BEFORE THE UNITED STATES ENVIRONMENTAL PROTECTION AGENCY COMMENTS OF THE AMERICAN CHEMISTRY COUNCIL

Transcription

1 BEFORE THE UNITED STATES ENVIRONMENTAL PROTECTION AGENCY COMMENTS OF THE AMERICAN CHEMISTRY COUNCIL ON EPA S PREVENTION OF SIGNIFICANT DETERIORATION (PSD) AND NON-ATTAINMENT NEW SOURCE REVIEW (NSR): ROUTINE MAINTENANCE, REPAIR AND REPLACEMENT Prevention of Significant Deterioration (PSD) and Non-attainment New Source Review (NSR): Routine Maintenance, Repair and Replacement 67 Fed. Reg. at December 31, 2002 ) ) ) ) ) ) ) ) ) Docket ID No. A T. Ted Cromwell Co-Leader Air Team Ronald A. Shipley Counsel Air Team Rasma I. Zvaners Director Regulatory Center of Expertise American Chemistry Council 1300 Wilson Blvd. Arlington, VA (703)

2 Table of Contents Executive Summary I. Introduction...1 II. Background...1 III. Legal Authority for the Proposed Revisions to the Routine Maintenance, Repair and Replacement Exclusion...3 A. The Proposed Safe Harbor Provisions are Within EPA s Authority to Explain and Implement the Statute The Plain Language of the Statutory Modification Definition Combined with the History of EPA s Construction of That Term Demonstrate the Legality of the Proposal Under Chevron, the Agency Is Authorized to Adopt a Reasonable Interpretation of the Statutory Definition of Modification, Incorporating Bright Line Tests to Ease Administrative Burdens B. EPA Has Authority To Promulgate These Proposals To Clarify And Simplify The Existing Regulatory RMRR Provision Case Law Supports Using Bright Line Tests in Regulations to Avoid the Regulatory Burdens of Case-by-Case Adjudication Adopting Monetary Cutoffs Below Which Activities Qualify as RMRR Is An Approach Accepted By the Courts The Equipment Replacement Provision Is A Lawful Interpretation of The Agency s Existing RMRR Exclusion...14 C. EPA May Promulgate the Proposals Under Its Inherent De Minimis Authority IV. The Council Supports A Cost Allowance for Maintenance, Repair and Replacement Activities..16 A. EPA's Final Rule Should Include Up to a Five-Year Annual Average for the Annual Maintenance, Repair, and Replacement Allowance (AMRRA) Test B. The Agency Should Allow the Use of Either a Replacement Cost Estimate or Inflation-Adjusted Original Investment For the AMRRA Facility Cost Basis C. EPA Should Allow Replacement Costs to be Determined Using Cost Estimation Techniques Currently Employed by Companies...17 D. EPA Should Allow a Stationary Source the Option of Selecting the Entire Stationary Source Methodology or the Process Unit Approach...18 E. The Council Supports EPA s Proposed Definition of Process Unit F. EPA Should Use the IRS Annual Asset Guideline Repair Allowance as the Basis for the Annual Maintenance, Repair and Replacement Allowance Percentage...20 G. The Council Supports Inclusion of Pollution Control and Dual Purpose Equipment Within the Definition of a Process Unit...20 H. The Council Supports Exempting Repairs and Replacements Resulting From the Unanticipated Shutdown of Equipment or of an Entire Source Due to Catastrophic Events...21 I. The Council Supports the First Two Safeguards Proposed by the Agency J. EPA Should Address the NSR Year-End Compliance Report Through the Title V Compliance Certification Process V. The Council Supports EPA Promulgating An Equipment Replacement Provision...22 A. While the Council Supports EPA's Definition of Replacement Exemption, the Agency Should Clarify the Phrase "Does Not Alter the Basic Design Parameters" in the Final Rule...23 B. The Council Supports EPA s Proposal to Allow Component Replacements As Long As Such Replacements Do Not Exceed a Specified Percentage of the Entire Process C. The Council Supports Using a Capital Replacement Percentage Backstop of 50 Percent D. EPA Should Implement a Combined Allowance/Replacement Exemption Approach...24 E. The Council Supports EPA's Proposed Definition of Process Unit...24 F. The Council Supports Consideration of Pollution Control and Dual Purpose Equipment....25

3 G. EPA Should Allow Replacement Costs to be Determined Using Cost Estimation Techniques Currently Employed by Companies...25 VI. Miscellaneous Issues...25 A. Exclusion of Consideration of Non-Emitting Equipment from RMRR The Council supports an approach that facilities should have an option as to whether or not nonemitting components and units should be excluded from the cost calculations for the AMRRA and Equipment Replacement options B. Facility Changes that are "Expense" Items Should Always be Characterized as Routine Maintenance, Repair and Replacement...26 C. The Council Supports a General Stand-Alone Exemption for Efficiency Projects EPA should exclude from NSR certain activities / projects that promote energy efficiency and/or resource conservation EPA should include a stand-alone provision whereby an owner or operator can request a caseby-case exemption from NSR for activities / projects that may increase actual air emissions, but will have a more significant decrease in cross-media impacts...28 D. The Council Agrees that a Capacity-Based Exemption Option for RMRR is Not Feasible...28 E. The Council Does Not Support the Age-Based Option to RMRR...28 VII. Conclusions/Recommendations...28

4 Executive Summary The American Chemistry Council (Council) offers the following comments on EPA s proposed New Source Review (NSR) Routine Maintenance, Repair and Replacement (RMRR), [67 Fed. Reg. at December 31, 2002]. The Council wishes to emphasize the following key points. The Council supports both of EPA's proposed RMRR reforms. Implementing the reforms will provide significant and needed improvements to the NSR program that has been the subject of ongoing deliberations and debate for a number of years. We also offer suggestions for clarifying the "backstop," as it applies to our industry. Further, the Council encourages EPA to streamline and simplify the implementation of the RMRR proposal. For example, allowing companies to use their corporate cost estimating techniques with the regulation only referencing the Air Pollution Control Cost Manual as a resource to be used as a guide rather than mandating its use in developing replacement values. Further, EPA should coordinate the NSR year-end compliance report through the Title V Compliance Certification process. The Council recommends that EPA exclude from NSR applicability facility changes that are "expense" items and should appropriately characterize these as RMRR. The recommended approach is consistent with EPA's desire to provide increased certainty in decision-making and focus resources on more significant changes versus the typically minor changes made at facilities every day. The Council recommends that EPA specifically exclude from the definition of major modification under NSR any activity/project that promotes resource conservation and/or energy efficiency by meeting all of the following criteria: Project results in lower emissions per unit of production or lower energy utilization per unit of production; The % decrease in emissions or energy utilization per unit of production is greater than the % increase in maximum hourly emission rates; and Project costs do not exceed 50% of the replacement value of the process unit. Project does not result in an increase in allowable emissions.

5 Page 1 I. Introduction The American Chemistry Council (the Council) is pleased to provide comments on EPA's Prevention of Significant Deterioration (PSD) and Non-attainment New Source Review (NSR): Routine Maintenance, Repair and Replacement, [67 Fed. Reg. at December 31, 2002]. The Council represents the leading companies engaged in the business of chemistry. Council members apply the science of chemistry to provide innovative products and services that make people s lives better, healthier, and safer. The business of chemistry is critical to the nation s economy and is the country s largest exporter, accounting for ten cents of every dollar in US exports. As major producers and consumers of energy, our industry is familiar with the obstacles that the current NSR program places in the path of projects that increase energy production, improve energy efficiency, and achieve emissions reductions at existing facilities. NSR requirements were intended to address substantial modifications to facilities that increase emissions beyond legislatively established limits. In recent years, EPA has broadened the program to include practically all changes at existing plants, even those that resulted in decreased emissions. Once triggered, NSR takes months and sometimes years of negotiations, and often adds costs of such magnitude that projects are often not cost-effective. Implementing the Routine Maintenance, Repair and Replacement (RMRR) proposed reforms will provide significant and needed improvements to the NSR program that have been the subject of ongoing deliberations and debate for a number of years. Our comments respond to the issues set forth by the Agency in its December 31, 2002 Federal Register notice and provide recommendations on the legal, policy and implementation issues of the NSR program. II. Background The Council supports EPA promulgating rules, such as EPA' proposed annual maintenance, repair and replacement allowance, and an equipment replacement provision, that bring clarity to the RMRR exclusion that currently exists in the NSR regulations. Ever since EPA promulgated the RMRR exclusion in the initial NSR rules, sources have been left, more or less on their own, to determine whether thousands of activities they routinely perform at their facilities trigger NSR or were exempt under the RMRR exclusion. Since the phrase routine maintenance, repair and replacement has not been explained in the NSR rules, commonsense definitions and everyday usage guide sources decisions. However, because reasonable people can easily disagree over what constitutes routine maintenance, repair, and replacement, it has required many difficult case-by-case evaluations by sources. Even though EPA has issued applicability determinations, guidance documents, and developed a four-part test as part of its WEPCO determination in 1990 which has now grown to 14 parts, see below at III.B.1 the Agency properly acknowledges that Unless an owner or operator seeks an applicability determination from his or her reviewing authority or from EPA, it can be difficult to know with certainty whether a particular activity constitutes RMRR. Applicability determinations can be costly and time consuming for reviewing authorities and

