[Federal Register Volume 59, Number 224 (Tuesday, November 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-28708]


[[Page Unknown]]

[Federal Register: November 22, 1994]


      
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Part IV





Environmental Protection Agency





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40 CFR Part 72




Acid Rain Program: Permits; Final Rule
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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 72

[FRL-5109-8]
RIN 2060--AF59

 
Acid Rain Program: Permits

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

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SUMMARY: Title IV of the Clean Air Act, as amended by Public Law 101-
549, the Clean Air Act Amendments of 1990 (the Act), authorizes the 
Environmental Protection Agency (EPA or Agency) to establish the Acid 
Rain Program. On January 11, 1993, the Agency promulgated final rules 
under title IV. Several parties filed petitions for review of the 
rules. On November 18, 1993, the Agency published a notice of proposed 
revisions of those rules implementing sections 404(b) and (c) 
(substitution plans) and 408(c)(1)(B) (reduced utilization plans) of 
the Act. On May 4, 1994, EPA and other parties signed a settlement 
agreement addressing substitution and reduced utilization issues.
    After reviewing the record, EPA concludes that the January 11, 1993 
rules can be read to give utilities an ability to use substitution and 
reduced utilization plans to create excess, new allowances. These 
allowances will authorize sulfur dioxide emissions in excess of total 
emissions without the plans and will result from emission reductions 
made, or required by federal or State law adopted, before enactment of 
title IV. This creation of allowances is contrary to the purposes of 
sections 404(b) and (c) and 408(c)(1)(B) and can compromise achievement 
of the emissions reductions intended under title IV. Consequently, EPA 
is modifying sections of part 72 of the January 11, 1993 regulations. 
The rule revisions will prevent the use of substitution and reduced 
utilization plans to create excess, new allowances and are consistent 
with the May 4, 1994 settlement.
EFFECTIVE DATE: December 22, 1994.

ADDRESSES: Docket No. A-93-40, containing supporting information used 
to develop the proposal, copies of all comments received, and responses 
to comments, is available for public inspection and copying from 8:30 
a.m. to 12:00 p.m. and 1:00 p.m. to 3:30 p.m., Monday through Friday, 
excluding legal holidays, at EPA's Air Docket Section (LE-131), 
Waterside Mall, room 1500, 1st floor, 401 M Street, SW., Washington DC 
20460. A reasonable fee may be charged for copying.

FOR FURTHER INFORMATION CONTACT: Dwight C. Alpern, Attorney-advisor, at 
(202) 233-9151, Acid Rain Division (6204J), U.S. Environmental 
Protection Agency, 401 M St., SW., