OFHEO requests comments from the public and will take all comments into consideration before issuing the final regulation. Copies of all comments will be posted on the OFHEO Internet web site at http://www.ofheo.gov . In addition, copies of all comments received will be available for examination by the public at the Office of Federal Housing Enterprise Oversight, Fourth Floor, 1700 G Street, NW., Washington, DC 20552.

Title XIII of the Housing and Community Development Act of 1992, Pub.L. No. 102-550, entitled the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Act), established OFHEO as an independent office within the Department of Housing and Urban Development to ensure that the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises) are capitalized adequately and operate safely and in compliance with applicable laws, rules and regulations.

Section 1316 of the Act (12 U.S.C. 4516) provides that OFHEO may establish and collect annual assessments from the Enterprises. OFHEO has been assessing the Enterprises pursuant to section 1316 and proposes to set forth its policies and procedures with respect to such assessments in the proposed regulation.

This section states that the purpose of the proposed regulation is to set forth the policy and procedures of OFHEO with respect to the annual assessments of the Enterprises under section 1316 of the Act. The Act provides for an initial annual assessment for the startup costs of OFHEO; however, since the initial annual assessment has been collected and OFHEO no longer has start up costs, the initial annual assessment is not addressed in the proposed regulation.

Section 1701.2 sets forth the definition of terms used in the proposed regulation.

The term “Act” is defined to mean the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, Title XIII of the Housing and Community Development Act of 1992, Pub.L. No. 102-550, § 1301, Oct. 28, 1992, 106 Stat. 3672, 3941-4012 (1993).

The term “adequately capitalized” is defined to mean the adequately capitalized capital classification under section 1364 of the Act (12 U.S.C. 4614). It is used in proposed § 1701.4.

The term “Director” is defined to mean the Director of the Office of Federal Housing Enterprise Oversight or his or her designee. The Director may delegate his or her authority under section 1316 of the Act to officers or employees of OFHEO.

The term “Enterprise” is defined to mean the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

The term “surplus funds” is defined to mean funds, which were collected from an Enterprise in connection with an annual assessment, that are unobligated as of September 30 of each fiscal year. Appropriated funds of OFHEO are available for obligation and expenditure for an indefinite period without fiscal year limitation. Notably, section 1316(d) of the Act (12 U.S.C. 4516(d)) requires the crediting of surplus funds that are “unobligated at the end of the year for which the assessment was collected.” Any unobligated funds remaining as of September 30, regardless when they were collected, should be treated as surplus funds and credited to the annual assessment.

The term “total assets” is used in § 1701.3(b) of the proposed regulation in connection with the calculation of the proportional amount of the annual assessment of each Enterprise. The definition of the term “total assets” is broader than the definition of the term “total assets” in section 1316(b)(3) of the Act (12 U.S.C. 4516(b)(3)) in that it lists the types of other off-balance sheet assets to be used in the calculation of total assets. The assets used to calculate total assets for purposes of the annual assessment are the same as the assets used to calculate the minimum capital level of an Enterprise under 12 CFR part 1750, subpart A. The proposed regulation defines the term as the sum, as of the June quarterly minimum capital report of the Enterprise under 12 CFR part 1750, subpart A, of the on-balance-sheet-assets, as adjusted in the June quarterly minimum capital report under 12 CFR part 1750, subpart A; the unpaid principal balance of outstanding mortgage-backed securities issued or guaranteed by the Enterprise that are not included in on-balance-sheet assets; one-half of the average dollar amount of commitments outstanding each quarter over the preceding four quarters; the sum of the credit-equivalent amounts for interest rate contracts; the unpaid principal balance of other guaranteed obligations, such as multifamily credit enhancements; other guaranteed amounts, such as sold portfolio remittances pending; and other off-balance-sheet obligations, as determined by the Director.

The term “OFHEO” is defined to mean the Office of Federal Housing Enterprise Oversight.

Paragraph (a) of proposed § 1701.3 sets forth the authority of the Director to establish and collect assessments under section 1316(a) of the Act (12 U.S.C. 4516(a)). As provided in section 1316(a) and (f) of the Act (12 U.S.C. 4516(a) and (f)), the proposed regulation provides that the Director may, to the extent provided in appropriation acts, establish and collect from the Enterprises an annual assessment for each fiscal year. It further indicates that the amount of the annual assessment shall not exceed the estimated amount to be sufficient to provide for the necessary administrative and non-administrative expenses to carry out the responsibilities of the director relating to the Enterprises and to carry out the purposes of the Act.

Paragraph (b) of proposed § 1701.3 reiterates the statutory formula in section 1316(b) of the Act (12 U.S.C. 4516(b)) for determining how the annual assessment is to be allocated between the Enterprises. The allocation for each Enterprise is the proportion of the annual assessment that bears the same ratio to the total annual assessment as the total assets of each Enterprise bears to the total assets of both Enterprises. The term “total assets” is defined in proposed § 1701.2.

Section 1316(b)(2) of the Act (12 U.S.C. 4516(b)(2)) requires the Enterprises to pay their proportional share of the annual assessment in semiannual payments on or before October 1 and April 1 of each fiscal year. Paragraph (c)(1) of proposed § 1701.3 restates this requirement and clarifies that one-half of the proportional share of the annual assessment is to be paid in each semiannual payment.

Paragraph (c)(2) of proposed § 1701.3 also explains how the semiannual payments are to be handled in the event OFHEO does not have a regular appropriation as of October 1 of any year. When legislative action on a regular appropriation bill is not completed before the beginning of a fiscal year, a continuing appropriation (also called a continuing resolution) may be enacted to provide funding for the affected agencies until their regular appropriations are enacted. In such a situation, each Enterprise is to pay, by such date as determined by the Director, an amount that is determined by applying the annual assessment proportion calculated pursuant to paragraph (b) of proposed § 1701.3 to the amount authorized by the Office of Management and Budget (OMB). After OFHEO receives a regular appropriation, the amount of the proportional share of the annual assessment collected from each Enterprise is to be reduced by the partial payments made by each Enterprise in connection with any continuing appropriations. In the event there is no continuing appropriation as of October 1 of any fiscal year, OFHEO would continue to operate if authorized by OMB to use funds remaining from the prior fiscal year assessment.

Paragraph (d) of proposed § 1701.3 provides that the annual assessment is to be credited by the amount of any surplus funds, a requirement which is set forth in section 1316(d) of the Act (12 U.S.C. 4516(d)). Paragraph (d) also provides that surplus funds are to be allocated in the same proportion in which they were collected, except as determined by the Director. The term “surplus funds” is defined in proposed § 1701.2.

Proposed § 1701.4 sets forth the authority of the Director under section 1316(c) of the Act (12 U.S.C. 4516(c)) to provide for an increase in the semi-annual payments made by an Enterprise that is not classified as “adequately capitalized,” as that term is defined in proposed § 1701.2. The funds collected under this provision are to be deposited in the Federal Housing Enterprise Oversight Fund, but are not to be considered funds appropriated by Congress.

Paragraph (a) of proposed § 1701.5 codifies the OHFEO practice of providing the Enterprises with written notice of the annual assessment, semiannual payments, any partial payments, and any changes in the assessment procedures.

Paragraph (b) of proposed § 1701.5 provides that, at the written request of an Enterprise, the Director, in his or her discretion, may review the calculation of the Enterprise's proportional share of the assessment, semiannual payments or partial payments. The determination of the Director is final. Review by the Director does not suspend the obligation of the Enterprise to make the semiannual payment or partial payment on or before the date it is due, except as provided by the Director.

This section of the proposed regulation reiterates the statutory requirements with respect to the assessment of interest and penalties on delinquent payments. It provides that the Director may assess interest and penalties on delinquent payments of any assessment under this part in accordance with 31 U.S.C. 3717 (interest and penalties on claims) and 12 CFR part 1704 (debt collection). The Director may waive interest and penalties in his or her discretion. Any interest and penalties collected under this section are to be transferred to the general fund of the Treasury of the United States.

Proposed § 1701.7 provides that notwithstanding § 1701.6, the Director may enforce the payment of assessments pursuant to the authority of section 1371 (12 U.S.C. 4631) (cease-and-desist proceedings); section 1372 (12 U.S.C. 4632) (temporary cease-and-desist orders), and section 1376 (12 U.S.C. 4636) (civil money penalties) of the Act. These sections authorize the Director to take enforcement actions for violations of any provisions of the Act.

As provided in 1316(f) of the Act (12 U.S.C. 4516(f)), this section of the proposed regulation would require that OFHEO deposit any assessments collected under this part in the Federal Housing Enterprise Oversight Fund established in the Treasury of the United States.

The proposed regulation is not classified as a significant rule under Executive Order 12866 because it will not result in an annual effect on the economy of $100 million or more or a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions; or have significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in domestic or foreign markets. Accordingly, no regulatory impact assessment is required and this proposed regulation has not been submitted to the Office of Management and Budget for review.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) requires that a regulation that has a significant economic impact on a substantial number of small entities, small businesses, or small organizations must include an initial regulatory flexibility analysis describing the regulation's impact on small entities. Such an analysis need not be undertaken if the agency has certified that the regulation will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 605(b). OFHEO has considered the impact of the proposed regulation under the Regulatory Flexibility Act. The General Counsel of OFHEO certifies that the proposed regulation, if adopted, is not likely to have a significant economic impact on a substantial number of small business entities because the regulation is applicable only to the Enterprises, which are not small entities for purposes of the Regulatory Flexibility Act.

Accordingly, for the reasons stated in the preamble, OFHEO proposes to add 12 CFR part 1701 as follows:

Title XIII of the Housing and Community Development Act of 1992, Pub. L. 102-550, entitled the “Federal Housing Enterprises Financial Safety and Soundness Act of 1992” (the “Act”), 1 established the Office of Federal Housing Enterprise Oversight (“OFHEO”) as an independent office within the Department of Housing and Urban Development. Generally, OFHEO is the safety and soundness regulator of two of the nation's largest housing-related government sponsored enterprises: the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively, the “Enterprises”). In addition to establishing OFHEO, the Act made amendments to the Enterprises' enabling statutes (collectively, the “charter acts”), 2 in part to accommodate OFHEO's statutory supervisory powers.

Included in the supervisory responsibilities of the Director of OFHEO (the “Director”) is oversight of compensation provided by the Enterprises to their respective executive officers. Briefly, the Director's statutory oversight of executive compensation involves two statutory mandates: (1) the prohibition of excessive compensation, as required by the Act; and (2) the prior review of termination benefits, as required by the charter acts. Notably, the differing statutes use similar but not identical terms in delineating the standards and identifying the different comparator groups to be used in these matters.

Specifically, the Act requires the Director to prohibit the Enterprises from providing compensation to any executive officer that is not reasonable and comparable with that paid by similar businesses to executives doing similar work. Businesses used for comparison purposes include publicly held financial institutions or major financial services companies. 3

The charter acts were amended by the Act to similarly provide that an Enterprise may only pay compensation that it determines is reasonable and comparable with compensation for employment in other similar businesses, and that the Enterprise must report annually to Congress on the comparability of the compensation policies for their employees with the compensation policies of other similar businesses. 4 The Enterprises have the general power to select the individuals who will work for them and to set their specific compensation. The Act explicitly provides that OFHEO may not prescribe or set a specific level or range of compensation for executive officers of the Enterprises. 5

To effectuate OFHEO's charge to prohibit excessive compensation, the Act empowers OFHEO to take such actions and perform such functions as the Director determines to be necessary. 6 OFHEO may also require an Enterprise to submit reports and special reports as deemed appropriate and in such form as the Director may require. 7 Moreover, OFHEO has express statutory authority to retain any consultant that the Director determines is necessary to assist in such matters. 8 The Act also grants OFHEO a wide array of enforcement powers. Thus, without regard to the capital condition of an Enterprise, the Director can issue a notice of charges, or take such other enforcement action, for conduct violative of the compensation provisions of the Act, the charter acts or this regulation. 9 The Director can require an Enterprise, or any executive officer or member of the board of directors to correct or remedy any violation as the Director determines to be appropriate. 10

In addition to prohibiting the payment of excessive executive compensation, OFHEO is empowered to approve individual termination packages provided by the Enterprises to their executive officers. The respective charter acts of the Enterprises were identically amended by the Act to provide that an Enterprise may not enter into an agreement or contract to provide for payment of money or other thing of current or potential value in connection with the termination of employment of an executive officer unless the agreement or contract is approved in advance by OFHEO. 11 The Act further amended the charter acts to prohibit the Director from approving termination benefits that are not comparable to such benefits provided by other businesses to executives doing similar work. Businesses used for comparison purposes include public and private entities involved in financial services and housing.

These amendments to the charter acts were effective after October 28, 1992. Therefore, agreements to provide termination payments to executives that were entered into before that date are not explicity subjected to retroactive review for approval or disapproval by OFHEO. However, the amended charter acts provide that any subsequent renegotiation, amendment or change to any such agreement entered into on or before October 28, 1992, is to be considered as entering into an agreement subject to approval by OFHEO. An extension of such an agreement is deemed to constitute a change subject to OFHEO's prior approval. OFHEO's approval is required regardless of how such an extension is structured, e.g. , by a written agreement or by a resolution adopted by the board of directors of the Enterprise.

The requirement that OFHEO receive and approve termination provisions before an agreement or change is effective may be met when new executive officers are hired or contracts and agreements with existing executive officers are amended if such contracts or agreements contain a provision noting that termination benefits provided under the agreements are not effective until approved by OFHEO.

The term “executive officer” for these purposes is defined to include an Enterprise's chairman of the board of directors, chief executive officer, chief financial officer, president, vice chairman and any executive vice president, as well as any senior vice president (SVP) “in charge of a principal business unit, division or function.”  12 The Director has also found the term to include any individual who acts as the chief operating officer of an Enterprise. Additionally, the term “executive officer” includes any individual who performs functions similar to such positions, whether or not the individual has an official title.

For purposes of this regulation, the term “executive officer” includes any SVP in charge of a principal business unit, division or function as well as any individual, however titled, who has similar authority. A reading of the statute joined with an analysis of job functions at the Enterprises could lead to a reasonable determination that all current senior vice presidents are subject to the provisions of this section. If an individual is identified by an Enterprise in public disclosures as being an “executive officer,” a presumption shall exist that such individual is an executive officer for these purposes. The Act's use of qualifying language in defining “executive officer” suggests that Congress intended OFHEO to classify covered individuals on a functional basis, rather than solely on a basis of title. That is, any officer or employee who participates or has authority to participate in major policymaking functions is deemed to be an executive officer, regardless of his or her title. Notably, the indicia of a major policymaking function may include the authority to control substantial resources or expend substantial funds of an Enterprise. A major policymaking function is not limited to a revenue-generating function.

The Act defines the term “compensation” to include “any payment of money or the provision of any other thing of current or potential value in connection with employment.”  13 [Emphasis added.] The legislative history of the Act, demonstrates that the term is to be defined broadly. 14 OFHEO's analysis of an executive officer's compensation reasonably includes factors that are weighed by federal bank regulators in similarly assessing compensation issues. The definition of “compensation” adopted by the federal banking agencies is all-inclusive, encompassing all direct and indirect payments of benefits, both cash and non-cash, granted to or for the benefit of any executive officer including, but not limited to, payments and benefits derived from an employment contract, compensation or benefit agreement, fee arrangement, perquisite, stock option plan, post employment benefit or other compensatory arrangement. 15

The legislative history of the Act and that of contemporaneously enacted federal banking legislation reveal that Congress viewed executive compensation to be a serious matter of safety and soundness concern. In discussing the need for oversight of the executive compensation provided by the Enterprises, the congressional sponsor of language relating to executive compensation explicitly referred to similar legislation earlier enacted in the same Congress to require the federal bank regulators to adopt safety and soundness standards affecting, among other things, executive compensation paid by insured banks and thrift institutions, as well as their parent holding companies. 16 The statutory authorities of OFHEO and the banking agencies, however, are not identical in this regard. 17 OFHEO treats as an unsafe and unsound practice any compensation arrangement that would result in an executive of an Enterprise receiving compensation that is excessive or termination benefits that are not comparable to compensation provided by other businesses to executives doing similar work.

With respect to its statutory mandate to prohibit excessive executive compensation, OFHEO evaluates all aspects of each Enterprise's executive compensation practices and policies, and periodically undertakes a study to compare compensation of executives at the Enterprises with compensation of executives in other similar businesses (including other publicly held financial institutions or major financial services companies). OFHEO separately reviews termination benefit packages submitted by the Enterprises under the prior approval requirements of the charter acts.

In order to carry out its executive compensation responsibilities, OFHEO requires each Enterprise to make timely submissions of relevant information to OFHEO on both routine and episodic bases. 18 Practice and procedures reflected in this rule have evolved over time. As noted in § 1770.2 of the proposed rule, the purposes of this regulation are to formalize the existing process and to clarify the terms used therein in order to facilitate the routine conduct and enhance the efficiency of OFHEO's procedures.

OFHEO's executive compensation authorities are recited in § 1770.1 of the proposed rule. Definitions applicable to terms used in the proposed rule are enumerated in § 1770.3. Reporting and submission requirements are set forth in § 1770.4.

Specifically, paragraph (a) of § 1770.4 identifies to whom an Enterprise is to make timely submission of relevant information in such fashion as specified by OFHEO. Paragraph (b) lists the categories of information to be provided by the Enterprise to OFHEO. Paragraph (c) sets out when information relevant to the Director's prior approval of termination benefits should be submitted by an Enterprise to OFHEO. Paragraph (d) specifies what information the Enterprise is to submit and when it must be submitted in order for OFHEO to calculate an executive officer's total termination or severance benefits package.

Section 1770.5 of the proposed rule addresses compliance requirements. Paragraph (a) codifies current practices to require that certain employment agreements expressly state that termination benefits provided therein are not to be effective until approved by the OFHEO. Additionally, the section provides that disclosures to employees should note that alteration of benefit plans that affect the benefits accorded a covered employee, that occur subsequent to OFHEO approval of a termination package, will require OFHEO review of the termination agreement at the time a covered employee terminates their relation with the Enterprise. Paragraph (b) requires the Enterprises to establish written procedures implementing the submission requirements of section 1770.4. Paragraph (c) states that failure by an Enterprise to comply with the requirements of paragraph (a) or (b) of section 1770.5 or the submission requirements of section 1770.4 may be deemed to be an unsafe or unsound practice warranting specific corrective action. Paragraph (d) of section 1770.5 provides that OFHEO may require corrective or remedial action under this regulation by an Enterprise or individual either separately from, in conjunction with, or in addition to any other remedy, or an enforcement action.

This proposed rule is not deemed to be a significant rule under Executive Order 12866 because it will not result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions; or (3) significant adverse effects on competition, employment, investment, productivity, innovation or on the ability of United States-based enterprises to compete with foreign-based enterprises in domestic or foreign markets. Accordingly, no regulatory impact assessment is required and this proposed rule has not been submitted to the Office of Management and Budget for review.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) requires that a rule that has a significant economic impact on a substantial number of small entities, small businesses, or small organizations must include an initial regulatory flexibility analysis describing the regulation's impact on small entities. Such an analysis need not be undertaken if the agency has certified that the regulation will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 605(b). OFHEO has considered the impact of this proposed rule under the Regulatory Flexibility Act. The General Counsel certifies that this proposed rule will not have a significant economic impact on a substantial number of small business entities.

This proposed rule does not contain any information collection requirements that require the approval of the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. 3501 et seq. ).

This proposed rule does not require the preparation of an assessment statement in accordance with the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1531. Assessment statements are not required for regulations that incorporate requirements specifically set forth in law. As explained in the preamble, this rule implements specific statutory requirements. In addition, this rule does not include a Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more (adjusted annually for inflation) in any one year.

