For other versions of this document, see http://wikileaks.org/wiki/CRS-RL31757
------------------------------------------------------------------------------

                                                   Order Code RL31757




                  CRS Report for Congress
                                      Received through the CRS Web




                        Clean Air: New Source Review
                               Policies and Proposals




                                                 February 25, 2003




                                                     Larry Parker
                                      Specialist in Energy Policy
                       Resources, Science, and Industry Division




Congressional Research Service ~ The Library of Congress
 Clean Air: New Source Review Policies and Proposals

Summary
      On November 22, 2002, the Environmental Protection Agency (EPA) finalized
revisions to several aspects of the Clean Air Act's (CAA) New Source Review
(NSR) requirements. At the same time, EPA proposed rules to clarify the definition
of "routine maintenance" under NSR. The proposed and final rules have generated
controversy. The Bush Administration has argued that the new rules will reduce
pollution and increase energy efficiency. In contrast, the State and Territorial Air
Pollution Program Administrators (STAPPA) and Association of Local Air Pollution
Control Officials (ALAPCO) argue that the revisions will "undermine efforts to
achieve and sustain clean, healthful air." Nine Northeastern states filed suit against
the final rules issued by EPA on December 31, 2002 in the U.S. Court of Appeals for
the D.C. Circuit, and Pennsylvania filed a separate lawsuit on January 27, 2003; on
January 30, eight states, mostly from the Midwest and the South, filed a petition in
support of the final rule.

      Into the 1970s, coal-fired electric generating facilities were built with a
projected useful life of 30-40 years. Over time a powerplant's efficiency declined,
until it would be replaced or put on standby for use during emergencies. As the CAA
evolved, it established stringent pollution control requirements on newly constructed
facilities, but not on older ones unless they underwent a modification that increases
emissions (or emitted pollutants that exceeded health-based air quality standards).
By the early 1980s, however, it became technically feasible to refurbish a powerplant
to preserve its efficiency, so plants could continue in regular operation.

      Thus, "life extension" became more advantageous than building new facilities
that would incur capital and operating costs of CAA-required pollution controls. The
crucial issue was whether life extension triggered the "modification" provision of the
CAA: In promulgating regulations in 1975, EPA had exempted certain activities
from the definition of modification, including "maintenance, repair, and replacement
which the Administrator determines to be routine for a source category...." In
response, utilities began to spread out their plant rehabilitation efforts in an attempt
to fit them into their routine maintenance schedules.

      If one believes that EPA's routine maintenance exemption was limited and did
not permit the rehabilitation of existing facilities, then one would conclude that many
of the industry's rehabilitation activities of the last 20 years go beyond what NSR
allows. From this perspective, current law requires existing sources undergoing
refurbishment to meet stringent NSR standards. This is the perspective underlying
the Clinton Administration's enforcement initiative, an initiative for which the Bush
Administration has stated its support. In contrast, if one believes that an exemption
for routine maintenance is appropriate and should be defined in terms of current
industry practices, then one would argue that NSR discourages plant owners from
upgrading facilities operating with worn-out, inefficient components, thereby
foregoing opportunities to conserve energy and to reduce emissions by installing
newer, more efficient components. This perspective that NSR discourages energy
efficiency is reflected in the Bush Administration's proposed revisions to routine
maintenance published in December 2002. This report will not be updated.
Contents

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
    What Has Happened? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
    What Is the Controversy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
    What Is a Modification? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
    How Does Routine Maintenance Fit? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
    Emissions Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Proposed Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
    Reform NSR to Permit Current Utility Rehabilitation Practices: The
         Administration Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
    Replace NSR with Multi-pollutant Legislation . . . . . . . . . . . . . . . . . . . . . . 21
    Reform NSR to Reduce Emissions From Existing Facilities . . . . . . . . . . . 22

Conclusion: NSR ­ Ambiguous, Meaningless or Moot? . . . . . . . . . . . . . . . . . . 23



List of Figures
Figure 1: Trend of Power Plant Heat Rate with Age . . . . . . . . . . . . . . . . . . . . . . 12
Figure 2: Impact of Power Plant Aging on Reliability of Fossil-Fired Units 50 to 200
     Mw . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12



List of Tables
Table 1: NSR Final Rule: Summary of Major Provisions . . . . . . . . . . . . . . . . . . . 4
Table 2: U.S. Coal-fired Electric Generating Capacity Additions, 1989-2000 (net
    summer capacity) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 3: Coal Consumption and Coal-fired Generation,
    1989-2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 4: Coal-fired Generation Capacity Factors and Heat Rates: 1989-2001(based
    on net summer capacity)
      ............................................................8
Table 5: EIA's 2010 NSR Reference Cases: Emissions from Coal-fired Electric
    Generating Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
             Clean Air: New Source Review
                 Policies and Proposals

                                 Background
      On November 22, 2002, the Environmental Protection Agency (EPA) finalized
revisions to several aspects of the Clean Air Act's (CAA) New Source Review
(NSR) requirements. These revisions became effective with their publication in the
Federal Register on December 31, 2002. At the same time, EPA proposed a rule to
clarify the definition of "routine maintenance" under NSR. The proposed and final
rules have generated controversy. The Bush Administration has argued that the new
rules will reduce pollution and increase energy efficiency.1 In contrast, the State and
Territorial Air Pollution Program Administrators (STAPPA) and Association of
Local Air Pollution Control Officials (ALAPCO) argue that the revisions will
"undermine efforts to achieve and sustain clean, healthful air."2 The attorneys
general in nine Northeastern states filed suit against the final rules issued by EPA on
December 31, 2002 in the U.S. Court of Appeals for the D.C. Circuit.3 Pennsylvania
filed a separate lawsuit on January 27, 2003. On January 30, the attorneys general
in eight states, mostly from the Midwest and the South filed a petition in support of
the final rule.4

What Has Happened?
     This is not the first time the NSR provisions of the Clean Air Act (CAA) have
engendered controversy. Enacted as part of the 1977 CAA Amendments and
modified in the 1990 CAA Amendments, NSR is designed to ensure that newly
constructed facilities, or substantially modified existing facilities, do not result in
violation of applicable air quality standards. NSR provisions outline permitting
requirements both for construction of new major pollution sources and for
modifications to existing major pollution sources. Specific requirements dictated by
NSR depend on where the facility is sited. In attainment areas ­ those meeting the


1
 Environmental Protection Agency, New Source Review (NSR) Improvements, November
21, 2002.
2
 STAPPA/ALAPCO, "EPA's New Source Review Reforms Will Undermine Environmental
Protection, Say State/Local Air Pollution Control Agencies," November 22, 2002.
3
They are: Connecticut, Maine, Maryland, Massachusetts, New Hampshire, New Jersey,
New York, Rhode Island, and Vermont. See: "Nine States Sue Bush Administration for
Gutting Key Component of Clean Air Act," Press release, Department of Law, State of New
York (December 31, 2002).
4
 They are: Indiana, Kansas, Nebraska, North Dakota, South Carolina, South Dakota, Utah,
and Virginia.
                                            CRS-2

National Ambient Air Quality Standard (NAAQS) for a pollutant ­ the governing
requirements are the Prevention of Significant Deterioration (PSD) provisions of the
CAA. In nonattainment areas ­ those not in compliance with a NAAQS for one or
more pollutant ­ the governing requirements are covered by nonattainment
provisions. Some facilities can be subject to a combination of both, if the area is in
attainment for some criteria pollutants,5 but not others. Meeting these permitting
requirements can be a long and complex process, depending on the specific project,
the pollutants involved, and the specific state and federal regulatory authorities
involved.6 In 1996, EPA proposed changes to NSR to streamline it.7 However, the
proposals were subject to considerable controversy, and a final rule was not issued
under the Clinton Administration. These complexities and controversies, particularly
with respect to modifications of existing sources, became manifest in the November
1999 enforcement suits filed by the Justice Department for EPA, and in the responses
to them.8