6 Page 2 industry alike. If a source proceeds without a determination and is later proven to have made an incorrect determination, that source faces potentially serious enforcement consequences. 67 Fed. Reg. at As the Agency also notes there have been cases in which uncertainty about the exclusion for RMRR resulted in delay or cancellation of activities that would have maintained and improved the reliability, efficiency, safety of existing energy capacity." Id. The Council, therefore, believes that it is better to address what specific activities are excluded from NSR through notice and comment rulemaking rather than guidance documents, enforcement orders, and judicially resolved disputes. In this way, EPA can remove the doubt and confusion that is attached to myriad activities sources routinely undertake every year to ensure their operations are operating safely and efficiently. The two rules EPA is proposing can eliminate significant amount of doubt and confusion regarding what specific activities constitute routine maintenance, repair, and replacement and the Council generally supports them. The Council notes that the statute triggers NSR whenever a source undertakes a modification. When Congress enacted this provision, it specifically cross-referenced the definition of modification it used in the New Source Performance Standard (NSPS) program. See CAA 169(2)(C). At the time of Congressional adoption, EPA had already interpreted a modification as not including any activity that fell within the rubric of routine maintenance, repair, and replacement. Consequently, EPA simply adopted an exclusion for routine maintenance, repair and replacement when it adopted the original NSR rules in Thus, the RMRR exclusion has been embodied in the law and regulations of the program since its inception. But, as noted above without much needed clarification. The Agency s proposal to adopt two specific examples of RMRR activities is a step in the direction of clarity. The first one a monetary allowance for activities comes directly from the NSPS program and recognizes that each industry routinely spends a certain amount of money to maintain, repair and replace equipment. Consequently, it fits within the concept of RMRR but alleviates the need for case-bycase determinations on each discrete maintenance, repair, or replacement activity that may change the facility. The component replacement provision which requires the new equipment to serve the same function and not alter the basic design parameters of the unit also squarely falls within the concept of routine maintenance, repair and replacement since any replacement that meets these criteria is the epitome of routine replacement. Both of these proposals go to the heart of manufacturing activities: facilities routinely maintain, repair and replace equipment not only to keep it functional, but also to improve its usefulness and efficiency. This is simply the function of routine maintenance repair and replacement. In the following comments the Council discusses the Agency s legal authority for these two proposals and offers three rationales to support them. The first is that such activities do not constitute a physical or operational change as contemplated by Congress when it adopted the NSPS definition of modification. The second is that these two proposals are merely further elucidation and implementation of the RMRR exclusion EPA adopted over twenty years ago, and clearly within the Agency s authority to interpret its own rules. The third rationale is the Agency s inherent use of its de minimis authority. As the Agency knows, it has the authority to decline to regulate activities when doing so would be overly burdensome and not result in promoting the statutory goals of protecting human health and the environment. See e.g., EDF v. EPA, 82 F.3d 451, 466 (D.C. Cir. 1996). That is clearly the case here. Industry undertakes hundreds of thousands of activities every year to keep its equipment operating safely, efficiently, and reliably. For example, one large chemical company has 40,000 annual mechanical work orders. Designating each as an activity that prompts a need for an NSR hinders health and environmental benefit

7 Page 3 and will hinder health and environmental protection by putting obstacles in the way of maintaining and improving equipment that, in turn, lowers emissions. The Council also provides comments supporting the two proposed exclusions and offers suggestions on how to improve them. III. Legal Authority for the Proposed Revisions to the Routine Maintenance, Repair and Replacement Exclusion EPA provides a limited discussion in the preamble to the proposed rule of the legal basis underlying the proposed clarification of the existing routine maintenance, repair and replacement (RMRR) exclusion to include the two safe harbor provisions 1 the annual maintenance, repair and replacement allowance and the component replacement test. The Council agrees that EPA has the legal authority to adopt these safe harbor provisions and that adoption of these provisions is necessary in order to redress serious problems that have emerged over the last several years in the administration and operation of the RMRR and of the NSR program as a whole. EPA should expand its preamble discussion of the legal bases for these provisions. EPA has three distinct yet overlapping sources of legal authority to promulgate the proposed provisions. First, and most fundamental, EPA has the authority to promulgate the RMRR annual allowance and the component replacement test in order to explain and implement the statutory definition of modification. CAA 111(a)(4). Under the statute, for there to be a modification possibly subject to the NSR provisions, there must first be a physical or operational change. The proposal is well within EPA s authority to explain and implement the statutory test of change. Second, EPA has the authority to promulgate these proposals to clarify and simplify the existing regulatory RMRR provision. The proposal reflects EPA's recognition that the existing RMRR provision has become so encrusted with levels of complexity and subjective assessment that it no longer provides adequate guidance to the regulated community. Third, EPA has the authority to promulgate the proposals as an exercise of its inherent de minimis authority to alleviate severe administrative burdens, as explained by the United States Court of Appeals for the District of Columbia Circuit in Alabama Power Co. V. Costle, 636 F.2d 323 (1979) and later cases. The case-by-case approach embodied in the existing RMRR provision has become overloaded and ineffective, severely burdening both the regulators and those they regulate. The creation of clear, categorical safe harbors, would go a long way to reducing these burdens, enabling the regulators to devote their resources to significant issues that could truly affect the quality of air that we all breathe. 1 A safe harbor specifies conditions that, if met, constitute compliance with a requirement. If the safe harbor conditions are not met, the activity might or might not be in compliance with the underlying requirement. As made clear in the preamble to the proposed rule, activities that meet the conditions of either the annual RMRR allowance or the replacement components test, then those activities will be considered to be routine maintenance, repair, or replacement, but if the conditions of neither of those two proposed tests are not met, the activity still could constitute RMRR. The two proposed tests therefore meet the definition of safe harbor provisions.