For the reasons stated in the preamble, OFHEO proposes to add 12 CFR part 1770 to read as follows:

Title XIII of the Housing and Community Development Act of 1992, Pub. L. No. 102-550, entitled the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the Act), established OFHEO. OFHEO is an independent office within the Department of Housing and Urban Development (HUD) with responsibility for ensuring that Fannie Mae and Freddie Mac (collectively, the Enterprises) are adequately capitalized and operate safely and in conformity to the requirements of applicable laws, rules and regulations, including their respective charter acts. The Enterprises are Government-sponsored corporations established under Federal law to effect specific public purposes. 1 These include providing liquidity to the residential mortgage market and promoting the availability of mortgage credit benefiting low-and moderate-income families and areas that are underserved by lending institutions.

The express statutory authorities of the Director of OFHEO (Director) under the Act include the primary responsibility of ensuring that the Enterprises operate in a safe and sound manner. 2 OFHEO's principal responsibility is to ensure the Enterprises are operating in a safe and sound manner, and in compliance with applicable laws and regulations. To this end, the Act grants OFHEO broad statutory powers similar to those of the Federal bank regulatory agencies, including the authority to issue regulations to carry out the Act; 3 to conduct examinations of the Enterprises and require the Enterprises to provide financial reports; 4 to establish capital requirements for the Enterprises; 5 and, in appropriate circumstances, to take prompt corrective action against any Enterprise that fails to remain adequately capitalized, including possible imposition of a conservatorship. 6

In addition, the Act grants OFHEO essentially the same administrative enforcement authority as Congress has granted the Federal bank regulatory agencies, including the power to issue temporary and permanent cease and desist orders to an Enterprise or its executive officers or directors, and to impose civil money penalties when appropriate. 7 Prior to issuing a cease and desist order, OFHEO must conduct a hearing on the record and provide the subject of an order with notice and the opportunity to participate in such hearings. Prior to imposing civil money penalties, OFHEO must provide notice and the opportunity for a hearing to the persons subject to the penalties. Part 1780 of OFHEO's rules and regulations currently sets out the procedural rules under which such notices are provided and hearings conducted.

In this Notice of Proposed Rulemaking (NPR), OFHEO proposes to clarify the agency's enforcement rules at part 1780, which are largely procedural in nature, by describing briefly the categories of circumstances in which OFHEO may initiate enforcement actions, as well as the types of remedies and sanctions OFHEO may impose through a cease and desist order or civil money penalty. By providing the public with general information about the scope of OFHEO's administrative enforcement authority, OFHEO seeks to effect greater transparency for the OFHEO's supervisory regime and increased public awareness of the supervisory standards and safeguards affecting the Enterprises.

OFHEO's general enforcement powers are codified in Subtitle C of the Act. Subtitle B of the Act specifies certain enforcement steps required to be taken by OFHEO when an Enterprise is not adequately capitalized, as well as certain discretionary enforcement actions available to OFHEO in such circumstances. Whenever the discretionary provisions of Subtitle B apply, the Director has discretion to take action under Subtitle B alone or to take alternative or simultaneous actions under the provisions of Subtitle C. 8

OFHEO's enforcement powers extend to affiliates of the Enterprises 9 and executive officers and directors thereof. The Act defines an affiliate to be any entity that controls, is controlled by, or is under common control with an Enterprise. 12 U.S.C. 4502(1). Congress did not define control, leaving the term instead to be interpreted by OFHEO in its administrative expertise. For these purposes, OFHEO will look to see whether an entity exercises a controlling influence over the management and policies of the particular entity, whether it be by ownership of or the power to vote a concentration of any class of voting securities, the ability to elect or appoint members of the board of directors or officers of the entity, or otherwise. This standard is appropriate, in order to ensure that an Enterprise or an entity controlling it does not manipulate its organizational structure in order to evade OFHEO's enforcement jurisdiction.

The Act, at 12 U.S.C. 4631, authorizes the Director to issue a cease and desist order or orders to an Enterprise or its executive officers or directors. The Director may issue a notice of charges if the Director determines that certain conduct has occurred, or reasonably believes such conduct is about to occur:

• For an adequately capitalized Enterprise any conduct that threatens to cause a significant depletion of core capital, or for an Enterprise that is not adequately capitalized any conduct that is likely to result in a material depletion of core capital;

• Any conduct that could result in the issuance of an order to require an executive officer or director of an Enterprise to reimburse or indemnify the Enterprise, where such person is either unjustly enriched or engaged in knowing misconduct likely to cause substantial loss, as provided under the Act at 12 U.S.C. 4636(b)(3);

• Any conduct that violates a written agreement entered into by the Enterprise with the Director; or

• Any conduct that violates the Act, the Federal National Mortgage Association Charter Act, the Federal Home Loan Mortgage Corporation Act (collectively, the Charter Acts), or any regulation, rule, or order under such Acts. However, the Director may not enforce compliance with housing goals established pursuant to 12 U.S.C. 4561-4567 under the Act, 10 with 12 U.S.C. 4566 and 4567 under the Act, 11 or with 12 U.S.C. 1723a(m)-(n) under the Federal National Mortgage Association Charter Act or 12 U.S.C. 1456(e)-(f) under the Federal Home Loan Mortgage Corporation Act. 12

Section 4631 authorizes the Director to issue a notice of charges to initiate cease and desist proceedings if an Enterprise, an executive officer, or a director thereof engages in an unsafe or unsound practice or if the Enterprise is in an unsafe or unsound condition. As indicated by the language of the statute and its legislative history, 13 the unsafe and unsound conduct or condition in question need not be specifically defined as such by a particular statutory or regulatory provision. The Act subjects the Enterprises to an overarching obligation to conduct their operations in a manner that maintains the safe and sound condition of the Enterprise, the boundaries of which are set by OFHEO in its supervisory discretion. 14 Unsafe or unsound practices or conditions are deemed to be violations of the Act for purposes of section 4631(a)(3)(A), justifying the Director's initiation of cease and desist proceedings based on such a violation.

Interested persons are invited to participate in the making of the proposed rule by submitting such written data, views, or arguments as they may desire. Communications should identify the Rules Docket number and be submitted to the address specified above. All communications received on or before the closing date for comments, specified above, will be considered before taking action on the proposed rule. The proposals contained in this action may be changed in light of the comments received.

Comments are specifically invited on the overall regulatory, economic, environmental, and energy aspects of the proposed rule. All comments submitted will be available, both before and after the closing date for comments, in the Rules Docket for examination by interested persons. A report summarizing each FAA-public contact concerned with the substance of this proposal will be filed in the Rules Docket.

Commenters wishing the FAA to acknowledge receipt of their comments submitted in response to this action must submit a self-addressed, stamped postcard on which the following statement is made: “Comments to Docket Number 2000-NE-25-AD.” The postcard will be date stamped and returned to the commenter.

Any person may obtain a copy of this NPRM by submitting a request to the FAA, New England Region, Office of the Regional Counsel, Attention: Rules Docket No. 2000-NE-25-AD, 12 New England Executive Park, Burlington, MA 01803-5299.

This proposal is prompted by reports that thirteen 2nd stage HPT air seal assemblies have been found cracked in the rim area. The current design 2nd stage HPT air seal assemblies are operating in a temperature environment that is hotter than the manufacturer anticipated. Investigation shows that the crack initiation and propagation result from thermal mechanical fatigue. Investigation also revealed that the length of the flight, or mission cycle affects the service life limit of the 2nd stage HPT air seal assembly. Therefore in recalculating the service life of 2nd stage HPT air seal assemblies, this AD requires operators to determine, on a monthly basis, the flight hour-to-cycle-ratio for the hours and cycles accumulated that month, and then to apply the appropriate initial inspection threshold and repetitive cyclic inspection interval. Cracking of the 2nd stage HPT air seal assembly, if not corrected, could result in seal fracture and uncontained engine failure. The manufacturer has informed the FAA that the 2nd stage HPT air seal assembly is currently being redesigned, and that upon completion of the certification, the installation of the new design will act as terminating action to the repetitive inspection requirements of the proposed AD. This proposed rule may be revised based on the new design.

The FAA has reviewed and approved the technical contents of PW Alert Service Bulletin (ASB) No. PW4G-112-A72-233, dated August 25, 2000. These contents describe procedures for operators to: (1) Determine, on a monthly basis, the flight hour-to-cycle ratio for the hours and cycles accumulated that month. (2) Apply the appropriate initial inspection threshold and repetitive cyclic inspection interval. (3) Recalculate the service life of 2nd stage HPT air seals. (4) Determine the appropriate inspection interval. The ASB also includes procedures for the removal from service of any cracked 2nd stage HPT seal assemblies or the removal of 2nd stage HPT seal assemblies at or before the newly calculated service life limits.

Since an unsafe condition has been identified that is likely to exist or develop on other products of this same type design, the proposed AD would require recalculation of service lives of 2nd stage HPT air seal assemblies, and the initial and repetitive on-wing borescope inspections of 2nd stage HPT air seal assemblies for cracks. The proposed action would also require the removal from service of any cracked seal assemblies, or the removal of seal assemblies at or before the calculated service life limits. The actions would be required to be accomplished in accordance with the ASB described previously.

The FAA estimates that there are 233 engines of the affected design in the worldwide fleet, and that 96 engines installed on aircraft of U.S. registry would be affected by this proposed AD. The FAA also estimates that it would take approximately 2.3 work hours per engine to accomplish the proposed on-wing borescope inspection, and that the average labor rate is $60 per work hour. The FAA estimates that approximately 47% of the certified life of the affected parts will be lost. Required parts would cost $235,950 per engine. Based on these figures, the total cost impact of the proposed AD on U.S. operators is estimated to be $10,659,312.

This proposal does not have federalism implications, as defined in Executive Order 13132, because it would not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. Accordingly, the FAA has not consulted with state authorities prior to publication of this proposal.

For the reasons discussed above, I certify that this proposed regulation (1) is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and (3) if promulgated, will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. A copy of the draft regulatory evaluation prepared for this action is contained in the Rules Docket. A copy of it may be obtained by contacting the Rules Docket at the location provided under the caption ADDRESSES .

Accordingly, pursuant to the authority delegated to me by the Administrator, the Federal Aviation Administration proposes to amend part 39 of the Federal Aviation Regulations (14 CFR part 39) as follows:

How do I comment on the proposed AD? We invite your comments on the proposed rule. You may send whatever written data, views, or arguments you choose. You need to include the rule's docket number and send your comments in triplicate to the address specified under the caption ADDRESSES. We will consider all comments received by the closing date specified above, before acting on the proposed rule. We may change the proposals contained in this notice in light of the comments received.

Are there any specific portions of the proposed AD I should pay attention to? The FAA specifically invites comments on the overall regulatory, economic, environmental, and energy aspects of the proposed rule that might require a change to the proposed rule. You may look at all comments we receive. We will file a report in the Rules Docket that summarizes each FAA contact with the public that concerns the substantive parts of this proposal.

We are re-examining the writing style we currently use in regulatory documents, in response to the Presidential memorandum of June 1, 1998. That memorandum requires federal agencies to communicate more clearly with the public. We are interested in your comments on the ease of understanding this document, and any other suggestions you might have to improve the clarity of FAA communications that affect you. You can get more information about the Presidential memorandum and the plain language initiative at http://www.faa.gov/language/.

How can I be sure FAA receives my comment? If you want us to acknowledge the receipt of your comments, you must include a self-addressed, stamped postcard. On the postcard, write “Comments to Docket No. 99-CE-89-AD.” We will date stamp and mail the postcard back to you.

What events have caused this proposed AD? The Luftfahrt-Bundesamt (LBA), which is the airworthiness authority for the Federal Republic of Germany, notified FAA that an unsafe condition may exist on all DG Flugzeugbau Model DG-500MB sailplanes equipped with a SOLO 2625 02 engine. The LBA reports that the service history for the SOLO 2625 02 engine shows a need to modify the front crank shaft bearing. Additionally, the digital engine indicator circuit breaker amperage is too low for use and needs replacement.

What are the consequences if the condition is not corrected? The actions specified by the proposed AD are intended to correct propeller drive belt tension that could cause damage to the engine crankshaft, and to replace an inadequate circuit breaker. Such failure could result in loss of power and consequently the loss of sailplane control.

Is there service information that applies to this subject? DG Flugzeugbau has issued: Technical Note No. 843/13, dated November 3, 1999. SOLO, the engine manufacturer, has issued Technical Note 4600-1.

What are the provisions of these technical notes? These technical notes includes procedures for:

What action did LBA take? The LBA classified this DG Flugzeugbau technical note as mandatory and issued German AD Number 1999-383, dated December 1, 1999, to ensure the continued airworthiness of these sailplanes in Germany.

Was this in accordance with the bilateral airworthiness agreement? These sailplane models are manufactured in Germany and are type certificated for operation in the United States under the provisions of section 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement. Complying with this bilateral airworthiness agreement, the LBA has kept FAA informed of the situation described above.

What has FAA decided? The FAA has examined the findings of the LBA; reviewed all available information, including the technical note referenced above; and determined that:

What would the proposed AD require? This proposed AD would require you to incorporate the actions in the previously referenced technical notes.

How many sailplanes would the proposed AD impact? We estimate that the proposed AD affects 1 sailplane in the U.S. registry.

What would be the cost impact of the proposed AD on owners/operators of the affected sailplanes? We estimate the following costs to do the proposed modification:

Would this proposed AD impact various entities? The regulations proposed here would not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. Therefore, it is determined that this proposed rule would not have federalism implications under Executive Order 13132.

Would this proposed AD involve a significant rule or regulatory action? For the reasons discussed above, I certify that this proposed action (1) is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and (3) if issued, will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. A copy of the draft regulatory evaluation prepared for this action has been placed in the Rules Docket. A copy of it may be obtained by contacting the Rules Docket at the location provided under the caption ADDRESSES .

Accordingly, under the authority delegated to me by the Administrator, the Federal Aviation Administration proposes to amend part 39 of the Federal Aviation Regulations (14 CFR part 39) as follows:

The Office of Inspector General (OIG) is a component of the Postal Service that performs as one of its principal functions investigations into violations of criminal law in connection with Postal Service programs and operations, pursuant to the Inspector General Act of 1978, as amended. 5 U.S.C. App.3. The OIG Investigative File System falls within the scope of subsections (j)(2), (k)(2), and (k)(5) of the Act.

The Postal Service has exempted certain systems of records that it maintains from specific provisions of the Privacy Act. At the time it adopted the exemptions contained in its Privacy Act regulations (39 CFR 266.9), the Postal Service stated its reason for each exemption in the preamble of the notice of proposed rulemaking (40 FR 37227, August 26, 1975). These reasons were added to the text of § 266.9 by final rule published July 13, 1994 (59 FR 35625). This proposed rule does not change the current application of exemptions, except to apply certain exemptions to the OIG Investigative File System.

Pursuant to the Bank Secrecy Act, 31 U.S.C. 5318(g), anti-money laundering provisions, and implementing regulations of the U.S. Treasury, 31 CFR Part 103, the Postal Service is required to report to the Department of the Treasury certain suspicious financial transactions that are relevant to a possible violation of law or regulation. Further, the Postal Service is prohibited from notifying any participant in the transaction that a report has been made. 31 U.S.C. 5318(g)(2).

The Postal Service is publishing separately a notice of a new system of records, USPS 050.080, Finance Records-Suspicious Transaction Reports, which was made necessary by the reporting requirements of the Bank Secrecy Act. The system of records contains information about certain postal customers who purchase or receive money orders, wire transfers, or stored value cards.

In order to permit compliance with the non-notification requirement of the Bank Secrecy Act, the Postal Service is adopting an exemption from the Privacy Act provisions related to individual access. Under 5 U.S.C. 552a(k)(2), the head of an agency may promulgate rules to exempt a system of records from certain provisions of 5 U.S.C. 552a if the system of records is “investigatory material compiled for law enforcement purposes, other than material within the scope of subsection (j)(2) of this section.”

The Postal Service is hereby giving notice of a proposed rule to exempt the Suspicious Transaction Report system from certain provisions of the Privacy Act pursuant to 5 U.S.C. 552a(k)(2). The reasons for exempting the system of records from sections (c)(3), (d), (e)(1), (e)(4)(G), (e)(4)(H), (e)(4)(I), and (f) of the Privacy Act are set forth in the proposed rule.

For the reasons set out in the preamble, the Postal Service proposes to amend part 266 of 39 CFR as follows:

Throughout this document “we,” “us,” and “our” means EPA.

The Act requires the EPA to establish National Ambient Air Quality Standards (NAAQS) for certain widespread pollutants that cause or contribute to air pollution that is reasonably anticipated to endanger public health or welfare. Clean Air Act sections 108 and 109. In 1979, EPA promulgated the 1-hour ground-level ozone standard of 120 parts per billion (ppb). 44 FR 8202 (February 8, 1979).

Ground-level ozone is not emitted directly by sources. Rather, Volatile Organic Compounds (VOC) and Nitrogen Oxides ( NO X ), emitted by a wide variety of sources, react in the presence of sunlight to form ground-level ozone. NO X and VOC are referred to as precursors of ozone.

Ozone formation is accelerated or enhanced under certain meteorological conditions, such as high temperatures and low wind speeds. Higher ozone concentrations occur downwind of areas with relatively high VOC and NO X concentrations or in areas subject to relatively high background ozone and ozone precursor concentrations (ozone and ozone precursors entering an area as the result of transport from upwind source areas).

VOC emissions are produced by a wide variety of sources, including stationary and mobile sources. Significant stationary sources of VOC include industrial solvent usage, various coating operations, industrial and utility combustion units, petroleum and oil storage and marketing operations, chemical manufacturing operations, personal solvent usage, etc. Significant mobile sources of VOC include on-road vehicle usage and off-road vehicle and engine usage, such as farm machinery, aircraft, locomotives, and motorized lawn care and garden implements.

NO X emissions are produced primarily through combustion processes, including industrial and utility boiler use, process heaters and furnaces, and on-road and off-road mobile sources.

An area exceeds the 1-hour ozone standard each time an ambient air quality monitor records a 1-hour average ozone concentration above 124 ppb in any given day (only the highest 1-hour ozone concentration at the monitor during any 24 hour day is considered when determining the number of exceedance days at the monitor). An area violates the ozone standard if, over a consecutive 3-year period, more than 3 days of exceedances are expected to occur at any monitor in the area. 40 CFR Part 50, App.H.

The highest of the fourth-highest daily peak ozone concentrations over the 3 year period at any monitoring site in the area is called the ozone design value for the area. The Act, as amended in 1990, required EPA to designate as nonattainment any area that was violating the 1-hour ozone standard, generally based on air quality monitoring data from the 1987 through 1989 period. Clean Air Act section 107(d)(4); 56 FR 56694 (November 6, 1991). The Act further classified these areas, based on the areas' ozone design values, as marginal, moderate, serious, severe, or extreme. Marginal areas were suffering the least significant ozone nonattainment problems, while the areas classified as severe and extreme had the most significant ozone nonattainment problems.

The control requirements and date by which attainment is to be achieved vary with an area's classification. Marginal areas were subject to the fewest mandated control requirements and had the earliest attainment date, November 15, 1993. Severe and extreme areas are subject to more stringent planning requirements but are provided more time to attain the standard. Serious areas were required to attain the 1-hour standard by November 15, 1999, and severe areas are required to attain by November 15, 2005 or November 15, 2007, depending on the areas' ozone design values for 1987 through 1989. The BPA ozone nonattainment area was initially classified as serious (56 FR 56694). Subsequently, EPA determined that the serious classification was made in error. The area was reclassified to moderate and the attainment date for a moderate area is November 15, 1996 (61 FR 14496). The BPA ozone nonattainment area is defined (40 CFR Parts 81.314 and 81.326) to contain Jefferson, Hardin and Orange Counties in Texas.

