In this testimony I would like to touch on three topics: the role of new source requirements in the nation's air quality management program; features of the current regulatory program that need improvement; and some of the general claims surrounding efforts to enforce the Act's NSR programs against various electric utility companies.
I. The Clean Air Act's Dual-Track Air Quality Strategy
In 1970 Congress adopted a dual-track program to protect and enhance our nation's air quality. The first program calls on states to adopt comprehensive pollution control programs under state law to achieve air quality objectives set forth in National Ambient Air Quality Standards (NAAQS) adopted by EPA. This ambient program is an example of the "assimilative capacity" approach to environmental management based on the belief that the environment can assimilate a certain amount of dirt or toxins released from human activities without causing identifiable harm. This approach starts by identifying exposure levels of pollution that current research indicates may be tolerable for humans and ecosystems and then seeks to reduce emissions from pollution sources enough to meet the maximum tolerable exposure targets.
The 1970 Act's ambient management program strengthened previous efforts enacted by Congress in the 1960s and relied on states to set control rules for pollution sources at levels just tough enough to bring total pollution down to the level of the national ambient standards. Implicit in this approach is that an area's air quality determines the amount of clean-up required of sources. Even if there are readily available means of reducing a source's pollution, a state is not required to adopt such measures if not needed to meet the NAAQS.
But Congress did not rely exclusively on the assimilative approach to air quality protection in the 1970 Act. Congress adopted another strategy designed to minimize air pollution by requiring sources to meet emission performance standards based on modern "best practices" in pollution abatement. The performance standard approach does not set required levels of control based on the air quality conditions of particular areas. Rather, the required emission reductions are determined by assessing how much polluting processes can be cleaned up, taking account of technical and economic constraints.
Congress expected that future ambient goals would likely be more ambitious than 1970's defined goals and wanted an independent program that would be effective in reducing total emissions over time. Congress' intent in the performance standard program was to use the force of new purchases and investments to incorporate advances in pollution prevention and control as a complementary strategy to the ambient management program.
Congress applied the performance standard approach to both stationary and mobile sources but with some important distinctions. In the mobile source area (cars, trucks, buses), only entirely new vehicles were subject to federally-established modern performance standards. Congress was presented with analyses demonstrating that with traditional rates of "fleet turnover," most of the benefits of tighter new car standards would be experienced in less than 10 years.
In requiring performance standards for stationary sources, Congress adopted more sweeping provisions. The Act requires that both new and modified stationary sources must meet modern performance standards. As I will discuss later, Congress in 1970 also adopted a very expansive definition of "modification."
The 1970 Act's principal tool for improved pollution control for new and modified sources was the New Source Performance Standard (NSPS), a national, categorical requirement based on very good, but not the best, pollution minimizing practices. In 1977, when the Act was amended, Congress adopted the new source review (NSR) and prevention of significant deterioration (PSD) programs to strengthen efforts to minimize emissions and air quality impacts from new and modified sources. In the 1977 Amendments Congress expanded both the scope of the rigor of the requirements for improved performance from new and modified sources. Coverage would no longer be limited to the categories for which EPA had adopted NSPS requirements; rather all new and modified sources above certain pollution tonnage thresholds would be required to minimize their emissions. Second, the level of the performance requirement would not be tied to often out-of-date NSPS; rather case-by-case determinations of current best performance would be required. Third, covered sources locating in clean areas as well as dirty areas would have to pass ambient impact tests to prevent a worsening of air quality. In 1990, Congress again increased its emphasis on pollution prevention from new and modified sources, reducing the size thresholds for coverage in badly polluted areas.
In sum, Congress has repeatedly endorsed the concept of modern performance standards for new and modified pollution sources, adopting, in successive amendments, strengthened requirements intended to make the NSR programs more effective in reducing pollution.
However, these programs have for twenty years been the subject of criticism from industry representatives and from many academic economists. The economists' argument runs, "why should new sources be regulated more strictly than existing sources? After all, air quality is determined by how much pollution is released and where it is released. The air certainly cannot tell the difference between a pound of pollution from a plant built in 1965 and that from a plant built in 1995."