     The Clinton Administration's enforcement initiative raised questions within the
Bush Administration. In May 2001, Vice President Cheney's energy task force called
on the Justice Department to review the legality of the lawsuits.9 In January 2002,
the Justice Department found the lawsuits to be supported in law and fact.10 In
addition, the energy task force asked EPA to review the impact of NSR on new utility
and refinery generation capacity, energy efficiency, and environmental protection.
In June 2002, EPA reported to the President that: (1) NSR had not significantly
impeded investment in new power plants or refineries; (2) NSR had impeded projects
at existing facilities that would maintain and improve reliability, efficiency and
safety; and (3) NSR does result in significant environmental and public health




5
  Pollutants for which EPA has set NAAQS are often called "criteria pollutants" after the
criteria documents EPA prepares for setting the standard. For background on NAAQS and
the criteria air pollutants and how the CAA is structured to ensure attainment of clean air,
see Clean Air Act: A Summary of the Act and Its Major Requirements, CRS Report
RL30853, pp. 3-8.
6
 Many of the activities under the CAA, including many requirements specifically involving
NSR, either reside with or can be and have been delegated to states (which can include
territories, Indian tribal governments, and the District of Columbia). In essentially all cases,
EPA can act in lieu of states to which authorities have not been delegated, or whenever
states fail to take required actions.
7
    61 Federal Register 38249-38344, July 23, 1996.
8
 Larry B. Parker and John E. Blodgett, Air Quality and Electricity: Enforcing New Source
Review, CRS Report RL30432.
9
    Report of the National Energy Policy Development Group, May 2001 (Chapter 7, p. 14)
10
 United States Department of Justice, Office of Legal Policy, New Source Review: An
Analysis of the Consistency of Enforcement Actions with the Clean Air Act and
Implementing Regulations, January 2002, p. vi.
                                           CRS-3

benefits.11 Based on its findings, EPA recommended several revisions to NSR.12
There were two parts to the recommendations. The first consisted of four
recommendations that would complete the 1996 Clinton Administration's
rulemaking process. The second was a recommendation to propose a regulation to
clarify the definition of "routine maintenance."

     As published in December 2002, the final rule's provisions fall into four
categories based on EPA's June 2002 recommendations,13 and which the EPA
believes completes the rulemaking process begun under the Clinton Administration
in 199614: (1) Plantwide Applicability Limits (PALs); (2) Clean Unit Exclusion; (3)
Pollution Control and Prevention Projects; and (4) Emissions Calculation Test
Methodology. Table 1 briefly summarizes the major differences between the
regulations existing at the time of the rulemaking, the Clinton Administration's
proposed rule; and EPA's 2002 final rule. EPA's final rule provides a detailed
discussion of what it proposed in 1996 and what it finalized in November.15

      The second rulemaking is a proposed clarification of the definition of routine
maintenance.16 Moving away somewhat from its current "case-by-case" approach to
determining routine maintenance, the revisions would carve out two categories of
activities that would automatically constitute routine maintenance under NSR. The
first category, "Annual Maintenance, Repair, and Replacement Allowance," would
provide an exemption for safety, reliability, and efficiency activities whose capital
and non-capital cost fall below a specific cost threshold. The second category,
"Equipment Replacement Approach," would provide an exemption for replacing
safety, reliability and efficiency rated components with new, functionally equivalent
equipment if the cost of the replacement components is below a specific threshold.
The proposal includes several options for implementing each of these approaches,
and asks for comments on how the two approaches should interact and whether the
second approach is sufficient alone.




11
  Environmental Protection Agency, New Source Review: Report to the President (June
2002), p. 1.
12
 U.S. Environmental Protection Agency, EPA Announces Steps to Increase Energy
Efficiency, Encourage Emissions Reductions (June 2002).
13
  Some documents released by EPA refer to five "improvements" because they include in
the Emissions Calculation Test Methodology category two improvements: (1) baseline
change; and (2) test change.
14
     61 Federal Register 142 (July 23, 1996), pp. 38250-38344.
15
  67 Federal Register 80185-80314 (December 31, 2002). An internet version is available
at: http://www.epa.gov/nsr/nsrfinal.pdf
16
     67 Federal Register 80290-80314 (December 31, 2002).
                                  CRS-4

     Table 1: NSR Final Rule: Summary of Major Provisions

    Provision        Prior Existing     1996 Clinton             2002 EPA
                      Regulation       Proposed Rule             Final Rule
Plantwide           none              Voluntary emission      Emission cap
Applicability                         cap based on most       based on any
Limits                                recent 2-yr.            consecutive 24-
                                      average plus a          month period over
                                      reasonable              the past 10 years
                                      operating margin        and valid for 10
                                      that is less than the   years
                                      trigger for NSR
                                      review. PALs may
                                      be adjusted to
                                      reflect any new
                                      requirements
Clean Unit          none              If unit meets a         If unit meets a
Exclusion                             BACT or LAER            BACT or LAER
                                      limit set in the last   limit set since
                                      10 years, NSR           1990, or MACT,
                                      would not be            RACT or
                                      triggered by            undertook
                                      changes unless unit     pollution
                                      increases hourly        prevention efforts,
                                      potential emissions     it would be
                                                              excluded from
                                                              NSR for 10-15
                                                              years
Pollution Control   none              Excludes P2             Excludes P2
and Prevention                        projects from NSR       projects from NSR
Projects (P2                          unless emission         unless emission
projects)                             increase would          increase would
                                      contribute to           contribute to
                                      violation of            violation of
                                      NAAQS, PSD, or          NAAQS, PSD or
                                      air quality related     air quality related
                                      values in a Class I     values in a Class I
                                      area. Permitting        area. EPA will
                                      authority               provide a list of
                                      responsible for air     presumptively
                                      quality                 eligible
                                      determination           technologies
                                          CRS-5

        Provision         Prior Existing          1996 Clinton              2002 EPA
                           Regulation            Proposed Rule              Final Rule
 Emissions               Actual to potential    Proposed options        Applies the
 Calculation Test        test for all           ranging from            utility's actual to
 Methodology             industrial sources     applying the actual     future actual test to
 (baseline and test      except electric        to future actual test   all industrial
 changes)                utilities which have   to only electric        sources based on a
                         an actual to future    utilities or to all     facility's emissions
                         actual test based on   industrial sources,     over two
                         a facility's           or eliminating it       consecutive years
                         emissions over 24                              within the most
                         consecutive                                    recent ten-year
                         months within the                              period
                         most recent five-
                         year period

What Is the Controversy?
      The CAA requires a preconstruction review of, and a permit for, almost any
modification of an air polluting source or any major new source. Assuming that a
state has an EPA-approved State Implementation Plan (SIP), which spells out the
state's strategy for complying with NAAQS, regulatory approval to construct the new
source or modify the existing source must come from the appropriate state agency.
To receive this "Permit to Construct," the applicant must show that the proposed
source or modification will not result in, or exacerbate, violation of a NAAQS, either
locally or downwind. In addition, applicants must show that their proposal will not
result in local or downwind exceedences of increments of increased air pollution
allowed under Prevention of Significant Deterioration (PSD) regulations in areas
complying with NAAQS. It is this preconstruction review process that is called New
Source Review (NSR).17

      The NSR process is triggered for any new source that potentially could emit 100
tons annually (or less in some areas) of any criteria air pollutant, and by any
modification that will cause a significant increase in annual emissions (regulatorily
defined as 40 tons for SO2 and NOx18). The specific NSR requirements for affected
sources depend on whether the sources involved are subject to the PSD or the non-
attainment provisions.19 If covered by PSD, the source is required to install Best
Available Control Technology (BACT), which is determined on a case-by-case basis,
and which cannot be less stringent than the federally determined New Source
Performance Standard (NSPS) for that pollutant. If covered by non-attainment


17
   Some restrict the term "NSR" to the review process in a nonattainment area only; the
review process in an attainment area being called "PSD pre-construction review". This
paper will use the term to indicate both. In addition, new and modified sources must meet
New Source Performance Standards (NSPS).
18
     40 CFR 52.24(f)(10) for nonattainment; 40 CFR 52.21(b)9230(i) for PSD.
19
  It should be noted that a source can be affected by the PSD requirements for one pollutant,
and by the nonattainment requirements for another pollutant.
                                            CRS-6

provisions, the source is required to install Lowest Achievable Emission Rate
(LAER) and obtain applicable offsets for that particular area.20 Like BACT, LAER
must not be less stringent than the federal NSPS.