The specific requirements of the Act for moderate ozone nonattainment areas are found in part D, section 182(b). Section 172 in part D provides the general requirements for nonattainment plans. Section 172(c)(6) in part D of the Act and section 110 require SIPs to include enforceable emission limitations, and such other control measures, means or techniques as well as schedules and timetables for compliance, as may be necessary to provide for attainment by the applicable attainment date. Section 172(c)(1) requires the SIP to provide for implementation of all reasonably available control measures as expeditiously as practicable and requires the SIP to provide for attainment of the NAAQS. Section 182(b)(1)(A) requires the State to submit for the moderate nonattainment area, a 15% Rate of Progress Plan and also provide for specific annual reductions in emissions of VOC and NO X “as necessary to attain” the ozone NAAQS by the applicable attainment date. EPA's “General Preamble for the Implementation of Title I of the Clean Air Act Amendments of 1990” (57 FR 13498 dated April 16, 1992) provides the interpretive basis for EPA's rulemakings under the nonattainment plan provisions of the Act (General Preamble). In the General Preamble, the EPA provides that this section 182(b)(1)(A) requirement for attainment may be met by the use of EPA-approved modeling techniques. As part of today's proposal, EPA is proposing action on the attainment demonstration SIP revision submitted by the State of Texas for the BPA moderate ozone nonattainment area.

In general, an attainment demonstration SIP includes a modeling analysis showing how an area will achieve the standard by its attainment date and the emission control measures necessary to achieve attainment. The attainment demonstration SIPs must include motor vehicle emissions budgets for transportation conformity purposes. Transportation conformity is a process required by Section 176(c) of the Act for ensuring that the effects of emissions from all on-road sources are consistent with attainment of the standard. Ozone attainment demonstrations must include the estimates of motor vehicle VOC and NO X emissions that are consistent with attainment, which then act as a budget or ceiling for the purposes of determining whether transportation plans, programs, and projects conform to the attainment SIP. Refer to Section II.A.5 for more details.

The BPA area is classified as moderate and, therefore, was required to attain the 1-hour ozone standard of 0.12 parts per million by November 15, 1996.

Attainment Demonstration SIPs were originally due November 1994. However, through a series of policy memoranda, the EPA recognized that States had not submitted these attainment demonstrations and were constrained to do so until ozone transport had been further analyzed. One policy memorandum addressing the issue of ozone transport is the Transport Policy issued by the EPA in July 1998. The Transport Policy is particularly relevant to BPA, which is downwind of the Houston/Galveston (HG) area, a severe-17 ozone nonattainment area with an attainment date of November 15, 2007.

On April 16, 1999, EPA proposed in the Federal Register to reclassify the BPA area to a serious ozone nonattainment area, and alternatively, proposed to extend the BPA area's attainment date if the State submitted a SIP timely and meeting the criteria of the 1998 Transport Policy (64 Federal Register 18864).

The BPA Attainment Demonstration SIP revision was adopted by the State on October 27, 1999 and submitted to the EPA under a cover letter from the Governor dated November 12, 1999. This submittal was termed by the State as “Phase I” of their NO X rulemaking activities. The State submitted a revision to their SIP dated April 25, 2000, as “Phase II” NO X rules and controls needed for attainment.

In the BPA ozone attainment demonstration SIP reviewed here, the State does rely, in part, on regional and statewide NO X emission reductions for Texas, including the upwind HG Area, the eastern half of the State of Texas, and States upwind of Texas (most importantly, Louisiana). In developing the attainment demonstration for BPA, the State makes the case that the 1998 Transport Policy is particularly relevant to BPA, which is downwind of the HG area, and that the BPA area is affected by transport from HG. If we approve of such a determination for BPA, the area would have until no later than November 15, 2007, the attainment date for HG, to attain the 1-hour ozone standard.

The State submitted the attainment demonstration SIP revisions and supporting documentation between November 1999 and April 2000. In today's Federal Register , EPA is proposing to approve the attainment demonstration SIP for the BPA area. The anticipated schedule includes a 30-day public comment period. The EPA cannot finalize the proposed action upon the attainment demonstration SIP unless and until we have fully approved all of the control measures relied upon in the State's attainment demonstration SIP for the BPA area and the control measures required by the Act for a moderate area such as the BPA area. The EPA intends to complete final rulemaking on all of those required control measures by early spring 2001. We are acting upon those measures in separate Federal Register rulemaking notices. The EPA intends to have the Regional Administrator sign a final rulemaking on the attainment demonstration SIP and the attainment date extension for the BPA Area in late April, 2001. The final rule would be published in the Federal Register following Regional Administrator signature. The Texas Natural Resource Conservation Commission (TNRCC) submitted an enforceable commitment in the April 2000 SIP submittal to perform a mid-course review (including evaluation of all modeling, inventory data, and other tools and assumptions used to develop this attainment demonstration). The TNRCC committed that it will submit a mid-course review SIP revision, with recommended mid-course corrective actions, to the EPA by May 1, 2004.

The EPA provides guidance ( Guidance on the Use of Modeled Results to Demonstrate Attainment of the Ozone NAAQS, EPA-454/B-95-007, June 1996) that States may rely on a modeled attainment demonstration supplemented with additional evidence to demonstrate attainment. To have a complete modeling demonstration submission, States should have submitted the required modeling analyses and identified any additional evidence that EPA should consider in evaluating whether the area will attain the standard. Additional components are discussed below.

The following documents, among others, contain EPA's guidelines affecting the content and review of ozone attainment demonstration submittals:

1. Guideline for Regulatory Application of the Urban Airshed Model, EPA-450/4-91-013, July 1991. Web site: http://www.epa.gov/ttn/scram/ (file name: “UAMREG”).

2. Procedures for Emission Inventory Preparation, Volume IV: Mobile Sources (Revised) (1992);

3. Guidance on Urban Airshed Model (UAM) Reporting Requirements for Attainment Demonstrations, EPA-454/R-93-056, March 1994. Web site: http://www.epa.gov/ttn/scram/ (file name: “UAMRPTRQ”).

4. User's Guide to MOBILE5 (Mobile Source Emission Factor Model), May 1994;

5. Memorandum, “Ozone Attainment Dates for Areas Affected by Overwhelming Transport,” from Mary D. Nichols, Assistant Administrator for Air and Radiation, Environmental Protection Agency, September 1994;

6. Memorandum, “Ozone Attainment Demonstrations,” from Mary D. Nichols, Assistant Administrator for Air and Radiation, March 2, 1995. Web site: http://www.epa.gov/ttn/oarpg/t1pgm.html .

7. Guidance on the Use of Modeled Results to Demonstrate Attainment of the Ozone NAAQS, EPA-454/B-95-007, June 1996. Web site: http://www.epa.gov/ttn/scram/ (file name: “O3TEST”).

8. Memorandum, “Guidance for Implementing the 1-Hour Ozone and Pre-Existing PM10 NAAQS,” from Richard Wilson, Office of Air and Radiation, December 29, 1997. Web site: http://www.epa.gov/ttn/oarpg/t1pgm.html .

9. Memorandum, “Extension of Attainment Dates for Downwind Transport Areas,” from Richard D. Wilson, Acting Assistant Administrator for Air and Radiation, July 16, 1998.

10. Memorandum, “Use of Models and Other Analyses in Attainment Demonstrations for the 8-Hour Ozone NAAQS (Draft)”, 1998.

11. Memorandum, “Guidance on Motor Vehicle Emissions Budgets in One-Hour Ozone Attainment Demonstrations,” from Merrylin Zaw-Mon, Acting Director of the Regional and State Programs Division, November 3, 1999. Webb site: www.epa.gov/oms/transp/conform/nov3guid.pdf.

12. Memorandum, “Guidance on the Reasonably Available Control Measures (RACM) Requirement and Attainment Demonstration Submissions for Ozone Nonattainment Areas,” from John S. Seitz, Director of Office of Air Quality Planning and Standards, November 30, 1999.

13. Draft Memorandum, “1-Hour Ozone NAAQS—Mid-Course Review Guidance,” from John Seitz, Director, Office of Air Quality Planning and Standards.

For purposes of demonstrating attainment under section 182(b), the General Preamble provides that a State may rely upon EPA's modeling guidance. EPA's modeling guidance provides for the use of photochemical grid modeling and additional information. The photochemical grid model is set up using meteorological conditions conducive to the formation of ozone in the nonattainment area and its modeling domain, as defined below. Emissions for a base year are used to evaluate the model's ability to reproduce actual monitored air quality values. Following validation of the modeling system for a base year, emissions are projected to an attainment year to predict air quality changes in the attainment year due to the emission changes, which include growth up to and controls implemented by the attainment year. A modeling domain is chosen that encompasses the nonattainment area. Attainment is demonstrated when all predicted ozone concentrations inside the modeling domain are at or below the ozone standard or an acceptable upper limit above the standard under certain conditions provided in EPA's 1996 guidance. When the predicted concentrations are above the standard or an upper limit using the 1996 guidance criteria, EPA's 1996 guidance provides for the use of an optional weight-of-evidence determination which incorporates other analyses, such as air quality and emissions trends, to address uncertainty inherent in the application of photochemical grid models. This latter approach may be used under certain circumstances to support a demonstration of attainment.

EPA guidance identifies the features of a modeling analysis that are essential to obtain credible results. First, the State develops and implements a modeling protocol. The modeling protocol describes the methods and procedures to be used in conducting the modeling analyses and provides for policy oversight and technical review by individuals responsible for developing or assessing the attainment demonstration (State and local agencies, EPA). Second, for purposes of developing the information to put into the model, air pollution days, i.e., days in the past with high ozone concentrations exceeding the standard, are considered by EPA to be representative of the ozone pollution problem for the nonattainment area. Third, identification of the appropriate dimensions of the area to be modeled, i.e., the modeling domain size, is an important criterion. A domain larger than the designated nonattainment area reduces uncertainty in the boundary conditions as does including any large upwind sources just outside the nonattainment area. In general, the domain is considered the local area where control measures are most beneficial to bring the area into attainment. Alternatively, a much larger modeling domain may be established, addressing the impacts of both local and regional emission control measures on a number of ozone nonattainment areas. In both cases, the attainment determination is based on the review of ozone predictions within the local area where control measures are most beneficial to bring the area into attainment (referred to as the local modeling domain). Fourth, determination of the grid resolution is an important criterion. The horizontal and vertical grid resolutions in the model can affect significantly the modeled results of dispersion and transport of emission plumes. Artificially large grid cells (too few vertical layers and horizontal grids) may dilute concentrations and may not properly consider impacts of complex terrain, complex meteorology, and land/water interfaces. Fifth, meteorological and emissions data that describe atmospheric conditions and emissions inputs reflective of the selected high ozone days are generated. Finally, verification that the modeling system is properly simulating the chemistry and atmospheric conditions through diagnostic analyses and model performance tests (generally referred to as model validation) provides confidence in the performance. Once these steps are satisfactorily completed, the model is ready to be used to generate air quality estimates to support an attainment demonstration.

The modeled attainment test compares model predicted 1-hour daily maximum ozone concentrations in all grid cells for the attainment year to the level of the ozone standard. A predicted peak ozone concentration above 124 ppb indicates that the area is expected to exceed the standard in the attainment year. This type of test is often referred to as an exceedance test. The EPA's June 1996 guidance recommends that States use either of two exceedance tests for the 1-hour ozone standard: A deterministic test or a statistical test.

Under the deterministic test the State compares predicted 1-hour daily maximum ozone concentrations for each modeled day (the initial, “ramp-up” days for each episode are excluded from this determination) to the attainment level of 124 ppb. If none of the predictions exceed 124 ppb, the test is passed.

The statistical test takes into account the fact that the form of the 1-hour ozone standard allows exceedances. If, over a 3 year period, the area has an average of 1 or fewer ozone standard exceedances per year at any monitoring site, the area is not violating the standard. Thus, if the State models a severe day (considering meteorological conditions that are very conducive to high ozone levels and that should lead to fewer than 1 exceedance per year at any location in the nonattainment area and in the modeling domain over a 3 year period), the statistical test provides that a prediction above 124 ppb up to a certain upper limit may be consistent with attainment of the standard. (The form of the 1-hour ozone standard allows for up to three readings above the standard over a three-year period before an area is considered to be in violation.)

The acceptable upper limit above 124 ppb is determined by examining the size of exceedances at monitoring sites which meet or attain the 1-hour standard. For example, a monitoring site for which the 4 highest 1-hour average concentrations over a 3 year period are 136 ppb, 130 ppb, 128 ppb, and 122 ppb is attaining the standard since there are no more than 3 exceedences at any one monitor over a 3-year period. To identify an acceptable upper limit, the statistical likelihood of observing ozone air quality exceedances of the standard of various concentrations is equated to the severity of the modeled day. The upper limit generally represents the maximum ozone concentration level observed at a location on a single day and it would be the only reading above the standard that would be expected to occur no more than an average of once a year over a 3 year period. Therefore, if the maximum ozone concentration predicted by the model is below the acceptable upper limit, in this case 136 ppb, then EPA might conclude that the modeled attainment test is passed. Generally, exceedances well above 124 ppb are very unusual at monitoring sites meeting the standard. Thus, these upper limits are rarely substantially higher than the attainment level of 124 ppb.

When the modeling does not conclusively demonstrate attainment, additional analyses may be presented to help determine whether the area will attain the standard. As with other predictive tools, there are inherent uncertainties associated with modeling and its results. For example, there are uncertainties in some of the modeling inputs, such as the meteorological and emissions data bases for individual days and in the methodology used to assess the severity of an exceedance at individual sites. The EPA's 1996 guidance recognizes these limitations and provides a means for considering other evidence to help assess whether attainment of the standard is likely. The process by which this is done is called a weight-of-evidence determination.

Under a weight-of-evidence determination, the State can rely on and EPA will consider factors such as: Model performance and results, episode selection, other modeled attainment tests, e.g., relative reduction factor analysis; other modeled outputs, e.g., changes in the predicted frequency and pervasiveness of exceedances and predicted changes in the design value; actual observed air quality trends; estimated emissions trends; analyses of air quality monitored data; the responsiveness of the model predictions to further controls; and, whether there are additional control measures that are or will be approved into the SIP but were not included in the modeling analysis. This list is not an exhaustive list of factors that may be considered and these factors could vary from case to case. The EPA's 1996 guidance contains no limit on how close a modeled attainment test must be to passing to conclude that other evidence besides an attainment test is a sufficiently compelling case for attainment. However, the further a modeled attainment test is from being passed, the more compelling the weight-of-evidence needs to be.

The EPA's 1996 guidance also recognizes a need to perform a mid-course review as a means for addressing uncertainty in the modeling results. Because of the uncertainty in long term projections, EPA believes a viable attainment demonstration that relies on weight of evidence should contain provisions for periodic review of monitoring, emissions, and modeling data to assess the extent to which refinements to emission control measures are needed.

In addition to the modeling analysis and weight-of-evidence determination demonstrating attainment, the EPA has identified the following key elements which must be present in order for EPA to approve the 1-hour attainment demonstration SIP under the criteria of the 1998 Transport Policy.

1. Clean Air Act measures and other measures relied on in the modeled attainment demonstration State Implementation Plan. To receive final approval of the BPA attainment demonstration SIP under the 1998 Transport Policy, the State must have adopted the emission control measures required under the Act for the area's classification or must have established negative source declarations for the source categories for which the area has no sources that are subject to the Clean Air Act area's classification requirements for such sources. All required emission controls must be implemented as expeditiously as practicable but no later than prior to the beginning of the ozone season (year round in the BPA area, 40 CFR Part 58—Texas Air Quality Control Region 10) in the area's attainment year to assure attainment of the ozone standard in the attainment year.

The attainment demonstration must incorporate the emission impacts of, and the SIP submittal must address the rule development for, any additional emission control measures needed to achieve attainment. The rules for these emission controls relied upon in the attainment demonstration must also have been adopted by the State and approved by EPA before the EPA can finally approve the attainment demonstration SIP. The emission controls for these sources must be implemented as expeditiously as practicable.

Table 1 presents a summary of the Clean Air Act requirements that need to be met for a moderate ozone nonattainment area for the 1-hour ozone standard. These requirements are specified in sections 182(b) and 182(f) of the Act. Information on additional measures that Texas has adopted and relied on in the attainment demonstration SIP for the BPA area is not shown in this table, but is addressed later in this proposed rule.

2. Motor vehicle emissions budgets. An attainment demonstration SIP must establish the motor vehicle emissions budget that is the maximum level of on-road emissions that can be produced in the attainment year. The attainment demonstration SIP must also demonstrate that this emissions level, when considered with emissions from all other sources, is consistent with attainment. The motor vehicle emissions budgets must meet certain criteria which are listed in the Transportation Conformity Rule (40 CFR Part 93 Subpart A Section 93.118) and all pertinent SIP requirements before the budgets can be approved as part of the attainment demonstration SIP.

The EPA's policy regarding an extension of the ozone attainment date for the BPA area is fully addressed in EPA's initial notice of proposed rulemaking dated April 16, 1999 (64 FR 18864). In the April 16, 1999, notice, the EPA proposed to reclassify the BPA area to a serious ozone nonattainment area, but also provided notice of the area's potential eligibility for an attainment date extension based on a July 16, 1998, EPA guidance memorandum. The specifics of the attainment date policy are repeated below for clarity.

On July 16, 1998, a guidance memorandum entitled “Extension of Attainment Dates for Downwind Transport Areas” was issued by the EPA. That memorandum included EPA's interpretation of the Act regarding the extension of attainment dates for ozone nonattainment areas that have been classified as moderate or serious for the 1-hour ozone standard and which are downwind of areas that have interfered with their ability to demonstrate attainment of the ozone standard by dates prescribed in the Act. That memorandum stated that the EPA will consider extending the attainment date for an area or a State that:

(1) Has been identified as a downwind area affected by transport from either an upwind area in the same State with a later attainment date or an upwind area in another State that significantly contributes to downwind ozone nonattainment;

(2) Has submitted an approvable attainment demonstration with any necessary, adopted local measures and with an attainment date that shows it will attain the 1-hour standard no later than the date that the reductions are expected from upwind areas under the final NO X SIP call (63 FR 57356, October 27, 1998; compliance dates revised by Court order August 30, 2000) and/or the statutory attainment date for upwind nonattainment areas, ( i.e., assuming the boundary conditions reflecting those upwind emission reductions);

(3) Has adopted all applicable local measures required under the area's current classification and any additional measures necessary to demonstrate attainment, assuming the reductions occur as required in the upwind areas;

(4) Has provided that it will implement all adopted measures as expeditiously as practicable, but no later than the date by which the upwind reductions needed for attainment will be achieved.

Once an area receives an extension of its attainment date based on ozone/precursor transport impacts, the area is no longer subject to reclassification to a higher ozone nonattainment classification for failure to attain the ozone standard by the original attainment deadline. If the BPA area is granted an attainment date extension, it would no longer be subject to a reclassification to serious nonattainment for ozone and no longer subject to the additional emission control requirements that would result from the reclassification to serious nonattainment, for failure to attain by the original November 15, 1996, deadline.

Texas has requested an extension of the attainment date for the BPA nonattainment area in conjunction with the ozone attainment demonstration submittals. The ozone attainment demonstration SIP uses November 15, 2007 as the ozone attainment date. The chosen 2007 attainment date reflects the statutory attainment date for the HG area, as the BPA is downwind of the HG area.