8 Page 4 A. The Proposed Safe Harbor Provisions are Within EPA s Authority to Explain and Implement the Statute. The proposed safe harbor provisions are within EPA s authority to construe statutory terms. This is demonstrated by the history of the construction of the term modification by EPA in the NSPS program leading up to its adoption by Congress for purposes of the PSD NSR program and then for purposes of the nonattainment NSR program. Further, under Chevron, U.S.A. v. NRDC, 467 U.S. 837 (1984), EPA clearly possesses the legal authority to adopt the proposed provisions. 1. The Plain Language of the Statutory Modification Definition Combined with the History of EPA s Construction of That Term Demonstrate the Legality of the Proposal. a. Use of the term change in the definition of modification indicates that Congress did not intend activities within normal plant operating parameters and design to trigger an NSR inquiry. Congress established the NSR program and the NSPS requirements to regulate new sources. Congress recognized, however, that major investments at existing facilities could substantially transform those sources to such a degree that they should be treated as new sources for purposes of these programs. For this reason, Congress included modifications of existing sources within the scope of the NSPS and NSR programs. Congress defined the term modification for purposes of the NSR program by incorporating the definition of modification used in the NSPS program, providing in 169(2)(C) 2 that: The term construction when used in connection with any source or facility, includes the modification (as defined in section 7411(a) [Section 111(a)] of this title) of any source or facility. Subsection (a)(4) of section 111 (which creates the NSPS program) defines a modification as any physical change or change in the method of operation of a stationary source which increases the amount of any air pollutant emitted by such source U.S.C. 7411(a)(4). Thus, Congress (and then EPA) established a two step process for evaluating whether a modification occurs under the NSPS and NSR programs. First, it must be determined whether there is a physical or operational change. Next, it must be determined whether an emissions increase will result from the change. 3 Congress did not define the term change when it originally enacted the NSPS program. But a simple examination of the statutory language as well as EPA s historical interpretation of the term indicates that 2 This provision provides the definition of modification for the PSD program; for the nonattainment NSR program, see 171(4): The terms modifications and modified mean the same as the term modification as used in section 111(a)(4) of this Act. 3 See Letter from Francis X. Lyons to Henry Nickel, dated May 23, 2000 (Applicability Determination for Detroit Edison Monroe Power Plant).

9 Page 5 non-routine activity is needed before a source should be considered to have undertaken a physical change or change in its method of operation. Because the term physical change or change in the method of operation was not defined in the statute, EPA had to issue regulations to help answer the question change from what? Change implies some sort of baseline against which the existence of change can be determined. In other words, to have a change there must be a pre-change state and a post-change state that differ in some manner from one another. By its promulgation of regulations under the NSPS program as far back as 1971 establishing the RMRR provision and other clarifications of what would be considered a change, EPA made it clear that there are many activities including projects that involve the physical replacement or alteration of equipment that do not constitute changes. 4 The common denominator of these provisions dating from the first NSPS regulations in 1971 and continuing on is that they reflect the contemplated normal operation of the unit. Thus, routine maintenance, repair, and replacement; an increase in the hours of operation; use of an alternative fuel or raw material if... the affected facility is designed to accommodate such alternative use and certain increases in production rate, are not changes because they all reflect the contemplated normal operation of the unit. See 40 CFR 60.2(h), 36 Fed. Reg. at (December 23, 1971). b. Congress Adoption of the NSPS Definition for the NSR Program Reaffirmed the Exclusion for RMRR Activities. Whether the basis for these regulatory clarifications regarding the concept of change was the contemplated normal operation of the unit, or operation consistent with the original design of the unit, or 4 From the very first days of the NSPS program, EPA has limited the types of activities that are to be regarded as physical changes or as a change in the method of operation. Thus, in the initial set of proposed rules to implement the NSPS program, issued on August 17, 1971, EPA proposed that (1) Routine maintenance, repair, and replacement shall not be considered physical changes, and (2) An increase in the production rate or hours of operation shall not be considered a change in the method of operation. Proposed 40 CFR (i), 36 Fed. Reg , (August 17, 1971). The exception for routine maintenance, repair, and replacement was finalized without any change in wording at 40 CFR 60.2(h), 36 Fed. Reg , (December 23, 1971). The exception for an increase in the production rate or hours of operation was also promulgated in final form on December 23, 1971, though the language was altered and also expanded to include an exemption for a change in fuel use. As promulgated, the regulation provided: (2) The following shall not be considered a change in the method of operation: (i) An increase in the production rate, if such increase does not exceed the operating design capacity of the affected facility; (ii) An increase in hours of operation; (iii) Use of an alternative fuel or raw material if, prior to the date any standard under this part becomes applicable to such facility, as provided by 60.1, the affected facility is designed to accommodate such alternative use. 40 CFR 60.2(h), 36 Fed. Reg. at (December 23, 1971). The scope of the exemption for an increase in the production rate was thus limited in comparison to the proposal by the addition of the phrase if such increase does not exceed the operating design capacity of the affected facility.