     Despite the breadth of coverage suggested by NSR, few permits have been
issued to coal-fired power plants over the program's history.21 If this situation is
examined from the perspective of new construction, the lack of permits is not too
surprising. Current U.S. coal-fired electric generating capacity is about 300,000
megawatts (MW), and has remained steady at that level for the last ten years.22 As
indicated in table 2, additions to coal-fired capacity, while greater than retirements,
have not been significant. Capacity that began operation between 1989-2000
constitutes about 3% of total current coal-fired capacity.

 Table 2: U.S. Coal-fired Electric Generating Capacity Additions,
                1989-2000 (net summer capacity)

              Year                  Capacity Additions              Retirements (MW)
                                         (MW)
 1989                                                   1,967                                 379
 1990                                                   3,063                                 175
 1991                                                     792                                 377
 1992                                                     498                                 254
 1993                                                        0                                104
 1994                                                     540                                 461
 1995                                                   1,036                                   2
 1996                                                   1,611                                  16
 1997                                                        0                                293
 1998                                                        0                                  2
 1999                                                       55                                192
 2000                                                       16                                 40
 Total 1989-2000                                        9,578                            2,295
 Source: Energy Information Administration, Inventory of Power Plants in the United States,
various years.


20
  For details on these provisions and their requirements, see Clean Air Act, Part C ­
Prevention of Significant Deterioration of Air Quality, sections 160-169; and, Part D ­ Plan
Requirements for Nonattainment Areas, sections 171-178.
21
     Environmental Protection Agency, Letter to Chairman Inhofe (March 26, 1999), p. 2.
22
 Data represent net summer capacity. Energy Information Administration. Annual Energy
Review 1998, DOE/EIA-0384(98), July 1999. P. 219.
                                          CRS-7

     The dynamism in coal-fired generation is the continuing operation of existing
coal-fired facilities. As indicated by table 3, despite the general lack of new plant
construction, coal-fired electricity generation and related coal consumption has
continued to climb over the past decade. This increase results from utility efforts to
optimize performance of existing coal-fired facilities despite their increasing age.
Historically, as plants age they become less reliable and less efficient, leading utilities
to derate them and move them from baseload to cycling duties. However, as indicated
in table 4, contrary to historical expectations, utilization of coal-fired capacity has
increased over the past decade, and the efficiency of units has not decreased.

      Table 3: Coal Consumption and Coal-fired Generation,
                          1989-2000

            Year                   Coal Consumption                Net Generation
                                 (thousand short tons)             (billions Kwh)
            1989                         781,672                         1,584
            1990                         790,244                         1,591
            1991                         793,666                         1,591
            1992                         805,140                         1,621
            1993                         842,153                         1,690
            1994                         848,796                         1,691
            1995                         860,594                         1,709
            1996                         907,209                         1,795
            1997                         931,949                         1,845
            1998                         946,295                         1,874
            1999                         949,802                         1,881
            2000                         994,933                         1,966
            2001                         975,570                         1,904

Source: Net generation, coal consumption data from Energy Information Administration, Annual
Energy Review 2001, July 2002.

     This suggests that the economics of plant maintenance has changed
fundamentally over the past decade or so, making it economic for utilities to spend
more to maintain their coal-fired capacity than was the case previously. The question
the EPA lawsuits raise is whether these efforts to maintain or even to expand
generation from existing coal-fired facilities ­ compared to the degradation of
capacity that would be expected ­ represent "routine maintenance" or a
"modification" of those facilities under the CAA. If such maintenance does represent
a " modification," then the CAA would require the installation of pollution control
equipment; "routine maintenance," on the other hand, would not trigger the
                                         CRS-8

requirement for new controls. With the restructuring of the electric utility industry
placing ever-greater focus on plant economics, this issue has intensified in recent
years.23

Table 4: Coal-fired Generation Capacity Factors and Heat Rates:
           1989-2001(based on net summer capacity)

            Year                   Capacity Factor                   Heat Rate
            1989                         59.1%                         10,302
            1990                         59.1%                         10,331
            1991                         59.1%                         10,344
            1992                         59.8%                         10,285
            1993                         62.2%                         10,303
            1994                         62.0%                         10,336
            1995                         62.7%                         10,342
            1996                         65.4%                         10,383
            1997                         67.2%                         10,364
            1998                         67.7%                         10,363
            1999                         68.1%                         10,346
            2000                         71.0%                         10,378
            2001                         68.7%                         10,435

Source: Net summer capacity, net generation, coal consumption data from Energy Information
Administration, Annual Energy Review 2001, July 2002.



What Is a Modification?
     As noted above, there is no firm data that NSR has seriously obstructed the
construction and operation of new power plants. The controversy over NSR with
respect to power generation focuses on existing facilities and under what conditions
they meet the modification trigger that would require them to undergo NSR. As
defined under the 1970 Clean Air Act, a modification is "any physical change in, or
change in the method of operation of, a stationary source which increases the amount
of any air pollutant emitted by such source or which results in the emission of any air




23
 See: Larry Parker and John Blodgett, Electricity Restructuring: The Implications for Air
Quality, CRS Report 98-615 ENR, July 16, 1999.
                                           CRS-9

pollutant not previously emitted."24 In subsequent regulations issued in 1975 with
respect to New Source Performance Standards (NSPS), EPA defined modification
as any physical or operational change that resulted in any increase in the maximum
hourly emission rate (kilograms per hour) of any controlled air pollutant.25 In
addition, EPA regulations stated that any replacement of existing components that
exceeded 50% of the fixed capital costs of building a new facility placed the plant
under NSPS, regardless of any change in emissions.26 With the advent of NAAQS
non-attainment provisions (Part D), Prevention of Significant Deterioration
provisions (Part C), and NSR in 1977, a different approach to defining modification
was appropriate as the focus was shifted from enforcing NSPS emission rates to
compliance with NAAQS and PSD. In promulgating regulations for the PSD and
non-attainment programs, EPA defined "significant" increase in emissions in terms
of tons per year emitted by a major source. For sulfur dioxide and nitrogen oxides,
the threshold is 40 tons per year.27 Facilities that exceed that threshold are subject
to NSR.

     Enforcing these thresholds has been more difficult than their apparent clarity
would suggest. EPA's thresholds for the NSPS program generally represent no
practical constraint on life extension efforts by utilities. Most life extension efforts
improve the availability and reliability of generating units, not their capacity to
generate. Thus, their maximum hourly emission rate would not change. Likewise,
most life extension efforts cost far less than the 50% asset value threshold.

     NSR review has a far more sensitive trigger ­ a tonnage increase in pollutant
output. Because life extension does improve availability and reliability, it is likely
to increase emissions over levels emitted before the life extension activities were
undertaken. But how does one measure the change? What are the baselines28?

      These issues came to a head in the late 1980s when EPA decided to enforce
NSR against facilities undergoing life extension efforts. In 1988, the EPA ruled that
a life extension project by Wisconsin Electric Power Company (WEPCO) met the
trigger for NSR because of the potential for increased emissions from the facilities
after the project compared with actual emissions from the facilities before the project.


24
     Section 111(a)(4).
25
     40 CFR 60.14(a) (1975).
26
     40 CFR 60.15 (1975).
27
     For PSD, see 40 CFR 52.21(b)(23)(i); for nonattainment, see 40 CFR 52.24(f)(10)
28
   Defining the baseline has been a key issue. Every powerplant has what is called
"nameplate" capacity, which indicates its theoretical size; but the actual output is defined
by its "operating capacity," which is determined by the engineering and operational details
of the individual plant. Moreover, from an engineering perspective, the operating capacity
declines over time as a result of boiler deterioration, pipe clogging, and other predictable
changes due to use. The issue is, then, what level of capacity restored by renovations trigger
NSR: only renovations that increase capacity beyond the facility's nameplate capacity?
those that increase capacity beyond the original operating capacity? those that increase
capacity above an engineering-defined capacity that projects declines over time? Or those
that increase potential emissions above the actual emissions before the modification?
                                          CRS-10

After considerable litigation29 and congressional debate, EPA modified this "actual
to potential" emissions trigger with respect to electric utilities in 1992.30 The new
"test" to determine the applicability of NSR compares a facility's actual emissions
before the modification with its projected actual emissions after the modification
("actual to future actual"). Specifically, "actual emissions" equal the facility's
average emission rate during a 2-year period out of the preceding 5 years before the
proposed change. "Future actual" is the product of the facility's projected emission
rate after the change and its projected actual utilization based on historical and other
data. These are the current NSR regulations for utility plants.

How Does Routine Maintenance Fit?
      Fundamental to the debate on NSR enforcement with respect to existing
facilities is the notion of "routine maintenance." In promulgating implementing
regulations, EPA exempted certain activities from the definition of physical or
operational change. Among those activities exempted was: "maintenance, repair, and
replacement which the Administrator determines to be routine for a source
category...."31 In addition, increases in production rates that do not involve capital
expenditures do not constitute a modification. Responding to this situation, utilities
began to spread out their life extension efforts in an attempt to make them fit into
their routine maintenance schedules.32 Indeed, the term "life extension" has fallen
out of the professional literature, replaced with terms like capital improvement,
performance improvement and unit integrity, condition assessment, life operation
management, review of continued operating requirements, and asset management.33
The commonly used term currently is rehabilitation program.34 By spreading out the
life extension efforts and integrating them into facilities' operation and maintenance
schedules, the distinction between "modification" and "routine maintenance" is
effectively blurred, and arguably, eliminated.




29
     Wisconsin Electric Power Company v. Reilly, 893 F.2d 901 (7th Cir. 1990).
30
      57 Federal Register 32314-32339 (July 21, 1992).
31
     40 CFR 60.14(e)(1)
32
  As observed by Robert Smock, Editor, "Power Plant Life Extension Trend Takes New
Directions," Power Engineering (February 1989): "There are signs that many utilities will
not use the term "life extension" to describe their spending on old power plants, even though
extended life is one of the major goals of the spending program. The reason for the aversion
to the term lies in the 1970 Clean Air Act. That federal law requires all power plants
constructed after August, 1971 to restrict emissions of air pollutants such as sulfur dioxide.
Plants built prior to 1971 are exempt, which includes most of the early candidates for life
extensions. The problem is that the law also says that grandfathered plants can lose their
exemption if they are "modified" or "reconstructed" in a major way and emission of
proscribed pollutants are increased."(p. 21)
33
  Robert G. Presnak and Bock H. Yee, "Life Extension: The Benefits Are Real," Power
Engineering (December 1993), pp. 25-27
34
 For a current view of managing existing facilities, see Jason Makansi, "Rehab: Get the
Most from the Existing Asset Base," Power (June 1999), pp. 30-40.
                                          CRS-11

     These "rehabilitation" practices that extend the design life of a power plant
represents a change in what had earlier been considered accepted maintenance
practices: Before the early 1980s, power plants were generally assumed to have fixed
lives ­ 30-40 years ­ after which they would be replaced or relegated to cycle or
peaking duties. In its 1981 Technical Assessment Guide, The Electric Power
Research Institute (EPRI) defined a unit life as follows:

        Unit life is an estimate of the book life of the plant. The maintenance costs
        include sufficient funds to replace minor equipment that wears out before the
        unit life shown.35

In its cost analyses for coal-fired powerplants, this unit life was assumed to be 30
years.36 By its 1986 Technical Assessment Guide, the definition of unit life was the
same, but the assumed unit life for a coal-fired powerplant was 40 years.37

      The flux in the notion of fixed powerplant lives was evident in the early 1980s
debate on proposed acid rain legislation. In utility analyses of anticipated cost of
retrofitting their existing powerplants with additional pollution controls, utilities split
on the issue of retirement, either as a pollution control strategy, or as utility policy
in general. For example, American Electric Power, a leading opponent of such
legislation, conducted its cost analysis with assigned specific retirement dates for its
existing powerplants ranging from 30-40 years. Indeed, it considered early
retirement to be a viable, cost effective pollution control option.38 In contrast,
analyses by other utilities assumed neither any specific retirement dates, nor early
retirement as a control option.39

     Up to this time, routine maintenance practices did not attempt to arrest or
reverse the normal deterioration of the powerplant's performance over its life span.
Industry aging trends with respect to powerplant performance with standard
maintenance practices (as suggested by the EPRI definition) are well documented.40
In general, aging affects both the efficiency of the powerplant along with its
reliability and availability. Degradation of key components, such as turbines,
waterwall tubing, and reheaters, slowly reduces a powerplant's efficiency in


35
 Electric Power Research Institute, TAG ­ Technical Assessment Guide, Palo Alto: EPRI,
(May 1982), p. App B-48.
36
     ibid, p. App B-55
37
 Electric Power Research Institute, TAG ­ Technical Assessment Guide (volume 1:
Electricity Supply ­ 1986), Palo Alto: EPRI (December 1986), p. B-43.
38
  See: American Electric Power, "Acid Rain Control Costs," in Acid Rain: A Technical
Inquiry, Hearings before the Committee on Environment and Public Works, U.S. Senate,
May 25 and 27, 1982, p. 736.
39
 For example, see: ibid., Responses to Written Questions, pp., 748 (Southern Company
Services), 756 (Public Service of Indiana), 767 (Indianapolis Power & Light), 790 (Ohio
Edison).
40
 In particular, see: H. H. Heiges and H. G. Stoll, "Power Plant and Turbine-Generator
Upgrading Economics," presented at EPRI and EEI's Fossil Plant Life Extension Workshop,
June, 1984.
                                       CRS-12

converting heat to steam and steam to electricity. The result is a higher heat rate and
less output. As shown in Figure 1, "average industry maintenance practice" results
in heat rates increasing by about 0.3 percent annually during the first ten years of
operation, dropping to below 0.2 percent after that.41
                Figure 1: Trend of Power Plant Heat Rate with Age




Figure 2: Impact of Power Plant Aging on Reliability of Fossil-Fired Units 50
                                to 200 Mw




41
     ibid., pp. 12-2 - 12.3.
                                       CRS-13

      Likewise, the aging of components eventually increases the forced outage rate
of powerplants as component failure becomes more frequent. As indicated in Figure
2, reliability of coal-fired facilities peak at between 10 and 20 years of service and
then begins to deteriorate. By 35 years of operation, a facility's forced-outage rate
has increased by 10 percentage points. In particular, older facilities begin to have
significantly longer outages as they age, in line with the failure of major equipment,
such as the turbine-generator.42

      As indicated by the data presented in table 3, these documented trends based on
1980 "average industry maintenance practices" are not occurring. Heat rates for coal-
fired facilities are remaining relatively stable while capacity factors are increasing
substantially. It is obvious that the rehabilitation programs utilities initiated in the
1980s and continuing to the present have been successful in dramatically reducing
the aging process with respect to coal-fired facilities. However, is this success a
violation of the modification definition of NSR? If "routine maintenance" is defined
in terms of "average industry maintenance practice" at the time of the 1970 or 1977
Clean Air Act Amendments, then a strong case can be made that it is ­ major
components are being replaced or upgraded that would not have been under average
industry maintenance practices of that time. Yet, if "routine maintenance" is
interpreted to mean industry practices at the current time, then one can argue that
rehabilitation has become routine over the past 20 years, and thus does not represent
a modification.

      This is fundamental to the way one views the proposed clarifications to the
definition of routine maintenance proposed by EPA. If one believes that EPA's
routine maintenance exemption as enunciated in the 1970s was delimited and not a
license to rehabilitate existing facilities, then one would conclude that many of the
industry's rehabilitation activities of the last 20 years go beyond what NSR
requirements allow. Thus, any argument by the current Administration that its
proposed NSR revisions would reduce emissions beyond that required under current
law would be untenable as enforcement of current law would require existing sources
subject to NSR to meet the stringent standards of either BACT or LAER. This
perspective that applying NSR requirements to rehabilitation would reduce emissions
is consistent with the enforcement initiative of the Clinton Administration, an
initiative for which the Bush Administration has stated its support.

      In contrast, if one believes that an exemption for routine maintenance is
appropriate and should be defined in terms of current industry practices, then one
would conclude that the potential threat of NSR (and the installation of BACT or
LAER) prevents owners from making cost-effective improvements in the overall
performance and efficiency of their existing facilities (e.g., improved heat rates).
From this perspective, NSR discourages plant owners from upgrading facilities
operating with old, worn-out, inefficient components, thereby foregoing opportunities
to conserve energy and to reduce carbon dioxide emissions by installing newer, more
efficient components. This perspective that NSR discourages energy efficiency is




42
     ibid., pp. 12-3 - 12.5.
                                           CRS-14

reflected in the Bush Administration's proposed revisions to routine maintenance
published in December, 2002.43

     This second view that rehabilitation is in fact routine also reflects the defense
of many of the utilities sued by the Justice Department under the Clinton
Administration. For them, rehabilitation programs are the norm for the industry and,
therefore, should not trigger NSR. In its proposed revisions to the definition of
routine maintenance, the Bush Administration cited analyses by the Tennessee Valley
Authority (TVA) and First Energy that they would have "lost" 32% and 39% of their
coal-fired capacity respectively, if they had capped their emissions under a "narrow"
routine maintenance exclusion.44 With the decision of the Bush Administration to
support revisions to NSR, utilities subject to litigation originating under the Clinton
Administration's enforcement initiative are using EPA's new policy position as a
defense.45

Emissions Impact
      In announcing the NSR suits in 1999, the EPA Administrator stated that
"controlling the sulfur dioxide and nitrogen oxides from these plants could lead to
an 85 to 95 percent reduction respectively in these pollutants."46 Based on her
statement, this would reduce SO2 emissions by 1.87 million tons and NOx emissions
by 0.63 million tons. Also, given the widespread nature of life extension efforts, it
is reasonable to assume that further reductions would be achieved as other utilities
either installed BACT or retired their offending facilities. Thus, at first glance, it
would appear that very substantial emission reductions could be achieved by rigorous
enforcement of NSR's regulations using the existing definition of "routine
maintenance" rather than EPA proposed new one.

    The best analysis of future possibilities under current NSR regulations is by the
Energy Information Administration (EIA).47 The three relevant scenarios are: (1)


43
     67 Federal Register 80290-80314 (December 31, 2002).
44
     67 Federal Register 80302 (December 31, 2002)
45
  For example, on January 8, 2003, Southern Indiana Gas & Electric Company (SIGECO)
filed a "notice of supplemental authority" with the U.S. District Court for the Southern
District of Indiana arguing that EPA's proposed revisions undercuts the government's case
against it. Specifically, the company argues that its activities that invoke the lawsuit are far
smaller than those that would be allowed under the revised rule, and that language in the
proposal supports its argument that the company did not receive fair notice of the
interpretation underlying the enforcement action. On February 18, 2003, the U.S. District
Court for the Southern District of Indiana rejected the claims by SIGECO, calling testimony
by SIGECO experts on the routine maintenance issue "irrelevant and unpersuasive." This
follows a ruling on February 13, 2003 by the same Court that "EPA's interpretation for
routine maintenance is reasonable and persuasive."
46
    Carol M. Browner, Administrator, Remarks Prepared for Delivery, Clean Air
Enforcement Press Conference (Washington, D.C.: November 3, 1999).
47
     Energy Information Administration, Strategies for Reducing Multiple Emissions from
                                                                          (continued...)
                                           CRS-15

reference: no enforcement (including halting current lawsuits); (2) NSR 32:
enforcement limited to the current lawsuits; and (3) NSR All: enforcement expanded
to include all coal-fired plants over 25 megawatts. The projected 2010 sulfur dioxide
(SO2) and nitrogen oxides (NOx) results under these three scenarios are presented in
table 5. As indicated, depending on one's expectation with respect to NSR
enforcement in lieu of the EPA proposed rule on routine maintenance, the difference
in emissions could be on the order of a factor of five.

     Table 5: EIA's 2010 NSR Reference Cases: Emissions from
               Coal-fired Electric Generating Facilities

          Scenario                    NOx Emissions                   SO2 Emissions
                                       (million tons)                  (million tons)
 Reference                                   4.20                            9.70
 NSR 32                                      3.78                            9.10
 NSR All                                     1.56                            1.94

Source: EIA, Strategies for Reducing Multiple Emissions from Power Plants, table 20.

      However, the CAA is a complex piece of legislation built up over time. In the
case of SO2 any reduction achieved under NSR would interact with reduction
requirements under title IV ­ a SO2 reduction program designed with different
premises than NSR. Specifically, title IV limits total SO2 emissions from utilities to
8.9 million tons beginning in the year 2000, with interim reductions required in 1995.
The cap is enforced through tonnage limitations at individual existing utility plants
and by an emission offset requirement for new facilities. SO2 emissions from most
existing sources are capped at a specified emission rate times a historical (1985-
1987) average fuel consumption level. Thus the tonnage limitation is based on preset
and historical data, not regulatory limits. To implement the program, title IV created
a comprehensive emissions allowance system. An allowance is a limited
authorization to emit a ton of SO2 during or after a specified year. Issued by EPA,
allowances are allocated to existing facilities in accordance with the emission
rate/fuel consumption formulas detailed in the law. Such allowances may be used
at the plant they are allocated to, or they can be traded or banked for future use or
sale. The program has been very successful with nearly 100% compliance.

     This 1990 CAA Amendments program does not integrate well with the 1977
CAA Amendments NSR program. Except that they both focus on existing facilities
and SO2, they have little in common. The NSR is concerned with modifications at
existing facilities and installation of BACT. Title IV doesn't address whether
existing facilities continue operation or not, or whether a specific facility installs
BACT or not; compliance with the cap is the determining criterion. NSR is an
enforcement mechanism to assure compliance with individual plant standards; title

47
 (...continued)
Electric Power Plants with Advanced Technology Scenarios, chapter 5: Potential Impacts
of New Source Review Actions (October 2001), pp. 57-63.
                                         CRS-16

IV is a program to reduce aggregate SO2 emissions by permitting utilities
considerable flexibility in determining appropriate compliance strategies.

      The current SO2 NSPS, the "floor" for any BACT or LAER determination, is
a percentage reduction requirement that reduces SO2 emissions by 70%-90%,
depending on the coal burned. However, the allocations under title IV for existing
coal-fired facilities is not as stringent and can be met with low-sulfur coal. Thus, any
facility that installed BACT under NSR would "overcontrol" SO2 under title IV, and,
therefore, have excess allowances available for sale or to bank for future use.
Consequently, any reductions achieved because of NSR enforcement could be
rendered moot by title IV, if the affected plant subsequently sold its SO2 reduction
to some other facility not covered by an NSR action.48 Except for any TVA
reductions, the net result would be no reductions, at least theoretically. Title IV does
not provide for adjusting allowance allocations as a result of NSR enforcement.
Rather, the law explicitly bases its allowance allocations on historical data, not on
any presumption of compliance with NSPS or SIP requirements. To avoid this
"allowance trap," either Congress would have to change the law, or utilities would
have to agree to surrender the excess allowances created by any NSR enforcement
action. Indeed, NSR settlements and agreements in principle resulting from EPA's
enforcement initiative have included the retirement of SO2 allowances that the
utilities could have used to emit additional pollution elsewhere.49

      The situation with potential NOx reduction is more complex. First, there is the
interaction of NSR and the NOx NSPS. Unlike the very stringent SO2 NSPS, the
NOx NSPS historically has not reflected the cutting edge in technology
development.50 Until the new standard was set in 1998, the NOx NSPS for coal-fired
facilities was 0.6/0.5 lb. of NOx per million Btu of heat input, depending on the type
of coal burned. This standard, set in 1979, could be met with fairly simple
combustion modifications or low-NOx burners, and did not require the installation
of pollution control devices such as selective catalytic reduction (SCR). Indeed, the
standard did not reflect the state of the art with respect to low-NOx burners.

