
                                                              7
             Because EPA’s Assessments Showed That Some NSR Revisions 

               Could Affect the Enforcement Cases, the Agency Made Changes
               before Issuing the Final and Proposed Rules                          15
             Portions of the December 2002 Final Rule Could Limit Assurance
               That the Public Has Input into Company Decisions to Modify a
               Facility When Modifications Affect Emissions                          21
             Conclusions                                                            
26
             Recommendations for Executive Action 
                                  27
             Agency Comments 
                                                       27

Appendix I   Objectives, Scope, and Methodology                                     30



Tables
             Table 1: Ongoing New Source Review Court Cases Involving Coal-
                      Fired Power Plants, October 2003                              11
             Table 2: NSR Revisions Included in the December 2002 Final Rule        13
             Table 3: Judicial Settlements Entered Into with Coal-Fired Power
                      Plants since Issuance of the December 2002 Final and
                      Proposed NSR Rules                                            20


Figure
             Figure 1: New Source Review Permitting Process                           9




             Page i                                             GAO-04-58 Clean Air Act
Abbreviations

CAA               Clean Air Act 

DOJ               Department of Justice 

EPA               Environmental Protection Agency 

NAPA              National Academy of Public Administration 

NEPDG             National Energy Policy Development Group 

NSR               New Source Review 

PAL               Plantwide Applicability Limitations 

PSD               Prevention of Significant Deterioration 

TVA               Tennessee Valley Authority 

WEPCO             Wisconsin Electric Power Company 




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Page ii                                                         GAO-04-58 Clean Air Act
United States General Accounting Office
Washington, DC 20548




                                   October 21, 2003 


                                   The Honorable James M. Jeffords 

                                   Ranking Minority Member 

                                   Committee on Environment and Public Works 

                                   United States Senate 


                                   The Honorable Joseph I. Lieberman 

                                   United States Senate 


                                   Since its inception in 1977, the New Source Review (NSR) Program—one 

                                   of the Clean Air Act’s (CAA) key mechanisms for maintaining air quality to 

                                   protect public health—has prevented the emission of millions of tons of 

                                   harmful pollutants. It has done so by requiring newly built industrial 

                                   facilities, and existing industrial facilities undergoing major modifications 

                                   to equipment or operating procedures, to install modern air pollution 

                                   controls.1 The Congress allowed existing facilities to defer installation of 

                                   such controls until a major modification was made with the expectation 

                                   that, over time, all facilities would install such equipment, and this would 

                                   lead to lower overall emissions. In recent years, the program has become

                                   increasingly controversial because of what the utility industry believes to 

                                   have been inconsistent interpretation and enforcement of the program by 

                                   the Environmental Protection Agency (EPA) against power plants. Some 

                                   of the affected companies have agreed to settlements that will cost 

                                   hundreds of millions of dollars and require emissions reductions, while 

                                   other companies are in various stages of litigation. In addition, two recent 

                                   rounds of changes to this program have been the subject of congressional 

                                   debate and litigation and have drawn the scrutiny of environmental 

                                   groups, some state attorneys general, and some state and local air quality 

                                   authorities. These groups are concerned about, among other things, the 

                                   potential effect of the changes on emissions, the ongoing NSR 

                                   enforcement cases, or the public’s ability to access information about 

                                   facility changes and the emissions that result. 


                                   When created, the NSR program was intended to represent a balance 

                                   between the environmental interest in improving air quality and the 




                                   1
                                    EPA defines a major modification as a physical or operational change that causes a
                                   significant increase in emissions.



                                   Page 1                                                          GAO-04-58 Clean Air Act
economic interest in allowing capital improvement projects at industrial
facilities. Accordingly, one of the program’s objectives is to protect public
health in areas that both meet and do not meet federal air quality
standards. Companies that want to make changes to existing facilities that
would result in emissions increases exceeding a certain threshold have to
apply for a federal NSR permit and then typically install some type of
pollution control.2 According to EPA, the cost of installing controls can
reach hundreds of millions of dollars for some facilities. However,
companies can be exempt from the federal NSR requirements if (1) a
facility change is considered “routine maintenance, repair, and
replacement,” (2) the company agrees not to significantly increase its
emissions after making a physical or operational change, or (3) the
company balances any emissions increases resulting from a change in a
facility with emissions reductions elsewhere in the same facility. To
implement the NSR program, the CAA requires that EPA provide
permitting and enforcement authority to state and local air pollution
agencies, and most of these agencies currently have this authority. Some
states and localities also have their own NSR programs for governing new
construction or facility changes whose emissions thresholds are lower
than the federal NSR threshold.

Because of the NSR program’s complexity and administrative burden,
among other things, EPA began a reform process in 1992 that resulted in
proposed changes to the program in 1996 and 1998, but the agency did not
take final action until 2002. In the meantime, EPA referred to the
Department of Justice (DOJ) a number of alleged violations of existing
NSR provisions by the owners and operators of some of the largest coal-
fired power plants in the country.3 In general, EPA targeted companies
that undertook projects without obtaining a permit or installing pollution
controls but that EPA believed were significant facility changes that
resulted in emissions increases and were therefore subject to NSR. For
their part, the companies believed that their projects were not subject to
NSR for various reasons, including that the projects qualified for the


2
 The thresholds for these “major” modifications vary by pollutant and the air quality status
of the area in which the facility is located. For example, in areas that meet air quality
standards, a 100-ton per-year increase is significant for carbon monoxide, while a 40-ton
per-year increase is significant for nitrogen dioxide or sulfur dioxide.
3
 EPA also referred a number of alleged violations of the NSR provisions involving
industries other than coal-fired power plants, such as the petroleum refinery industry.
Generally, the defendants in those cases did not challenge EPA’s interpretation of the term
“routine maintenance,” and many of these cases were settled.




Page 2                                                            GAO-04-58 Clean Air Act
“routine maintenance, repair, and replacement” exclusion (hereafter
referred to as the “routine maintenance exclusion”). In November 1999,
DOJ filed seven NSR enforcement actions in U.S. district courts, and EPA
issued an administrative compliance order to the Tennessee Valley
Authority (TVA). Subsequently, DOJ filed an additional six NSR
enforcement actions against several other companies.4 In many of these
federal cases, states have also taken action to intervene against the power
plants. As of October 2003, 7 of the 14 cases have been settled or decided.

As a result of concerns about regulatory barriers to investments in energy
efficiency and pollution control projects, among other things, EPA decided
to finalize some of the 1996 and 1998 NSR reform proposals. Subsequently,
the agency issued final and proposed rules to revise the program in
December 2002. First, the agency decided to modify certain of the
proposed 1996 NSR revisions and issue them as a final rule that provided
companies with options to avoid triggering NSR requirements. For
example, companies could set a limit on a facility’s overall emissions and
then make changes within the facility without being subject to NSR, or
obtain credit for controls already in place. Because EPA received a
number of petitions from parties asking the agency to reconsider certain
aspects of this rule, EPA took public comments on certain features of the
final rule during July and August 2003. The agency is analyzing the
comments to determine if it should make any changes in response. Also in
December 2002, EPA issued for public comment a proposed rule to revise
the criteria by which it would determine if a facility change is “routine
maintenance, repair, or replacement” and therefore exempt from NSR.
After reviewing the comments received on the proposed rule, in August
2003, EPA announced plans to issue a final rule defining when a facility
change could be considered a replacement under the routine maintenance
exclusion.

When EPA formally announced in June 2002 that it intended to revise,
among other things, the routine maintenance exclusion, several
environmental groups and some state attorneys general involved in the
ongoing enforcement cases raised concerns that the revisions could
negatively affect the cases. Among other things, these groups were
concerned that industry attorneys might use the planned revisions to the



4
 Due to an adverse jurisdictional decision, Alabama Power Company was dismissed as one
of the defendants from one of the seven cases that had been filed in November 1999. DOJ
refiled against this company in January 2001.




Page 3                                                        GAO-04-58 Clean Air Act
                     routine maintenance exclusion to delay the cases by arguing that the
                     lawsuits should be dismissed because under the rule proposal, the
                     companies’ actions would not violate the NSR requirements.