When were the ozone attainment demonstration State Implementation Plan revisions submitted to the Environmental Protection Agency? The TNRCC made two submittals to us, which in whole or in part concern the ozone attainment demonstration, and an extension of the attainment date for the BPA ozone nonattainment area:

(a) A November 12, 1999, submission from the Governor of Texas, which included the following:

A. Regulations and associated documentation for the control of VOC emissions from batch process operations and industrial wastewater treatment processes, intended to fulfill the remaining VOC RACT requirements of section 182(b)(2) of the Act for the BPA moderate nonattainment area;

B. A regulation and associated documentation for the control of NO X emissions from lean burn engines, intended to meet the remaining NO X RACT requirements of section 182(b)(2) of the Act for the BPA moderate nonattainment area;

C. A Photochemical Modeling demonstration and its accompanying control strategy to bring the BPA area into attainment of the one-hour ozone standard as expeditiously as practicable, but no later than 2007;

D. A 2007 motor vehicle emissions budget for transportation conformity;

E. Emissions growth estimates and an emissions inventory; and,

F. An enforceable commitment to submit additional rules to us in accordance with its modeled control strategy.

(b) An April 25, 2000, submission from the Governor of Texas, which included the following:

A. NO X emissions specifications in the BPA area for electric utility boilers, industrial, commercial or institutional boilers, and certain process heaters, relied upon for attainment in the BPA area;

B. Additional regional rules and orders relied upon for demonstrating attainment in the BPA area;

C. A Revised Photochemical Modeling demonstration and emissions growth estimates; and,

D. An enforceable commitment to perform a mid-course review with submittal to the EPA by May 1, 2004.

For the purposes of this action, we are reviewing only the modeling, weight-of-evidence support, the transport analysis, MVEB, emissions inventory, the approved VOC 1990 baseline emission inventory regarding major VOC sources in the BPA area, and the mid-course enforceable commitment.

When were the submittals addressed in public hearings, and when were the submittals formally adopted by the States? The TNRCC held a public hearing on the November submittal on August 9, 1999. This submittal was formally adopted by the TNRCC on October 27, 1999. The TNRCC held ten public hearings on the April submittal; a public hearing was held in the BPA area on January 31, 2000. The TNRCC formally adopted the April 25, 2000, submittal on April 19, 2000.

What modeling approach was used in the analyses? The State of Texas conducted the modeling analyses and other analyses, including weight-of-evidence analyses, used to support the attainment demonstration. The modeling approach is documented in both Texas' November 12, 1999, ozone attainment demonstration (Phase I) and the April 25, 2000, supplemental ozone attainment demonstration (Phase II) submittals.

The TNRCC used the Comprehensive Air Quality Model with Extensions (CAMx) photochemical grid model (which is based on well-established treatments of advection, diffusion, deposition, and chemistry similar to the UAM photochemical grid model) to conduct the SIP attainment demonstration modeling.

TNRCC used a relatively large modeling domain to capture the influence of inter-urban transport between Lake Charles, Louisiana (LC), the BPA area, and the HG area. The modeling domain covers most counties in central and east Texas, including the ozone nonattainment counties of Harris, Jefferson, Orange, Chambers, Hardin, Liberty, Montgomery, Waller, Brazoria, Galveston, and Fort Bend counties, and parts of three parishes in Louisiana.

How were high ozone episodes evaluated for modeling selection? In selecting the episodes to be modeled, the State followed the guidance provided by the EPA. The July 1991 ozone modeling guidance, “Guideline for Regulatory Application of the Urban Airshed Model”, recommends that episodes for modeling be selected to represent different meteorological regimes observed to correspond with ozone exceeding the standard. The policy represents EPA's view that both stagnation and transport conditions should be examined, and a minimum of 3 primary episode days should be modeled. Primary episode days are those days for which ozone concentrations exceeding the standard were monitored in the area. For a more complete description of episode selection criteria see the TSD for this document.

What high ozone periods were modeled? TNRCC selected two episodes for BPA's attainment demonstration modeling purposes. They were the August 31-September 2, 1993, and September 6-11, 1993, episodes. Details of the rationale for inclusion of these two episodes can be found in the State's BPA attainment demonstration SIP submittal and the TSD for this document.

The August 31 to September 2, 1993, episode, in EPA's view, features representative wind patterns and high monitored ambient ozone concentration levels. This particular meteorological regime is highly correlated with rather severe monitored ozone exceedances. Transport between HG and BPA is indicated during this episode. The highest monitored reading in the BPA area for this period was 139 ppb on September 2, 1993.

The September 6-11, 1993, episode is characterized by having high to moderately high daily monitored peak ozone concentrations over the entire large domain. The highest monitored reading in the BPA area for this period was 141 ppb on September 10, 1993. As noted, the high ozone episodes TNRCC selected and modeled cover more than 3 primary episode days and cover the types of meteorology observed along with high ozone in the BPA area. For a more complete description of episode selection see the TSD for this document.

What input data systems and analyses were used as part of the combined modeling system? The following input data systems and analyses were used by the State:

Emissions: TNRCC developed two major types of modeling emission inventories, one type representing the actual emissions that occurred during the two chosen specific episode periods, and another type representing the projected emissions expected to occur at the attainment date for the HG area ( i.e., 2007). The episode-specific modeling emissions, termed the “base case,” were used to evaluate the model's reliability in replicating the ozone exceedances that occurred during the two chosen episodes. The 2007 projected modeling emissions, termed the “future case,” were used to estimate the overall level of reductions in VOC and NO X needed to achieve attainment. For a more complete description of how these base case and future case inventories were developed, see the TSD for this document.

Meteorology: TNRCC developed the meteorological inputs to CAMx using the System Application International Mesoscale Model (SAIMM), which is a prognostic mesoscale meteorological model with four dimensional data assimilation (4DDA). EPA is proposing to accept TNRCC's use of SAIMM upon the technical justification that it adequately replicates the land-sea breeze and inter-urban area transport features which appear to be typical of conditions associated with ozone exceedances along the Texas Gulf coast.

Chemistry: Atmospheric chemistry within the modeling grid system was simulated using the Carbon Bond-Version IV model developed by the EPA.

Boundary and Initial Conditions: EPA's modeling Guidelines recommend the use of the ROM photochemical model on a regional basis for developing boundary conditions. TNRCC in collaboration with ENVIRON conducted a regional modeling application to determine boundary and initial conditions for the COAST modeling domain. This regional modeling domain covered a rather large area of the southeastern United States, extending from San Angelo, Texas on the west to the Georgia-Alabama border on the east, and from south of Brownsville on the south to the Oklahoma-Kansas border on the north. EPA considers this modeling framework used by TNRCC for the development of boundary and initial conditions to be superior to ROM, since it encompasses many improvements in model formulation over ROM. Using the OTAG model performance criteria as a gauge for the technical acceptability of this Texas regional modeling, EPA proposes to accept the TNRCC/ENVIRON regional modeling application as producing acceptable results upon which to derive initial and boundary conditions for the two COAST modeling episodes.

What procedures and sources of projection data were used to project the emissions to future years? In general the projected 2007 modeling emissions inventory (future case) was derived from the base case modeling emissions inventory (base case) by applying growth and control factors to the various source categories.

For the growth of stationary point sources, TNRCC used survey data of point source startups and shutdowns that occurred from 1990 to 1996 to account for banking emissions, startups and shutdowns. As recommended, TNRCC used procedures developed by EPA, which take into account the survey data and the required offsets for nonattainment New Source Review purposes, to develop growth rates for the modeling domain.

For the growth of the area and off-road mobile source emissions, TNRCC used a combination of growth factors derived from a model developed specifically for Texas by Regional Economic Modeling Inc. (REMI). The Texas model is an adaptation of the Emissions Growth Analysis System (EGAS), which is the standard EPA method of developing growth factors. The EPA is proposing to find the Texas model acceptable for projecting the growth of the area and off-road mobile source emissions in the BPA area modeling.

TNRCC developed the projected 2007 on-road mobile source emissions using much of the same procedures as used for the base case on-road mobile source emissions, for most of the counties. For these counties, the projections were based upon the results of the Travel Demand Model (TDM)(a Texas Department of Transportation—TxDOT—travel demand model) and additional special survey data (local travel counts, etc.), which provided estimates of the Vehicle Miles Traveled (VMT) mix and hourly VMT fractions. The TDM modeling used a projected 2007 roadway network. The results of this TDM modeling were coupled with the results of MOBILE5a, the EPA-approved mobile sources model. However, some counties in the COAST modeling domain were not covered by the TDM. For this smaller group of counties, TNRCC did not develop the projected 2007 on-road mobile source emissions in the same manner as discussed above. In these cases, TNRCC used regional adjustment factors based upon: (1) the difference between MOBILE5a runs for model years 1993 and 2007 that were calculated above for those counties in the COAST modeling domain that were covered by the TDM, and (2) the difference between 1993 and 2007 VMT for those same TDM covered counties from the Highway Performance Monitoring System (HPMS) estimates provided by TxDOT. The adjustment factors were calculated by averaging county-specific ratios. Then, similar to how MOBILE5a was run for the TDM covered counties, MOBILE5a was run for the non-TDM covered counties with the same input setup used for the 1993 episodic on-road mobile source emissions, only changing the model year to 2007. EPA is proposing to accept this approach for projecting the future 2007 on-road mobile source emissions in the domain.

TNRCC used the same biogenic emissions developed for the 1993 episodic inventory ( i.e., BIOME generated) for the future case. TNRCC assumed biogenic emissions would remain approximately constant between the years 1993 and 2007, and the EPA proposes to accept this assumption.

The above emission projection procedures are acceptable to the EPA. The emission projection procedures are explained in greater detail in the TSD.

How did the State validate the photochemical modeling results? The State conducted a number of statistical analyses to compare the modeling system's ozone predictions to observed peak ozone concentrations for the base period. Using the preliminary base period emissions and meteorological inputs, the State derived statistics covering: unpaired peak accuracy; normalized bias; and, gross error of data pairs for each of the modeled high ozone episode days. These results were compared to acceptable accuracy ranges in the EPA guidance. With a few exceptions, the modeling results for the selected two episodes are in agreement with EPA-specified criteria.

Table 2 presents a summary of the model performance statistics for the BPA ozone nonattainment area. The days August 31, September 6 and 7, in EPA's view as expressed in the guidance, can be excluded for use in the analyses as these were ramp-up days for the modeling (the ramp-up days are expected to exhibit poor model performance and are generally dropped from further consideration). These data were taken from Appendix K of the State's submittal.

The model performance statistics can be compared to EPA's recommended (July 1991, Guideline for Regulatory Application of the Urban Airshed Model ) acceptable model performance statistics:

It can be seen from Table 2 above that the modeling system adequately performs within acceptable performance ranges for the majority of the performance criteria. The model does under predict the peak ozone levels on the days of September 1 and 2, 1993. The model over predicts ozone peaks on the other days, particularly on September 8, 9, and 11, 1993. The model over predicts an ozone peak but it is fairly close to that measured on the September 10, 1993, day. EPA is proposing that the modeling system is performing adequately and in an acceptable manner to support emission control strategy considerations.

The State used the September 6-11 ozone episode for its attainment demonstration. The model performance is in reasonable agreement with EPA performance specifications in the BPA area for three of the four days of this episode, with the exception being September 8, 1993. However, since this date had no monitored exceedances in the BPA area, it is EPA's proposed technical position that the September 8, 1993, day of the selected episode is not required for attainment demonstration control strategy evaluation for the BPA SIP.

A number of other tests and considerations were also given to the overall model performance evaluation. The performance evaluation considered various items of statistical and graphical information, diagnostic and sensitivity analyses, and graphical performance measures. It is EPA's technical position that these tests and considerations show acceptable performance of the modeling system for the chosen base period, and that September 10, 1993 shows good agreement between modeled and monitored data.

For a more detailed description of the validation of the photochemical modeling results, and the procedures to determine the controlling episode and day, see the TSD for this document.

How was potential transport from the HG area addressed ? TNRCC demonstrated the impact of ozone and ozone precursor transport from the upwind HG nonattainment area upon the BPA nonattainment area through the August 31 to September 2nd, 1993 episode. TNRCC applied the CAMx model using the same set of air quality and meteorological inputs previously used in the base case simulation, but with an emissions data set in which anthropogenic (man-made) emissions from the 8-county HG nonattainment area were eliminated. As a result, the modeled base peak ozone is reduced by as much as 10-30 ppb on most modeled days in the BPA area. Jefferson and Hardin counties are influenced more strongly by HG transport than Orange County, which in EPA's opinion, makes sense given their greater proximity to the HG nonattainment area. However, on some days, the modeled peak ozone level is not greatly diminished by the exclusion of the HG contribution. This does not mean, in EPA's opinion, that the BPA area is not affected by transport from the HG area. It is EPA's proposed technical position that for some days, the BPA area is affected by transport from the HG area. On other days, the BPA area is affected by ozone emissions generated within the BPA area itself.

In addition, TNRCC hired Dr. Thomas W. Sager of the University of Texas (UT) to conduct an analysis of back trajectories of air parcels coming into the BPA area and evaluate the effect of HG-only strategies' impact in BPA. He conducted a statistical study that evaluated back trajectories that terminated in BPA. He evaluated back trajectories on both high ozone concentration and low ozone concentration days for the BPA area. Dr. Sager used the HYSPLIT (HYbrid Single-Particle Lagrangian Integrated Trajectory) model for these studies. The HYSPLIT model is the newest version of a complete system for computing simple air parcel trajectories to complex dispersion and deposition simulations.

Based on the results of the study, Dr. Sager showed that back trajectories from the BPA area that pass near the HG area result in higher average ozone concentration levels in BPA, and that the closer the trajectory came to HG, the higher the ozone concentration levels in BPA. However, he did not show that transport from HG was the sole cause of high ozone concentrations in the BPA area. It is EPA's position that his study supports the above modeling results, that transport is a reason for higher ozone concentration levels in the BPA area on some days. On other days, the high ozone concentration levels in the BPA area are not due to transport, but due to locally-generated ozone or ozone precursor emissions.

In conclusion, we are proposing that Texas has demonstrated that during some BPA exceedances, ozone levels are affected by emissions from the HG area, and that the HG area emissions affect BPA's ability to meet attainment of the 1-hour ozone standard.

What were the ozone modeling results for the base period and for the future attainment period ? The ozone modeling system was run to simulate ozone concentrations on selected high ozone days in the 1993 episodes using emissions for those days, and a future year (2007). The resulting BPA area ozone peaks for 1993 and 2007 are given in Table 3. These modeled ozone peaks reflect the 2007 emissions and modeling results for the September 6-11 episode as documented by Texas in its April 25, 2000 submittal (September 6, 7, and 8 omitted as detailed in previous discussions), taking into consideration the emission control strategies discussed later.

Do the modeling results demonstrate attainment of the ozone standard ? As noted in Table 3, the 1-hour maximum predicted ozone concentration on the controlling day (September 10—the day during the selected episode with the maximum observed ozone concentration for the BPA area) over the BPA area is 132 ppb.

The modeling by itself does not conclusively demonstrate attainment of the standard, but its results are close enough to attainment to warrant the consideration of weight of evidence arguments that support the demonstration of attainment. The TNRCC conducted several weight of evidence analyses (please see next sections for further details) to add additional evidence that the demonstration shows that BPA will attain the standard by 2007 with the planned emission controls.

What weight-of-evidence analyses and determinations are used to support the modeled attainment demonstration ? A weight-of-evidence determination includes an assessment of the confidence one has in the modeled results. The more extensive and credible the corroborative information, the greater the influence it has in how to view deviations from the modeled attainment demonstration. As discussed in the June 1996 EPA guidance, Guidance on Use of Modeled Results to Demonstrate Attainment of the Ozone NAAQS , the weight-of-evidence given to model results depends on the following factors: (1) Model performance; (2) confidence in the underlying data bases; (3) length of the projection period; and (4) how close the results come to demonstrating attainment for all receptor sites and times modeled (see Table S.1. of the June 1996 guidance for a complete list of factors affecting weight-of-evidence determinations and acceptance of model results nearly passing the attainment tests).

EPA's draft guidance document entitled “Use of Models and Other Analyses in Attainment Demonstrations for the 8-Hour Ozone NAAQS” (Draft) (1998), addresses additional weight-of-evidence approaches, one of which considers methods relating modeled ozone concentrations to monitored design values for a particular area. TNRCC relied on this concept (called the future design value) as well as the criteria from the 1996 guidance. All predicted future design values for the attainment year, in EPA's view, should be less than 125 ppb to support the attainment demonstration.

Texas relied on the future design value calculations, Design Value trends, modeling metrics evaluating spatial and temporal changes in ozone extent, and results of alternative modeling scenarios including 30% point source NO X emissions reductions from grandfathered non-electric generating facilities (EGFs) to develop weight of evidence for the BPA 1-hour ozone attainment demonstration SIP.

The State analyzed, and the EPA considered, the following factors and data in aggregate in assessing whether the State has provided sufficient evidence that corroborates further the attainment demonstration. The following is a summary of the analyses. Reference the BPA SIP and the TSD for this document for details of the analyses. A historical account of exceedance days is provided in the TSD to this proposed rulemaking.

Future Design Value Calculations : The TNRCC performed future design value calculations. Since episodes chosen for the BPA attainment demonstration occurred during 1993, TNRCC used monitoring data collected from 1992 to 1994 in the BPA nonattainment area, as discussed in the 1998 EPA draft guidance, using monitoring data from the 3 year time frame around the modeled episodes. They used reading from both Southeast Texas Regional Planning Commission (SETRPC) and TNRCC monitors in the BPA area from that time period.

To calculate the future design values, TNRCC developed a ratio of the predicted future case model results (including the control scenarios) to that of the original base case modeling results, and then multiplied these ratios by the 1992-1994 design value (DV C ) to obtain a future design value (DV F ). This technique demonstrates in EPA's opinion, that although the modeled maximum concentration in the BPA area for the 2007 Control Scenario is 132 ppb on September 10th, the calculated future design value is 115.4 ppb, which is less than the 1-hour standard of 125 ppb. This provides in EPA's view, additional support that the BPA area will attain the standard in 2007.

Design Values Trends : As a part of weight-of-evidence, TNRCC also analyzed the historic air quality in the BPA ozone nonattainment area for the period of 1975 to 1999. The analyses demonstrate that the area's ozone design value exhibits a general decrease since 1995 (this can be seen on Figure 6.3-2 of the April 25, 2000 BPA SIP submission). This downward trend is almost as great for the period 1991-1999 as for the earlier period. TNRCC believes, and EPA proposes, that this long-term downward trend is likely to continue. In addition, TNRCC expects, and the EPA is proposing, that the air quality will keep improving due to substantial reductions in precursor emissions in both HG and BPA, due to both state and federal emission control requirements. This includes the impacts of the implementation of the NO X RACT and beyond-RACT NO X rules for the BPA area.

Spatial and Temporal Modeling Metrics : Another of the weight-of-evidence analyses that TNRCC included in the BPA SIP attainment demonstration is an analysis of metrics to assess the relative effectiveness of modeled strategies. This is in addition to comparing maximum concentrations between two or more modeled scenarios (i.e., 1993 base case, 2007 future case, etc.) These metrics include changes in the modeled area exceeding the standard and changes in the number of grid cell-hours exceeding the standard. For this analysis, TNRCC made a comparison between the initial September 6-11, 1993, base case and the 2007 future base case (with banked and shutdown emissions added back) and the final chosen rules control scenario. The results of this analysis show that even though the chosen control strategy does not drive each and every grid cell below 125 ppb, it does substantially change area and temporal extent of predicted ozone concentrations greater than 124 ppb. In particular, the changes in temporal/area extent for September 10th show that the number of grid cells greater than 124 ppb drops by 28 percent from the original 1993 base case to the 2007 base case. The 2007 post-control case then drops the values from the 2007 base case by a additional 82 percent. This represents an overall 87 percent improvement in ozone exceedence days for the 2007 post-control case as compared to the 1993 base case. This analysis, in EPA's technical opinion, indicates the State's NO X control strategy demonstrates a dramatic improvement in predicted air quality over the original and future base case scenarios.

Alternative Modeling Scenarios: TNRCC also conducted alternative scenarios to include in their weight-of-evidence analyses. In the first scenario, shutdown and banked emissions were taken out of the future base case inventory. The results indicated that the future base case concentration declined from 146 ppb to 142 ppb. This would indicate an improvement in air quality if all banked emissions are not used. In another scenario, in-line with expectations from Senate Bill 766, as enacted in 1997 (which encourages non-EGF sources in attainment areas of Texas to acquire permits for their grandfathered units) TNRCC estimated that SB 766 would result in approximately a 30 percent decrease in emissions of NO X from grandfathered non-EGF sources across Texas. TNRCC believes that these reductions will aid BPA in reaching attainment by reducing background concentrations of ozone and its precursors, which will in turn aid in lowering ozone concentrations in the nonattainment area. Details of the above alternative modeling scenarios are provided in the TSD to this document.

In addition to the above scenarios, an EPA proposed rule entitled “Control of Air Pollution from New Motor Vehicles: Proposed Heavy-Duty Engine and Vehicle Standards and Highway Diesel Fuel Sulfur Control Requirements”, 65 FR 35430 (Friday, June 2, 2000) will reduce NO X emissions from heavy-duty diesel engines. This rule, which was not included by the State in the control strategy modeling portion of the SIP, is to be phased in beginning in model year 2007. The rule will reduce NO X to 98% of the uncontrolled level for these engines, adding to the weight-of-evidence analyses for attainment.

The EPA is proposing that the State's analyses of air quality and emission trends do provide additional support for the State's attainment demonstration. Progress in air quality improvement through recent periods is demonstrated and future progress in air quality improvement is shown. In addition, these analyses lend support to a regional NO X reduction as a reasonable approach to achieving attainment of the ozone standard. EPA is proposing that based on the weight-of-evidence and the modeling, the control strategy should provide for attainment by November 15, 2007. EPA's proposed approval is based on a composite of the information, not on a single element of the “weight-of-evidence.”

What emission control strategies were included in the attainment demonstration? The BPA Attainment Demonstration SIP relies on a combination of Federal measures, CAA statutory requirements, Regional measures, local controls in the BPA area, and projections of the level of control in the HG area based on enforceable commitments in the November 1999 SIP for the HG area.

Federal Measures: The TNRCC included the following federal measures in their Future Year Base Case.

(1) On-road mobile sources:

• Heavy-duty diesel standards.

• Federal motor vehicle control program.

• National low emission vehicles standards.

• Federal low sulfur gasoline.

• Tier II vehicle emission standards.

EPA believes that the projected growth rates and emissions reductions from the sources subject to the above federal measures were calculated correctly by the TNRCC.

(2) Off-road mobile sources:

• Heavy duty diesel standards.

• Locomotive standards.

• Compression ignition standards for vehicles and equipment.

• Spark ignition standards for vehicles and equipment.

• Commercial marine vessel standards.

• Recreational marine standards.

The EPA believes that the State correctly projected the growth rates and emissions reductions from sources subject to these federal measures.

CAA Statutory Requirements: The TNRCC included the following CAA Statutory Requirements in their Future Year Base Case.

• Phase II reformulated gasoline in H-G eight county nonattainment area

• Texas motorists' choice inspection and maintenance (I/M) program in Harris county

The EPA believes that the State correctly projected the growth rates and emissions reductions from sources subject to these CAA Statutory Requirements.

State/Regional Measures: The TNRCC included the following State Measures as state-wide or regional controls in their Future Year Base Case.

• Agreed orders with Alcoa, Inc. (formerly Aluminum Company of America) for their Milam facility, and the Eastman Chemical Company, Texas operations, for their facility near Longview, Texas.

• 50% Reductions at EGFs in Central and Eastern Texas.

• Low Reid Vapor Pressure (RVP) Gasoline in Eastern and Central Texas.

• Stage I vapor recovery at gas stations in Eastern and Central Texas.

• Water Heaters Rule in all of the State.

The EPA has already published actions on the above control measures in the Federal Register . EPA believes that the TNRCC correctly projected the growth rates for and the emissions reductions from these affected sources.

Local Measures: The TNRCC included the following additional State Measures as local (BPA) area controls in their Future Year Post-Control Case.

• Rich-Burn Internal Combustion Engines.

• Lean-Burn Internal Combustion Engines.

• Industrial/Utility Boilers.

• Process Heaters.

• Gas Turbines.

• Electric Utility Boilers (five electric utility power boilers in BPA).

For the above local measures, emission limits were assigned to categories of combustion units of the categories and sizes as listed in Table 4. Table 4, also, shows corresponding reductions in the NO X emissions inventory from each control strategy. This strategy applies to major stationary sources of NO X in BPA. EPA believes that the State correctly projected the growth rates for and the emissions reductions from these affected sources.

The adopted NO X emission limit of 0.10 lb NO X /MMBtu applies to all five electric utility power boilers in BPA and represents approximately a 45% reduction in emissions from this source category. The adopted NO X emission limit of 0.10 lb NO X /MMBtu for industrial boilers and 0.08 lb NO X /MMBtu for process heaters requires four refineries and 15 chemical plants which are major sources of NO X in BPA to reduce their associated NO X emissions by approximately 58% and 32%, respectively. Overall, the control case modeling reflects a point source NO X reductions for BPA area sources of roughly 44%.

Table 5 provides the projected NO X reductions for the 2007 attainment year afforded by the Federal and State rules.

The intent of the State's rules is to reduce NO X emissions from major stationary sources in the BPA ozone nonattainment area. The adopted rules established an emission limitation for lean burn stationary combustion engines greater than 300 hp. Other adopted rules limit emissions of NO X from power plants, industrial boilers, and process heaters. The rules will also lower the applicability threshold for boilers and process heaters to a rated input heat capacity of 40 MMBtu/Hr and above.

Lowering of the trigger limits and restricting emission specifications from combustion sources in the BPA area contributes significantly to ozone attainment. For a detailed analysis, section by section, of the TNRCC's adopted rules, see EPA's Federal Register notices with accompanying Technical Support Documents, and the SIP and its appendices.

Houston Measures: TNRCC committed to substantial emission reductions in the HG area in their November 1999 SIP submission.

These reductions included expanded I/M program, 90% point source reductions, and fuels measures. TNRCC has proposed these measures for adoption and enforceably committed to submitting the necessary adopted measures by the end of December, 2000.

Has the State adopted the selected emission control strategies and has the State adopted the emission control regulations needed to implement the emission control strategies? The State has adopted and submitted the emission control strategies and all associated emission control regulations required for a moderate ozone nonattainment area and relied upon in the attainment demonstration modeling, but for the HG measures. See the previous Section, including Tables 4 and 5, for a listing of applicable State measures. Many, but not, all of these measures have been approved. EPA is proposing approval of the attainment demonstration SIP contingent upon SIP approval of all CAA required measures for a moderate area and other attainment measures (but for the HG measures) before final action on the BPA attainment demonstration SIP and request for an extension of the attainment date.

What is a motor vehicle emissions budget (MVEB) and why is it important? The MVEB is the level of total allowable on-road emissions established by a control strategy implementation plan or maintenance plan. In this case, the MVEB establishes the maximum level of on-road emissions that can be produced in the attainment year of 2007, when considered with emissions from all other sources, that meets the requirements of the SIP to demonstrate attainment. It is important because the MVEB is used to determine the conformity of transportation plans and programs to the SIP, as described by section 176(c)(2)(A) of the Act.

Did the State Establish Motor Vehicle Emissions Budgets? Texas has submitted motor vehicle emissions budgets for the 2007 attainment year for the BPA ozone nonattainment area. The emission budgets are shown in Table 6.

The EPA is proposing to approve the MVEBs listed in Table 6.

Did the State adequately document the techniques and data used to derive the modeling input data and modeling results? The submittals from the State thoroughly documented the techniques and data used to derive the modeling input data. The submittals adequately summarized the modeling outputs and the conclusions drawn from these model outputs. The submittals adequately documented the State's weight-of-evidence determinations and the bases for concluding that these determinations support the attainment demonstration.

Did the modeling procedures and input data used comply with the Environmental Protection Agency guidelines and Clean Air Act requirements? Yes, the modeling procedures and input data (including evaluation of the emissions inventory input and procedures) meet the requirements of the Act and are consistent with the EPA's July 1991 and June 1996 ozone modeling guidelines.

Do the weight-of-evidence determinations support the attainment demonstration? The TNRCC incorporated the following weight-of-evidence elements for the BPA attainment demonstration:

• Design Value trends;

• Modeling metrics evaluating spatial and temporal changes in ozone extent;

• Results of alternative modeling scenarios including 30% point source NO X reductions in adjacent, non-SIP call states; and,

• DVf/RRF calculations using modeled concentrations from an array of cells about each monitor.

The above weight-of-evidence, when viewed in aggregate with the modeling, shows attainment of the standard and thus EPA is proposing approval.

Do the emission control strategies meet the requirements of the Clean Air Act? The selected emission control strategy, based upon modeling and the weight-of-evidence techniques, plus additional information regarding the effect of HG upon BPA, demonstrates attainment of the 1-hour ozone standard in BPA.

Do emission control shortfalls exist with regard to probable attainment of the ozone standard? We do not believe there exist any emission control shortfalls with regard to the attainment of the 1-hour ozone standard in BPA by the 2007 attainment year, provided the HG area meets its enforceable commitment to submit all adopted rules needed for attainment by the end of December 2000. On December 6, 2000, the TNRCC adopted a major SIP revision for the HG area. In this revision, the commission adopted all of the measures relied upon in the BPA attainment demonstration. EPA will be evaluating the HG SIP measures after they are received (expected by December 31, 2000).

Has the State established an acceptable MVEB? The State has submitted an MVEB. The MVEB budget submitted by the TNRCC for the BPA nonattainment area has been found to meet the adequacy criteria and upon further review of the SIP for approvability continues to be consistent with attainment; therefore, it is proposed for approval.

Does the BPA Area Meet the RACT Requirements for Major Source VOC Emissions?

On March 7, 1995, as part of our action approving VOC requirements, we found that TNRCC had implemented RACT on all major sources in the BPA area except those that were to be covered by post-enactment Control Technique Guidelines (CTG's). 44 FR 12438 (March 7, 1995). Since that time, many expected CTGs were issued as Alternative Control Technique documents (ACTs). Of the expected CTGs and ACT's, BPA has major sources in the following categories: batch processing; reactors and distillation; industrial wastewater; and Volatile Organic Liquid Storage. EPA has approved measures as meeting RACT for the reactors and distillation and the Volatile Organic Liquid Storage categories for the BPA area. 64 FR 3841 (January 26, 1999), and 61 FR 55894 (October 30, 1996), respectively. EPA has published a direct final rulemaking action wherein we find that the State is imposing RACT on the batch processing and industrial wastewater categories in the BPA area (signed November 2, 2000). While CTGs and ACTs were issued for other categories such as wood furniture coating or aerospace coating, there are no major sources in those categories in the BPA area. It is EPA's position that RACT is being implemented on all major VOC sources in BPA. (see item 8 under Section IV Proposed Action).

The policy for the extension of an ozone attainment date is discussed earlier. The State's compliance with these requirements is discussed here.

a. Identification of the area as a downwind area affected by ozone transport.

We have reviewed the CAMx demonstrations, and are proposing to agree with the TNRCC that this episode adequately demonstrates transport of pollutants from the Houston Galveston ozone nonattainment area. We are proposing that this transported pollution affects BPA's ability to attain by the current attainment date. Thus, for BPA to attain, controls both in BPA and HG are necessary. We therefore propose to find that the State's demonstration of ozone transport meets the criteria in EPA's attainment date extension policy.

b. Submittal of an approvable attainment demonstration.

EPA's review of the attainment demonstration shows that it should be approved. The State has modeled and adopted an acceptable control strategy that demonstrates attainment. We propose to approve the attainment demonstration and agree that it meets the criteria in the July 1998 transport policy and all other EPA guidance, and the regulatory and statutory requirements.

c. Adoption of all applicable local measures required under the area's current ozone classification.

Texas has adopted all VOC and NO X related emission control requirements required under the Clean Air Act (CAA) for a moderate ozone nonattainment area. A listing of applicable CAA moderate classification-related VOC and NO X related regulations and their effective dates as approved by the EPA as part of the Texas SIP for the BPA area, is provided in the TSD to this rulemaking.

It is EPA's position that the State of Texas has met the 1998 Transport Policy's criteria for adoption and submittal to EPA for approval of all measures required under the Act for an area classified as moderate.

d. Implementation of all adopted measures by the time upwind controls are expected.

All of the NO X rules will be implemented as expeditiously as practicable, but no later than 2005, two years before the Houston attainment date of November 15, 2007. We are proposing to find that this transport policy criteria has been met by the State.

The State is proposing a phase-in approach to the NO X controls which will provide compliance earlier than the attainment date. The State's compliance schedule is provided in Table 7.

We are of the opinion that the above listed compliance dates in Table 7 are as expeditious as practicable compared with the compliance dates of similar sources in moderate ozone nonattainment areas of the country.

Section 172(c)(1) of the Act requires SIPs to provide for the implementation of all reasonably available control measures (RACM) as expeditiously as practicable and for attainment of the standard. EPA has previously provided guidance interpreting the RACM requirements of 172(c)(1) in the General Preamble. See 57 FR 13498, 13560. In the General Preamble, EPA indicated its interpretation of section 172(c)(1), under the 1990 Amendments, as imposing a duty on States to consider all available control measures and to adopt and implement such measures as are reasonably available for implementation in the particular nonattainment area. EPA also retained its pre-1990 interpretation of the RACM provisions that where measures that might in fact be available for implementation in the nonattainment area could not be implemented on a schedule that would advance the date for attainment in the area, EPA would not consider it reasonable to require implementation of such measures. EPA indicated that a State could reject certain measures as not reasonably available for various reasons related to local conditions. A State could include area-specific reasons for rejecting a measure as RACM such as the rejected measure would not advance the attainment date, or technological and economic feasibility in the area.

The EPA also issued a recent memorandum reaffirming its position on this topic, “Guidance on the Reasonably Available Control Measures (RACM) Requirement and Attainment Demonstration Submissions for Ozone Nonattainment Areas.” John S. Seitz, Director, Office of Air Quality Planning and Standards, dated November 30, 1999. A copy can be obtained from www.epa.gov/ttn/oarpg/t1pgm.html. In this memoranda, EPA states that in order to determine whether a state has adopted all RACM necessary for attainment and as expeditiously as practicable, the state will need to provide a justification as to why measures within the arena of potential reasonable measures have not been adopted. The justification would need to support that a measure was not reasonably available for that area and could be based on technological or economic grounds.

EPA has reviewed the SIP submittal for the BPA area and believes that the State did not include sufficient documentation concerning the rejection of certain available measures as RACM for the specific BPA area. Therefore, EPA has itself reviewed potential available measures, as documented in the RACM available analysis section of the TSD for this proposed rulemaking. Based on this analysis, EPA proposes to conclude that this additional set of evaluated measures are not reasonably available for the specific BPA area, because (a) some would require an intensive and costly effort for numerous small area sources, (b) due to the small percentage of mobile source emissions in the over-all inventory, some are not cost-beneficial, and (c) since the BPA area relies in part on reductions from the upwind HG area which are substantial, and the reductions projected to be achieved by the evaluated additional set of measures are relatively small, they would not produce emission reductions sufficient to advance the attainment date in the BPA area and, therefore, should not be considered RACM.

Although EPA encourages areas to implement available RACM measures as potentially cost-effective methods to achieve emissions reductions in the short term, EPA does not believe that section 172(c)(1) requires implementation of potential RACM measures that either require costly implementation efforts or produce relatively small emissions reductions that will not be sufficient to allow the BPA area to achieve attainment in advance of full implementation of all other required measures.

The EPA believes that the transport demonstration and attainment demonstration SIP developed for the BPA ozone nonattainment area meet the Clean Air Act. The EPA is proposing that the State has adequately followed the EPA's 1998 Transport Guidance for demonstrating transport. In the State's transport demonstration, EPA believes that the analyses conducted by TNRCC indicate there are impacts of ozone and ozone precursor transports from the upwind HG area affecting the BPA area. In addition, EPA is proposing to approve the State's demonstration that BPA will attain the ozone NAAQS. The modeling, the provided weight-of-evidence analyses, and the analysis of transport of ozone and ozone precursor compounds from the HG area, demonstrate that the control strategy chosen by TNRCC will provide for attainment of the ozone standard. For BPA, it is the EPA's technical opinion that the control strategy will provide for attainment of the ozone NAAQS by November 15, 2007.

The EPA proposes to: approve the attainment demonstration SIP for the BPA ozone nonattainment area; approve the State's request to extend the ozone attainment date for the BPA ozone nonattainment area to November 15, 2007 while retaining the area's current classification as a moderate ozone nonattainment area; approve the on-road motor vehicle emissions budgets; find that the BPA area meets all remaining outstanding VOC RACT requirements for major sources; and approve the State's enforceable commitment to conduct a mid-course review (including evaluation of all modeling, inventory data, and other tools and assumptions used to develop this attainment demonstration) and to submit a mid-course review SIP revision, with recommended mid-course corrective actions, to the EPA by May 1, 2004. If the subsequent analyses conducted by the State as part of the mid-course review indicate additional reductions are needed for BPA to attain the ozone standard, EPA will require the State to implement additional controls as soon as possible until attainment is demonstrated through photochemical grid modeling.

EPA cannot finalize the above proposed actions unless and until the EPA approves all of the following:

1. The NO X rules for Electric Generating Facilities in East and Central Texas (30 TAC sections 117.131, 117.133, 117.134, 117.135, 117.138, 117.141, 117.143, 117.145, 117.147, 117.149, 117.512);

2. The State-wide NO X rules for Water Heaters, Small Boilers, and Process Heaters (30 TAC sections 117.460, 117.461, 117.463, 117.465, 117.467, 117.469);

3. The revised emission specifications in the BPA area for Electric Utility Boilers, Industrial, Commercial or Institutional Boilers and certain Process Heaters (30 TAC sections 117.104, 117.106, 117.108, 117.116, 117.206 as they relate to the BPA area, and the repeal of sections 117.109 and 117.601 as they relate to the BPA area);

4. The administrative revisions to the existing Texas NO X SIP (30 TAC sections 117.101-117.121, 117.201-117.223, 117.510, 117.520, and 117.570);

5. The two Agreed Orders entered into by TNRCC and Alcoa, Inc. and TNRCC and Texas Eastman;

6. Lower RVP Program in East and Central Texas (30 TAC sections 114.1, 114.301, 114.302, and 114.304-114.309);

7. Stage I vapor recovery Program in East and Central Texas (30 TAC sections 115.222-114.229); and,

8. VOC rules as RACT for batch processing (30 TAC sections 115.160-115.169) and wastewater (30 TAC sections 115.140-115.149).

If the EPA cannot fully approve all of the above actions (one through eight), EPA will take final action on the proposed reclassification as described in the April 16, 1999 Federal Register . To the extent that comments received on the April 1999 proposed action are applicable to this proposed rulemaking, EPA will respond to those comments in its final rulemaking action.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this proposed action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. This proposed action merely approves state law as meeting federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this proposed rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et. seq. ). Because this rule proposes to approve pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Public Law 104-4). For the same reason, this proposed rule also does not significantly or uniquely affect the communities of tribal governments, as specified by Executive Order 13084 (63 FR 27655, May 10, 1998). This proposed rule will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999), because it merely approves a state rule implementing a federal standard, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This proposed rule also is not subject to Executive Order 13045 (62 FR 19885, April 23, 1997), because it is not economically significant.

In reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. In this context, in the absence of a prior existing requirement for the State to use voluntary consensus standards (VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA, when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the Clean Air Act. Thus, the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. The proposed rule does not involve special consideration of environmental justice related issues as required by Executive Order 12898 (59 FR 7629, February 16, 1994). As required by section 3 of Executive Order 12988 (61 FR 4729, February 7, 1996), in issuing this proposed rule, EPA has taken the necessary steps to eliminate drafting errors and ambiguity, minimize potential litigation, and provide a clear legal standard for affected conduct. The EPA has complied with Executive Order 12630 (53 FR 8859, March 15, 1988) by examining the takings implications of the rule in accordance with the “Attorney General's Supplemental Guidelines for the Evaluation of Risk and Avoidance of Unanticipated Takings' issued under the executive order. This proposed rule does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

In this proposed rulemaking, the terms “we,” “us,” and “our” mean USEPA. This document is organized according to the following table of contents:

On December 16, 1997, Illinois submitted rules for a “cap and trade” program for emissions of volatile organic compounds (VOC  1 ) in the Chicago area. In this program, sources receive allotments generally equivalent to 12 percent less than their baseline emissions, issued as the appropriate number of allotment trading units or ATUs. Sources must have emissions no higher than the number of ATUs they hold, so a source's ATU holdings are a “cap” on its emissions. Sources may buy or sell ATUs and thereby increase or decrease their own cap. This “trade” of ATUs gives sources more flexibility in meeting program requirements. Trading is expected to shift emission reductions toward sources that can reduce emissions more cheaply. Trading does not affect the net total emissions allowed under the program, which is approximately 12 percent below net total baseline levels.

USEPA proposes to approve these rules, provided that Illinois addresses certain issues. Specifically, USEPA proposes to approve the rules only if Illinois: (1) Clarifies the applicability of penalties as given in Clean Air Act section 113 for violating sources, (2) satisfies USEPA's trading program policy on environmental justice, (3) provides for full-year offsets for new sources, (4) commits to discount credits where emission reductions are accompanied by emission increases elsewhere, and (5) commits to remedy any problems identified in its periodic program review.

The Illinois trading program is designed to reduce VOC emissions and thereby help attain the ozone standard in the Chicago area. The Chicago area is a Severe ozone nonattainment area.

The Illinois trading program is a cap and trade program. Each participating source is subject to a cap on its total emissions, but sources may redistribute the allowed emissions by trading allotment trading units. The Illinois Environmental Protection Agency (IEPA) establishes a cap for each participating source as a function of ozone season emissions during a baseline period (generally 1994 to 1996). In most cases, this cap is set at 12 percent below baseline emissions.

Each year, the State issues allotment trading units or ATUs to each source, reflecting the source's cap level of emissions. Sources are required to hold a number of ATUs that is at least equivalent to their actual ozone season emissions that year. If a source emits more or less emissions than corresponds to its State issuance of ATUs, it must purchase or may sell ATUs, respectively, until the source at a minimum holds the number of ATUs that correspond to the source's emissions for that ozone season.

It is immaterial whether changes in emissions are due to emission controls or production level changes. For example, a source that emits 15 percent less per widget but produces 10 percent more widgets is still required to purchase ATUs.

If no trading were to occur, then each source would have to limit its emissions to its allotment level, which again in most cases is 12 percent below baseline emission levels. Trading of ATUs allows redistribution of emissions from the seller to the buyer of ATUs. For example, if a source was issued ATUs for 50 tons of emissions but emitted 75 tons, the source would have to buy 25 tons worth of ATUs, generally from another source that reduced its emissions to 25 tons below its allotment level. Presumably, sources that can reduce emissions more cheaply will be selling ATUs to sources for whom controls are more expensive. However, this trading does not increase the total emissions that are allowed from the universe of sources in the program. Consequently, total emissions from the sources in the program are subject to a net cap equal to approximately 12 percent below the total baseline emissions.

The rules for the Illinois trading program provide various tools for implementing the program. The rules provide for an electronic data base for tracking ATUs. This data base will include information on the trades of ATUs, the current holdings of each source, and additional information such as recent ATU prices. Thus, after a source reports its ozone season emissions each year, it is then easy to identify whether a source has adequate ATUs to accommodate its emissions for that year's ozone season.

Participation in the trading program is mandatory for essentially all major sources of VOC in the Chicago area. In this area, “major source” of VOC is defined as a source with the potential to emit 25 tons of VOC per year. The only significant exclusion of major sources from the trading program is for sources that emit disproportionately little during the summer, specifically for sources that emit less than 10 tons during the ozone season. Participation is mandatory for sources throughout the Chicago ozone nonattainment area, including Cook, DuPage, Kane, Lake, McHenry, and Will Counties, as well as townships within Grundy County (Aux Sable and Goose Lake Townships) and Kendall County (Oswego Township).

Additional sources have the option for voluntary participation. Illinois' rules include separate “opt-in” provisions for small industrial sources and for mobile and area sources. Any person who arranges emission reductions from such sources may petition IEPA to receive allotments corresponding to the quantity of the emissions reduction. The direct or indirect sale of these ATUs to a major source will then shift the burden of emission reductions from major to minor sources but will not alter the total emission reductions that must occur.

Sources in the Illinois trading program have several obligations. First, the source must evaluate its baseline emissions and submit this information as part of an application for an allotment of ATUs. The application also must identify the emission quantification techniques used to determine baseline and future year emissions and must justify any requests for exemption from the 12 percent reduction that is normally reflected in allotment levels. IEPA uses this information to determine the allotment it will issue to the source and to establish the methods that the source shall use to determine future emissions levels.

Illinois began issuing ATUs in early 2000. (The rules provide for first issuance in 1999, but Illinois has deferred this one year.) Each source is required to apply the identified methods for determining emissions during the ozone season, defined for the trading program as May through September. Now, the most important source obligation has begun, namely to assure that emissions are no higher than the quantity of ATUs held.

Baseline emissions generally reflect VOC emissions during the ozone seasons in 1994, 1995, and 1996. Illinois adjusts these emissions values downward if the emissions exceeded 1996 allowable emissions levels, whether due to noncompliance or because 1996 limitations were not yet in effect. Illinois adjusts these emission values upward if the source reduced emissions after 1990 below the level required as of 1996. In most cases, baseline emissions reflect the average of the higher two of these three ozone season emissions values. However, the option exists for sources to demonstrate that their production levels were unrepresentative for one or more of these years and to substitute a value(s) from a more representative year chosen from 1990 to 1993 or from 1997.

Once Illinois establishes baseline emissions, it can determine the quantity of ATUs to be issued to the source. In most cases, allotments are set at 88 percent of baseline emissions, targeting a 12 percent emission reduction.

An exception applies if the source can demonstrate that an emissions unit is well controlled and should not be targeted for further reductions. This exception is possible if the source is meeting a recently established Lowest Achievable Emission Rate limitation, is meeting a Maximum Achievable Control Technology limitation, or has Best Available Technology. In such cases, allotments for such a unit are set at the well controlled level.

The State uses source operating permits to implement several features of the trading program. As mandated by Title V of the Clean Air Act, Illinois requires operating permits for all major sources, which it calls Clean Air Act Permit Program (CAAPP) permits. These permits must identify all requirements applicable to a source and can be issued only after input from USEPA and the public has been solicited. Illinois' trading rules require participation only from sources that must obtain a CAAPP permit. This permit is used to formally establish the source's baseline emissions, identify any maximally controlled emission units that are exempt from the 12 percent reduction requirement, set the quantity of ATUs to be issued to the source, and specify the methods to be used to measure emissions. To incorporate these items into the CAAPP permit, the State must follow procedural requirements that provide ample opportunity for USEPA and the public to have input into any relevant issues.

Sources violating the requirements of the Illinois trading rules are liable for the full penalties authorized in Section 113 of the Clean Air Act. One type of noncompliance is violating requirements for measuring and reporting emissions. A second type of noncompliance is failing to hold ATUs equivalent to the year's ozone season emissions.

Sources must generally secure adequate ATUs by December 31 of each year, that is, within 3 months of the end of each ozone season. A source that holds insufficient ATUs at the end of the year then has a “second chance” to secure ATUs equaling 120 percent (or in some cases 150 percent) of the shortfall. This “second chance” appears to last for 3 additional months, though USEPA is requesting clarification from IEPA on this point. A source that holds insufficient ATUs after this “second chance” is a violating source. This source could be subject to various enforcement actions and would be liable for penalties currently authorized at up to $27,500 per day for each of the 153 days of the ozone season.

In general, no. Most importantly, no emission limitations are relaxed by this program. The limitations requiring reasonably available control technology (RACT), for example, remain fully and independently enforceable. That is, a source that exceeded its RACT limits would be liable for enforcement action regardless of the number of ATUs it held.

The one pre-existing requirement that the Illinois trading rules modify is the requirement for offsets for major new sources and major modifications of existing sources. In these cases, the source obtains offsets by obtaining the appropriate number of ATUs rather than by traditional means as part of a construction permit. Since the Chicago area is a severe ozone nonattainment area, sources must obtain 1.3 tons worth of ATUs for each ton of new source emissions. The State issues no ATUs for new sources or for modifications. The ATUs that the source must purchase to accommodate these new emissions are available if and only if some other source has made a corresponding reduction in its emissions. Therefore, the trading program provides offsets that in principle are equivalent to offsets provided by traditional means. However, the use of the trading rules to provide offsets has several ramifications for the quantity of offsets required and obtained. These ramifications are discussed below in the review of Illinois' program.

USEPA must use several types of criteria for evaluating Illinois' trading program. First, USEPA has established numerous criteria as part of published and promulgated guidance on economic incentive programs, including guidance on emission trading programs. Second, USEPA must apply guidance on any other Clean Air Act program that is affected by Illinois' program. Third, insofar as the purpose of Illinois' program is to achieve specified emission reductions, USEPA must evaluate the State's estimate of anticipated reductions.

The guidance most relevant to Illinois' trading program is the guidance on economic incentive programs published on April 7, 1994, promulgated as subpart U of part 51 of title 40 of the Code of Federal Regulations (40 CFR 51), including sections 51.490 to 51.494. Although a portion of that guidance speaks to economic incentive programs that are required in certain circumstances under the Clean Air Act, that portion of the guidance is not relevant here. Instead, the relevant portion of that guidance addresses voluntary programs, with the general purpose of assuring that the net effect of any emissions trading (or actions under any other economic incentive program) does not cause violations of any of various requirements of the Clean Air Act.

More recently, on September 15, 1999, at 64 FR 50086, USEPA published notice of availability of proposed revised guidance on economic incentive programs. This guidance proposes more detailed recommendations for many of the issues addressed in the 1994 guidance and also provides guidance on several types of programs not addressed in the 1994 guidance.

One issue not addressed in the proposed guidance is whether this guidance applies to programs developed before the proposed guidance became available. When USEPA publishes new guidance, USEPA often allows an exemption from that guidance for submittals that the State adopted and submitted prior to the proposal of that guidance. This exemption is known as “grandfathering.” This practice allows us to approve programs that the State adopted in good faith according to guidance available at the time. Since Illinois submitted its program on December 16, 1997, today's rule grandfathers this program from most of the 1999 proposed guidance and instead reviews most aspects of this program against the criteria published in 1994.

Today's rule nevertheless uses one element of the newer proposed guidance in our review of Illinois' program, namely the element that addresses environmental justice and related “toxic hotspot” issues. Environmental justice refers to efforts to assure that areas with high populations of minorities or low-income persons are not unfairly exposed to environmental hazards such as toxic air pollutants. The proposed new guidance identifies specific issues to be addressed to assure that trading programs do not have an inequitable impact on environmental justice areas or other communities of concern. We are applying this portion of the proposed guidance due to the importance of this issue and because relevant guidance was not previously available.

For other issues, USEPA intends to examine Illinois' program in light of the new guidance once the new guidance is finalized. USEPA has discussed these plans with Illinois. Illinois and USEPA share an understanding that we will review the program accordingly and Illinois will reconcile the program to the new guidance within three years after guidance issuance.

A second set of criteria is that the program not result in contravention of any Clean Air Act requirement. As will be discussed below, the Illinois trading program has little effect on other programs, and so only limited guidance on other programs must be considered.

A third set of review criteria is for the quantity of emission reductions that the program is likely to achieve. These criteria reflect standard judgments of emission inventory estimates. This review is expected to be relevant in a future review of whether Illinois has provided sufficient emission reductions to attain the ozone standard.

Guidance published on April 7, 1994, promulgated at 40 CFR 51 subpart U, gives guidance on numerous features of trading programs. This guidance helps assess whether State programs:

—Assure that credits are quantifiable, surplus, enforceable, and permanent. Quantifiable means that the quantity of emission reductions can be estimated. Surplus for this type of program means that reductions creditable to this program are not already required under other programs. Enforceable means that the State and USEPA can take action to require compliance with the program requirements and deter noncompliance. Permanent here means that reductions are required as long as the trading rules are part of the State Implementation Plan (SIP).

—Assure that appropriate methods will be used to determine emission quantities. The 1994 guidance requires that the submittal “specify the approach or the combination or range of approaches” that will be used for each source category to quantify emissions, and provides guidance for judging whether these approaches are acceptable.

—Authorize adequate penalties for sources that violate these rules. State programs must authorize enforcement actions and penalties as permissible under section 113 of the Clean Air Act (currently, penalties up to $27,500 per day per violation) or equivalent penalties based on the size of the violation measured in tons.

USEPA is also evaluating Illinois' program against criteria in the 1999 proposed guidance for addressing environmental justice issues. USEPA shares the commonly expressed concern about the possibility of trading programs creating localized increases in hazardous air pollutants, both in minority and low-income areas (“environmental justice areas”) and elsewhere. This is a concern with programs that address VOC or particulate matter emissions, insofar as these emissions may have hazardous constituents. Therefore, USEPA's 1999 proposed guidance identifies four elements of well designed trading programs, including (1) prevention or mitigation of unacceptable impacts, (2) provision of sufficient information for public review, (3) suitable opportunities for public input, and 4) periodic program review to identify and remedy problems.

An important general criterion in reviewing any trading program is whether the program affects other State regulatory provisions such that the State no longer satisfies Clean Air Act requirements. The specific criteria to be used in program review are a function of the particular provisions that the program affects. For example, many trading programs allow relaxations from RACT (counterbalanced by other reductions) or allow alternative reductions to achieve RACT. Such programs must be reviewed based on criteria that address whether the alternative set of limits continue to satisfy RACT requirements.

As noted in the prior section describing the Illinois trading program, Illinois' program has no effect on emission limitations that satisfy RACT or other assorted Clean Air Act requirements. As a result, no detailed review of the Illinois program is needed to conclude that these requirements remain satisfied.

The only existing provision in Illinois rules that the trading program affects is the requirement for offsets of emissions from major new sources and major modifications. Sources conventionally obtain offsets as part of a construction permit. Therefore, sources conventionally obtain offsets in advance of construction, based on shutdown or reductions at a specified other source. Under the Illinois trading program, sources obtain offsets in the form of ATUs, which represent emission reductions at the source or sources that no longer hold(s) these ATUs. In effect, the source obtains offsets on an ongoing basis, perhaps from different sources at different times.

The offset requirement is established in Section 173 of the Clean Air Act. Section 173(c) requires that “the total tonnage of increased emissions of the air pollutant from the new or modified source shall be offset by an equal or greater reduction, as applicable, in the actual emissions * * * from the same or other sources in the area.” Section 173(a) requires that these offsets be sufficient to assure “that total allowable emissions from existing sources (plus any new source emissions) will be sufficiently less than (existing emissions) so as to represent * * * reasonable further progress.” Section 182(d) generally requires 1.3 tons of offsets per ton of new emissions. These requirements set the principal criteria for reviewing this aspect of the Illinois program. The program review below discusses these criteria in more detail.

Illinois' trading program submittal includes an estimate of the emission reductions that it expects the program to achieve. USEPA must review baseline emissions estimates from Illinois and differences between baseline emissions as defined by the program and average actual emissions. USEPA must also evaluate the impact of assorted program features such as exemptions from the 12 percent reduction, potential use of a special ATU fund, the distribution of ATUs upon source shutdown, and the possibility of ATU creation from reductions by small sources. This review will also address the possibility of false credits from “demand shifting” ( e.g. shutdown of a gasoline station leading to increased gasoline sales elsewhere) and the possibility of “spiking” ( i.e. hoarding of ATUs now followed by high emissions in a future year).

USEPA's guidance on trading programs includes four key principles, that emission reductions in these programs be quantifiable, surplus, enforceable, and permanent. This section will review whether the emission reductions in Illinois' program are surplus and permanent. Subsequent sections will review whether the emission reductions are quantifiable and enforceable.

“Surplus” here means that the emission reductions are beyond the requirements which are already part of the SIP. Illinois' trading rules use the existing SIP as the baseline from which further reductions are calculated. This approach is used both in setting baseline emissions levels for major sources, from which a 12-percent reduction is calculated, and in assessing the number of ATUs to be issued for emission reductions by minor sources and mobile sources. Thus, the reductions from the Illinois trading program qualify as surplus.

A question about whether the trading program reductions are surplus may arise in the future. If Illinois adopts further regulations, USEPA must evaluate whether the reductions pursued by those regulations would also help meet trading rule requirements. If so, then USEPA would view the trading rule as continuing to achieve the reductions accorded to it in this rulemaking but would view the further regulations as achieving no further reductions. For example, if Illinois adopts a car scrappage program that allows generation of ATUs based on the emission reductions, then USEPA would view this program as redistributing the emission reductions of the trading program without producing further reductions.

“Permanent” is defined in USEPA's economic incentive program guidance as assuring that the emission reductions will endure as long as the rule applies and as long as the SIP relies on these reductions. This principle is satisfied because the Illinois trading rules and the emission reductions they require have no termination.

Trading programs must provide appropriate methods for determining the quantity of emissions, in order that trades and compliance evaluations accurately reflect actual emissions. Guidance at 40 CFR 51.493(d) states that programs are to specify the approach or menu of approaches that may be used for each source category in the program.

The Illinois program identifies methods to be used for each type of emission unit. Section 205.330 identifies a range of methods which, “in conjunction with relevant source-specific throughput and operating data, are acceptable methods * * * to determine seasonal emissions”. For example, the first method is “material balance calculation, based on the VOM content of raw materials and recovered materials, as is typically used for degreasers, coating lines, and printing lines equipped with a carbon adsorption system (recovery-type control device) or without any control device”.

USEPA's 1994 guidance does not address how particular emission quantification methods for particular sources are to be chosen from a range of methods or whether USEPA is to be given the opportunity to review the selection. Nevertheless, the Illinois program provides USEPA and the public an additional opportunity to review the specification of the method to be used for each unit of each source. The Illinois rules dictate that the methods to be used for each source are to be specified in the source's Title V permit. Consequently, USEPA and the public have the opportunities for methods review that are inherent in the Title V process, including a 30-day public review of a draft permit and a 45-day period in which USEPA may veto the permit if it finds the permit objectionable. Thus, the Illinois program satisfies the guidance of 40 CFR 51.493(d) for programs to specify the approach or range of approaches to be used, and provides additional opportunity for USEPA and the public to assure that each source's methods are appropriate.

Although USEPA is not currently reviewing Illinois' program against recent proposed guidance, it is worth noting that the program in fact satisfies this proposal. An option in the proposed guidance is for methods to be specified according to a procedure that offers a 30-day opportunity for public comment and a 45-day opportunity for USEPA to take steps leading to rejection of the method proposed by the State. Illinois identifies presumptive methods in its rules but uses Title V permits to require specific methods for specific sources. Therefore, Illinois' program satisfies the recent proposed guidance with respect to establishment of emission quantification methods as well as the 1994 guidance on the subject.

USEPA guidance requires that sources that violate trading program requirements be potentially liable for the penalties authorized in Section 113 of the Clean Air Act or their equivalent. USEPA's guidance further specifies that a violation for an ozone season must be tallied as a violation for each day of the season. The Illinois rules authorize penalties of this magnitude for violators of Illinois trading program requirements.

