NRECA S 2009 G&T LEGAL SEMINAR November, 2009 Seattle, Washington CURRENT ISSUES IN POWER PLANT PERMITTING

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1 NRECA S 2009 G&T LEGAL SEMINAR November, 2009 Seattle, Washington CURRENT ISSUES IN POWER PLANT PERMITTING Presented By: Kenneth A. Reich, Esq. kenneth.reich@leclairryan.com One International Place, Eleventh Floor Direct Phone: Boston, Massachusetts Direct Fax: Phone: \ Fax: Connecticut Avenue, N.W., Suite 600 Washington, D.C Phone: / Fax: CALIFORNIA \ CONNECTICUT \ MASSACHUSETTS \ MICHIGAN \ NEW JERSEY \ NEW YORK \ PENNSYLVANIA \ VIRGINIA \ WASHINGTON, D.C. A T T O R N E Y S A T L A W \ W W W. L E C L A I R R Y A N. C O M

2 NRECA S 2009 G&T LEGAL SEMINAR November, 2009 Seattle, Washington CURRENT ISSUES IN POWER PLANT PERMITTING Presented By: Kenneth A. Reich, Esq. 1 It has always been challenging to build electric power plants, particularly coalfired plants. A variety of groups - NIMBYS, BANANAS, and local and national environmental organizations come out of the woodwork to oppose or delay the project, and the law is in constant flux. The past few years have been even more challenging, putting aside the collapse of the financial markets and the current unwillingness of the Rural Utilities Service to fund base load plants. The Sierra Club led a national, fairly successful campaign against all things coal. The Bush Administration environmental rules were challenged and overturned at a stunning rate in the courts. Some states decided to depart from EPA s policies and guidance. In short, it has been chaos for power plant developers. This paper will briefly address four recent legal developments in the area of power plant permitting: (1) PM2.5 regulation; (2) the Maximum Achievable Control Technology hazardous air pollutant program as it applies to power plants; (3) the question whether integrated gasification combined cycle ( IGCC ) technology must be considered in a Best Available Control Technology ( BACT ) analysis for coal-fired 1 Kenneth A. Reich is a partner in the law firm of LeClairRyan, resident in the firm s Boston and District of Columbia offices, where he practices energy and environmental law. Mr. Reich is grateful to Richard A. Sugarman, Esq., an associate at LeClairRyan, for his assistance in the preparation of this paper. 2

3 power plants; and (4) EPA s policy regarding whether CO2 is subject to regulation for the purposes of new source review permitting. I. Current PM2.5 Issues in Permitting of Power Plants Particulate matter 2.5 ( PM2.5 ) is an air pollutant regulated under federal and state law. 2 PM2.5 is particulate matter that is less than or equal to 2.5 microns in size. PM10, which is particulate matter less than or equal to 10 microns in size, is also an air pollutant subject to regulation under federal and state law. Because PM2.5 is a regulated air pollutant, a BACT analysis must be performed for PM2.5 as part of a New Source Review ( NSR ) PSD permit application. 3 EPA has long taken the position that a straight BACT analysis for PM2.5 is infeasible due to a lack of reliable methods for measuring and monitoring PM 2.5 emissions and the absence of PM2.5 emissions factors. 4 Due to these difficulties, EPA policy has been to allow permit applicants to perform a BACT analysis of PM10 emissions as a surrogate for PM2.5 emissions. 5 Because PM2.5 emissions are a subset of PM10 emissions, this surrogate analysis results in a conservative estimate of PM2.5 that actually over-predicts PM2.5 concentrations. However, at least one state agency ignored EPA s surrogate policy and held that a power plant must perform a PM2.5 specific BACT analysis. 6 2 See 42 U.S.C. 7602; 40 C.F.R. Part 51 Appendix A. For purposes of this paper we will address only federal regulation of PM U.S.C. 7475(a)(4). 4 See Memorandum from John S. Seitz, Director Office of Air Quality Planning & Standards, to EPA Regions and various EPA personnel, with subject of Implementation New Source Review Requirements for PM2.5, October 23, See id. 6 In Re Southern Montana Electric Montana (Montana Board of Environmental Review AQ). Order dated May 30, The author represented Southern in this contested proceeding, which included a three day evidentiary hearing. 3