                     In light of the concerns about the impact of the revisions, as well as recent
                     congressional debate on them, you asked us to determine (1) whether EPA
                     and DOJ assessed the potential impact of the NSR revisions on
                     enforcement cases against coal-fired utilities before issuing them as final
                     and proposed rules in December 2002 and, if so, what the assessments
                     indicated and (2) what effect, if any, the December 2002 final rule might
                     have on public access to information on facility changes and the resulting
                     emissions.5 You also asked us to review EPA’s assessment of the economic
                     and environmental impact resulting from the December 2002 final rule,
                     and we presented our findings to you in a report issued on August 22,
                     2003.6

                     To respond to these objectives, among other things, we met with EPA
                     officials who were involved in discussions related to the potential impact
                     of the NSR revisions on the coal-fired power plant enforcement cases,
                     including officials from three EPA offices—Air Quality Planning and
                     Standards, Enforcement and Compliance Assurance, and General
                     Counsel—and DOJ’s Environment and Natural Resources Division. We
                     also spoke to former EPA officials who had been involved in these
                     discussions. To determine how the December 2002 NSR final rule could
                     affect public access to information about facility changes and their
                     associated emissions, we reviewed the relevant federal NSR requirements
                     before the revisions and compared them with those in the final rule. We
                     also met with officials from EPA’s offices of Air Quality Planning and
                     Standards and Enforcement and Compliance Assurance, industry groups,
                     environmental groups, and state associations to discuss their views on the
                     effects of the final rule on public access to this information.

                     EPA enforcement officials assessed the potential impact of the draft NSR
Results in Brief 	   revisions (before they were issued as final and proposed rules in



                     5
                      We focused on the December 2002 final rule revisions because EPA did not select the final
                     criteria it would use to determine whether a facility change is considered a “replacement”
                     and exempt from NSR until August 27, 2003, after we had completed most of our work.
                     6
                      See U.S. General Accounting Office, Clean Air Act: EPA Should Use Available Data to
                     Monitor the Effects of Its Revisions to the New Source Review Program, GAO-03-947
                     (Washington, D.C.: Aug. 22, 2003).




                     Page 4                                                          GAO-04-58 Clean Air Act
December 2002) on the ongoing enforcement cases against coal-fired
utilities and discussed their views about the impact with DOJ officials.
According to current and former EPA enforcement officials, because they
determined that certain provisions could affect the cases, they changed
the provisions to limit their effects. Nevertheless, the EPA officials and
representatives of some environmental groups believe settlement of some
cases was delayed during development of the two rules because of the
possibility that the routine maintenance exclusion could be defined in
terms favorable to industry, thereby jeopardizing the expected emissions
reductions. According to available documentation and the EPA
enforcement officials, the EPA staff during this time prepared various
analyses to illustrate the draft revisions’ potential impact on the cases and
presented the results in briefings to senior EPA managers, including the
EPA Administrator. In formulating the final rule, the agency staff
determined that, after carefully making content and wording changes, the
rule would not affect the integrity of the enforcement cases. However, in
formulating the proposed rule, the staff determined that the revisions EPA
was considering could adversely affect the cases. Specifically, EPA was
considering establishing a specific cost threshold below which facility
changes would be considered “routine maintenance, repair, and
replacement” and thereby exempt from NSR permit and pollution control
requirements; in the enforcement cases, EPA was challenging the way in
which companies used this exclusion in the past. In general, the EPA
enforcement officials were concerned that if the agency proposed a
specific definition of the exclusion that differed from the way EPA had
applied the exclusion in the past, defendants could argue that some of the
facility changes under dispute should now be considered exempt. In part
because of these concerns, EPA proposed several options for calculating
cost thresholds to define this exclusion and solicited public comment on
them.

After reviewing the comments submitted, EPA announced a final rule in
August 2003 specifying that a facility change may be considered a
replacement—and exempt from NSR—if the cost of the change is less than
20 percent of the cost of replacing an entire process unit, such as an
electric steam-generating unit in a power plant. EPA assessments indicate
that under this threshold, almost all of the facility changes at issue in the
enforcement cases could now be exempt. Therefore, some of the EPA
enforcement officials and key stakeholders are concerned the August rule
could serve as a disincentive for utilities to settle the remaining seven
cases and could affect judges’ decisions on remedies in these cases,
especially regarding the installation of pollution controls, affecting the
expected emission reductions. Conversely, EPA and DOJ argue in the


Page 5                                                 GAO-04-58 Clean Air Act
litigation that the rule governs only prospective conduct and should not
impact the liability of companies who violated the law in the past.

Overall, the final rule could result in less assurance that the public will
have access to data on facility changes and the emissions they create, as
well as input on decisions about undertaking these changes in the first
place and controlling their emissions. Less information would make it
more difficult for the public to monitor local emissions and health risks, as
well as compliance with NSR. The full impact of the rule will partly
depend on the extent to which state and local air quality agencies have
their own regulations requiring public notice, comment, and reporting on
facility changes. In particular, one provision of the final rule could
increase publicly available information but decrease the public’s
participation in facility changes that affect emissions. Under the provision,
a company may set an annual limit on emissions—good for 10 years—
across an entire facility and then modify equipment or operations within
the facility during this time without being subject to NSR, as long as it
does not exceed its emissions limit. To initially set this limit, the company
must notify the public and provide an opportunity to comment on the
company’s intended action. The company must also periodically report on
the facility’s overall emissions, individual changes made, and the
emissions generated from each piece of equipment within the facility. On
the other hand, because the company no longer has to obtain a permit for
a major modification, it does not have to notify the public of its intended
action and solicit comment. EPA maintains that most companies, for
various reasons, were not obtaining federal NSR permits for these
modifications anyway, even before the rules, so overall, they will not have
an impact. Several industry representatives also believe that the public will
still be involved in decisions and have access to information about facility
changes and emissions because other federal CAA programs, or states’ and
localities’ own programs, will require it, but according to states and other
stakeholders we contacted, the scope and stringency of these other
programs vary widely.

Two other provisions in the final rule—outlining how a company is to
measure its historic emissions and estimate increases from a facility
change—when implemented together could also limit assurance that the
public will have access to information about changes and their emissions.
To determine if emissions resulting from a change will be significant
enough to trigger NSR requirements, a company determines its historic
baseline of emissions, estimates the expected emissions after a facility
change, and calculates the difference. Before the final rule, a company
generally had to use the most recent 24 months of emissions as the


Page 6                                                GAO-04-58 Clean Air Act
               baseline and assume its facility would operate at full production when
               estimating expected emissions, even if the facility had not been operating,
               or did not plan to operate, at this level. Industry complained that these
               requirements ignored market fluctuations and a facility’s actual
               production levels. In the final rule, EPA generally allowed companies to
               use any 24-month period over the prior 10 years to establish a baseline and
               to assume actual production levels. Some stakeholders maintain, although
               EPA disagrees, that these revisions will result in fewer calculations
               showing emissions potentially increasing enough to trigger NSR.
               Therefore, fewer facility changes will require a federal permit and its
               related public participation requirements, although some may still be
               subject to these requirements under state and local programs.

               Moreover, if the calculation shows that emissions do not trigger NSR, the
               company does not have to maintain documentation of its calculations.
               Under the new rules, the company may determine that there is still a
               reasonable possibility the change will trigger NSR, and if it does, the
               company maintains documentation of this decision on site. However, the
               rule does not define what constitutes a “reasonable possibility.” Therefore,
               companies may be inconsistent in how they make this decision and
               maintain records of it, and they are in effect policing their own NSR
               compliance. As the National Academy of Public Administration (NAPA)
               recently concluded, such self-policing makes it difficult for EPA, state and
               local agencies, and the public to verify company compliance with NSR.
               Furthermore, the rule does not specify how the public can access the
               company’s on-site documentation of its reasonable possibility
               determinations. At the request of a number of stakeholders, EPA agreed to
               reconsider the “reasonable possibility” provision, among others, is
               assessing the comments it received, and expects to announce whether it
               will make any changes to the provision by the end of October. In this
               context, we are recommending that EPA (1) issue guidance better defining
               what constitutes a “reasonable possibility” that facility changes will trigger
               NSR, (2) require companies to maintain documentation of all “reasonable
               possibility” determinations, and (3) determine, with state and local air
               quality agencies, how to ensure public access to company’s on-site
               information on facility changes and emissions.