10 Page 6 something else, Congress in effect affirmed these regulatory clarifications into the statute when it adopted the statutory definition of modification in section 111 for use in the PSD program. In adopting 169(2)(C) as one of the November 1977 technical and conforming amendments to the 1977 amendments, Congress said that it was honoring the conference agreement by conforming the terminology to its use in section 111, the provision on new source performance standards.... Section 169(2)(C) of the Act by its reference to Section 111(a) in effect adopts the definition of modification under Section 111(a) for the purpose of PSD. In adding Section 169(2)(C) to the Act, Congress indicated that it intended to conform the meaning of modification to usage in other parts of the Act. 123 Cong. Rec. H 11955, (November 1, 1977). 43 Fed. Reg , 26394, (June 19, 1978). When Congress incorporated the NSPS definition of modification into the PSD program, it is presumed to have been aware that EPA had interpreted that term to exclude RMRR, and the various other clarifications of the term change. See Bragdon v. Abbott, 524 U.S. 624, 631 (1998). Congress is presumed to be aware of an administrative or judicial interpretation of a statute, and when Congress reenacts a statute without showing disapproval of its existing interpretation, Congress is presumed to adopt that interpretation. Hall v. U.S.E.P.A., 263 F.2d 926, 937 (9 th Cir. 2001), quoting Lorillard v. Pons, 434 U.S. 575, 580 (1978). Given the fact that Congress specifically looked to the NSPS program as the source of the definition of modification for the PSD program, it must be assumed that Congress approved EPA s previous administrative interpretations concerning that term, endorsing the concept that any change must be from the base case (e.g., normal operating parameters or original design). The regulatory clarification that RMRR, and the other clarifications as to what constitutes a change for purposes of the definition of a modification are now part of the statutory definition of modification, which EPA is not free to discard. EPA is free, however, to clarify the scope of the definition, which EPA s current proposal would do. c. EPA s Historical Application of the Term Modification Recognized that a Fundamental Change Must Be Made to Trigger an NSR Inquiry. As noted above, EPA has issued numerous administrative decisions regarding what constitutes a change for purposes of NSPS. In addition, EPA has clarified this term through adoption of exclusions under the NSPS program. It is these interpretations that Congress endorsed when it incorporated the NSPS modification definition into the NSR program. This section of the comments reviews the history of EPA s actions to demonstrate that the proposed "safe harbor" provisions are, in fact, consistent with approaches EPA has previously adopted. Thus, they are within the realm of activities EPA has previously excluded from the program, and which exclusion was affirmed by Congress when it adopted the NSPS modification definition for purposes of NSR. The regulatory explication of what constituted a modification for NSPS purposes did not remain static with the promulgation of the 1971 final regulations. Instead, on October 15, 1974, EPA proposed several

11 Page 7 clarifications and elaborations of the previously promulgated provisions and the creation of a new 60.14: (e) The following shall not, by themselves, be considered modifications under this part. (1) Maintenance, repair, and replacement which the Administrator determines to be routine for a source category, subject to the provisions of paragraph (c) of this section and (2) An increase in production rate of an existing facility, if that increase can be accomplished without a major capital expenditure on the stationary source containing that facility. (3) An increase in the hours of operation. (4) Use of an alternative fuel or raw material if, prior to the date any standard under this part becomes applicable to that source type,..., the existing facility was designed to accommodate that alternative use. A facility shall be considered to be designed to accommodate an alternative fuel or raw material if provisions for that use were included in the final construction specifications.... (5) The addition or use of any system or device whose primary function is the reduction of air pollutants Fed. Reg One of the proposed changes is particularly pertinent to understanding EPA s current safe harbor proposals. EPA proposed to clarify the original NSPS provision that an "increase in production rate of an affected unit if not in excess of the operating design capacity is not a change. The proposal would change that test to one involving whether a major capital expenditure on the stationary source containing that facility was necessary. The proposal contained a definition of a capital expenditure, but it contained no definition of a major capital expenditure. 5 In explaining this proposal, EPA stated: As proposed, 60.14(e) sets forth operational or physical changes which will not be considered modifications even though the emission rate may increase. These exemptions are similar to the present exemptions expressed in the definition of modification under 40 CFR 60.2(h); however, some differences should be noted. The exemption of increases in production rate is no longer dependent upon the operating design capacity. This term is not easily defined, and for certain industries the design capacity bears little relationship to the actual operating capacity of the facility. The proposed exemption implicitly defines design operating capacity as that production rate which can be accomplished without making major capital expenditures on the stationary source containing the existing facility. 39 Fed. Reg. at If an increase in production does not involve a major capital expenditure, then under this proposal the fact of an emissions increase does not transform the change into a modification for NSPS purposes. The proposed shift from a term that had proven to be not easily defined in practice to what was believed to be a more mechanical and straightforward test is just the sort of step EPA is proposing in the current rulemaking. 5 In addition, EPA proposed to clarify routine maintenance, repair and replacement by changing the exception to be maintenance, repair, and replacement which the Administrator determines to be routine for a source category... This proposed change would make it clear that what is routine is not a matter that is unique for each facility, but rather a matter of the practice throughout the relevant industry.