4 On May 16, 2008, EPA issued a final rule amending the PSD and nonattainment New Source Review ( NSR ) regulations to add specific requirements for the preconstruction review of PM This final rule addressed major source threshold, significant emissions rate, offset ratios for PM2.5, interpollutant trading for offsets, and applicability of NSR to PM2.5 precursors. The rule also provided for a grandfathering of the surrogate policy for permit applications submitted before the July 15, 2008, effective the date of the new rule. Earthjustice, on behalf of the Natural Resources Defense Council and Sierra Club, submitted a Petition for Reconsideration of four specific provisions of the final rule, including the grandfathering provision. On April 24, 2009, EPA stated its intention to convene a reconsideration proceeding for all four issues and to grant a three-month administrative stay of the grandfathering provision. EPA also indicated it would publish a notice of proposed rulemaking to propose repealing the grandfathering provision for PM2.5 in the federal PSD program, on the grounds that it was adopted without prior public notice and is no longer substantially justified in light of the alleged resolution of technical issues with respect to PM2.5 monitoring, emissions estimation, and air quality modeling that led to the PM10 surrogate policy Fed. Reg. 28,321 (May 16, 2008). On November 1, 2005 (70 Fed. Reg. 65,984) and on September 21, 2007 (72 Fed. Reg. 54,112), EPA proposed elements for the PSD program for PM2.5. The May 16, 2008, rule concerns the bulk of the major NSR program for PM2.5. That final rule, along with EPA s proposed rule on increments, significant impact levels, and significant monitoring concentrations (Sept. 21, 2007) when final, will represent the final elements necessary to implement the PM 2.5 PSD program. When both rules are promulgated and in effect, the PM2.5 PSD program will no longer use a PM10 program as a surrogate, as has been the practice under EPA s guidance. 73 Fed. Reg. at 28,324. 4

5 The administrative stay of the grandfathering provision became effective on June 1, On July 23, 2009 EPA proposed extending the stay until June 1, 2010 to allow it time to propose, take comment on, and issue a final action on issues that are associated with the grandfathering provision for PM2.5 that [it] propose[s] to repeal. 9 EPA made it clear in its Proposed Rule that it was not taking comments on any substantive issues concerning the repeal of the grandfathering provision for PM or on any other provisions subject to the reconsideration. 10 Instead, comments were being taken simply on the issue of how long to extend the existing administrative stay. 11 In sum, the current status of the surrogate rule is that it is being phased out but still has applicability in certain aspects of NSR permitting. However, some of the concerns about measuring PM2.5 emissions still remain. II. MACT Hazardous Air Pollutant Rules and Effect on Pending or Constructed New Sources Another high-profile issue in power plant permitting concerns the regulation of hazardous air pollutants ( HAPs ). Clean Air Act Section 112(d) requires EPA to promulgate Maximum Achievable Control Technology ( MACT ) emission standards for all listed source categories. Since December 20, 2000, coal-fired and oil-fired electric utility steam generating units ( EGUs ) have been Clean Air Act Section 112(c) listed source categories. 12 EPA, however, has never promulgated MACT standards for coal Fed. Reg. 26,098 (June 1, 2009) Fed Reg. 36,427, 36,429 (July 23, 2009). 10 Id. 11 Id. 12 See 65 Fed. Reg. 79,825, 79,831 (Dec. 20, 2000). 5

6 fired or oil-fired EGUs. In this situation, 112(g) requires that prior to actual construction or reconstruction of a major source of HAPs, the state or other local permitting authority must set MACT requirements on a case-by-case basis. 13 In 2005, EPA removed coal- and oil-fired EGUs from the section 112(c) source category, opting instead to issue the Clean Air Mercury Rule ( CAMR ) which regulated mercury emissions from coal-fired EGUs under section 111 of the Act. 14 The Section 112(n) Revision Rule and CAMR were challenged by many states and advocacy groups and on February 8, 2008, the D.C. Circuit, as the appellate court with review authority over EPA s rulemaking process, vacated both rules in their entirety 15. On March 14, 2008, the DC Circuit issued its mandate. The EPA and industry groups appealed this decision to the Supreme Court and later EPA withdrew its petition for certiorari. By order dated January 7, 2009 the Supreme Court decided not to hear the case. 16 The vacature of the CAMR and Revision rules created a great amount of uncertainty within industry regarding permitted projects. Neither the courts nor EPA addressed the issue of the effect of the ruling on those entities which had already been issued a permit and begun construction. Would they need to perform a retroactive a caseby-case MACT analysis, the result of which could require expensive retrofitting of the source? In an attempt to address this issue, EPA issued a memorandum dated January 7, 2009, entitled Application of CAA Section 112(g) to Coal- and Oil-Fired Electric Utility 13 Clean Air Act 112(g)(2)(B); 40 CFR See 70 Fed. Reg. 15,994 (March 29, 2005). 15 New Jersey v. EPA, 517 F.3d See EPA v. New Jersey, 129 S. Ct (2009). 6

7 Steam Generating Units that Began Actual Construction or Reconstruction Between March 29, 2005 and March 14, EPA stated in the memo that coal- and oil-fired EGUs remain on the Section 112(c) list and, therefore, are subject to section 112(g) which provides no person may begin actual construction, or reconstruction of a major source of HAPs unless the permitting authority determines on a case-by-case basis that new source MACT requirements will be met. The memo also confirmed that coal- and oil-fired EGUs are major sources and must comply with CAA Section 112(g). EPA allegedly contacted specific sources that could be impacted by this letter to inform them of EPA s interpretation of the requirements. This issue played out with one of the larger electric coops. On July 31, 2006, the Kentucky Division for Air Quality issued a PSD/Title V permit authorizing the construction of a CFB Unit 4 at East Kentucky Power Cooperative, Inc. s Hugh L. Spurlock Generating Station. Section 112(g) case-by-case MACT limits for HAPs emitted from the unit were not included in the permit. Instead, the permit contained a mercury limit for the new unit, in accordance with CAMR. Actual construction of CFB Unit 4 began on or about June 13, 2006, nearly two years before the vacature of the CAMR rule. Sierra Club, however, filed a petition with EPA requesting EPA to object to East Kentucky s air permit because, among other reasons, it alleged that the permit lacked HAP emission limits under section 112(g). On September 21, 2009, the EPA Administrator agreed with the petitioner and issued a decision that the KDAQ needed to develop case-by-case MACT limits consistent with section 112(g),... revise the EKPC Spurlock Title V permit to include 17 The memorandum is available at 7

8 the case-by-case MACT limits on HAP emissions and, if necessary, [set] a compliance schedule with dates for EKPC Spurlock to come into compliance with the case-by-case MACT limits. This case certainly sends a signal that EPA intends to enforce the MACT HAP requirements against all major sources, even those that may have been permitted and/or begun construction before the date of the DC Circuit s decision. III. Consideration of Integrated Gasification Combined Cycle at BACT Step 1 In yet another developing area of permitting, the US EPA Environmental Appeals Board ( EAB ) weighed in on the issue of whether the integrated gasification combined cycle ( IGCC ) technology had to be considered at Step 1 of the Best Available Control Technology ( BACT ) analysis for a coal-fired electric generating facility. In a break with past EPA guidance and rulings, 18 EAB held in its ruling dated September 24, 2009 that IGCC did need to be considered. 19 The background of the case is that on July 31, 2008, EPA Region 9 issued a final PSD permit to Desert Rock Energy Company, LLC ( Desert Rock ). 20 The permit was for a 1,500 megawatt coal-fired electric generating facility being built near Farmington, New Mexico. 21 On April 27, 2009, after the change in Administration, EPA Region 9 moved for a voluntary remand of the permit to consider certain issues. 22 This motion was 18 See, e.g., Deseret Power Cooperative (Bonanza), PSD No (Nov. 13, 2008). 19 In re Desert Rock Energy Company, LLC, PSD Permit No. AZP 04-01, PSD Appeal Nos , 08-04, & (EAB Sept. 24, 2009), at See id. at See id. 22 See id. 8