     In 1998, EPA promulgated a new NOx NSPS for coal-fired facilities of 0.15 lb.
of NOx per million Btu ­ a standard more in line with available technology.
However, this new standard was challenged in court. In September, 1999, the D.C.
Court of Appeals vacated the new NOx NSPS with respect to modified utility boilers,
while later upholding the NSPS with respect to new sources.51 By vacating the


48
  The TVA Compliance Order would require retirement of allowances equal to any SO2
reductions achieved as a result of the compliance order.
49
 For example, see U.S. Environmental Protection Agency, "United States and New Jersey
Announce Clean Air Act Coal-fired Power Plant Settlement With PSEG Fossil LLC Effect
Will Cut New Jersey Industrial Sulfur Dioxide Emissions by 32%," EPA Press Release,
January 23, 2002.
50
  Larry Parker, Nitrogen Oxides and Electric Utilities: Revising the NSPS, CRS Report 96-
737 ENR (October 13, 1998).
51
     Lignite Energy Council v. Environmental Protection Agency, Order No. 98-1525, D.C.
                                                                           (continued...)
                                         CRS-17

modified standard, the NSPS for modified sources returned to the previous 1979
standard until such time as EPA proposes a revised NSPS. As a result, the floor for
determining BACT or LAER for modified coal-fired sources is unclear at the current
time. If the floor is the current modified NSPS as set in 1979, reductions achieved
by NSR enforcement would be considerably less than that suggested by some. In
contrast, if the floor is the new 1998 NSPS, the reduction would be substantial.
Surveying BACT determinations over the time period 1991-1995 sheds no light on
what BACT might be currently: data indicate permitted emission rates ranged from
0.15 to 0.5 lb. per million Btu.52 Thus, it is difficult at the current time to project what
any actual NOx reduction would be achieved by increased NSR enforcement.

     The confusion is exacerbated by the interaction of NSR and title IV. The NOx
reduction program under title IV differs substantially from the SO2 program. Like the
NSPS program, the title IV NOx program is based on emission rates, not tonnage
limitations. The difference is that the emission rate for the title IV program is set for
existing facilities to be achieved in 1995 or 2000 (depending on the facility),
regardless of whether the facility is modified or not. In addition, the rate limitation
for most boilers under title IV is 0.45 to 0.5 lb. per million Btu, or more stringent
than the 1979 NOx NSPS. Thus, you have the curious situation of some existing
coal-fired facilities having emission controls since 1995 that are more stringent than
the existing NSPS ­ a situation that continues currently with the court action on the
modified NSPS.

     A third interaction is between NSR and the NOx SIP call. The NOx SIP Call
(also called the Ozone Transport Rule), requires 21 eastern and midwestern States
and the District of Columbia to reduce emissions of NOx to prevent interstate
transport of ozone pollution.53 To achieve the necessary reductions, EPA stipulates
an emission budget for each of the affected states, with each state free to decide on
what controls to use to maintain emissions within those budgets. With much of the
reduction likely to come from coal-fired electric powerplants, EPA is recommending
States agree to a regional cap and trade program to implement the reduction program.
The potential interaction between this program and an NSR enforcement is unclear,
as the allowances used in any NOx trading program would have a regulatory, rather
than a statutory, basis.




51
  (...continued)
Court of Appeals (September 21, 1999). In a separate opinion issued December 21, 1999,
the court upheld the NSPS with respect to new sources.
52
  Office of Air and Radiation, EPA, Analyzing Electric Power Generation under the CAAA
(July 1996).
53
  Environmental Protection Agency, Findings of Significant Contribution and Rulemaking
for Certain States in the Ozone Transport Assessment Group Region for Purposes of
Reducing Regional Transport of Ozone, 63 Federal Register 57356-57538, October 27,
1998. Further litigation removed the state of Wisconsin from the list of states affected by
the rule.
                                            CRS-18

                             Proposed Alternatives
     Alternatives to the current NSR situation focus on either energy or
environmental considerations. For example, the Administration's proposed revisions
to routine maintenance are an outgrowth of the President's National Energy Policy
and are intended "to provide greater regulatory certainty without sacrificing the
current level of environmental protection...." The policy goal is not to reduce
emissions. As stated in the proposed rule:

        What these [EPA's] analyses indicate, however, is that regardless of which
        scenario is closest to what comes to pass, none of the proposed provisions related
        to the RMRR [routine maintenance, repair, replacement] exclusion will have a
        significant impact on emissions from the power sector.54

     The Bush Administration's NSR focus on energy policy contrasts directly with
the focus of the Clinton Administration's enforcement initiative where, by seeking
to enforce NSR requirements, EPA attempted to exploit an existing authority to
reduce emissions. Likewise, proposed legislation in the 107th Congress to define a
modification in terms of a power plant's age was another attempt to use NSR as an
emissions reduction program.

     NSR is one approach that the Clean Air Act takes to control emissions from
existing sources, but arguably more efficient and more effective methods to ensure
declining emissions from existing sources over time have been developed since NSR
was added to the CAA in 1977. For example, title IV of the CAA, enacted in 1990,
explicitly and substantially reduces SO2 and NOx emissions from existing utility
plants. In fact, title IV reduced more SO2 emissions from coal-fired electric
generating facilities in its first year of implementation (1995) than NSR has in its 20
years of existence. The "cap and trade" program has had nearly100% compliance
(indeed, substantial over-compliance); the implicit logic of EPA's lawsuits suggests
NSR's compliance with respect to electric generating facilities has been near zero.
The title IV program began without significant delays (SO2 program on-time, NOx
program 1 year late); the EPA lawsuits could take years to resolve with uncertain
results.

Reform NSR to Permit Current Utility Rehabilitation
Practices: The Administration Proposal
     Published in December, 2002, the Bush Administration's proposed definition
of routine maintenance would permit current utility rehabilitation practices to
continue without the threat of triggering NSR. As suggested above, the proposed
changes to the definition of routine maintenance are focused on energy policy
considerations, not environmental considerations. If one's baseline is current utility
emissions, EPA believes, as stated above, the proposed changes will have no
significant impact on emissions.




54
     67 Federal Register 80304 (December 31, 2002).
                                         CRS-19

      The proposed rule suggests two approaches for determining whether a utility's
activities exceed routine maintenance. Both approaches involve the use of a cost
trigger, and EPA suggests that the two could be used together, or the second approach
could stand alone. The first category, "Annual Maintenance, Repair, and
Replacement Allowance," would provide an exemption for safety, reliability, and
efficiency activities whose capital and non-capital cost fell below a specific cost
threshold. The second category, "Equipment Replacement Approach," would
provide an exemption for replacing safety, reliability, and efficiency rated
components with new, functionally equivalent equipment if the cost of the
replacement components is below a specific threshold. Obviously, using a cost
threshold to define routine maintenance means that the stringency of NSR with
respect to an existing source would depend substantially on the cost estimate used to
set the trigger.

      However, no proposed estimates are provided in the proposed rule for an
"annual, maintenance, repair and replacement allowance." EPA's quantitative
discussion of such estimates in the rule consists of noting the IRS values for such
items (ranging from 0.5% to 20% of invested costs, depending on industry); and
estimates contained in standard reference manuals for the chemical process industry
(ranging from 2% to 10% for that industry). From this literature review, EPA
concludes: "Based on information contained in the resources mentioned above, the
appropriate annual maintenance percentages would be in the range of 0.5% to 20%,
depending on the industry."55 Even this broad conclusion is more precise than the
actual proposal as the proposal also states that EPA is considering whether or not to
exclude from the allowance calculation costs associated with replacing components
that experience unanticipated failure or a catastrophic failure.56

      With regard to a cost trigger with respect to the second approach EPA anchors
its discussion on the 50% of the assessed value reconstruction cost trigger of the
NSPS, stating:

         Thus, we believe that the 50% capital replacement threshold used under the
         NSPS might constitute an appropriate limitation on when identical or
         functionally equivalent replacement should qualify as RMRR under the
         equipment replacement provision without regard to other considerations.57

     EPA does not provide any analyses to reinforce its belief that 50% is an
appropriate cost trigger for its replacement approach, and notes that "there are other
considerations pointing in favor of a threshold lower than the 50% reconstruction
threshold that may be appropriate to bound the equipment replacement provision."58

     This position by EPA appears to reflect two somewhat contrasting perceptions
with respect to NSR.


55
     67 Federal Register 80298 (December 31, 2002).
56
     67 Federal Register 80299 (December 31, 2002).
57
     67 Federal Register 80301 (December 31, 2002).
58
     ibid.
                                             CRS-20

     First, EPA believes that it is not reasonable for the replacement approach to
exclude from NSR activities that involve the total replacement of an existing entire
process.59 However, a 50% cost trigger would, in fact, permit such activities, at least
for power plants. As CRS noted in reports beginning in 1985, the 50%
reconstruction trigger is not a serious constraint on utility rehabilitation activities.60
Indeed, a review of EPA's Applicability Determination Index (ADI) database
indicates no instance where the reconstruction provisions of the NSPS regulations
has been applied to an electric generating facility.61 EPA appears to recognize the
potential that a 50% cost trigger would never be invoked and, therefore, suggests a
limiting principle for rehabilitation programs based on "functional equivalence" of
replaced components. Even this may have problems, as stated by EPA:

         We recognize that it may sometimes be difficult to determine where to draw the
         line between an activity that should be treated as an excluded replacement
         activity and one that should be viewed as a physical change that might constitute
         a major modification when the replacement of equipment with identical or
         functionally equivalent equipment involves a large portion of an existing unit.
         At the same time, we believe it is important to provide some clear parameters for
         making this determination.62

Whether those parameters would be clearer than the current NSR trigger remains to
be seen.

      Second, while EPA believes that complete reconstruction should not be allowed,
it also believes that the breadth of exclusion permitted by any definition of routine
maintenance is irrelevant in terms of reducing powerplant emissions. In a qualitative
discussion of utility behavior and the potential emissions impact of a "narrow"
definition of routine maintenance, EPA states:

         ...a narrow RMRR exclusion that is clearly established is not expected to achieve
         significant reduction in historic emission levels, and might even lead to area wide
         emissions increases. Most facilities would take lawful steps to avoid having to
         obtain an NSR permit that would impose strict limitations, even when
         replacements would be found under this narrow exclusion to be non-routine.63

     If the breadth of definition does not affect emissions, it is not clear why it
matters whether a utility can completely reconstruct a facility. If EPA's concerns are
primarily energy policy driven and focused on providing industry with clear
parameters, a simple cost trigger without any functional restraint is well within the
rationales presented in its routine maintenance proposal. Indeed, the Bush
Administration has stated that it believes that multi-pollutant legislation would be
more effective and efficient in reducing pollutants than rigorous NSR enforcement.

59
     ibid.
60
 Larry Parker, et. al., The Clean Air Act and Proposed Acid Rain Legislation: Can We Get
There From Here? CRS Report 85-50 (February 21, 1985), p. 46.
61
     Telephone conversation with EPA, February 3, 2003.
62
     67 Federal Register 80301 (December 31, 2002)
63
     67 Federal Register 80302 (December 31, 2002)
                                           CRS-21

Thus, the Administration "Clear Skies" proposal includes an exemption from NSR
for facilities complying with provisions contained in the bill.64

Replace NSR with Multi-pollutant Legislation65
      If the object of the Clinton Administration's NSR enforcement initiative was to
reduce SO2 emissions from coal-fired powerplants, the most straightforward
alternative would be to lower the cap on such emissions contained in title IV. The
practical effect of the 1990 SO2 cap was to reduce SO2 emissions from existing
facilities to the level required by the 1971 NSPS. The effect on new sources was to
reduce the NSPS to zero, as all emissions now have to be offset. Lowering the
existing cap by about two-thirds would achieve roughly the same emission reductions
as all existing powerplants meeting the 1978 NSPS, but utilities would have some
flexibility in achieving such reductions. Admittedly, utilities would get credit for
shutdowns that they would not get under NSR enforcement; however, the
administrative and cost advantages of the allowance system might be considered
worth it. In any case, it would require new legislation, which could be a long drawn
out process.

      Similarly, a new "cap and trade" program for NOx would eliminate the
uncertainties involved in the NSR enforcement debate, and, potentially, in several
other EPA initiatives with respect to NOx emissions. In that context, EPA has been
strongly urging states to consider a regional cap and trade program in implementing
its NOx SIP Call, and any possible compliance with Section 126 petitions. Indeed,
EPA made such a program a part of its proposed Federal Implementation Plan (FIP)
for states that do not submit adequate SIPs under the SIP Call and its compliance
plan for implementing approved Section 126 petitions. However, to implement a
regionwide cap and trade program under the NOx SIP Call for NOx would require
either extraordinary cooperation between the states affected (because of the SIP
process), or new EPA authority.

     The Administration apparently agrees with this position. In February 2002, the
Bush Administration announced its "Clear Skies" proposal to place emission caps on
electric utility emissions of SO2, NOx and mercury (Hg). Implemented through a
tradeable allowance program the emissions caps would be imposed in two phases:
2010 (2008 in the case of NOx) and 2018. It was introduced as part of a complete
rewrite of Title IV of the Clean Air Act on July 26, 2002, as H.R. 5266. It was
introduced in the Senate on July 29 as S. 2815. No action was taken on the proposal
in the 107th Congress.

    In addition to the emission caps, H.R. 5266/S. 2815 would have substantially
modified or eliminated several provisions in the Clean Air Act with respect to


64
     Introduced in the 107th Congress as H.R. 5266 and S. 2815.
65
  For a comprehensive discussion of multi-pollutant strategies, see: Larry Parker and John
Blodgett, Electricity Generation and Air Quality: Multi-Pollutant Strategies, CRS Report
RL30878 (March 13, 2001); for a comparison of multi-pollutant legislation introduced in
the 107th Congress, see Larry Parker and John Blodgett, Air Quality: Multi-Pollutant
Legislation, CRS Report RL31326 (October 22, 2002).
                                           CRS-22

electric generating facilities. With respect to existing facilities, the bills provided an
exemption from NSR (and other provisions) for existing facilities that meet specific
requirements provided in the legislation.

     Replacing NSR with a cap and trade program is not without controversy.
Indeed, a report by EPA Region IX found that NSR is very compatible with a cap and
trade program.66 After examining implementation of California's RECLAIM
program from its inception in 1993 to the present, EPA concluded:

         RECLAIM's experience seems to demonstrate that cap and trade (CAT) can
         work with Clean Air Act (CAA) New Source Review (NSR). This may be a
         function of the types of sources included or the controls in place at many
         facilities. This lesson is contrary to the commonly reported federal view and
         should be further researched.67

      Others also see a conflict between NSR and multi-pollutant legislation. Multi-
pollutant legislation introduced by Senator Carper in the 107th Congress, S. 3135,
included provisions modifying NSR. Under S. 3135, NSR would have been triggered
if the capital costs of replacement components exceeded 50% of the construction
costs of a new facilities (similar to current reconstruction regulations and the
Administration's proposed second option) or if the rate of emissions (in terms of
pounds per megawatt-hour) increased. Unlike the Administration's regulatory
proposal, this modification of NSR would occur within the context of a
comprehensive series of emissions caps on SO2, NOx, Hg, and CO2 that are laid out
in the bill. The Administration's Clear Skies proposal does not include CO2.

