Making Sense of the New Source Review

Despite a pending court challenge, recent changes to the Clean Air Act's "new source review" regulation may make it easier to expand or modify your facility.

For more than a decade, the Clean Air Act's new source review (NSR) process has sparked dismay in the hearts and pocketbooks of plant managers across America. The NSR process applies to two types of activities: construction of "new sources" of air emissions, and major modifications at existing facilities. Whether a particular process or equipment change at an existing facility triggers NSR has been a major headache from the beginning.

Background

As EPA itself acknowledged, the complexity of the NSR process generated regulatory uncertainty while adding a year or more to the time needed to review plant modifications at an estimated additional cost of $1 million. From a plant manager's perspective, an incorrect analysis of whether NSR applies could mean fines and penalties, as well as the possibility of enforcement actions by citizens' groups for "unpermitted" air emissions. For environmentalists, however, any modification to a permitted process should mandate an upgrade to the best available emissions control technology because these upgrades would hasten industry's progress to achieve health-based air quality standards to the benefit of all.

Against this background, EPA began a rulemaking proceeding that has spanned 10 years and three administrations from beginning to final rulemaking. The lengthy process culminated in rules that became effective at the end of 2003. The effective date of one component of the new regulations the equipment replacement rule has been halted by a court order pending a court appeal of the rules.

In what follows, I will explain how the old NSR process worked for plant modifications, discuss the highlights of new NSR rules, and provide examples of how these new regulations work.

The Old NSR

If the facility was an existing major stationery source, a major modification triggering NSR was defined as "a physical change or a change in a method of operation" that results either in an "increase in existing emissions" or that "emits a new pollutant." Simple examples of physical or operational changes that required NSR are: a new production line, reconfiguration of a process or installation of new equipment in an existing production line.

Not all changes, however, automatically triggered NSR. First, the changes must have resulted in a "significant net increase" of a pollutant for NSR to come into play. These levels varied by type of pollutant and whether the plant was in an "attainment" or "nonattainment" area. (Attainment areas are places with good air quality; nonattainment regions have poor air quality.)

Second, the changes must not have fallen under a number of exemptions to the NSR rules that allow for changes such as routine maintenance or changes in hours of operation.

To determine whether there is a net increase in emissions, one had to know current emissions (usually based on 2 years of data) and estimate future emissions using the "potential to emit" test developed by EPA. This test has been among the most controversial regulations in the NSR process because it focuses on the change's maximum capacity to emit, using a 24 hour-per-day, 365 day-per-year operating schedule, even if the physical change or change in method of operation would never, in reality, operate at the maximum capacity. Industry viewed this test as unjustifiably hampering its ability to make beneficial operational changes without triggering the costly NSR process.

To illustrate this concern, EPA cited the following simple example as part of its explanation of why NSR reform was necessary. A refinery wanted to install a heat exchanger to recover waste heat from one of its gasoline- producing units. The recovery of waste heat from this unit would mean that the heaters and boilers at the refinery would be used less, thereby reducing overall energy usage and emissions from those heaters and boilers. However, because NSR assumed future operations would be at full capacity, the project showed "potential" emissions increases that could trigger NSR. The refinery management determined that NSR would make the project uneconomical and it would not go forward.

New NSR Rules

In December 2002, EPA released final rules describing significant changes in the NSR rules that were designed to address a number of perceived flaws in the NSR program. These five changes are:

  • Actual to projected actual emissions method This is a new way to calculate emissions that may trigger NSR review. It allows plant operators to be realistic in estimating the post-modification emissions from modified units. The regulations provide for projection of an annual rate in tons per year reflecting the maximum annual rate that will occur in either 5 or 10 years, beginning immediately after the modification. Factors that go into calculating that rate are hourly emissions rates, taking permit limitations into account, and the projected level of utilization of the unit using historical data and projected changes.
  • Baseline Actual Emissions The facility's baseline actual emissions are a key component of calculating whether a modification causes an increase in emissions. EPA decided to change the baseline actual emissions to any consecutive 24-month period over the past 10 years as opposed to the prior rule of looking at the last 2 years of emissions data.
  • Clean Units After NSR review and installation of the best applicable control technology as part of the permitting process, the "clean units" designation allows the plant operator to make certain changes to those units in the future without undergoing additional NSR. Units that did not undergo NSR can still be eligible for clean unit designation on a case-by-case basis.
  • Pollution Control Projects (PCPs) Specific "pollution control projects" listed in the final rules have been designated as not subject to NSR, as long as there would be no adverse air quality regulations. Examples include conventional or advanced flue gas desulfurization and, more importantly, projects designed to switch to a less polluting fuel.
  • Plant-wide Activity Limitations (PALs) This is a voluntary option that will allow plant managers to manage facility-wide emissions as long as the overall emissions from the facility remained under the facility "cap." Changes can be made to processes or emissions without triggering NSR, as long as overall emissions from the plant remain below the facility cap. The trade-off is that the plant operator must monitor air emissions from all units, which may not otherwise be required.