9 opposed by several parties, including Desert Rock 23 One issue addressed by the EAB was whether EPA was wrong not to have considered IGCC at Step 1 of the BACT analysis. 24 The Clean Air Act and EPA s regulations require, as part of the PSD preconstruction source review, that new major stationary sources and major modifications employ the best available control technology ( BACT ) to minimize emissions of regulated pollutants. 25 The EAB has recognized that BACT is a sitespecific determination that results in the selection of an emission limitation representing application of control technology or methods appropriate for the facility. 26 EPA utilizes a top down approach for determining BACT. This top-down analysis requires that all available control technologies be ranked in descending order of effectiveness. 27 The top technology is considered BACT unless the permit applicant determines and EPA agrees that technical considerations, or energy, environmental or economic impacts justify another choice. 28 Step 1 of the analysis requires consideration of all demonstrated and potentially applicable control technology alternatives. 29 It has long been EPA policy that the applicant and EPA do not need to consider technologies at Step 1 that redefine 23 See id. at See id. at U.S.C. 7475(a)(4); 40 C.F.R (j)(2). 26 Desert Rock at 52 (citing In re Prairie State Generating Co., PSD Appeal No , slip op. at 15 (EAB Aug. 24, 2006) (remaining citations omitted). 27 See Office of Air Quality Planning & Standards, US EPA, New Source Review Workshop Manual (draft Oct. 1990) ( NSR Manual ), at B See id. 29 See id. at B.10. 9

10 the source. 30. In other words, because it is the permit applicant who defines the proposed facility s end, object, aim, or purpose that is the facility s basic design for reasons independent of permitting, the EPA will not force an applicant to consider an alternative that fundamentally alters the definition of the source. 31 According to EPA, whether an alternative requires a redefining of the source calls for a hard look at the applicant s determination in order to determine which design elements are inherent for the applicant s purpose and which design elements may be changed to achieve pollutant emissions reductions without disrupting the applicant s basic purpose for the proposed facility while keeping in mind that BACT should not be applied to regulate the applicant s purpose or objective for the proposed facility. 32 In Desert Rock, the permit applicant and Region did not consider IGCC at step 1 of BACT. The EAB found that the Region had not addressed several critical questions in consideration of IGCC The first was that the Region did not take a hard look to see how Desert Rock defined its project in order to discern which design elements were inherent to that purpose and which design elements could be changed to achieve pollutant emission reductions without disrupting Desert Rock s business purpose. 34 The second error found by the EAB was that the Region did not explain in its BACT analysis how IGCC could be considered as a potentially available control technology under step 30 Desert Rock at 59 (citing In re Knauf Fiber Glass GmbH, 8 E.A.B. 12, 136 (EAB 1999); NSR Manual at B.13). 31 Id. at 64 (internal citations omitted). 32 See id. 33 Id. at Id. 10

11 1 of the BACT analysis for two other EPA-issued permits... at similar facilities the Christian County coal-fired electric generating plant and the Prairie State mine-mouth, coal-fired electric generating station but was not likewise considered by the Agency at the Desert Rock Facility, which is proposed to be a mine-mouth, coal-fired electric generating station. 35 The EAB also found it compelling that IGCC was considered a redefinition of the source at Desert Rock, but not at these two earlier EPA-permitted coal-fired electric generating plants. 36 The EAB s decision sends a strong signal to industry that the scope of technologies that must be addressed in a BACT analysis has been expanded to include, potentially, technologies which redefine the source. In Desert Rock it appears that the EAB was swayed at least in part by other power plants consideration of IGCC. With this precedent it may be difficult to justify omitting IGCC as a potential technology in future coal plant PSD BACT analyses. IV. EPA s Policy on Interpretation of Subject to Regulation Under the Prevention of Significant Deterioration Program for CO2 Of all the hot-button topics concerning power plant permitting, the issue of whether a BACT analysis must be performed for carbon dioxide under the New Source Review PSD program is at the top of the list. The issue stems from the PSD requirement that a BACT analysis must be performed for any pollutant that is subject to regulation. The meaning of the phrase depends on whose ox may be gored. On one side, some environmental advocacy groups, such as Sierra Club, have advocated that the phrase means could regulate or is subject to a monitoring requirement, e.g., the Id. 36 See id. 11