               Under the CAA, EPA establishes health-based air quality standards that the
Background 	   states must meet and regulates air pollutant emissions from various




               Page 7                                                 GAO-04-58 Clean Air Act
sources, including industrial facilities and mobile sources such as
automobiles. EPA has issued standards for six primary pollutants—carbon
monoxide, lead, nitrogen oxides, ozone,7 particulate matter, and sulfur
dioxide—that have been linked to a variety of health problems. For
example, ozone can inflame lung tissue and increase susceptibility to
bronchitis and pneumonia. In addition, nitrogen oxides and sulfur dioxide
contribute to the formation of fine particles that have been linked to
aggravated asthma, chronic bronchitis, and premature death. About 133
million Americans already live in areas with air pollution levels above
health-based air quality standards, according to EPA.

The NSR program, established in 1977, is intended to ensure as new
industrial facilities are built and existing ones expand that public health is
protected, that the air quality in national parks and wilderness areas is
maintained, and that economic growth will occur in a manner consistent
with the preservation of existing clean air resources. The NSR program
comprises (1) the Prevention of Significant Deterioration (PSD) program,
which generally applies to pollutants in areas that meet federal air quality
standards for those pollutants or for which the attainment status is
unclassified, and (2) the Nonattainment NSR program, which generally
applies to pollutants in areas that are not meeting the standards for those
pollutants, although the term NSR usually refers to both.

The federal NSR program is primarily administered by state and local air
quality agencies, with oversight by EPA. If a company plans a change to its
facility and determines that it will trigger federal NSR regulations, the
company must then prepare and file a permit application with the relevant
state or local agency. Figure 1 illustrates this permitting process.




7
 Ozone forms when nitrogen oxides react with volatile organic compounds in the presence
of heat and sunlight.




Page 8                                                        GAO-04-58 Clean Air Act
Figure 1: New Source Review Permitting Process




                                       a
                                        While there is no federal NSR requirement specifically requiring public access to compliance
                                       information, there is such a requirement under Title V of the CAA that applies to NSR data.


                                       The state or local permitting agency determines if the application is
                                       complete; develops a draft permit, if justified; notifies EPA and the public
                                       of the application; and solicits comments on the draft permit. The
                                       permitting agency then responds to comments and issues a final permit, if
                                       merited, which can be administratively or judicially appealed. The
                                       permitting agency must provide EPA with a copy of every permit
                                       application and draft permit; address EPA’s comments, if any; and notify
                                       EPA of the final action taken. In addition, the records and reports the state
                                       or local agency collects as it monitors compliance with the permit and
                                       NSR program generally must be available for public review.8

                                       Even when federal NSR requirements do not apply to a facility change, the
                                       project may still be subject to other federal, state, and local air pollution
                                       control requirements. For example, under Title V of the CAA, a company
                                       must obtain a facility operating permit that consolidates all of the
                                       company’s federal obligations for controlling air pollution and complying
                                       with the act. These obligations can include meeting the requirements and
                                       standards of states’ and localities’ federally approved plans for improving
                                       air quality; other federal requirements to control pollution, such as those
                                       controlling hazardous air pollutants not also covered under NSR; and
                                       requirements included in any federal, state, or local NSR permits issued to
                                       the facility. EPA has now given most state and local agencies approval to
                                       implement the Title V operating permit programs that, among other things,
                                       provide for public participation in the Title V permitting process. These



                                       8
                                        While there is no federal NSR requirement specifically requiring public access to
                                       compliance information, Title V of the CAA provides that emissions and compliance
                                       monitoring reports for major sources of emissions shall be available to the public.




                                       Page 9                                                                  GAO-04-58 Clean Air Act
operating permits are issued and then renewed every 5 years and can be
updated at any time.

During the mid-1990s, EPA began evaluating NSR compliance for entire
industry sectors that produced significant amounts of air pollution. The
agency focused its inspections on industry sectors it suspected of potential
NSR violations. In particular, EPA looked at industries with a decreasing
number of facilities but static or increased production, industries with
many years of operation and high emissions but with no record of NSR
permits, and industries with new plants being constructed with no NSR
permits. EPA’s data suggested that facilities in some sectors might have
been making major modifications to increase production or extend the life
of the facilities’ equipment—and therefore increasing emissions—without
obtaining NSR permits or installing pollution controls. As a result, EPA
targeted its NSR investigations on coal-fired power plants, petroleum
refineries, steel minimills, chemical manufacturers, wood products
companies, and the pulp and paper industry. In 1996, EPA began its
investigation of the coal-fired utility industry. Subsequently, EPA referred
to DOJ a number of alleged violations of the NSR provisions. Generally,
the referrals indicated EPA’s conclusion that the owners and operators of
some of the largest coal-fired power plants in the country had violated the
NSR provisions by making physical changes to their facilities, without
obtaining a permit, that increased emissions and that the agency did not
consider to be routine in nature. The companies, however, believed the
changes did not violate the NSR program for a number of reasons,
including that the projects were exempt under the routine maintenance
exclusion. After reviewing these referrals, DOJ in November 1999 filed
seven enforcement actions in U.S. district courts. That same month, EPA
issued an administrative compliance order to the Tennessee Valley
Authority alleging multiple NSR violations at its coal-fired power plants.
Since these actions were taken, DOJ has filed an additional six
enforcement actions against coal-fired utilities. As of October 2003, 7 of
the 14 cases have been settled or decided.9 Table 1 provides a summary of
the seven ongoing enforcement cases and the status of each.




9
 The case involving the administrative compliance order, issued to the Tennessee Valley
Authority (TVA), was upheld by EPA’s Environmental Appeals Board. TVA’s appeal of the
Board’s decision was denied by the 11th Circuit Court of Appeals. Six other cases—filed
against Alcoa, PSEG Fossil, Southern Indiana Gas and Electric, Tampa Electric, Virginia
Electric Power, and Wisconsin Electric Power—were settled.




Page 10                                                        GAO-04-58 Clean Air Act
Table 1: Ongoing New Source Review Court Cases Involving Coal-Fired Power Plants, October 2003

                                                                                                                               Power Plants
 Case                                               Court                    Status                                                   Sued
 U.S. v. Illinois Power Co. and Dynegy Midwest U.S. District Court,          Liability trial held June 2003; closing                     1
 Generation Inc.                               Southern District of          argument September 29, 2003; remedy trial
                                               Illinois                      not set
 U.S. and States of Conn., N.J., and N.Y. v.        U.S. District Court,     Liability trial begins June 1, 2005                         6
 Cinergy Corp.                                      Southern District of
                                                    Indiana
 U.S. and States of Conn., Mass., Md., N.J.,        U.S. District Court,     Liability trial begins January 2005                        11
 N.H., N.Y., R.I., and Vt. v. American Electric     Southern District of
 Power Service Corp.                                Ohio
 U.S. and States of Conn., N.J., and N.Y. v.        U.S. District Court,     Liability ruling in favor of U.S. issued August             1
 Ohio Edison Co.                                    Southern District of     7, 2003; remedy trial April 19, 2004
                                                    Ohio
 U.S. v. Georgia Power Co. and Savannah             U.S. District Court,     Administratively closed to await TVA                        3
 Electric & Power Co.                               Northern District of     decision; court notified of decision; parties
                                                    Georgia                  have not moved to reopen
 U.S. v. Alabama Power Co.                          U.S. District Court,     Stayed                                                      5
                                                    Northern District of
                                                    Alabama
 U.S. v. Duke Energy Corp.                          U.S. District Court,     Summary judgment granted in part and                        8
                                                    Middle District of North denied in part on August 26, 2003; liability
                                                    Carolina                 trial date continued; remedy trial not set
Source: Department of Justice.

                                               Over the years since its inception, various aspects of the NSR program
                                               have been subject to litigation that resulted in court decisions affecting the
                                               program. For example, in 1990, the Seventh U.S. Circuit Court of Appeals
                                               issued a decision in Wisconsin Electric Power Co. v. Reilly.10 EPA argued
                                               in the case that when Wisconsin Electric Power Company (WEPCO) was
                                               estimating whether a physical change would increase emissions enough to
                                               trigger NSR, the company should have assumed it would operate the
                                               modified equipment at the maximum level possible, even though WEPCO
                                               had never operated at that level. The court ruled that this requirement was
                                               inappropriate. EPA then issued a rule for electric steam-generating utilities
                                               only that allowed them to estimate their projected annual emissions after
                                               the change based on their actual emissions history for purposes of




                                               10
                                                  Wisconsin Electric Power Co. v. Reilly, 893 F.2d 901 (7th Cir. 1990) (“WEPCO”).




                                               Page 11                                                             GAO-04-58 Clean Air Act
preconstruction permitting, but they would have to report their actual
emissions for 5 years after making the change.11

More recently, in January 2001, the President established a task force—the
National Energy Policy Development Group (NEPDG)—chaired by the
Vice President to develop a national energy policy. In its May 2001
National Energy Policy Report,12 the group recommended to the President
that EPA and the Department of Energy investigate the impact of the NSR
program on investments in new utility and refinery generation capacity, on
energy efficiency, and on environmental protection. The group also
recommended that the Attorney General review the existing NSR
enforcement actions to ensure they were consistent with the CAA and its
implementing regulations. In response to the group’s recommendations,
DOJ issued a report in January 2002 that concluded EPA had a reasonable
basis for bringing those actions against coal-fired utilities.13

In June 2002, also in response to the group’s recommendations, EPA
issued a report to the President and concurrently issued a set of
recommendations for revising the NSR program.14 EPA issued a final rule
in December 2002 that contained five provisions based on its June 2002
recommendations, outlined in table 2 below.15




11
 57 Fed. Reg. 32314 (July 21, 1992) (codified at 4 C.F.R. Parts 51, 52, and 60).
12
 For more information on the NEPDG’s report, see U.S. General Accounting Office,
Energy Task Force: Process Used to Develop the National Energy Policy, GAO-03-894
(Washington, D.C.: Aug. 22, 2003).
13
  This report focused principally on enforcement actions against coal-fired power plants
because defendants in other industries generally had not alleged that EPA’s actions were
inconsistent with the CAA.
14
 New Source Review: Report to the President, U.S. Environmental Protection Agency,
June 2002.
15
  Prevention of Significant Deterioration (PSD) and Nonattainment New Source Review
(NSR): Baseline Emissions Determination, Actual-to-Future Actual Methodology, Plantwide
Applicability Limitations, Clean Units, Pollution Control Projects, 67 Fed. Reg. 80186 (2002)
(to be codified at 40 C.F.R. Pts. 51 and 52.)




Page 12                                                            GAO-04-58 Clean Air Act
Table 2: NSR Revisions Included in the December 2002 Final Rule

 Provision                                   Final Rule Requirements

 Clean unit 	                                Excludes production equipment with state-of-the-art pollution controls from NSR
                                             requirements for up to 10 years after installation provided the unit will still meet the
                                             physical or operational characteristics that formed the basis for the clean unit designation.

 Revised method for calculating “baseline”   Changes the timeframe for computing a piece of equipment’s baseline emissions from the
 emissions 	                                 most recent 24-month period—or any other period more representative of normal
                                             operations—to any 24-month period in the past 10 years adjusted for any new emission
                                             limits added since the baseline period. No changes were made to rule for electric utilities.

 Pollution control project 	                 Exempts pollution prevention and control projects from NSR if they are on EPA’s list of
                                             “environmentally beneficial” projects or on a case-specific basis if a non-listed project is
                                             determined to be environmentally beneficial. It also must be shown that the project will not
                                             cause or contribute to a violation of federal air quality standards or adversely impact air
                                             quality standards for a national park.

 Plantwide emissions limit 	                 Allows facilities to set a single emissions limit for an entire plant and then make changes
                                             within the facility without triggering NSR, provided they do not exceed the limit.

 Revised test for calculating emissions      Allows a facility to calculate expected emissions after a facility change based on its
 changes 	                                   projection of its future operation, rather than at full capacity. This provision extended to all
                                             other industries the same methodology for calculating expected emissions that EPA had
                                             granted to the utility sector in the early 1990s.

Source: EPA.

                                             Subsequently, in response to a number of requests, EPA agreed to
                                             reconsider certain aspects of the final rule, took public comment on those
                                             features during July and August 2003, and is assessing the comments to
                                             determine if the agency needs to make any changes.

                                             Also in December 2002, EPA issued for public comment a proposed rule
                                             that would change the method for determining whether a facility change
                                             can be exempt from federal NSR requirements because it is routine
                                             maintenance, repair, or replacement.16 EPA intended for the final version
                                             of the proposed rule to supplement its case-by-case determination of what
                                             facility changes qualify for the routine maintenance exclusion, using
                                             factors such as the nature, extent, cost, frequency, and purpose of the
                                             change. EPA proposed to determine a facility’s total replacement costs
                                             and calculate a certain percentage of those costs that the agency would
                                             allow the company to spend on routine maintenance and repair without


                                             16
                                              “Prevention of Significant Deterioration (PSD) and Nonattainment New Source Review:
                                             Routine Maintenance, Repair and Replacement,” 67 Fed. Reg. 80290 (2002).




                                             Page 13                                                             GAO-04-58 Clean Air Act
triggering NSR. EPA proposed several alternative cost thresholds for
routine maintenance and repair below which modifications could be
considered exempt and solicited comments on the thresholds. EPA also
included for comment a provision that would generally allow a facility to
consider the replacement of existing equipment with identical or
functionally equivalent new equipment as routine replacement, depending
on the amount of costs involved. The agency announced a final rule in
August 2003, specifying the cost threshold industry could use to replace
equipment and exempt it from NSR. This rule will finalize one aspect of
the December 2002 proposed rule and, at this time, the agency is not
taking action to finalize any other aspects of this proposed rule.

The NSR revisions have recently been the subject of recent congressional
debates. In 2002, Congress held hearings during which members of
Congress, EPA and DOJ officials, and a number of stakeholders—
including representatives of industry, states, and environmental groups—
presented their positions on the NSR program revisions. For example,
during a July 16, 2002, hearing before the Senate Committee on
Environment and Public Works, some state attorneys general and
environmental group officials testified that the revisions could seriously
undercut the ongoing enforcement cases, jeopardizing the millions of tons
in pollution reductions that those cases could yield. At the same hearing,
EPA and industry officials generally testified that the revisions would
allow companies to modify their facilities so that they are more energy
efficient and, as a result, would emit less pollution. In addition, during a
September 3, 2002, hearing before the Subcommittee on Public Health,
Senate Committee on Health Education, Labor, and Pensions, former EPA
Administrator Carol Browner testified that, among other things, she was
concerned that the revisions would “eliminate the very features of the
current law that provide transparency to the public—monitoring, record
keeping, and reporting.”




Page 14                                               GAO-04-58 Clean Air Act
                            EPA enforcement officials assessed the potential impact of the NSR
Because EPA’s               revisions (before issuing them as final and proposed rules in December
Assessments Showed          2002) on the enforcement cases against coal-fired utilities and determined
                            that some of the revisions could have an impact. These EPA officials
That Some NSR               discussed their views on the potential impact with DOJ. In part as a result
Revisions Could             of the assessments, for the revisions that were included in the final rule,
                            EPA adjusted the content and wording of the language before issuing the
Affect the                  rule so that they were not expected to affect the cases. For the proposed
Enforcement Cases,          rule, the EPA enforcement staff had concerns that if EPA specifically
the Agency Made             defined what facility changes would qualify for the routine maintenance
                            exclusion, the cases could be affected since they involved disagreements
Changes before              about how EPA had been applying the routine maintenance exclusion in
Issuing the Final and       the past. Consequently, EPA decided not to specifically define what
                            activities qualify as routine maintenance but to propose several options for
Proposed Rules              calculating cost thresholds below which modifications could be
                            considered exempt and solicited public comment on the options.
                            Nevertheless, during the 1½ years that the final language of the revisions
                            was being debated, some EPA enforcement officials and key stakeholders
                            believe that some companies were discouraged from settling their cases
                            because of the possibility that EPA could revise the definition of the
                            exclusion in a way that would be favorable to industry—although some
                            companies did settle after the proposed rule was issued. Furthermore,
                            some EPA enforcement officials and key stakeholders believe that the
                            announcement of the August 2003 final rule, in which EPA set a specific
                            cost threshold for routine replacement activities, could also delay
                            settlement of some of the cases and could affect judges’ decisions in the
                            cases about what remedies to apply to companies that are found to be in
                            violation of the old NSR rule.


After Careful Content and   EPA enforcement officials assessed the potential impact of the draft NSR
Wording Changes, EPA        revisions that were issued as a final rule in December 2002 on the
Determined That the Final   enforcement cases and discussed their views about the impact with DOJ.
                            According to current and former EPA enforcement officials, after EPA
Rule Would Not              internally debated and agreed upon the language of the revisions, they
Significantly Affect the    were not expected to adversely affect the ongoing enforcement cases
Cases                       against coal-fired utilities. According to these EPA officials, in 2001 and
                            2002, several briefings and less formal discussions occurred during which
                            the enforcement staff raised concerns about the revisions’ potential
                            adverse impact on the cases. Officials involved in at least one, and in some
                            cases several, of these meetings included the EPA Administrator, the
                            Deputy Administrator, the Assistant Administrator for Air and Radiation,
                            the former Principal Deputy Assistant Administrator for Enforcement and


                            Page 15                                               GAO-04-58 Clean Air Act
Compliance Assurance, and the Director of the Air Enforcement Division.
DOJ’s Deputy Assistant Attorney General for Environment and Natural
Resources and other DOJ enforcement staff also discussed the potential
impact of the proposed revisions on the cases with EPA’s Assistant
Administrator for Air and Radiation and staff in EPA’s offices of the
General Counsel and Enforcement and Compliance Assurance. According
to EPA enforcement officials, they prepared analyses—some of which
were documented in briefing papers, charts, and graphs—that were
discussed internally. EPA enforcement officials said that because their
main objective in raising concerns about the revisions was to maintain the
cases, they urged senior agency officials to tailor the language of the
revisions to address their concerns before issuing the final rule. The
enforcement staff felt this would help ensure that the language finally
adopted would minimize any impact on the cases.

More specifically, according to the Director of EPA’s Air Enforcement
Division, the staff prepared analyses indicating that three of the revisions
in the rule would have no impact on the enforcement cases. These three
revisions involve the exemptions for clean units, pollution control
projects, and the option of setting a plantwide limit on emissions. In
addition, because of the 1990 WEPCO decision, utilities already had the
authority, before EPA issued the final rule, to use the revised method for
estimating emission changes resulting from a facility change. Therefore,
since this provision in the rule was not a significant change for the utility
industry, the EPA staff did not expect this provision to affect the cases.
However, the EPA enforcement officials were concerned about the
provision establishing a revised method for calculating past, or baseline,
emissions. Specifically, EPA considered changing the time period used to
calculate baseline emissions for utilities. According to the Director of
EPA’s Air Enforcement Division, the enforcement staff prepared an
analysis comparing the effects of using different time periods on the
viability of each case. In part as a result of this analysis, the baseline
calculation for utilities was not changed in the final rule.




Page 16                                                 GAO-04-58 Clean Air Act
Because EPA’s                During the same briefings held in 2001 and 2002, the EPA enforcement
Assessments of the Draft     staff expressed concern that more explicitly defining what facility changes
Proposed Rule Raised         qualify for the routine maintenance exclusion, as anticipated in the
                             December 2002 proposed rule, had the most potential to negatively affect
Concerns That It Could       the cases. They were concerned because the enforcement cases generally
Affect the Cases, EPA        involve disagreements between EPA and the utilities on whether past
Changed Its Strategy and     facility changes made without an NSR permit qualified for the routine
Revised the Rule before It   maintenance exclusion. In general, EPA enforcement officials were
Was Issued                   concerned that if the agency specifically proposed a definition of routine
                             maintenance that was different from the way the agency had applied the
                             exclusion in the past, defendants could delay the cases by arguing that
                             some of the facility changes under dispute in the lawsuits might be able to
                             qualify for an exemption from NSR. For example, the EPA officials were
                             considering setting a cost threshold for an allowance for annual
                             maintenance, repair, and replacement below which a company would not
                             have to obtain an NSR permit. EPA enforcement officials believed that if a
                             threshold were proposed that was higher than the costs incurred for the
                             facility changes at issue in the cases, the cases could be adversely
                             impacted. Specifically, the officials were concerned that judges might not
                             order companies to install pollution controls even if they were found to be
                             in violation of the prior NSR rule, since the facility changes in question
                             would now be legal under the proposed rule (if adopted as proposed). The
                             EPA enforcement staff compared the potential impact of various cost
                             thresholds on the viability of each case. Based in part on these
                             comparisons, EPA decided not to specifically set cost thresholds for
                             individual industries in its December 2002 proposed rule, but rather to
                             solicit comments on what thresholds to use.

                             The EPA enforcement staff had similar concerns about the other revision
                             under consideration for the December 2002 proposed rule. It would allow
                             companies to consider the replacement of existing equipment with
                             identically or functionally equivalent new equipment as “routine
                             maintenance, repair, and replacement” and be exempt from federal NSR
                             regulations. The cost of the equipment had to be below a certain
                             percentage of the cost to replace a process unit. A process unit for power
                             plants is defined as an electric utility steam-generating unit (power plants
                             can have more than one of these). The replacement equipment also had to
                             meet certain criteria, such as maintaining the basic design parameters of
                             the original unit. EPA enforcement officials were concerned that,
                             depending on where the threshold was set, this revision could also affect
                             the cases. As with the first provision, the EPA enforcement staff compared
                             the potential impact of various replacement cost thresholds (up to 50
                             percent) on the viability of each case in dispute at the time and concluded


                             Page 17                                               GAO-04-58 Clean Air Act
                             that 95 percent to 98 percent of the facility changes at issue in the utility
                             enforcement cases would be considered routine maintenance—and thus
                             exempt from NSR—if the new rule were applied and the threshold were
                             set at more than about 1 percent or 2 percent of the process unit’s costs.
                             Again, EPA decided not to specify a threshold in the December 2002
                             proposal but instead to solicit comments on the overall approach. EPA
                             reviewed the comments submitted on both proposed revisions and, even
                             though seven of the enforcement cases had not yet been settled or decided
                             by the courts, announced a final rule in August 2003 specifying a 20
                             percent threshold for the replacement of existing equipment, provided the
                             replacement does not change the basic design parameters of the process
                             unit and the process continues to meet enforceable emission and
                             operational limitations. To illustrate the impact of this cost threshold, it
                             costs approximately $800 million on average to replace a 1,000-megawatt
                             electric utility steam-generating unit, excluding the costs of pollution
                             controls, according to EPA enforcement officials. Under the new rule, an
                             unlimited number of projects costing on average between $8 million and
                             $160 million each (assuming cost thresholds of between 1 percent and 20
                             percent) could be excluded from NSR requirements. According to the
                             Director of EPA’s Air Enforcement Division, this could allow companies to
                             make facility changes without an NSR permit that are much more
                             substantial than any of those in dispute in the cases.


EPA Enforcement Staff        According to former and current EPA senior enforcement officials, despite
and Key Stakeholders         the agency’s efforts to minimize the impact of the final and proposed rules
Believe the Possibility of   on the enforcement cases, they believe the possibility that EPA could
                             revise the routine maintenance exclusion in ways that could improve the
Revising the Routine         companies’ legal positions in the cases had a detrimental effect on the
Maintenance Exclusion        willingness of some companies to settle. The officials stated that EPA
Delayed Settlement of        normally settles 90 percent to 95 percent of its enforcement cases before
Some Cases, and the          they go to trial, but that companies were slower to settle after EPA
August 2003 Rule May         publicly acknowledged it was considering the revisions. For example,
Have Additional Negative     according to a former EPA enforcement official who had been involved in
                             the cases, the attorneys representing some of the companies in the cases
Effects
                             asked EPA why they should comply with an interpretation of the law that
                             the administration was trying to change. These concerns were reinforced
                             further when an industry attorney in a state NSR enforcement case
                             suggested that the court delay the case because EPA was still
                             reconsidering its interpretation of the CAA through the NSR revisions.
                             Similarly, the current Director of EPA’s Air Enforcement Division believes
                             the most significant impact on the enforcement cases was that companies
                             delayed settling during the year and a half the agency spent discussing


                             Page 18                                               GAO-04-58 Clean Air Act
NSR program reforms before issuing the final and proposed rules.
According to current and former enforcement officials, companies spent
this time lobbying EPA to include language in the revisions that would
help them win their cases. Similarly, the National Academy of Public
Administration (NAPA) concluded in an April 2003 report on the NSR
program, “The possibility that EPA would soon reform the NSR
modification provisions favorably to industry may have led to [some]
companies’ reluctance to settle their cases.”17

According to the Director of EPA’s Office of Air Enforcement, in the
months immediately following the issuance of the December 2002 final
and proposed rules, settlement activity did increase. During this time, EPA
and DOJ entered into settlement agreements with four companies that
resulted in the annual reduction of approximately 421,000 tons of sulfur
dioxide and nitrogen oxide combined.18 See table 3 for a list of these
companies.




17
  A Breath of Fresh Air: Reviving the New Source Review Program, a report by a panel of
the National Academy of Public Administration for the U.S. Congress and the
Environmental Protection Agency, April 2003.
18
 DOJ and EPA have also entered into settlement agreements with two other companies.
Specifically, in October 2000, the courts approved a settlement with Tampa Electric
Company that resulted in an annual reduction of approximately 190,000 tons of sulfur
dioxide and nitrogen oxide combined. In July 2002, a consent decree was entered into in a
case involving PSEG Fossil LLC that resulted in an annual reduction of approximately
35,940 tons of sulfur dioxide and 18,270 tons of nitrogen dioxide.




Page 19                                                         GAO-04-58 Clean Air Act
Table 3: Judicial Settlements Entered Into with Coal-Fired Power Plants since
Issuance of the December 2002 Final and Proposed NSR Rules

                                                            Estimated Environmental
 Case                        Status of Negotiations         Benefit of the Settlements
 U.S. v. Virginia Electric   Consent decree submitted for   Annual reduction of 237,000
 Power                       public comment on April 21,    tons of sulfur dioxide and
                             2003                           nitrogen oxide combined
 U.S. v. Wisconsin           Consent decree submitted for   Annual reduction of 72,300
 Electric Power              public comment on April 29,    tons of sulfur dioxide and
                             2003                           32,600 tons of nitrogen oxide
 U.S. v. Alcoa               Consent decree approved by     Annual reduction of 52,900
                             the court on July 28, 2003     tons of sulfur dioxide and
                                                            15,480 tons of nitrogen oxide
 U.S. v. Southern            Settlement approved by the     Annual reduction of 10,600
 Indiana Gas and             court on August 13, 2003       tons of sulfur dioxide and
 Electric Co.                                               nitrogen oxide combined
Source: DOJ and EPA.



EPA’s Director of Air Enforcement believes these settlements suggest that
the December 2002 final and proposed rules, as issued, did not
significantly affect companies’ willingness to settle the cases. In this
official’s opinion, the cases were not substantially affected prior to the
announcement of the August 2003 final rule because the enforcement staff
was successful in negotiating and revising the language and content of the
rules. However, this official stressed that to the extent EPA decided to go
forward with more explicit exclusions for routine maintenance, repair, and
replacement, as it has now done, companies could be less willing to settle
their cases. According to the former Director of EPA’s Office of Regulatory
Enforcement, if EPA got agreements with companies in the remaining
seven pending enforcement cases against coal-fired utilities that are
equivalent to the settlements it has achieved in the past, sulfur dioxide
emissions could be cut by as much as 2.9 million tons annually and
substantial reductions in nitrogen oxide emissions could also be achieved.

Some EPA enforcement officials and officials from environmental groups
and states have raised concerns that the announced August 2003 rule, and
any subsequent rules more explicitly defining what facility changes qualify
for the routine maintenance exclusion, could negatively impact the
enforcement cases even further. In a September 2003 legal filing in one of
the enforcement cases, DOJ stated EPA’s position that the announced
August 2003 rule is prospective in nature and does not affect the ongoing
enforcement cases, which are based on past conduct. Officials from the
New York and New Jersey Attorney General offices have said that the



Page 20                                                        GAO-04-58 Clean Air Act
                        charges against the companies in these cases were brought under the
                        previous NSR program, before any of the recent revisions, and the officials
                        are confident that the judges will make decisions based on whether the
                        companies violated the rules that were in effect at that time. While these
                        officials did not expect the cases to be delayed on the basis of any motions
                        that industry may file in light of the August 2003 rule, they noted that if
                        such motions were filed, the officials would have to spend additional time
                        and resources to defeat them. In addition to these effects, some
                        stakeholders are also concerned that the rule could affect the remedies
                        imposed on companies (including fines companies must pay or actions
                        they must take) if the courts find the companies to be in violation of the
                        old NSR rule. Officials from environmental groups and state attorney
                        general offices expressed concerns that industry attorneys would attempt
                        to argue that since the modifications for which they were found liable
                        under the old rule were now permissible under the new rule, they should
                        not be penalized. If judges were to agree, this could mean that fines may
                        be reduced or companies may not be required to install pollution controls
                        and reduce emissions to the extent that they might have been before the
                        new rule.

                        Indeed, on September 29, 2003, industry attorneys in the Illinois Power
                        case asserted in their closing arguments that the new exclusion for routine
                        maintenance in the August 2003 rule decisively undercut the critical
                        premise of the government’s case because in the new rule, EPA changed
                        the interpretation of the Clean Air Act upon which it had based the
                        enforcement cases. The judge had not issued a ruling in the Illinois Power
                        case at the time GAO completed this report.


                        Several provisions in the December 2002 NSR final rule could limit
Portions of the         assurance that the public has input on changes companies make to their
December 2002 Final     facilities, especially those that increase emissions, hampering the public’s
                        ability to monitor health risks and company compliance with NSR. The
Rule Could Limit        provisions could also limit assurance that the public has access to
Assurance That the      documents showing how companies estimated whether the changes would
                        increase emissions enough to trigger NSR. For example, a company can
Public Has Input into   now determine on its own if there is a “reasonable possibility” that a
Company Decisions       change could trigger NSR, but the rule is unclear about how companies
to Modify a Facility    will make this determination and how the public can access information
                        about it. The extent of the rule’s impact depends on the extent to which
When Modifications      other federal, state, and local regulations still require that companies
Affect Emissions        obtain a permit and notify the public of modifications, but the scope of
                        these other requirements varies widely.


                        Page 21                                               GAO-04-58 Clean Air Act
Under a PAL, the Public     The Plantwide Applicability Limit (PAL) provisions in the December 2002
Can Help Set a Facility’s   final rule could impact the amount of data available on, and public input
Emissions Limit but May     into, facility changes and emissions. On the one hand, a PAL provides new
                            opportunities for the public to have access to facility emissions
Not Have Input into         information because a company must undergo a public notice and
Company Decisions to        comment process before setting a PAL. The company must also monitor
Modify the Facility When    and report more detailed and frequent emissions information during the
Modifications Affect        life of the PAL. For example, if a company decides to pursue a PAL, it must
Emissions                   apply to the state or local air quality agency, which in turn must notify the
                            public of the draft PAL and give the public at least 30 days to provide
                            comments. The application must list each piece of equipment in the plant
                            that emits the pollutant to be regulated under the PAL, such as a boiler or
                            paint sprayer, and the “baseline” emissions it generates. Also, during the
                            life of the PAL, a company must report semiannually to the state or local
                            agency the monthly emissions of some or all of the NSR “criteria
                            pollutants” from each piece of equipment. In contrast, for a facility without
                            a PAL, in many instances the company would have limited emissions data
                            for the facility. Thus, both the public notice and comment process for
                            obtaining a PAL and the semiannual reporting requirements while subject
                            to the PAL provide the public more specific and more frequent emissions
                            information than would be provided for a facility that does not have a PAL.

                            On the other hand, according to some state and local air quality agencies
                            and environmental groups, because a company can pursue a facility
                            change without an NSR permit under a PAL, as long as total facility
                            emissions do not increase, the public may have fewer opportunities to
                            provide input on a company’s decision to modify a facility, assess the
                            emissions created (including hazardous air pollutants that may not be
                            identified for monitoring under the PAL), and consider ways to control
                            them. For example, if a company without a PAL decided to install a piece
                            of equipment, such as a boiler, that would increase the facility’s emissions
                            to a level that would trigger federal NSR, the company would have to
                            submit an application to the state or local agency describing the change
                            and the anticipated emissions.19 The agency would have to notify the
                            public and give it 30 days to comment on the draft federal NSR permit, and
                            the company would have to install the best available pollution controls on
                            the equipment when making the facility change. However, under a PAL,



                            19
                              Prior to the final rule, a company also had the option to “net out” of, or avoid, NSR by
                            agreeing to reduce emissions elsewhere in a facility or accepting an enforceable emissions
                            limit that was below the threshold for triggering NSR.




                            Page 22                                                         GAO-04-58 Clean Air Act
                            the company could make the change without obtaining a federal NSR
                            permit, soliciting public participation, or installing pollution controls, even
                            though the change significantly increases emissions, as long as the
                            company offsets the increase somewhere else within the facility and does
                            not exceed the PAL.

                            Some industry groups have responded that other federal, state, or local
                            regulations will still require reporting and record keeping on facility
                            changes and installation of emission control technology, so public access
                            and input will not change. For example, if state and local air quality
                            agencies require that companies obtain permits for facility changes not
                            subject to federal NSR requirements, the public may still be notified about
                            company plans to make a change and could comment on them. However,
                            several states, as well as the State and Territorial Air Pollution Program
                            Administrators and the Association of Local Air Pollution Control
                            Officials, note that state and local emission control regulations governing
                            such facility changes vary widely. For example, some local air quality
                            agencies in California require a public comment process for many facility
                            changes not subject to the federal NSR program, while Ohio requires that
                            the public be notified of only large or potentially controversial changes.

                            EPA program managers maintain that many past changes were not subject
                            to federal NSR permits for a number of reasons, so public access will not
                            change. For example, prior to the final rule, the managers stated that a
                            company could make an unlimited number of changes to a facility, as long
                            as any one change did not trigger NSR. In addition, if the emissions effects
                            of some changes were too small to trigger NSR, a company could offset
                            emissions increases with other emissions reductions, “netting out” of
                            federal NSR requirements. The program managers also believe that a
                            predominant number of states and localities would still require public
                            notice and comment on these changes.


Two Provisions Revising     The two provisions of the December 2002 final rule revising the method
How Companies Measure       for calculating past emissions and estimating emissions resulting from a
Their Emissions Baseline    facility change could affect the amount and availability of information
                            available to the public. Companies use these provisions to determine if
and Estimate Future         their changes will trigger federal NSR requirements. To make this
Emissions Could Limit       determination, a company must estimate the emissions expected after the
Assurance That the Public   change and compare this with the actual historic emissions prior to the
Has Access to Data on       change, known as the baseline emissions level. Before the rule, a company
Facility Changes            determined the baseline for a piece of equipment or operating procedure
                            using the average annual emissions generated during the 24-month period


                            Page 23                                                 GAO-04-58 Clean Air Act
prior to the change—or the company could seek to use a different period,
more representative of normal operations. Under the new rule, a company
will be able to choose any 24-month period in the past 10 years as the
baseline. However, the company must adjust the baseline to account for
any other pollution control requirements implemented during this time,
such as limits on acid rain pollutants, and eliminate any time periods from
consideration where facilities exceeded required emissions limits.

Also under the new rule, once a company calculates its baseline, it
compares the baseline to the expected emissions after the equipment or
operations are modified to determine if emissions will increase enough to
trigger NSR. Prior to the final rule, when estimating expected emissions,
companies other than utilities had to assume that they would operate a
piece of equipment at the maximum level possible representing the
maximum possible emissions, even if they had not operated at that level in
the past and did not plan to do so in the future. 20 Companies have said that
this approach was unfair because, among other things, it ignored market
fluctuations. EPA revised the method of calculating the expected
emissions in the final rule. Now, a company can project the expected
activity level after the facility change and estimate the resulting emissions
accordingly. Thus, under the rule, some estimates of expected emissions
most likely will be smaller than in the past.

Various stakeholders involved in the NSR revisions disagree on the impact
of these two changes. For example, some expect that companies will
choose the time period that gives them the highest baseline, or allowable
emissions, thereby giving the companies the greatest flexibility to make
changes in response to economic variations without triggering NSR. On
the other hand, EPA program managers and a representative of a major
industry explain that this is not necessarily true because companies now
have to adjust their baselines downward to account for other pollution
control requirements.

In those cases where companies set higher emissions baselines and
estimate smaller emissions increases, the difference between these two
numbers will be smaller than in the past and will not trigger the federal
NSR program and its requisite permitting, public notice, and public



20
  Again, prior to the final rule, a company could avoid NSR review by reducing emissions
elsewhere in a facility and accepting an enforceable emissions limit that was below the
threshold for triggering NSR.




Page 24                                                         GAO-04-58 Clean Air Act
comment requirements. These changes may still trigger state or local
requirements to obtain a permit and its associated public participation
rules, depending on the state or locality, but, as we have stated, the scope
of these requirements varies widely. In addition, several industry
representatives claim that the Title V provisions governing record keeping
and reporting requirements will ensure the public continues to have
emissions data to monitor compliance. But other stakeholders point out
that the data are scattered across various programs, making it difficult for
the public to determine if facilities made any changes and what impact, if
any, this had on emissions. The public eventually may learn of a facility
change because under the rule, a company must annually report if the
actual emissions generated after certain changes exceeded the company’s
estimate. In any event, this reporting is done after the change is in place,
and the public can have any input.

Also under the NSR program, when a company calculates the expected
emissions after a change, if the company determines emissions will clearly
exceed the federal NSR threshold, the company must obtain a permit to
proceed. If the calculation does not clearly indicate that a proposed
facility change triggers NSR, the company does not have to keep any
records of this determination. Under the rule, a company can now
determine if there is a “reasonable possibility” the change will trigger NSR
requirements. If it does, the company must maintain on-site
documentation of this decision, as well as emissions records for the
modified equipment or process. EPA program managers maintain that as a
result, more data may be available now than in the past.

However, EPA did not define what constitutes a “reasonable possibility”
that emissions will trigger federal NSR requirements in the final rule, so
companies might not apply this provision consistently and are, in effect,
policing themselves. As several state and local representatives pointed out,
this makes it difficult for EPA, state and local air quality agencies, and the
public to monitor compliance with NSR, potentially leading to increased
emissions and enforcement actions. Similarly, NAPA reported that such
self-policing could lead to implementation problems and inadequate
reporting of information and recommended that EPA carefully oversee the
calculation of emissions increases resulting from facility changes and that
sources not be allowed to “self-police.” EPA program managers take issue
with the conclusion that self-policing is inherently wrong and point out
that many environmental programs provide such self-policing
mechanisms.




Page 25                                                GAO-04-58 Clean Air Act
              Furthermore, the rule states that if a company determines there is a
              reasonable possibility a facility change could trigger NSR, it must make the
              record of the determination as well as the emissions records related to the
              change available to state or local agency officials or the public upon
              request. But the rule is unclear how the public will know about the
              changes or access the company’s on-site records. According to industry
              representatives, some companies will keep records of all reasonable
              possibility determinations to limit their legal risks, and some will
              proactively reach out to local communities before undertaking facility
              changes because they want to maintain good relations in these
              communities. Nevertheless, this lack of clarity could potentially hinder
              enforcement and monitoring activities. It could also pose administrative
              problems for companies, should the public begin requesting information
              directly from them—especially if the information contains sensitive
              business data that the company is entitled to protect. EPA is currently
              considering comments it received on the reasonable possibility provision
              as part of its decision to reconsider portions of the final rule. The agency
              plans to determine whether it will make any changes by the end of
              October.


              While EPA enforcement officials assessed the potential impact of the
Conclusions   December 2002 final and proposed rules on the enforcement cases against
              coal-fired utilities and made changes before announcing the rules, these
              officials and key stakeholders believe that settlement of some cases was
              delayed because of the prospect that the definition of routine maintenance
              could be revised in a way that would improve industry’s legal position.
              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’ decisions regarding whether the companies have to install
              pollution controls, jeopardizing the expected emissions reductions.

              Overall, as a result of the final rule, the public may have less assurance
              that they will have notice of, and information about, company plans to
              modify facilities in ways that affect emissions, as well as less opportunity
              to provide input on these changes and verify they will not increase
              emissions. In some but not all cases, state or local regulations may require
              companies to continue to provide the public with this information and
              opportunities for input, or companies may do so voluntarily. However, the
              public will not have consistent access and input unless EPA better (1)
              defines the criteria companies use to determine if there is a reasonable


              Page 26                                               GAO-04-58 Clean Air Act
                       possibility a facility change will trigger NSR requirements and (2) explains
                       how the agency will ensure the public can access company documentation
                       on such decisions and the resulting emissions. Otherwise, it will be more
                       difficult not only for the public but also for EPA and state and local air
                       quality agencies to ensure companies are complying with the federal NSR
                       program and not increasing emissions in ways that affect localities’ air
                       quality and public health.


                       To better ensure the ability of federal, state, local, and public entities to
Recommendations for    monitor facility emissions and NSR compliance, we recommend that the
Executive Action       EPA Administrator

                  •	   better define what constitutes a “reasonable possibility” that emissions
                       after a facility change will trigger NSR requirements,

                  •	   require that companies maintain documentation on all “reasonable
                       possibility” determinations, and

                  •    determine, with state and local air quality agencies, how to ensure public
                       access to company’s on-site information on facility changes and emissions.