Avoiding NSR

The most important exemption from NSR for plant managers is routine maintenance, repair or replacement of equipment (RMRR). Other exemptions from NSR include increases in hours of operation or production rate according to the terms of the existing permit or changes in ownership.

Prior to this recent rulemaking, there were no regulations that expressly defined the RMRR exemption as it applied to the myriad of industrial processes and units in operation nationwide. Instead, EPA applied the RMRR exemption on a case-by-case basis using a multi-factor test either in the course of an official "applicability determination" or in an enforcement action for failure to comply with NSR. This was a flexible approach, but failed to provide any certainty for the regulated community and caused interminable delays.

This recent change is especially significant because, in the eyes of the regulated community, EPA's interpretation of what constitutes "routine maintenance" has narrowed since the agency's 1998 NSR Enforcement Initiative. Changes that were formerly exempt have been triggering NSR, according to industry.

For example, EPA took enforcement actions against a number of refineries over the scope of their modifications under routine maintenance or equipment replacement, saying the changes should have required NSR. Refiners argued that rebuilding or replacing fluid catalytic cracking units and modifying slide valves to increase catalyst circulation were the types of modifications that were covered by exemptions.

Settlement of these actions by the refineries led to significant emissions reductions, but resulted in compliance costs of over $1.3 billion. Annual nitrogen oxide emissions were cut by more than 40,000 tons; sulfur oxide emissions fell by over 80,000 tons. The billion dollar compliance costs, along with the magnitude of the emission reductions, illustrate the stakes that are at issue for industry and EPA in determining which modifications are exempt from NSR and which are not.

Routine Maintenance

The refinery heat exchanger example is one of many that prompted EPA to rewrite the RMRR exemption. The new EPA rule expressly provides that replacement of components of a process unit with identical components or their functional equivalent will unequivocally come within the scope of the RMRR exemption, provided that: (1) the cost of replacing the component falls below 20 percent of the replacement value of the process unit of which the component is a part; (2) the replacement does not change the unit's basic design parameters; (3) the unit continues to meet enforceable emission and operational limitations.

This is the so-called equipment replacement provision (ERP) of the RMRR. Even though ERP is not in force at press time because of pending court appeals, in my opinion it is the provision that could have the greatest practical impact for plant managers wishing to modernize their facilities.

If the provision survives, managers will need to answer the following questions:

  • What does "equipment replacement cost" mean? It means an estimate of the fixed capital cost of construction of a new process unit, on the current appraised value of the process unit or in the alternative, insurance value, investment valued adjusted for inflation or other alternative accounting procedure provided to the regulatory authority.
  • What does "process unit" mean? It means "any collection" of structures or equipment that processes, assembles, applies, blends or otherwise uses material inputs to produce or store an intermediate or a completed product. It does not include pollution control equipment unless that control equipment also has a dual function as process equipment.
  • What are "basic design parameters?" Replacement of equipment would also be required not to change the basic design parameters of the unit. This means, generally, for process units other than those units at a steam generating facility, the maximum rate of fuel or heat input, maximum rate of material input or maximum rate of product input.

Summary

EPA's recent revisions to the NSR program give plant operators a number of tools to make necessary changes to major sources without having to undergo NSR. While the most significant of these tools, the Equipment Replacement Provision of the RMRR exemption, is not yet effective, the other five changes achieve the administration's goal of encouraging energy efficiency, safety and productivity.

Mary Ellen Hogan, resident in McDermott, Will & Emery's Los Angeles office, is a partner in the firm's OSHA/MSHA and Environmental Groups. She focuses her practice in federal and state OSHA law, environmental law and litigation, architect and engineer malpractice and toxic torts. Her clients include a broad range of construction companies, chemical manufacturers, and industries located in California and elsewhere in the United States. She served as a keynote speaker at a recent ABA Meeting on Environmental Litigation in Keystone, Colo.

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