12 requirement that power plants monitor and report their CO2 emissions. 37 On the other side, utilities have argued that subject to regulation means is actually regulated. EPA policy has consistently sided with the industry interpretation. 38 In Montana Environmental Information Center v. Montana Department of Environmental Quality Permit No , BER AQ, the issue was hotly contested before the state Board of Environmental Review ( BER ). The BER decided that the phrase meant is actually regulated. Following this state agency ruling, the EAB decided in In re Deseret Power Electric Cooperative, PSD Appeal No (EAB Nov. 13, 2008), to remand a PSD permit after finding that prior EPA actions were insufficient to establish a historic, binding interpretation that subject to regulation for PSD purposes included only those pollutants subject to regulations that require actual controls of emissions. However, EAB also rejected arguments that the Clean Air Act compelled only one interpretation of the phrase and found no evidence of a Congressional intent to compel EPA to apply BACT to pollutants that are subject only to monitoring and reporting requirement. 39 The EAB remanded the permit to consider whether or not to impose a CO2 BACT limit in light of the decision. The EAB also encouraged EPA to address the interpretation of the phrase. 40 On December 18, 2008, in the waning days of the Bush Administration, then- EPA Administrator Stephen Johnson issued a memorandum setting forth the official 37 Section 821, Clean Air Act Amendments of Fed. Reg. at 51, Deseret at The author filed an amicus curiae brief on behalf of NRECA in this case. 12

13 EPA interpretation that pollutants subject to either a provision in the CAA or regulation adopted by EPA under the CAA that requires actual control of emissions of that pollutant were subject to regulation. The memo specifically stated that EPA regulations requiring only a monitoring or reporting requirement were not subject to regulation. On December 31, 2008, Sierra Club and fourteen other organizations filed petitions for reconsideration. 41 On February, 17, 2009, EPA granted the petitions for reconsideration and announced a rulemaking to allow for public comment on the issues raised by the memo and on any issues raised by the Deseret decision. Significantly, the EPA Administrator did not stay the Johnson memo. 42 On October 7, 2009, EPA issued a Proposed Rule in which EPA summarized the Johnson memo interpretation as well as a summary of arguments to the contrary and sought comment. 43 In the Proposed Rule, EPA provided five interpretations of the phrase subject to regulation, but also stated that EPA continues to favor the actual control interpretation, which remains in effect at this time. EPA also stated: As explained in the [Proposed Rule], the actual control interpretation best reflects our past policy and practice, is in keeping with the structure and language of the statute and regulations, and best allows for the necessary coordination of approaches to controlling emissions of newly identified pollutants. While the other interpretations described... may represent alternatives for interpreting subject to regulation, no particular one is compelled by the statute, nor did the EAB determine any one of them was so compelled Petition for Reconsideration, In the Matter of: EPA Final Action Published at 73 FR (Dec. 31, 2008). 42 The federal interpretation of the phrase does not prevent states from interpreting it in a different manner Fed. Reg. 51,538 (Oct. 7, 2009). 44 Id. at 51,

14 EPA also addressed another important issue in the Proposed Rule. It stated that issuance of the endangerment funding required by Massachusetts v. EPA would not automatically trigger regulation of stationary sources. 45 Many environmental advocates had argued that once EPA made an endangerment finding, new or modified stationary sources would have to regulate CO2. This proposed Rule rejects that argument. EPA requires that comments must be submitted on or before December 7, Assuming EPA keeps the actual control interpretation in force, this will be a welcome through surprising outcome. However, this outcome may well be mooted by federal climate change legislation that is being debated as this paper goes to press. CONCLUSION There are far more obstacles today to permitting power plants, particularly coalfired plants, than in the past. However, in view of the nation s expanding needs for energy and the threat of future blackouts, we will need to build more sources of reliable, inexpensive base-load power. Contrary to the wishful thinking of opponents of fossil fuel (or of anything), the wind does not always blow and the sun does not always shine. Laptops and toasters depend on a constant source of electricity. It is a safe bet that a significant percentage of new construction in the next decade or more will be coal and natural gas. The challenge will be to figure out how to build that needed capacity in the face of public opposition, ever changing laws and scarcity of capital. Patience and persistence will continue to be virtues for any utility considering the development of new or modified fossil fuel-fired power plants. 45 Id. at 51,