12 Page 8 EPA finalized this proposal, with some further clarifications, on December 16, This final regulation retained the concept of capital expenditure being the test for how much investment necessary to achieve an increase in production rate would cause such an increase to be considered a change, and substituted a new definition of capital expenditure that gave clarity and precision to the previously undefined major capital expenditure. That new definition was contained in 60.2: (bb) Capital expenditure means an expenditure for a physical or operational change to an existing facility which exceeds the product of the applicable annual asset guideline repair allowance percentage specified in the latest edition of Internal Revenue Service Publication 534 and the existing facility basis, as defined by section 1012 of the Internal Revenue Code. In the preamble, EPA discussed this change in the definition of capital expenditure between the proposal and the final: Several commentators argued that the proposed definition of capital expenditure, as applicable to the exemption for increasing the production rate of an existing facility in 60.14(e)(2), was too vague. The regulations promulgated herein correct this deficiency by incorporating by reference and by requiring the application of the procedure contained in Internal Revenue Service Publication 534, which is available from any IRS office. The procedure set forth in IRS Publication 534 is relatively straightforward.... The advantage of adopting the procedure in IRS Publication 534 is that firm and precise guidance is provided as to what constitutes a capital expenditure. The procedure involves concepts and information which are available to all owners and operators and with which they are familiar Fed. Reg. at Section 60.14(e) was promulgated to provide as follows: The following shall not, by themselves, be considered modifications under this part.: (1) Maintenance, repair, and replacement which the Administrator determines to be routine for a source category, subject to the provisions of paragraph (c) of this section and (2) An increase in production rate of an existing facility, if that increase can be accomplished without a capital expenditure on the stationary source containing that facility. (3) An increase in the hours of operation. (4) Use of an alternative fuel or raw material if, prior to the date any standard under this part becomes applicable to that source type, as provided by 60.1, the existing facility was designed to accommodate that alternative use. A facility shall be considered to be designed to accommodate an alternative-fuel or raw material if that use could be accomplished under the facility s construction specifications, as amended, prior to the change. Conversion to coal required for energy considerations. as specified in section 119(d)(5) of the Act, shall not be considered a modification. (5) The addition or use of any system or device whose primary function is the reduction of air pollutants, except when an emission control system is removed or is replaced by a system which the Administrator determines to be less environmentally beneficial. (6) The relocation or change in ownership of an existing facility. 40 Fed. Reg As is obvious from language of the final rule, the proposed clarification of the routine maintenance, repair, and replacement provision discussed in the previous footnote was promulgated in final.

13 Page 9 The final rule thus completed a shift from a test that, in practice, had proven to be not easily defined to a more mechanical and straightforward test. The rationale supporting the 1975 final rule is as applicable today to the proposed annual maintenance, repair and replacement allowance and component replacement test as it was to the change in definition of capital expenditure nearly 30 years ago. Moreover, Congress adoption of the NSPS definition for the NSR program is an endorsement of those EPA approaches to defining change that can provide firm and precise guidance. The annual allowance and component replacement tests do just that and are clearly the type of regulations Congress has authorized EPA to implement the program in a reasonable and streamlined manner. The proposed annual maintenance, repair, and replacement allowance is very similar to the capital expenditure test promulgated in the NSPS rules, though, in fact, more limited and restrictive in its scope. As proposed, only those activities performed in order to maintain, facilitate, restore or improve the efficiency, reliability, availability or safety of that stationary source within the annual allowance amount would be considered under this test not to constitute a change. The capital expenditure test under the NSPS program is not so limited. Given the legality of the capital expenditure test (since it was affirmed by the Congress when the NSPS definition was used for the PSD and nonattainment NSR programs), the more limited proposed annual allowance is a fortiori legal. The proposed replacement component test is simply a clarification of the replacement portion of the routine maintenance, repair and replacement test. As discussed above, at the time Congress adopted the definition of modification from the NSPS program for purposes of the PSD program in 1977, EPA s regulations provided that [m]aintenance, repair, and replacement which the Administrator determines to be routine for a source category, subject to the provisions of paragraph (c) of this section and is not to be considered a change. The proposed replacement component test simply is that determination by the Administrator with respect to replacements. That is, the proposal simply is the Administrator s determination that the replacement of components with identical or functionally equivalent components that do not change the basic design parameters of the process unit and that do not exceed a certain cost percentage determined for each industry sector are routine for that sector. Again, given the incorporation of the definition of modification from the NSPS program into the PSD and nonattainment NSR programs, the proposed component replacement test is clearly legal. EPA s initial regulations implementing the 1977 Clean Air Act Amendments reflect the same recognition of the importance of the plant s original design. These regulations omitted voluntary fuel switches from PSD scrutiny when the source was designed to accommodate that alternative use. 43 Fed. Reg (June 19, 1978). These actions were premised on EPA s belief that fuel switches the source was designed to accommodate were not changes in the 'method of operation.' Alabama Power Co. v. Costle, 636 F.2d 323, 378 n.31 (D.C. Cir. 1979). Thus, fuel switches were allowable without NSR even where the result was increased emissions. 7 What EPA has recognized in connection with fuel switches is true with 7 For example, EPA allowed a switch in feedstock from benzene to butane where benzene emissions were eliminated but VOC emissions increased by 2500 tons a year; because the facility was capable of accommodating butane as an alternate feedstock before Jan. 6, 1975 the proposed switch was not subject to PSD review. Memorandum from Edward E. Reich to W. Ray Cunningham, Chief, Air Media and Energy Branch, Region III, re: PSD Applicability for Ashland Chemical s Maleic Anhydride Plant in Neal, West Virginia (July 13, 1981). In another case, EPA allowed a switch from oil to coal where the unit had major equipment necessary to burn coal in place prior to Jan. 6, 1975 but needed changes (e.g., modifications to tubing, addition of flame scanners, burners, ignitors and relays, piping and wiring) totaling $5 million to implement the conversion. The change was ruled exempt from PSD and NSPS requirements. Memorandum from Edward E. Reich to Harley Lang, Director, Air Management Division, Region I, re: Bridgeport Harbor Coal Conversion (July 28, 1983).