Critics of the Act's new source requirements argue that instead of regulating new and old sources differently, we should simply establish our desired air quality objectives and allow them to be met by the most efficient means. Under this approach, agencies first would do research to identify the adverse effects of air pollution on health and welfare; next, agencies would convert this research into environmental standards; then, the agencies would design pollution control programs to achieve the environmental standards; finally, agencies and pollution sources would implement the pollution control programs and the air would become cleaner.
This critique and prescription has a certain superficial appeal. As I have mentioned, the ambient management program has been a central program of the Clean Air Act since 1970 and it should continue. The question is whether it is prudent to rely on the ambient standards approach as the only strategy for improving and protecting air quality. In my view that would be a mistake.
The 1970 and later Clean Air Acts reflect a judgment by Congress that the ambient standards approach should be the major pollution control strategy but that it should be complemented by other independently functioning programs such as the NSR and Mobile Source Emission Standards programs. I think that this judgment was a wise one. The history of air pollution control efforts both before and after the 1970 Act reveals that the ambient standards approach, while conceptually sound, has its weak spots, which when exploited by well-organized opposition, can prevent the program from solving air quality problems in a timely fashion.
First, the Government's capacity to acquire unambiguous information about natural processes is very limited. The research is complex, expensive, and time consuming. Due to perennial shortages of money, talent, and time, most of the studies undertaken in the past and those being conducted now are less than perfect. As a result, their conclusions are easy to pick apart and dismiss as not dispositive. Moreover, the health effects we are concerned about are increasingly related to chronic exposures to low levels of combinations of pollutants. We have never conducted an adequate study to characterize the effects from these kinds of exposures and none is even planned.
The uncertainties in what we know about air pollution effects in turn lead to controversy and delay in establishing environmental standards. All of us, including this Committee, have experienced this controversy in the continuing disputes about EPA's revised ozone and particulate standards.
The next step in the process -- control program design -- can also be affected. Different interests argue at length about how emissions in a particular location relate to air quality in that location or elsewhere. This can and has led to uncertainty, controversy and delay in designing pollution reduction programs to meet environmental standards. The continuing fights over efforts to address transported air pollution are an example of this problem.
Another weak spot in the ambient standards abatement program is that it often requires large changes in established patterns of behavior. When an air pollution control agency adopts a regulation that applies to an existing source it is trying to get firms to spend their money, time, and thought in ways they have not planned. Not surprisingly, these firms often resist, which leads to uncertainty, controversy and delay in the final step of the ambient standards approach, the actual implementation of pollution reduction measures in the real world.
This resistance to change often feeds back to the first step in the ambient standards process, setting the standards themselves. Pressure is mounted to weaken existing standards and to oppose the setting of new ones. Again, the unified fight of industrial polluters against the revision of the ozone and particulate standards highlights this problem.
These weaknesses do not call for abandoning the ambient standards approach. But they do suggest the wisdom of complementing that approach with programs that are strong where the ambient approach is weak. The Act's NSR programs meet that need. Implemented properly, these programs can assure that as new well-controlled sources replace old ones, we will make progress in reducing emissions as our economy grows. By controlling the major pollutants, the new source programs also serve as a hedge against unidentified risks associated with those pollutants. By dealing with engineering facts rather than biological facts, the new source programs usually involve more manageable factual controversies. We are relatively good at measuring the dollar costs of meeting performance standards and calculating the emission reductions such standards can provide. Finally, by focusing on new and modified sources, the new source programs can lessen the social and political costs of reducing pollution. Because they operate at the time firms are making new investments, these programs allow firms to plan pollution prevention and control into their plant operations.
All of this does not argue that the new source programs should replace the ambient program, only that they should complement that program. For the new source programs have weaknesses in areas where the ambient program performs better. The new source programs focus on the highly technical details of engineering and thus are too insulated from effective public participation. Controlling pollution only from new sources often is not the cheapest way to achieve a unit of emissions reduction. In my view, the premium we pay to accomplish reductions where the ambient program has failed to deliver them is a prudent investment, but controls on new and modified sources should not be our only program. Finally, new source programs, because they are technology based, do not guarantee a desirable level of environmental quality. We will degrade our air quality unless we improve pollution reducing methods and processes at least as fast as we grow. The new source programs do not create adequate incentives for such improvements and thus must be complemented by the ambient standards and PSD programs which do recognize that clean air is a scarce resource.
In sum, the Clean Air Act's dual track approach to air quality management employs the principle of diversification to reduce risks. In an uncertain world, a prudent investor will forego putting all his money into the one stock with the apparent highest yield. Instead he will spread his risk by selecting a range of investments some which offer high risk and high yield and others which offer less risk and less yield. Similarly, the Act resembles a stable ecosystem which has a diversity of species. Such systems are much less likely to fail in the face of adversity than systems that have no diversity.
II. How Should EPA's NSR Programs be "Reformed"?
NRDC has participated over the last decade in stakeholder discussions convened by EPA to consider ways to improve the Act's NSR programs. A major reason these talks have made little progress is the lack of agreement on the purposes of these programs. There are two major purposes: to assure that new investments do not degrade air quality and to assure that when new investments are made, emissions are minimized by requiring sources to meet performance standards that reflect modern emission prevention capabilities.
While a great deal of attention has been paid to the complexity of the NSR permitting process, the larger environmental failure of the NSR program is that the program has not brought down emissions as Congress intended. Citizens, pollution control agencies, and members of Congress are increasingly aware of the fact that grandfathered air pollution sources are more and more the central impediment to clean air progress. Contrary to the intent of Congress, investments in new production have not resulted in existing grandfathered sources being replaced by facilities that must meet modern performance standards. As a result, grandfathered sources dominate the pollution inventory throughout the United States.
The degree to which old stationary sources determine our nation's burden of air pollution is striking, especially when compared to the impact of old cars on pollution loads. For example, fossil electric powerplants built more than 20 years ago are responsible for 84% of total US nitrogen oxides (NOx) pollution from that sector and 88% of sulfur dioxide ( SOx). In contrast, 20-year-old cars contribute less than 7% of US car NOx pollution and 3% of that sector's VOC (volatile organic compounds) pollution. It is obvious that the Title II new mobile source program has done quite a good job of preventing old cars from dominating today's pollution problems but the Title I new stationary source program has performed miserably on this score.
There are some obvious reasons for the NSR program's poor pollution reduction performance. First, the rules themselves contain too many loopholes that allow sources to avoid NSR even though they continue to make significant investments year after year. Second, as recent enforcement actions have alleged, there are many instances of firms escaping the requirements of the rules by misclassifying projects in an unlawful manner.
Reform of the NSR program should address its failure to produce pollution reduction from old grandfathered sources as a priority issue as well as explore ways to simplify the NSR process. A genuine reform of the program should aim to make two basic changes: the program should apply to more industrial projects than it now does and the review process should be streamlined to enable decisions to be made quickly while protecting the public's right to participate. Instead, the "reform" proposals EPA has published over the last decade have concentrated almost entirely on changes that would expand the loopholes of the current rules so that even fewer grandfathered sources would be required to clean up as they upgraded their capital equipment.
The combination of categorical exemptions and exclusions, weak rules for calculating emission increases, and broad provisions for "netting out" of review allow far too many sources to avoid the NSR program indefinitely. When illegal evasions of the rules are added to the many exemption opportunities in the rules, we get the results we see most sources never encounter the federal NSR program and their pollution remains with us. NRDC has filed lengthy comments with EPA on these issues over the years and I will not burden the Subcommittee with a recitation of the details here. I would like to mention one area that of "netting." Netting is the jargon for a transaction that allows new projects at existing sources to escape NSR. In essence it allows the source operator to count "reductions" from grandfathered pieces of polluting equipment at the site in calculating whether a new project will result in an emission increase that would require new source review. By allowing sources to avoid the modern performance requirements of NSR, netting preserves the status quo, perpetuating excessively high levels of pollution originally emitted by poorly-controlled grandfathered pollution sources.
Netting rewards sources that have managed to manipulate the current system to preserve high levels of emissions. Current netting policy allows those high emission levels to function as an asset that can be deployed to avoid NSR/PSD review. Thus, netting operates at cross purposes with sound air quality objectives. It creates incentives to keep emissions at unnecessarily high levels and perpetuates an inefficient allocation of emission "shares" by providing the greatest rewards to the most polluting sources. Netting frustrates one of the primary objectives of the NSR/PSD program, which is to link requirements for modern emission performance standards to investments, so that emissions are reduced as the economy expands. Instead, netting allows existing emission levels to be perpetuated indefinitely.
While the netting rules are complex, the fundamental problem with the approach is easy to understand. Netting allows a grandfathered pollution source to "bequeath" its excessive pollution privileges to its descendant, the new piece of equipment. Under netting, the new piece of equipment is not required to meet modern performance standards; it can emit at much higher levels by relying on the pollution entitlements transferred from old, grandfathered pieces of equipment. In this way, excessive amounts of pollution can live on long after the original sources have disappeared. Netting resembles the former hereditary peerage system in England, where membership in the House of Lords and other privileges were handed down from generation to generation. England recently acknowledged this system has no proper place in a modern democracy. We too need to eliminate the pollution peerage that is imbedded in EPA's netting rules.
For nonattainment NSR, the Supreme Court in Chevron made it clear that EPA has the authority to eliminate the availability of netting altogether. One perverse effect of netting in nonattainment NSR is that new equipment is installed without meeting "lowest achievable emission rate" (LAER) performance standards. This in turn means that a greater level of emission reduction is required to offset the new equipment's emissions than if the new equipment had met LAER standards. These additional emission reductions must come from a finite pool of existing emission sources whose total pollution load must be further reduced for the area to attain the ambient standards. Thus, the effect of NSR netting is to allow existing source owners to unilaterally dedicate the cheapest and easiest emission reductions in a nonattainment area to compensate for poorly-controlled new units, leaving state and local control agencies with the more difficult task of developing an attainment plan from the more expensive, politically controversial remaining emission reduction opportunities.
EPA's original defense of its 1981 change to allow netting under the nonattainment NSR program was that areas choosing such an approach would be required to develop timely attainment plans in any event so that there would be no environmental harm. It is now the year 2000 and EPA can no longer deny that the theory it presented to the Supreme Court in the early 1980s has no basis in reality. In fact, areas have not succeeded in developing timely and adequate attainment plans. State and local agencies have protested repeatedly to EPA that they cannot identify sufficient, politically feasible emission reductions to demonstrate timely attainment. EPA has responded with policies that have permitted lengthy delays in the submission of adequate plans. Given that the premise for EPA's initial adoption of NSR netting in 1981 has not been achieved, it is time for nonattainment netting to be abolished.
To restrict netting in the PSD NSR program, EPA should reform its definition of contemporaneous so that only activities which are part of the project for which the netting claim is made can qualify. Second, EPA should reduce the netting credits available for shutting down or limiting operations at existing units to reflect the obvious fact that the new emission-increasing projects will have greater longevity than the older existing units that are generating the netting credits. For example, consider a source that proposes to build a 100-ton-per-year new unit with a 35-year useful life and to net out the increase with the shutdown of a 100-ton source that has only 5 years of life remaining. The stream of emission reductions from the shutdown source ends after 5 years but the emission increases from the new source continue for an additional 30 years. There clearly is an enormous increase in the cumulative emissions from the facility over the life of the new project that is not captured if netting credits are given for the shutdown unit based only on a comparison one year's emissions.
III. Enforcement of NSR Requirements
The "new source review" enforcement actions filed against major electric utilities are an effort to end a flagrant abuse of the Clean Air Act "grandfather clause" provisions relating to existing pollution sources. As mentioned above, Congress in the 1970 Clean Air Act did include a grandfather clause that exempted existing stationary pollution sources from the duty to meet modern emission performance standards. However, Congress did not intend to extend a permanent, blanket exemption to existing sources. Thus, Congress provided that when an existing source was "modified" it would become subject to new source requirements. Moreover, Congress defined "modification" extremely broadly, including in the term "any physical change or change in method of operation" that increases emissions. Congress adopted an expansive definition of the term to prevent sources from evading new performance standards with piecemeal changes. EPA regulations narrow the Act's modification definition somewhat by including an exemption for "routine maintenance, repair, and replacement." It is this exemption the defendant companies claim shield their plants from NSR. However, the challenged projects cannot be called routine, as a matter of law, logic, good policy, or history. Public information documents an industry capital investment strategy, starting in the 1980s, to upgrade existing plants to run longer and harder rather than letting them retire and be replaced by new capacity. For instance, one of the challenged projects involved removing existing 700 horsepower fans (the "lungs" of a powerplant) and replacing them with new 900 horsepower fans. If this is routine replacement, then so is taking the original 350 horsepower engine out of your