The Heritage Foundation

Executive Memorandum #792 on Energy and Environment

November 19, 2001

November 19, 2001 | Executive Memorandum on Energy and Environment

Time for EPA to Reevaluate Its Reinterpretation of New SourceReview Rules

When Congress established the New Source Review (NSR) program under the amended Clean Air Act of 1970, its goal was to improve air quality by addressing new sources of pollution during the permitting of new or expanded facilities. Congress understood that requiring companies to retrofit old facilities to meet the new standards would be prohibitively expensive. In 1998, however, the Environmental Protection Agency (EPA) under President Clinton arbitrarily reinterpreted the NSR rules to force existing facilities to meet the new standards whenever they modify or upgrade their facilities. The EPA did not follow proper procedural processes when it issued this reinterpretation, even though it contradicts established regulations, past EPA actions, and state permitting decisions.

This reinterpretation will have adverse consequences. Not only will it expand the scope of the NSR program, but the cost for meeting the new standards will force companies to delay routine maintenance projects or the installation of new technology to improve efficiency. This could cause disruptions in energy supplies and open the door to significant price volatility. In fact, since November 1999, the U.S. Department of Justice has filed multimillion-dollar lawsuits on behalf of the EPA against over 50 coal-fired power plants in the Midwest and South by retroactively applying the new interpretation to past replacement and maintenance activities.

Recognizing the potential for harm, President Bush directed the EPA and the Department of Energy to review the NSR program and report back by August 17 on its potential effects on energy supply, investment, market efficiencies, and the environment. The EPA, however, has delayed submitting this report to the White House; moreover, it is apparently trying to link NSR reform to a legislative proposal that seeks further reductions of air "pollutants" at power plants, effectively holding reform hostage to the fate of that proposal. The President should order the EPA to withdraw its reinterpretation of NSR rules and to work with the industry to develop an open administrative process to reform this onerous regulatory approach.

Reinterpretation Defies Congressional Intent
The NSR program was designed to impose costly pre-construction permitting and state-of-the-art control requirements on new sources of industrial pollution. Congress "grandfathered" existing facilities from these stringent requirements, except when facility modifications would result in significant increases in emissions. Consistent with Congress's intent to restrain new sources of air pollution, EPA's regulation excluded from the review process such activities as routine maintenance, repair, and replacement, and increases in hours of operation or production rates up to design capacity.

Until 1998, the EPA and industries had long understood that routine repair, maintenance, and replacement activities were not "major modifications" of a facility. But unexpectedly in 1998, and without proper notice and comment under the Federal Administrative Procedure Act (Title 5, U.S. Code), the EPA reinterpreted this rule to subject commonplace repair and replacement projects at existing facilities to the costly and burdensome NSR rules.

In a May 2000 letter to Detroit Edison Company, the EPA explained its arbitrary reinterpretation of the regulatory exclusion from NSR for "routine maintenance, repair and replacement." In the past, the test for "routineness" was whether a repair or replacement was commonplace or customary in an industrial category. Now the EPA would use a 24-factor test to determine "routineness," which effectively makes nearly all routine projects at existing facilities trigger NSR. This significant change in the basis of the review drastically exceeds Congress's intent, is procedurally deficient, and all but eliminates the exclusionary rule for existing facilities.

Adverse Economic and Energy Effects
To maintain safe and efficient operations, facilities must undertake repair and replacement projects on a regular basis and address emergencies as they arise. Under EPA's reinterpretations, such activities will trigger NSR review, which forces facilities to delay routine maintenance for 12 to 36 months while they await EPA approval. They face operating inefficiently until a shutdown or until forced outages render them inoperable and unable to provide adequate electricity or fuel to consumers. The arbitrary reinterpretation thus impedes efforts to improve energy efficiency and improve air quality.

The new EPA interpretation also could add billions of dollars in direct and indirect costs to industry, severely inhibiting a company's ability to compete domestically or internationally. Consumers will bear the burden of this flawed policy through increased prices and outages. Diminishing energy security at a time when the nation can ill afford it makes no sense.

In a March 2001 letter to Vice President Richard Cheney, Senators James Inhofe (R-OK) and John Breaux (D-LA) said that EPA's new interpretation created "great uncertainty" about which projects an industry can undertake in the near future to assure adequate and reliable energy supplies. Moreover, "utilities and refineries find themselves in a position where they cannot undertake these very desirable and important projects." The petrochemical and refinery industries, for example, have constrained their ability to expand domestic refining capacity, increase the supply of cleaner burning fuels, and enhance energy efficiency.

The EPA's reinterpretation, which also discourages innovation, conflicts with its prior treatment of technological improvements. For 29 years, the agency allowed industrial facilities to redesign and improve facilities with commonplace repair and replacement projects without claiming that using state-of-the art technology forces a new source review. In fact, in issuing what is now commonly known as the "WEPCo rule" about testing for emissions, EPA explained in 1992 that it "in no way intends to discourage physical or operational changes [to a facility] that increase efficiency or reliability or lower operating costs" or improve other "operational characteristics." It stated that it would treat these types of upgrades the same as other repairs and replacements. Ironically, this new interpretation will prolong industry reliance on older, dirtier technologies that maintain high levels of emissions.

Conclusion
The uncertainty surrounding EPA's arbitrary reinterpretation of the NSR rule impedes industries' ability to invest in projects that will improve energy efficiency and enhance environmental quality. The rule itself jeopardizes the nation's energy and fuel supplies. Such consequences of regulatory action are unacceptable. The President should direct the EPA to withdraw its reinterpretation and reinstate prior policy. Further, the Justice Department should terminate all actions on behalf of the EPA that are based on the flawed reinterpretation. The Administration and Congress should work together to simplify the NSR program to promote facilities' own ability to meet the program's long-term goals.

Charli E. Coon  is Senior Policy Analyst for Energy and the Environment in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

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