Reform NSR to Reduce Emissions From Existing Facilities
      While the above proposal sees a lessening of NSR for existing facilities, either
for energy policy reasons or to reduce potential conflict with a cap and trade program,
other proposals see an aggressive definition of modification as complementing a cap
and trade program. For example, in the 107th Congress, H.R. 1256 (Waxman), and
S. 556, as reported by the Senate Committee on Environment and Public Works,
contained provisions that would have required all powerplants 30 years or older to
meet current NSPS requirements. Essentially, this legislation would have defined
"modification" in terms of plant age, not physical or operation change. It would be
relatively easy to implement, and, as indicated in table 5 previously, an "all NSR"
scenario would result in substantial emission reductions.

     Similar to S. 3135, the proposals introduced above modify NSR within the
context of a comprehensive series of emissions caps on SO2, NOx, and CO2, along
with unit-by-unit emission limitations on Hg. Currently, NSR for powerplants can
only result in reduced emissions of SO2, NOx, and particulate matter. There is no
NAAQS or NSPS for either Hg or CO2. Thus, to control these additional pollutants,


66
 U.S. Environmental Protection Agency, An Evaluation of the South Coast Air Quality
Management District's Regional Clean Air Incentives Market ­ Lessons in Environmental
Markets and Innovation (November, 2002).
67
     ibid., p. 68.
                                          CRS-23

additional control regimes would be necessary, particularly for CO2. By combining
NSR with multi-pollutant legislation, one provides a fairly clear picture as to the
direction of emission control regulation for the lifetime of a powerplant.

     However, this clarity comes at the price of flexibility with respect to utilities
complying with the emissions caps. Instead of using market mechanisms, such as
trading of emissions credits, to create a cost-effective reduction in all four pollutants,
the 30-year rule means that BACT or LAER for SO2, NOx, and particulate matter
would have to be installed on given plants, regardless of what a more comprehensive
compliance strategy might suggest. Thus, it is possible that combining a stringent
NSR with multi-pollutant legislation in the manner suggested by H.R. 1256 and S.
556 might increase the overall cost of compliance.


     Conclusion: NSR ­ Ambiguous, Meaningless or
                        Moot?
    Much of the popular debate on NSR has focused on "grandfathered"
powerplants. One example from a 1998 report by a public interest group states:

     The Clean Air Act of 1970, as amended in 1977 and 1990, contains a major
     exemption that allows older coal-burning power plants to emit between 4 and 10
     times the amount of pollution that new plants may emit under the Clean Air Act.
     In part, this colossal loophole exists because industry lobbyists argued
     successfully that its older plants would soon retire, and that therefore it would be
     wasteful to require expensive retrofits to control pollution from these plants.
     However, over 20 years later, many of these same plants, built in the 30s, 40s,
     50s and 60s, are still operating, largely without environmental controls.68

      The term "grandfathered powerplant" is a much used and little understood
concept employed in debate on emissions from existing powerplants. Specifically,
"grandfathered" is an ambiguous, and, in some cases, meaningless term generally
used to indicate whether a given powerplant is covered under Section 111 of the
Clean Air Act. Passed with the 1970 Clean Air Act Amendments, Section 111
requires the EPA to promulgate regulations defining the minimum controls necessary
for new sources (including power plants) regardless of their location. Called New
Source Performance Standards (NSPS), they require major new sources constructed
after their promulgation to install the best system of continuous emission reduction
which has been adequately demonstrated according to EPA. Currently, there are
NSPS regulations for powerplants that cover three pollutants ­ sulfur dioxide (SO2),
nitrogen oxides (NOx) , and particulate matter. Typically, "grandfathered" refers to
those plants (usually coal-fired powerplants) that were constructed before the
effective dates of those NSPS regulations and, hence, not subject to them. NSPS
regulations for powerplants were first promulgated in 1971 and revised in 1979. The
NOx NSPS regulations for powerplants were revised again in 1998. Instead of NSPS



68
  United States Public Interest Research Group, Lethal Loophole, U.S. PIRG Education
Fund (June, 1998), p. 3.
                                       CRS-24

requirements, such "grandfathered" sources must meet emission rate limits
established by a State Implementation Plan (SIP).

     Three aspects of the NSPS make the term "grandfathered" at best ambiguous:

·    Some emissions of concern, such as carbon dioxide (CO2) and mercury (Hg) are
     not criteria air pollutants, and, therefore, not covered by the NSPS for
     powerplants at the current time. Hence, "grandfathered" would not apply for
     these pollutants as all powerplants (indeed, all major sources of these pollutants)
     are "grandfathered."

·    EPA is required to review the NSPS every eight years, resulting in increased
     stringency for covered pollutants as technology improves (and for
     determinations of BACT and LAER). Therefore, what powerplants are
     "grandfathered" is ambiguous as there is no set baseline. For example, the
     NSPS for NOx was revised in 1998 to a stringency that only a couple of
     commercially operating coal-fired powerplants met at the time; by that standard,
     virtually all coal-fired powerplants are "grandfathered" with respect to NOx
     emissions.

·    Title IV of the 1990 Clean Air Act Amendments changed the regulation of
     existing powerplants with respect to SO2 and NOx. In some cases, the
     requirements under title IV for existing sources are more stringent than some of
     the existing or previous NSPS. For example, under phase 1, some existing
     "grandfathered" powerplants were required in 1995 to meet NOx standards
     more stringent than then-existing NSPS NOx requirements for new
     powerplants. Likewise, under phase 2 of title IV, existing "grandfathered" coal-
     fired powerplants were required in 2000 to meet SO2 standards that are
     essentially equivalent to (if not more stringent than) the 1971 NSPS for SO2.
     The term "grandfathered" is essentially meaningless under such circumstances.

     If the focus of debate about "grandfathered" powerplants is NOx emissions, then
age of plant is not a relevant consideration ­ fuel source is. Coal-fired facilities,
regardless of age, are the relevant focus of any effort to increase NOx controls. If the
focus of debate about "grandfathered" powerplants is SO2 emissions, then the title
IV emissions cap is the relevant consideration. There, age was a consideration in
allocating emission credits; however, the relevant definition was not based on NSPS
compliance (or any other CAA compliance), but on whether the plant was
operational, under construction, or planned at the time of enactment. Indeed, the
NSPS for SO2 for new powerplants is in some ways moot ­ all new sources must
completely offset their emissions under the cap as they receive no allocation of
emission credits. The NSPS is effectively zero net emissions. Thus, if reducing SO2
from electric generating facilities is the goal, shrinking the current cap on SO2 is the
most logical approach. Likewise, a cap on NOx emission is a logical extension for
reducing NOx emissions from electric generating facilities. EPA favors this approach
in addressing transported pollution programs in the Northeast where the agency has
proposed state-by-state emissions caps.

     The WEPCO decision precipitated public debate and congressional oversight,
and the Bush Administration's proposed revisions to NSR have done the same.
                                       CRS-25

Unlike previous efforts to address NSR, the focus of the Administration's proposed
routine maintenance rule is not to reduce pollution, but to facilitate electricity
production. The proposed rule's attempt to reduce barriers to energy production by
widening the definition of routine maintenance is not attached to legislation to reduce
any emissions effects. The Administration has introduced legislation to reduce
emissions from powerplants, but promulgation of its proposed routine maintenance
rule is not contingent on passage of that legislation. The Administration believes the
linkage is not critical as it believes that the definition of routine maintenance will
have no effect on emissions. Others may disagree.

------------------------------------------------------------------------------
For other versions of this document, see http://wikileaks.org/wiki/CRS-RL31757