car and "replacing" it with a 450 horsepower engine. In essence, the industry decided to sell more electricity by building new capacity into their existing machines rather than building entirely new units. This practice has both kept pollution at unreasonably high levels and has functioned as a barrier to entry into the market keeping many new clean, efficient units from being built. While the industry is now labeling these projects as "routine maintenance," utility equipment vendors as well as utility witnesses in public utility commission rate cases have described these projects as going beyond maintenance and providing capacity that otherwise would have to be created by building new units. Indeed, in a recent filing with the Department of Energy, American Electric Power Co. explicitly referred to some of the challenged projects as not including "routine maintenance" activities. Industry's claim today is that any rebuild project, regardless of scope is "routine" as long as the rebuilt plant's maximum production capacity is no greater than the plant's original maximum design capacity. This may remind you of the fabled "one-hundred-year-old" axe: it's only had two new heads and four new handles over its life. The industry's interpretation would read the "modification" provision out of the Act, creating a permanent grandfather exemption for all the capacity that existed prior to 1970. And when the industry litigated their interpretation over a decade ago, they lost. The utility industry in the 1980's challenged a Reagan-era EPA ruling that rebuilding a deteriorated plant to "restore" original capacity could not fit within the routine maintenance exemption. In 1990, the 7th Circuit rejected industry claims that original design capacity should define the boundary for the "routine" exemption. Wisconsin Electric Power Co. v. Reilly, 893 F.2d 901. In WEPCO, the court flatly rejected industry's interpretation as one that would confer indefinite immunity from new source standards, contrary to Congress' intent. When the WEPCO court upheld EPA, the industry prevailed on the Office of Management and Budget (OMB) to kill a broader examination of industry practices initiated by EPA. Industry also lobbied Congress following the court ruling to amend the law to create broad new exemptions for utility modification projects. When they did not get new statutory exemptions, industry lobbied the Bush Administration for regulatory exemptions. In 1992, the Bush Administration amended the NSR rules to give the utility industry a more generous formula for calculating whether an emission increase had occurred. But the rule did not change the definition of routine maintenance. After the 1992 rule had been in place for a few years, EPA again launched an investigation to determine why so few NSR applications had been filed. The industry again sought intervention by OMB, using the Paperwork Reduction Act as a pretext. While this effort delayed EPA's investigation for a time, this time OMB ultimately rejected the industry's Paperwork Act claims. The industry complains that EPA has not published a detailed reference book listing exactly which projects are "routine maintenance" and which are not. But EPA has explained in numerous communications with utilities and other industries, that determining the correct classification of many projects is a highly fact-specific undertaking. For that reason, These letters are similar to the opinion letters that the IRS uses to answer fact-dependent tax questions. The utility industry implies that EPA has not given them fair notice of their NSR obligations. The opposite is true. It has been EPA's practice for 30 years to issue "applicability determination" letters to resolve questions about whether a specific project would trigger NSR. Industry officials have known from the beginning of their rebuild programs that these types of projects could trigger NSR but they did not seek determinations from EPA for any of the challenged projects. Minutes of a 1984 industry discussion shed some light on the industry's thinking. The minutes report a consensus that companies should -- § identify their projects as "upgraded maintenance programs;" § "downplay the life extension aspects of these projects (and extended retirement dates) by referring to them as plant restoration (reliability/availability improvement) projects;" § deal with the air regulatory issues "at the state and local level and not elevate [them] to the status of a national environmental issue." (ie, don't ask EPA because you won't like the answer) EPRI, Proceedings: Fossil Plant Life Extension Conference and Workshop (1984) at 27-4. As a final argument to inspire fear in the public, the industry has claimed that they now cannot make needed repairs for fear of triggering additional enforcement actions. There is no merit to this claim. EPA's NSR rules for utilities provide generous "baseline" emission formulas (the maximum polluting hour in the past five years and the average of the two maximum polluting years of the previous five years). A company that commits to not exceed these generous limits can carry out any maintenance or other project it wishes, routine or otherwise, without triggering NSR. Companies who refuse to commit to limit their pollution increases can seek applicability determinations from EPA. In short we believe EPA and the other plaintiffs are doing the right thing by enforcing the NSR law as Congress intended. The results of that enforcement should be to achieve a major reduction in pollution from these plants and to improve all industries' attention to their NSR obligations when they modify their facilities.
Thank you for this opportunity to testify. I am happy to answer any questions you may have.