Applicability of these penalties is straightforward for violations of measuring, recordkeeping, and reporting requirements. Applicability for violation of the ATU holding requirement is more complicated, reflecting the schedule by which this requirement takes effect.

Sources are ordinarily expected to hold ATUs at least equivalent to an ozone season's emissions by December 31 of that year. A source that holds insufficient ATUs then to accommodate its ozone season emissions has a “second chance” to accommodate its emissions. In this “second chance,” the source must obtain ATUs equal to the shortfall in its end-of-year ATU holdings plus a surcharge. The surcharge is generally 20 percent of the shortfall, but the surcharge is 50 percent of the shortfall if the source also had a shortfall the previous year. A source must either purchase the necessary ATUs or request to be issued that many fewer ATUs for the next year. A source that fails to compensate for its December 31 shortfall is violating the program requirements and is subject to penalties as authorized in Section 113.

Illinois' rules do not identify an explicit deadline by which sources must obtain compensating ATUs. However, practical considerations imply a de facto deadline. Since the next ozone season begins May 1, the State must issue ATUs by about April 1. This date would thus be a deadline for sources to request a reduction in the number of ATUs issued to them. More generally, if by April 1 a source has neither requested a reduction in their year's ATU issuance nor purchased the necessary ATUs, the source would clearly be violating the rules and the State could commence enforcement action.

While USEPA views the rules as implying a deadline for compliance, we believe that the State must clarify whether this interpretation is appropriate. Given the importance of having a clear deadline for compliance, USEPA intends to approve these rules only if the State submits clarifications that demonstrate that sources have a deadline for obtaining the necessary ATUs or be in violation and liable for appropriate enforcement action.

”Environmental justice” concerns the possibility that low income and minority populated areas are subject to worse environmental conditions and less regulatory mitigation efforts. The question here is what effect the Illinois program might have on air quality in low income and minority populated areas. A related question is whether the Illinois program might lead to worsened air quality in any location. These are not issues for ozone, insofar as ozone air quality is a regional problem that is insensitive to emission distributions. Instead, these issues arise because a subset of the VOC being regulated are hazardous air pollutants (HAPs). As a result, the issues arise from the possibility that a local increase of VOC emissions might occur that might translate to a local increase in HAP concentrations, notwithstanding the general VOC emission reductions that the trading program pursues.

The 1999 proposed guidance on economic incentive programs proposes four key elements to be included in trading programs to assure environmental justice and to avoid problematic increases in localized concentrations of HAPs. These elements are: (1) Provisions that prevent or mitigate potential adverse changes in emissions or emission distribution of HAPs, (2) provisions for sufficient information to be made available for meaningful review and participation, (3) public participation in program design, implementation, and evaluation, and (4) periodic program evaluations.

The proposed guidance notes the typical differences between open market trading programs and cap and trade programs, and recognizes that cap and trade programs often inherently make trades increasing HAPs unlikely. The guidance states:

The Illinois program is in fact a cap and trade program that requires a reduction in overall emissions and requires full compliance with HAPs emissions limits (notably, maximum achievable control technology (MACT) limits) and RACT limits, irrespective of the number of ATUs held. Emissions increases can occur at sources that increase production, but the program allows no emission increases that are not allowed in the absence of the program, and the program does not allow any source to forgo emission reductions that would otherwise be required. Furthermore, Illinois' program reduces the likelihood of emission increases, because a source that increases emissions here faces a cost not imposed elsewhere of purchasing ATUs for the emission increase in addition to the ATUs needed to avoid the normal 12-percent emission reduction. Consequently, the Illinois program is expected to reduce the likelihood of localized increases in HAPs emissions.

The second and third elements of USEPA's proposed policy on HAPs and trading concerns whether sufficient information is available and whether the public has suitable opportunities to provide informed input into the development and implementation of the program. The rules establishing the procedures and criteria of the program were adopted on the basis of a lengthy stakeholder consultation process as well as the normal process for public input for rulemaking. The Title V permit process employed in Illinois' program provides for public input in the establishment of the source-specific elements of the program. Finally, the ATU tracking data base and the annual report provide the public sufficient information and opportunity to offer input on ongoing implementation issues.

The fourth element to be addressed is to provide for periodic program evaluation and opportunity to remedy any problems that are identified following startup of the program. The rules for Illinois' program require an annual program review and report by Illinois. Illinois has convened a workgroup to determine what type of information to provide in this annual report. The workgroup includes business and environmental group representatives, and USEPA attends its meetings. The workgroup has focused on defining the information that companies must report to support an assessment of the effects of the program on HAPs emissions. The workgroup has achieved general consensus on a draft rule to require companies to report emissions of individual HAP species that are emitted in significant quantities in the Chicago area.

The State has not discussed how its annual report will be distributed or what it will do with the results of the report. In particular, the State has made no commitment to remedy any program deficiencies that are identified. USEPA needs this information before it can reach final judgment on whether Illinois' program satisfies this portion of USEPA's guidance.

As discussed in USEPA's proposed policy, USEPA must evaluate programs as a whole by considering the four above program elements jointly. In formulating this proposed policy, USEPA envisioned that cap and trade programs in many cases would inherently be unlikely to yield localized HAP increases, and that in such cases the mid-course program review would play an enhanced role as a backstop for assuring that the expected protection against localized HAP increases is realized. Therefore, USEPA proposes that if Illinois commits to a wide distribution of its annual review and commits to remedy any problems identified in its annual program review, then the Illinois program would be found to provide adequate assurances against localized HAP increases.

Public commenters on the State rulemaking for these rules noted these issues concerning localized increases in HAP concentrations and focused on an analogous issue, namely that trading might lead to overall increases in emissions of hazardous air pollutants. In essence, these commenters were concerned that trading might yield emission increases for the subset of the VOC components that are hazardous, notwithstanding the mandated reduction of VOC as a whole.

Increases in area-wide emissions of hazardous air pollutants are just as unlikely as increases of VOC or hazardous air pollutant emissions in localized areas, again because most sources' emissions will be decreasing and because an increase in HAPs at any particular source would presumptively involve an improbable shift in the proportion of emissions that are hazardous. Nevertheless, in response to these concerns, the trading rules provide for IEPA to evaluate the impacts of trades on HAP emissions and report its findings in a periodic program review. This program review is also required to identify any geographic redistributions of emissions occurring under the program, such as redistributions that would cause environmental justice concerns. Given this safeguard, if indeed Illinois commits to remedy any problems identified in its review, and given the minimal likelihood that such problems would arise, the Illinois trading program should have a favorable impact on HAP concentrations area-wide as well as in localized areas.

As noted previously, Illinois' trading rules explicitly provide in general that other State and Federal rules, which implement various Clean Air Act requirements such as RACT, MACT, and lowest achievable emission rate, must be satisfied and are unaffected by the trading rules. The only requirement under other rules that is significantly affected by the rules for the Illinois trading program is the requirement for offsets for new sources. Therefore, the review for consistency with the Clean Air Act needs only to address whether the alternative approach to offsets under these rules satisfies applicable requirements.

As discussed in the program description above, the trading rules provide that new sources and sources undergoing major modifications must purchase ATUs (representing emission reductions elsewhere) equivalent to at least 1.3 times the new emissions. This approach provides offsets that are generally equivalent to the traditional approach. However, a detailed comparison reveals important differences in the two approaches.

Offsets under the trading rule differ from conventional offsets in three key respects: (1) Trading rule offsets need only offset actual emissions, whereas conventional offsets must offset potential emissions; (2) trading rule offsets may be arranged essentially contemporaneously, whereas conventional offsets are arranged prior to issuance of the new source's permit to construct; and (3) trading rule offsets focus on ozone season emissions, whereas conventional offsets address the full year's emissions.

The first issue is whether offsetting of actual rather than potential emissions satisfies the basic requirement in Section 173, as quoted above, to assure that the sum of the emissions allowed from existing sources plus the new source is suitably reduced. Ordinarily, this assurance is provided by requiring reductions in existing source emissions that more than compensate for the full allowable quantity of new emissions from the new source. The trading program uses a different approach. The trading program directly regulates the sum of actual emissions from all major existing and new sources. The number of ATUs issued is effectively a cap on overall actual emissions from major sources in the Chicago area. No additional ATUs are issued to new or modified sources. Consequently, when a new source obtains the required 1.3 tons worth of ATUs per ton of new emissions, then the source or sources selling the ATUs have necessarily achieved 1.3 tons of emission reductions to offset each ton of the new source's emissions. That is, the Illinois program requires a net reduction of 0.3 tons per ton of new emissions in the total allowable emissions from existing plus new sources in the Chicago area. Thus, despite the focus on actual rather than potential emissions, the Illinois trading program nevertheless satisfies the relevant net reduction requirement.

Another perspective on this issue is to view the use of actual versus potential emissions as a reflection of how the offsets are administered. For conventional offsets, there is one opportunity to establish offsetting emission reductions, during issuance of the construction permit before the source is constructed. In those circumstances, the permit must provide sufficient offsets to offset as much new emissions as the new source will ever emit, i.e., the new source's potential emissions. In contrast, the trading rule provides opportunities recurring on an annual basis to reassess the quantity of emissions to be offset. The trading rule relies on this annual reassessment to assure that the new source obtains enough offsets each year to offset its emissions adequately.

A second difference between offsets under the trading program and conventional offsets is the timing by which the offsets are arranged. Section 173 requires that “sufficient offsetting emission reductions have been obtained” “by the time the source is to commence construction.” (The clauses in Section 173 are reversed here.) Ordinarily, the construction permit identifies the offsets. In Illinois' trading program, the construction permit restates the requirement to hold ATUs sufficient to offset (at a 1.3 to 1 ratio) the emissions attributable to the major new source or major modification. USEPA views this as satisfying the requirement to provide assurances prior to construction that the new emissions will be suitably offset. Illinois further requires new sources to identify how they plan to obtain offsets for the first three years of operation, which increases the likelihood in practice that new sources will make permanent arrangements for offsets similar to the unavoidably permanent arrangements for conventional offsets.

The third difference from conventional offsets is the seasonality of offsets under the Illinois trading program. Offsets under the trading rule are achieved by obtaining ATUs. These ATUs represent ozone season emissions, and must be obtained in proportion to ozone season emissions of the new source or major modification. This differs from the conventional focus on increases and decreases of annual emissions. In most cases the two approaches will have about the same effect, because the off-season new emissions will typically have about the same ratio to on-season new emissions as the off-season to on-season ratio of offsetting emission reductions. For example, if the new source emits 10 tons per month and the offsetting source reduces emissions by 13 tons per month, then there is no practical difference between tallying 50 new tons against 65 tons of reductions for a 5-month ozone season versus tallying 120 new tons versus 156 tons of reductions for the full year. However, seasonal distributions of emissions can vary, so USEPA must assess whether an approach that focuses on ozone season emissions satisfies applicable requirements.

Section 173, as quoted above, requires offsets to reduce “total emissions” sufficiently to achieve reasonable further progress toward attaining the relevant standard. One possible interpretation of this requirement is that one evaluates the total of all emissions that are germane to assessing whether reasonable further progress is occurring, in which case one would take the Illinois approach of focusing on ozone season emissions. However, USEPA views the term “total” in Section 173 to include all emissions from all times of the year, so that one must assess whether emission reductions (occurring in any part of the year) sufficiently offset the full year's new emissions, irrespective of the seasonal definition of reasonable further progress used in other contexts.

In short, the Illinois trading program provides offsets on the basis of ozone season emissions, but USEPA interprets Section 173 to require offsets on a full year basis. USEPA views this feature of the Illinois trading program as a significant deficiency that Illinois must correct before USEPA can fully approve the program.

The Illinois trading program clearly provides for satisfaction of other new source review requirements. New emissions must be offset permanently. Because the Illinois trading program and its ATU holding requirement are permanent, USEPA views the trading program as mandating permanent offsetting of new emissions. Sources must obtain offsets from the same nonattainment area or from other areas meeting certain criteria. The Illinois trading program operates only within the Chicago nonattainment area, so offsets for new Chicago area sources would derive entirely from other sources in the Chicago area. Other new source requirements, including lowest achievable emission rates, compliance by other sources having the same owner, and criteria for determining the applicability of these requirements, are all unaffected by the Illinois trading program. Therefore, USEPA proposes to find that Illinois will continue to satisfy previously satisfied Clean Air Act requirements if offsets are provided on a full year basis.

Because trading programs have a variety of designs and because we have little experience with these programs, USEPA guidance calls for trading programs to undertake periodic program evaluations and to remedy any problems that are identified.

Illinois' trading rules require an annual program review. This program review is available to the public. However, IEPA has not described how it will distribute this review and has not committed to pursue remedies if problems are identified. The pursuit of remedies is implicit in the requirement for annual program review. Nevertheless, in accordance with USEPA guidance, Illinois must provide an explicit commitment that it will provide the public suitable opportunity to comment on program implementation and that it will pursue remedies for any problems that the annual program review identifies.

The Illinois trading rules are clearly designed to achieve an overall reduction approaching 12 percent of the emissions of the major sources in the Chicago area. Most sources are issued ATUs equal to 12 percent less than their baseline emissions. Trades of these ATUs would shift which source achieves the emission reduction without changing the net total emission reduction achieved.

Features that affect the quantity of reduction to be achieved are: (1) Exemptions from the 12 percent reduction for specified classes of well controlled sources, (2) exemptions from the program for sources that submit to a limitation of 15 tons of emissions per ozone season and for sources that reduce emissions by 18 percent, (3) differences between baseline emissions and average emissions, (4) availability of a reserve account of ATUs equal to one percent of total baseline emissions, and (5) surcharges of ATUs that sources that emit in excess of their ATU holdings must purchase or not be issued. Many of the quantitative influences on the emission reductions to be achieved by this program are difficult to assess. The numbered paragraphs below address the impact of each of these features.

1. USEPA asked Illinois for clarification of the number of ATUs that would be issued to sources that are exempted from the 12 percent reduction in ATUs issued based on being well controlled. By letter of June 18, 1998, Illinois clarified that emission units that are found to be controlled with best available technology by May 1, 1999, for example, are to be issued ATUs reflecting emissions achieved by the best available technology, without adjustments that would otherwise apply. This means that the number of ATUs issued could be more or less than 12 percent below baseline emissions, depending on whether the extra controls achieve less or more than 12 percent emission reductions. As a result, the net effect of this exemption will likely be small.

2. Only a slight loss of emission reduction will likely result from sources opting out of the program via a 15 ton per season limit, and only a slight gain of emission reduction will likely result from sources opting out via an 18 percent reduction. USEPA has no precise estimate of these effects but expects the net effect to be small.

3. USEPA also has no precise estimates of differences between baseline emissions and average emissions. To investigate this issue, we obtained values of an index of midwest industrial production data prepared monthly by the Chicago Federal Reserve Board. We used this index because Chicago area industrial emissions should fluctuate in the same manner as midwest industrial production. We focused on values for the five months in Illinois' program. “Average” production reflected 1994 to 1996 values for these five months, and “baseline” production reflected the average for the higher two of these 3 years (1995 and 1996).

The index value for “baseline” production was 0.7 percent higher than the index value for “average” production. Consequently, USEPA estimates that baseline emissions under Illinois' program are 0.7 percent above average emissions, and so USEPA is subtracting 0.7 percent in its estimate of emission reductions required by Illinois' program.

USEPA recognizes that the Chicago Federal Reserve Board index, as a composite statistic, does not directly address the difference between average versus higher two of three that would be found by examining data on a source-by-source basis. Nevertheless, USEPA believes that the production index shows qualitatively that the difference is relatively small. Since source-specific data are unavailable, USEPA proposes to use the production index to adjust the estimate of the reductions that Illinois' program will achieve.

4. Illinois issues ATUs equal to 1 percent of baseline emissions to an “Alternative Compliance Market Account.” These ATUs are expensive, generally priced at the lesser of $10,000 per ton or 1.5 times the normal market price of ATUs. The emission reduction required by the Illinois trading program will be reduced to the extent that sources purchase ATUs from this account rather than from other sources. Thus, this feature will subtract between 0 and 1 percent of the reduction that the Illinois trading program requires.

5. When a source has a shortfall in its December 31 ATU holdings relative to its emissions that ozone season, it must provide ATUs equal to 120 percent of its shortfall. This provides a net 20 percent benefit to the environment. However, few sources are expected to have shortfalls, so this effect is likely to be small.

Illinois forecasted the emission reduction from its trading program by examining data in its emissions data base for major sources. This examination identified which sources would likely be subject to the program, preliminarily assessed which emission units at these sources would likely be exempted from the 12-percent reduction requirement (particularly because of implementation of MACT), and evaluated the total emissions which would be subject to a 12-percent reduction. Illinois thereby estimated that its trading program would reduce VOC emissions in the Chicago area by 12.6 tons per year.

Illinois has developed a reasonable inventory of sources to be subject to the trading program. However, Illinois overlooked two factors which could significantly affect emission reductions to be expected from the program. First, the issuance of ATUs equal to 1 percent of baseline emissions to the Alternative Compliance Market Account means that the program may reduce emissions only to 11 percent instead of 12 percent below baseline emissions. Second, as discussed above, baseline emissions are estimated to be about 0.7 percent higher than average emissions. Thus, 11 percent below baseline emissions would be about 10.4 percent below average emissions.

Consequently, USEPA estimates that Illinois' trading program will reduce emissions by 10.4 percent of the 105 tons per day emitted by sources in the program, or 10.9 tons per day. The actual reduction may be higher, to the extent that the Alternative Compliance Market Account goes unused and to the extent that surcharges are imposed on sources holding insufficient ATUs on December 31. The reduction will likely be higher in the first few years, while sources build up a reserve of ATUs, though this effect is likely to be minimal after a few years. The actual reduction may be lower, to the extent that the above analysis understates the difference between baseline and average emissions and to the extent that sources under 15 tons per ozone season obtain exemptions from the program. The reduction could be either slightly higher or slightly lower, depending on differences between well controlled emission levels and 12 percent below baseline levels. Nevertheless, despite the uncertainties in any estimate of program benefits, USEPA believes that Illinois' trading program will reduce VOC emissions in the Chicago area by about 10.9 tons per day.

The generation of ATUs is complicated in some cases by the difficulty of estimating the quantity of emission reductions. This is especially the case for programs to reduce highway vehicle emissions, for which the reductions are generally a function of a complicated array of variables. For example, the effect of programs for getting old cars off the road is influenced by the age mix of the cars being scrapped and the age mix of the cars being driven instead as well as collateral effects on miles driven, and is variable with time as the foregone mileage of the scrapped cars declines. USEPA anticipates being fully consulted on the quantification of emission reductions from programs that reduce highway vehicle emissions as a means of generating ATUs. In any case, the uncertainty in these emission estimates is no more likely to yield either greater or lesser reductions, and the net effect is expected to be small.

“Demand shifting” involves redistribution of production from one source to another. Demand shifting is a problem if credits are generated by the reduction in production at the first source and no credits are consumed by the production increase at the second source, since credits for emission reductions would be created where no net emission reduction has occurred. Illinois' program authorizes generation of ATUs via emission reductions at small industrial sources and at other sources including mobile sources and commercial operations.

For small industrial sources, the Illinois trading rules explicitly prohibit issuance of ATUs for small source production declines when that source's production might shift to another small source in the Chicago area. (Production shifts to large sources raise no problems, because large sources are required to hold ATUs to accommodate any increased production.) Therefore, the Illinois rules prevent the “demand shifting” problem for small industrial sources.

For commercial and mobile sources, Illinois' rules do not explicitly address the demand shifting issue. The IEPA is responsible for judging the quantity of emission reductions that a proposed control program will achieve (or has achieved). However, the rule does not require adjusting the emission reduction quantity to account for shifting of the relevant activity to other similar sources, nor has IEPA committed to make such an adjustment.