                       We provided DOJ and EPA with an opportunity to review and comment on
Agency Comments        a draft of this report. We subsequently received comments from both
                       agencies. DOJ advised that it could not address the accuracy of, or
                       otherwise comment on, the statements of EPA officials contained in the
                       report. The agency did not address or comment on those portions of the
                       report concerning public access to emissions data that GAO discussed
                       exclusively with EPA. DOJ also advised that its position on the final and
                       proposed regulations discussed in the report are contained in its legal
                       filings in the power plant cases, and GAO was provided with a copy of
                       those filings. Since EPA’s December 2002 announcement of the final and
                       proposed NSR rule changes, DOJ stated that it has continued to prosecute
                       these cases vigorously and has also achieved settlements with four
                       companies. 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.”

                       EPA generally agreed with the report’s characterization of the NSR
                       revisions’ potential impact on the ongoing enforcement cases. In terms of



                       Page 27                                                 GAO-04-58 Clean Air Act
the revisions’ impact on public access to information about facility
modifications and emissions, however, the agency maintains the revisions,
at a minimum, will not change, and most likely will increase, the amount
of information available. According to EPA, before the revisions,
companies were not obtaining federal NSR permits with their requisite
public participation requirements for the types of changes that would be
affected by the revisions, for several reasons. For example, companies
could avoid federal NSR requirements for such changes by offsetting
emissions increases with emissions reductions elsewhere in the facility (a
process known as netting). EPA also maintains that even if these changes
were not subject to federal NSR permitting requirements, they were
subject to state and local permitting and public participation requirements
in many cases, and that the NSR revisions would not change these
underlying state and local programs. In addition, EPA said that facilities
choosing to use a plantwide emissions limit have new and additional
reporting requirements that could increase the information available, as
we also point out in the report. Furthermore, the agency maintains that in
the past, companies calculated the expected emissions from a
modification and determined whether the emissions would increase
enough to trigger federal NSR requirements. If the NSR requirements were
not triggered, the companies did not have to keep records of the
calculations. Now, companies can take the extra step of determining that
even if the calculations do not show a significant enough increase, there is
a “reasonable possibility” of an increase and companies must keep records
on site supporting this determination.

For our work, however, we compared the federal NSR requirements
before and after the revisions and determined that the changes to these
requirements could limit assurance that the public has access to
information on facility changes and emissions. We did not have
information on, and did not try to account for, the extent to which
companies were actually triggering NSR requirements before and after the
rule, or the effect this had on available information. Based on discussions
with a number of state agencies and the national association representing
them, among other stakeholders, as to whether state and local programs
will continue to require permits and public notice for changes not subject
to the federal program, we determined that the extent varied considerably
across states and localities. For example, two states said they did not
allow netting. Furthermore, a number of states indicated that even if such
changes had been subject to their programs in the past, they might not be
in the future because states and localities are facing pressures to modify
their programs to match the federal NSR revisions and to not have more
stringent requirements.


Page 28                                               GAO-04-58 Clean Air Act
As to GAO’s recommendations, EPA did not take a formal position on
either the recommendation calling for additional guidance on reasonable
possibility determinations or for the maintenance of all records on these
determinations. The agency is still evaluating public comments it received
on these issues as part of its agreement to reconsider portions of the NSR
revisions and does not expect to make a final decision on the
reconsideration process until the end of October 2003. EPA did agree with
our recommendation on ways to better ensure public access to
information on facility changes and emissions that companies maintain on
site. DOJ and EPA also recommended a number of technical changes to
the report, which we incorporated, as appropriate.


As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 10 days from the
report date. At that time, we will send copies to the EPA Administrator,
the Attorney General, interested congressional committees, and other
interested parties. We will also make copies available to others upon
request. In addition, the report will be available at no charge on GAO’s
Web site at http://www.gao.gov.

If you or your staffs have any questions, please call me at (202) 512-3841.
Karen Keegan, Eileen Larence, Jeff Larson, and Lisa Turner made key
contributions to this report. Nancy Crothers, Mike Hix, and Laura
Yannayon also made important contributions.




John B. Stephenson
Director, Natural Resources
 and Environment




Page 29                                                GAO-04-58 Clean Air Act
Appendix I: Objectives, Scope, and
Methodology

              Our objectives were to determine (1) whether EPA and DOJ assessed the
              potential impact that issuing the final and proposed rules in December
              2002 would have on enforcement cases pending against coal-fired utilities
              and what the assessments indicated, and (2) what effect, if any, the final
              rule might have on public access to information on facility changes and
              the resulting emissions.

              To respond to the first objective, we interviewed both current and former
              EPA officials and current DOJ officials that were involved in discussions
              about the impact of the revisions on the relevant enforcement cases. These
              officials included the former Principal Deputy Assistant Administrator for
              EPA’s Office of Enforcement and Compliance Assurance, the former
              Director of EPA’s Office of Regulatory Enforcement, the current Director
              of EPA’s Air Enforcement Division, and the DOJ Deputy Assistant
              Attorney General for Environment and Natural Resources. We also
              submitted written document requests to both agencies, asking that they
              provide GAO with all documents referring to, relating to, or describing the
              assessments of the potential impact of the NSR revisions on the pending
              enforcement cases and discussions between officials from EPA and
              attorneys from DOJ concerning these assessments.

              In the case of DOJ, the agency’s enforcement staff acknowledged that in
              July 2002, they had prepared an internal evaluation, as backup material for
              testimony, that summarized EPA’s public announcement the previous
              month concerning proposed NSR rule changes the agency was
              considering, the content of some of the potential revisions, and the
              relevance of those changes to filed enforcement cases. The DOJ
              enforcement officials were concerned about providing us a copy of this
              document primarily because it could impact the ongoing litigation of the
              cases. In the case of EPA, the officials acknowledged that they, too, had
              prepared assessments, and they discussed the general content of some of
              them with us. They also provided us access to (but not copies of) the
              assessments supporting the December 2002 final rule. The officials had
              concerns similar to those of DOJ about (1) describing all of the details
              about the changes made to the rule as a result of the assessments, and (2)
              providing us access to the assessments concerning the December 2002
              proposed rule and the August 2003 rule. We did not further pursue access
              to this information because we had sufficient data to respond to our
              objectives, and it is GAO’s policy, except in limited circumstances, not to
              conduct work that would involve analyzing, evaluating, or commenting on
              specific issues that are pending before the courts.




              Page 30                                              GAO-04-58 Clean Air Act
     Appendix I: Objectives, Scope, and
     Methodology




     To respond to the second objective, we analyzed the December 2002 final
     rule to determine what provisions could impact public access to
     information about facility changes and their associated emissions. We
     interviewed the Director of EPA’s Information Transfer and Program
     Integration Division in the Office of Air Quality Planning and Standards,
     the Director of EPA’s Air Enforcement Division, and attorneys in EPA’s
     Office of General Counsel regarding the interpretation of relevant
     provisions of the rule and the potential effects of these provisions on
     public access. We also obtained the views of key stakeholders that could
     be affected by changes in public access to such information. To ensure we
     captured a wide cross section of interests, we focused on

•    groups identified by EPA officials as key stakeholders,

•    members of EPA’s CAA Advisory Council,1

•	   national level groups that have testified before Congress on NSR and CAA
     issues over the last several years,

•	   national level groups that submitted comments to EPA in response to the
     agency’s request for public comment on its June 2001 NSR 90-Day Review
     Background Paper (many of these were identified in EPA’s June 2002 NSR
     Report to the President), and

•	   trade associations representing those industries EPA identified as being
     most affected by NSR.

     Stakeholders included officials from the American Forest and Paper
     Association, Clean Air Trust, Georgia Pacific Company, National
     Petrochemical and Refiners Association, Natural Resources Defense
     Council, New York State Attorney General’s Office, Rockefeller Family
     Fund’s Environmental Integrity Project, and the professional association
     representing State and Territorial Air Pollution Program Administrators
     and the Association of Local Air Pollution Control Officials.




     1
      The council is a senior-level policy committee established in 1990 to advise EPA on issues
     related to implementing the CAA Amendments of 1990. Membership is approximately 60
     senior managers and experts representing state and local government, environmental and
     public interest groups, academic institutions, unions, trade associations, utilities, and
     industry.




     Page 31                                                          GAO-04-58 Clean Air Act
           Appendix I: Objectives, Scope, and
           Methodology




           We conducted our work between August 2002 and October 2003 in
           accordance with generally accepted government auditing standards.




(360383)
           Page 32                                           GAO-04-58 Clean Air Act
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