14 Page 10 respect to other plant changes, since there is no legal reason for distinguishing among such changes from the standpoint of the appropriateness of a baseline reflecting plant design and functional capacity. EPA administrative rulings prior to the Clean Air Act Amendments of 1990 also reflected the connection between its routine maintenance, repair and replacement exclusion and the facility s design and functional capacity. For example, in 1981 EPA concluded that the normal replacement of rocket engines in an engine testing facility, including changes in the test cell to accommodate different engines, was covered by the exclusion as long as the changes made to accommodate each individual engine tested were within the original basic design capacity of the source. 8 Because the facility was designed and built to accommodate the testing of various rocket engines, NSR was not required for changes within the original design parameters, particularly where the changes have not increased the source s maximum annual rated capacity Under Chevron, the Agency Is Authorized to Adopt a Reasonable Interpretation of the Statutory Definition of Modification, Incorporating Bright Line Tests to Ease Administrative Burdens. In Chevron, U.S.A. v. NRDC, 467 U.S. 837 (1984), the Supreme Court established a two-pronged test for assessing the validity of an agency s interpretation of a statute. Under the first prong, the question is whether Congress has evinced a clear intent on the precise question at issue. When Congress initially adopted the NSPS program it made that program applicable to new sources, not existing sources. Congress then defined a new source to include the modification of an existing source, i.e., as something that transforms an existing source into a new source. According to Congress, this transforming activity is a physical or operational change that increases the amount of any air pollutant emitted to the atmosphere. In short, Congress clearly did not intend to apply new source programs to existing facilities that are merely operated as existing facilities. In addition, Congress was clearly aware that industrial plants undertake a wide range of activities to maintain efficiency and operational capabilities and nothing indicates that such activities were to be considered activities that would trigger an NSR evaluation. This is precisely what EPA said when it addressed this issue during the 1970s. When Congress amended the CAA in 1977 and 1990, using the term modification in both instances, it was familiar with and endorsed the approach the Agency had taken -- an approach that reflected Congress original intent as to the scope of the new source program. As shown above, at the time Congress adopted the definition in 111 of modification for the PSD program, that definition incorporated several well-established 8 Memorandum from David Solomon, EPA, to File, May 28, 1981 at p. 4. While Solomon analyzed the project under the 1978 EPA regulatory definition of modification because the project was covered by the transition rules of the final 1980 regulations, his reasoning was premised on routine maintenance, repair and replacement exclusion, which did not change between the 1978 and 1980 regulations. His analysis keyed the routine maintenance, repair and replacement exclusion to design capacity of normal facility operations. The Solomon memorandum provided the basis for a ruling by Region IX that NSR was not applicable. Memorandum from Carl C. Kohnert, Region IX, to A.R. Bjorklund, Rockwell International (Nov. 5, 1981). 9 Id. at 4, 5. Further, conversion from gas to coal, gas to oil, or oil to coal in a wet process Portland cement kiln is exempt from NSPS because the kiln has the capability to burn these alternative fuels. Letter from Edward Reich, Division of Stationary Source Enforcement, USEPA to H. Berman, Region VI (May 9, 1978).

15 Page 11 clarifications of what would constitute a change for the purposes of that definition. These clarifications are part of the statutory definition of modification as if they were set out in the statute itself, and so including them in the NSR regulations is clearly valid under the first prong of the Chevron test. Even if it were assumed that Congress had not spoken directly to the issue, the agency has authority to make policy choices consistent with the statutory purpose. Chemical Manufacturers Ass n v. EPA, 859 F.2d 977, 984 (D.C.Cir. 1988), citing Chevron, 467 U.S. at In this rulemaking the Administrator may also rely on her general authority to prescribe such regulations as are necessary to carry out his functions under [the Clean Air Act]. 42 U.S.C. 7601(a). The power of an administrative agency to administer a congressionally created... program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress. Chevron, 467 U.S. at 843, quoting Morton v. Ruiz, 415 U.S. 199, 231 (1974). If [the agency s] choice represents a reasonable accommodation of conflicting policies that were committed to the agency s care by the statute, the courts will uphold it. Chevron, 467 U.S. at 845, quoting United States v. Shimer, 367 U.S. 374, 383 (1961). The NSR provisions adopted in 1977 are preceded by a Congressional statement of policies demonstrating that Congress wanted to accommodate the policies of environmental protection and economic growth. Thus, Congress stated its purpose to insure that economic growth will occur in a manner consistent with the preservation of existing clean air resources, Section 160(3), 42 U.S.C. 7470(3), and to protect and enhance the quality of the Nation s air resources so as to promote the public health and welfare and the productive capacity of its population, Section 101(b)(1), 42 U.S.C. 7401(b)(1). An interpretation of the Act concluding that operation of an existing facility as it was designed and constructed to operate does not change that existing source into a new source represents a reasonable accommodation of conflicting policies that Congress committed to EPA s discretion, and is thus sustainable under the Chevron decision. 10 With respect to the proposed annual allowance and component replacement provisions, the Agency s exercise of discretion is reasonable under Chevron in light of the statutory purpose of ensuring economic growth and the productive capacity of the nation while simultaneously protecting the nation s air resources and public health. The proposals are a reasonable elaboration of the statutory definition of modification, and in particular of the meaning of the word change used by Congress in that definition. B. EPA Has Authority To Promulgate These Proposals To Clarify And Simplify The Existing Regulatory RMRR Provision. EPA has determined, appropriately so, that the existing case-by-case administration of the RMRR exclusion is administratively cumbersome and has resulted in the deferral or cancellation of projects that would be beneficial to the environment, including energy efficiency projects. In many cases, industrial plants have been required to submit for lengthy environmental review a broad range of plant activities that are both routine and necessary to keep the plant in operation at an efficient level, and that, in many cases, actually improve the plant s emission performance. NSR can take a year or more, during which time plant managers are blocked from undertaking necessary activities. 10 EPA stated in the preamble to the proposed NSPS rule creating clarifications of the definition of modification that [s]supportive legislative history for section 111 of the Act allows considerable latitude in interpreting phrases in the definition of modification such as stationary sources and increases the amount of any air pollutant emitted. 39 Fed. Reg (Oct. 15, 1974).

16 Page 12 In addition to the delays involved, there is crippling uncertainty, since EPA considers as many as 14 factors, and perhaps others, on a case-by-case basis in determining whether plant activities that are normal for the industry will be considered changes under the NSR program. Since the outcome of a multifactor case-by-case test with no principle that guides the Agency s application of those factors is inherently unpredictable, plant managers can never be certain that projects they undertake can be implemented without the delay and expense of full-scale environmental review. This kind of regulatory uncertainty and delay is increasingly intolerable in a global economy, especially in the competitive chemical manufacturing industry. It can lead manufacturers to look more favorably on investments outside the United States when comparing such investments to the costs and risks associated with maintaining, repairing and replacing equipment at domestic plants. Given these consequences of the current approach to the RMRR exclusion, it is reasonable for EPA to create within the category of RMRR activities, bright line tests which minimize the administrative complexity of the program and thus remove roadblocks to companies that seek to implement environmentally beneficial and energy efficient projects. One important goal of these tests is for a company to be able to determine easily if a project qualifies as RMRR under EPA s regulations. 1. Case Law Supports Using Bright Line Tests in Regulations to Avoid the Regulatory Burdens of Case-by-Case Adjudication. The Courts have confirmed that it is reasonable for an agency to take into consideration the administrative burdens of a regulatory program and to fashion a bright line test to provide regulatory certainty. Agencies have very broad discretion whether to proceed by way of adjudication or rulemaking. Time Warner Entertainment Co. L.P. v. F.C.C., 240 F.3d 1126, 1141 (D.C.Cir. 2001). For example, the D.C. Circuit recently sustained the FCC s adoption of a five percent criterion for attribution of ownership of broadcast television stations, where the agency concluded a bright line rule was to be preferred because it reduces regulatory costs, provides regulatory certainty, and permits planning of financial transactions. Id. See also, Republican National Committee v. Federal Election Commission, 76 F.3d 400, (D.C. Cir. 1996) ( Although the Commission certainly could have chosen to judge best efforts on a case-by-case basis, we have no doubt that it is equally authorized to interpret the term through rulemaking. ). The regulatory costs and uncertainties associated with the present system of case-by-case adjudication are intolerable and a bright line rule is needed. EPA s decision in the TVA case articulated at least 12 factors in determining on a case-by-case basis whether industrial plant improvements constitute modifications requiring NSR. 11 The applicability determination for Detroit Edison s Monroe Power 11 In re Tennessee Valley Authority, 9 E.A.B. 357, 2000 WL , CAA Docket 00-6, CAA (Sep. 15, 2000), appeal pending. Among the twelve factors were: 1) Has the planning time length for the project been greater than normal maintenance and repair planning periods? 2) Does the project require approval of the Board of Directors or CEO? 3) Is the project being funded through capital budgets? 4) Is the central office managing the project (as opposed to plant maintenance personnel)? 5) Is the shutdown required to complete this project longer than the typical maintenance shutdown for the unit? 6) Are the components being replace relatively important or of large size relative to all components of that type or the unit? 7) Does the appropriations request or any management memoranda/ related to the project indicate that it will extend the design life or the useful life of the equipment? 8) Does the appropriation request or any management memoranda/ related to the project indicate that the project will increase availability and reliability or in effect improve the unit? 9) Is this project the first of its magnitude in the life of a unit that is near the end of its useful life? EPA also asserts authority to add on any other relevant factors.