USEPA believes that Illinois' trading program should be approved only if Illinois commits to adjust any amounts of ATUs issued for commercial or mobile source emission reductions to reflect potential “demand shifting” or otherwise satisfactorily addresses this issue. The need for such a commitment or other resolution of this issue reflects the significant impact that could result from failure to account for the full consequences of proposed control programs for these types of sources.

“Spiking” refers to the possibility that several years of low emissions would be followed by a year of exceptionally high emissions. This is possible in programs like Illinois' that allow “banking” of credits, wherein credits not used in the low emission years can be reserved for use in a later year to allow high emissions. Illinois' ATUs have a two year life, so a source that for several years emits below its allotment level would increasingly be using year-old ATUs and reserving same-year ATUs, until ultimately in theory the source could hold two years of allotments that it could use in one year. Note that this scenario necessarily involves below average emissions in the year or years preceding the exceptionally high emission year.

Spiking is most problematic when high emissions are more likely to occur during critical air pollution episodes than low emissions. This was possible with USEPA's “NO X SIP Call”, for example, where USEPA was concerned that above average electrical generation and nitrogen oxides (NO X ) emissions might be more likely to occur during high temperature ozone episodes than during supposedly compensating periods of below average activity and emissions. This is not the case for the Illinois program, which addresses principally manufacturing operations that are not influenced by meteorology or other factors affecting air quality. As a result, in Illinois, just as a hypothetical year with much higher than average emissions is preceded by a year or years with correspondingly lower than average emissions, the relative worsening of air quality for the high emissions year compared to average conditions is likely to be the same as the relative improvement of air quality for the preceding low emissions years.

USEPA has proposed guidance for States to “include safeguards * * * to prevent emission spiking commensurate with the probability that spiking will occur.” USEPA investigated the probability of spiking occurring in the Illinois program.

Because the Illinois program requires continued achievement of RACT, sources have little latitude to cause spiking by varying control efficiencies. Instead, spiking is only plausible if “spiking” in production levels occurs.

USEPA investigated the likelihood of significant variations in production by analyzing the Chicago Federal Reserve Board's Midwest production index referenced above. The Chicago area has a diverse manufacturing base, so the variability of Midwest production is indicative of the variability of the production of major VOC sources in the Chicago area. The index is available for 1973 to 1998. Again USEPA examined the average index value for the five ozone season months. Of the 25 comparisons of consecutive year index averages, the index never changed by as much as 20 percent, dropped between 12 and about 18 percent in 3 years, increased by about 16 percent in 1 year, and stayed within about 10 percent for the remaining 21 years.

USEPA concludes that spiking is unlikely to occur in the Illinois program. Nevertheless, USEPA expects Illinois to report in its annual program review whether a significant stockpile of ATUs is being banked and if so to take corrective action as appropriate.

USEPA proposes to approve the Illinois trading program if Illinois provides five commitments or program revisions identified in this notice. Today's notice solicits comments on these proposed prerequisites for program approval as well as on other issues raised by Illinois' submittal and USEPA's review. USEPA believes that submittal of these materials will not raise any new issues not addressed in today's notice. Therefore, USEPA anticipates that submittal of these materials will not necessitate further proposed rulemaking.

USEPA proposes to approve Illinois' trading program only if Illinois submits five items:

1. Illinois must describe the timeline for sources to obtain the necessary number of ATUs. This description must identify a deadline after which Section 113 enforcement actions may be pursued.

2. Illinois must satisfy USEPA's policy on environmental justice as described in the proposed trading program guidance announced on September 15, 1999, at 64 FR 50086. This requires Illinois to commit to review effects of the trading program on the distribution of hazardous air pollutant emissions in its annual program review, distribute that review for public comment, and commit to address any identified problems.

3. Illinois must modify its new source requirements to provide offsets (at a 1.3 to 1 ratio, optionally from off-season emission reductions) for potential off-season VOC emissions of any major new source or major modification, to supplement the offsets that the trading program provides for on-season emissions.

4. Illinois must commit to discount or prohibit issuance of ATUs for commercial or mobile source emission reductions when the reduction is attributable to an activity level decrease that may accompany an increase in the level of that activity elsewhere in the Chicago area (“demand shifting”).

5. Illinois must commit to address any problems that are identified in its annual program review.

The Office of Management and Budget (OMB) has exempted this regulatory action from Executive Order 12866, entitled “Regulatory Planning and Review.”

Protection of Children from Environmental Health Risks and Safety Risks (62 FR 19885, April 23, 1997), applies to any rule that: (1) Is determined to be “economically significant” as defined under Executive Order 12866, and (2) concerns an environmental health or safety risk that USEPA has reason to believe may have a disproportionate effect on children. If the regulatory action meets both criteria, the Agency must evaluate the environmental health or safety effects of the planned rule on children, and explain why the planned regulation is preferable to other potentially effective and reasonably feasible alternatives considered by the Agency. This rule is not subject to Executive Order 13045 because it does not involve decisions intended to mitigate environmental health or safety risks.

Under Executive Order 13084, USEPA may not issue a regulation that is not required by statute, that significantly affects or uniquely affects the communities of Indian tribal governments, and that imposes substantial direct compliance costs on those communities, unless the Federal government provides the funds necessary to pay the direct compliance costs incurred by the tribal governments, or USEPA consults with those governments. If USEPA complies by consulting, Executive Order 13084 requires USEPA to provide to the Office of Management and Budget, in a separately identified section of the preamble to the rule, a description of the extent of USEPA's prior consultation with representatives of affected tribal governments, a summary of the nature of their concerns, and a statement supporting the need to issue the regulation. In addition, Executive Order 13084 requires USEPA to develop an effective process permitting elected officials and other representatives of Indian tribal governments “to provide meaningful and timely input in the development of regulatory policies on matters that significantly or uniquely affect their communities.”

Today's rule does not significantly or uniquely affect the communities of Indian tribal governments. This action does not involve or impose any requirements that affect Indian Tribes. Accordingly, the requirements of section 3(b) of Executive Order 13084 do not apply to this rule.

Federalism (64 FR 43255, August 10, 1999) revokes and replaces Executive Orders 12612 (Federalism) and 12875 (Enhancing the Intergovernmental Partnership). Executive Order 13132 requires USEPA to develop an accountable process to ensure “meaningful and timely input by State and local officials in the development of regulatory policies that have federalism implications.” “Policies that have federalism implications” is defined in the Executive Order to include regulations that have “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.” Under Executive Order 13132, USEPA may not issue a regulation that has federalism implications, that imposes substantial direct compliance costs, and that is not required by statute, unless the Federal government provides the funds necessary to pay the direct compliance costs incurred by State and local governments, or USEPA consults with State and local officials early in the process of developing the proposed regulation. USEPA also may not issue a regulation that has federalism implications and that preempts State law unless the Agency consults with State and local officials early in the process of developing the proposed regulation.

This rule will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132, because it merely proposes to approve a state rule implementing a federal standard, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. Thus, the requirements of section 6 of the Executive Order do not apply to this rule.

The Regulatory Flexibility Act (RFA) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. Small entities include small businesses, small not-for-profit enterprises, and small governmental jurisdictions.

This rule will not have a significant impact on a substantial number of small entities because SIP approvals under section 110 and subchapter I, part D of the Clean Air Act do not create any new requirements but simply approve requirements that the State is already imposing. Therefore, because the Federal SIP approval does not create any new requirements, I certify that this action will not have a significant economic impact on a substantial number of small entities. Moreover, due to the nature of the Federal-State relationship under the Clean Air Act, preparation of flexibility analysis would constitute Federal inquiry into the economic reasonableness of state action. The Clean Air Act forbids USEPA to base its actions concerning SIPs on such grounds. Union Electric Co. v. U.S. EPA, 427 U.S. 246, 255-66 (1976); 42 U.S.C. 7410(a)(2).

Under section 202 of the Unfunded Mandates Reform Act of 1995 (“Unfunded Mandates Act”), signed into law on March 22, 1995, USEPA must prepare a budgetary impact statement to accompany any proposed or final rule that includes a Federal mandate that may result in estimated costs to State, local, or tribal governments in the aggregate; or to the private sector, of $100 million or more. Under section 205, USEPA must select the most cost-effective and least burdensome alternative that achieves the objectives of the rule and is consistent with statutory requirements. Section 203 requires USEPA to establish a plan for informing and advising any small governments that may be significantly or uniquely impacted by the rule.

USEPA has determined that the approval action proposed does not include a Federal mandate that may result in estimated costs of $100 million or more to either State, local, or tribal governments in the aggregate, or to the private sector. This Federal action proposes to approve pre-existing requirements under State or local law, and imposes no new requirements. Accordingly, no additional costs to State, local, or tribal governments, or to the private sector, result from this action.

Section 12 of the National Technology Transfer and Advancement Act (NTTAA) of 1995 requires Federal agencies to evaluate existing technical standards when developing a new regulation. To comply with NTTAA, USEPA must consider and use “voluntary consensus standards” (VCS) if available and applicable when developing programs and policies unless doing so would be inconsistent with applicable law or otherwise impractical.

The USEPA believes that VCS are inapplicable to this action. Today's action does not require the public to perform activities conducive to the use of VCS.

These proposed regulations implement the Privacy Act of 1974, 5 U.S.C. 552a. The Board proposes the following set of regulations to discharge its responsibilities under the Privacy Act. The Privacy Act establishes: basic procedures for individuals' access to all records in systems of records maintained by the Chemical Safety and Hazard Investigation Board (“CSB” or “Board”) that are retrieved by an individual's name or personal identifier. These proposed rules describe the procedures by which individuals may request access to records about themselves, request amendment or correction of those records, and request an accounting of disclosures of those records by the CSB. The Board invites comments from interested groups and members of the public on these proposed regulations.

The Board, in accordance with the Regulatory Flexibility Act, 5 U.S.C. 605(b), has reviewed this proposed regulation and by approving it certifies that this regulation will not have a significant economic impact on a substantial number of small entities.

This rule will not result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more in any one year, and it will not significantly or uniquely affect small governments. Therefore, the Board did not deem any action necessary under the provisions of the Unfunded Mandates Reform Act of 1995, Pub. L. 104-4, 109 Stat. 48.

For the reasons set forth in the preamble, the Chemical Safety and Hazard Investigation Board proposes to add a new 40 CFR Part 1602 to read as follows:

On November 3, 2000, we issued a proposed rule in the Federal Register (65 FR 66304) that provided information for understanding the development and implementation of the inpatient rehabilitation facility (IRF) prospective payment system (PPS). That information included the following:

• An overview of the current payment system for IRFs.

• A discussion of research on IRF patient classification systems and prospective payment systems, including prior and current research performed by the RAND Corporation.

• A discussion of statutory requirements for developing and implementing an IRF PPS.

• A discussion of the proposed requirement that IRFs complete the Minimum Data Set for Post Acute Care (MDS-PAC) (a patient assessment instrument) as a part of the data collection deemed necessary by the Secretary to implement and administer the IRF PPS.

• A discussion of the IRF patient classification system using case-mix groups (CMGs).

• A detailed discussion of the proposed PPS including the relative weights and payment rates for each CMG, adjustments to the payment system, additional payments, and budget neutrality requirements mandated by section 1886(j) of the Social Security Act.

• An analysis of the impact of the IRF PPS on the Federal budget and inpatient rehabilitation facilities, including small rural facilities.

• Proposed conforming changes to existing regulations as well as new regulations that are necessary to implement the proposed IRF PPS.

The comment period for the proposed rule is scheduled to close at 5 p.m. on January 2, 2001. However, due to the scope and complexity of this proposed rule, we are concerned that the public may not have adequate time to comment on the rule. Accordingly, we are now extending the comment period by 30 days. We will now accept comments on the proposed rule until 5 p.m. on February 1, 2001. We believe the revised date will allow sufficient time for the public to provide comments.

Sections 1851 through 1859 of the Social Security Act (the Act) established a new Part C of the Medicare program, known as the “Medicare+Choice (M+C) Program.” On June 26, 1998, we published a comprehensive interim final rule (63 FR 34968) in the Federal Register to implement the M+C Program. That interim final rule set forth the new M+C regulations in 42 CFR Part 422—Medicare+Choice Program. We published a subsequent final rule with comment period in the Federal Register on June 29, 2000 (65 FR 40170).

When these rules were promulgated, we established a 2-year recredentialing cycle consistent with standards adopted by nationally recognized private quality assurance accrediting organizations. Under § 422.204(b)(2)(ii), Medicare+Choice Organizations (M+COs) are required to recredential providers, who are physicians or other health care professionals (including members of physicians groups) at least every 2 years. The recredentialing updates information obtained during initial credentialing and considers performance indicators such as those collected through quality assurance programs, utilization management systems, handling of grievances and appeals, enrollment satisfaction surveys, other plan activities, and an attestation of the correctness and completeness of the new information.

Since the promulgation of these M+C rules, however, the nationally recognized private quality assurance accrediting organizations' standards for recredentialing have changed to a 3-year cycle. Therefore, our regulations are no longer consistent with standards adopted by these organizations. We believe that the change in the standards for recredentialing from a 2-year cycle to a 3-year cycle is appropriate because it lessens the administrative burdens on M+COs and their providers without negatively affecting Medicare beneficiaries or the Medicare program.

We propose to change the recredentialing cycle requirement in § 422.204(b)(2)(ii) from at least a 2-year cycle to at least a 3-year cycle. This change would maintain consistency with managed care industry recognized standards of practice and quality, and is consistent with standards already adopted by nationally recognized private quality assurance accrediting organizations. Under this proposed change to the regulation, M+COs that wish to recredential on a 2-year cycle may continue to do so.

Under the Paperwork Reduction Act of 1995, we are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we solicit comment on the following issues:

• The need for the information collection and its usefulness in carrying out the proper functions of our agency.

• The accuracy of our estimate of the information collection burden.

• The quality, utility, and clarity of the information to be collected.

• Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.

We are soliciting public comment on each of these issues for the following sections of this document that contain information collection requirements:

Section 422.204 (Provider selection and credentialing) requires recredentialing at least every 3 years that updates information obtained during initial credentialing and considers performance indicators such as those collected through quality assurance programs, utilization management systems, handling of grievances and appeals, enrollee satisfaction surveys, other plan activities, and an attestation of the correctness and completeness of the new information. While the criteria and timing of the recredentialing process is currently approved under OMB control number 0938-0753, the general recredentialing criteria of every 2 years is being revised to every 3 years.

If you comment on the information collection and recordkeeping requirements, please mail copies directly to the following:

We have examined the impacts of this rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review) and the Regulatory Flexibility Act (RFA) (September 19, 1980 Public Law 96-354). Executive Order 12866 directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year). This rule is not a major rule, as there are no additional costs to implement the one change that results from this proposed rule. Since the proposed rule changes the recredentialing requirement from a 2-year to a 3-year cycle to remain consistent with the private accreditation processes, the regulation change decreases administrative costs for the health plan and the providers within the health plan.

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government agencies. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $5 million or less annually. For purposes of the RFA, some M+COs are considered to be small entities. Individuals and States are not included in the definition of a small entity.

In addition, section 1102(b) of the Social Security Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 50 beds.

Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule that may result in an expenditure in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector, of $100 million. The proposed rule will not have an effect on State, local, or tribal governments, nor will the rule meet the $100 million threshold.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. This rule does not impose any direct requirement costs on State or local governments.

The effect on M+COs will be to lessen the mandated recredentialing requirements to at least once every 3 years rather than the current requirement of at least once every 2 years. If the rule is not promulgated, Medicare M+COs would be required to recredential on a schedule that is different and more demanding for Medicare contractors than private contractors, adding an administrative complexity and cost without benefit. M+COs can maintain recredentialing more often at their option; this change simply addresses consistency with standards of private accreditation agencies.

Effects on other providers are limited, except that providers in M+COs will not be required to provide credentialing material at a greater frequency than they are required to provide it by the private accreditation agencies and the M+COs' individual corporate requirements.

This rule makes no change to the Medicaid program. The rule simplifies the recredentialing mandated cycle for consistency with the private accreditation processes for Medicare M+COs. If the rule is not promulgated, a cycle inconsistent with the private accreditation organizations will require private accreditation organizations to change their cycle in order to be deemed for Medicare and require M+COs and their providers to undergo an additional administrative cost and process without identified benefit to Medicare beneficiaries or the Medicare program.

The only other alternative would be to leave the regulation unchanged. To meet our goal to be consistent, when appropriate, with the standards of the private accreditation organizations, we decided that the change is necessary.

For these reasons, we are not preparing analyses for either the RFA or section 1102(b) of the Act because we have determined, and we certify, that this rule would not have a significant economic impact on a substantial number of small entities, or a significant impact on the operations of a substantial number of small rural hospitals.

In accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget.

Because of the large number of items of correspondence we normally receive on Federal Register documents published for comment, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and time specified in the “DATES” section of this preamble, and, if we proceed with a subsequent document, we will respond to the major comments in the preamble to that document.

For the reasons set forth in the preamble, the Health Care Financing Administration would amend 42 CFR chapter IV as follows:

On December 20, 2000, the FCC's Common Carrier Bureau (the Bureau) granted a motion for extension of time for parties to file comments and reply comments in response to Public Notice in CC Docket No. 96-262. Common Carrier Bureau Grants Motion for Limited Extension of Time for Filing Comments and Reply Comments on Issues Relating to CLEC Access Charge Reform, Public Notice, CC Docket No. 96-262, DA 00-2866 (rel. Dec. 20, 2000). This document summarizes that Public Notice.

On December 7, 2000, the Bureau released a Public Notice in CC Docket No. 96-262 inviting comment on issues related to CLEC access charge reform. Common Carrier Bureau Seeks Additional Comment on Issues Relating to CLEC Access Charge Reform, Public Notice, 65 FR 77545, DA 00-2751, CC Docket No. 96-262 (pub. Dec. 12, 2000) ( CLEC Access Charge Reform Notice ). Pursuant to the CLEC Access Charge Reform Notice, parties were required to file comments on or before December 27, 2000 and reply comments on or before January 11, 2001.

On December 14, 2000, Allegiance Telecom, Inc. filed a Motion for Extension of Time to extend the dates for filing comments and reply comments in response to the Public Notice. In its pleading, Allegiance requests that the deadlines for filing comments and reply comments be extended by fifteen (15) days.

It is the policy of the Commission that extensions of time are not routinely granted. In this instance, however, the Bureau finds that Allegiance has shown good cause for an extension of the deadline for filing comments and reply comments in this proceeding. Accordingly, interested parties may now file comments on or before January 11, 2001 and reply comments on or before January 26, 2001. This matter shall continue to be treated as a “permit-but-disclose” proceeding in accordance with the Commission's ex parte rules. 47 CFR. 1.1200, 1206. All other requirements discussed in the CLEC Access Charge Reform Notice in this proceeding remain in effect.

This is a synopsis of the Commission's Notice of Proposed Rule Making, MM Docket No., adopted December 6, 2000, and released December 15, 2000. The full text of this Commission decision is available for inspection and copying during normal business hours in the FCC Reference Center (Room 239), 445 12th Street, SW., Washington, DC. The complete text of this decision may also be purchased from the Commission's copy contractor, International Transcription Services, Inc., (202) 857-3800, 1231 20th Street, NW., Washington, DC 20036.

Provisions of the Regulatory Flexibility Act of 1980 do not apply to this proceeding.

Members of the public should note that from the time a Notice of Proposed Rule Making is issued until the matter is no longer subject to Commission consideration or court review, all ex parte contacts are prohibited in Commission proceedings, such as this one, which involve channel allotments. See 47 CFR 1.1204(b) for rules governing permissible ex parte contacts.

Part 73 of title 47 of the Code of Federal Regulations is proposed to be amended as follows: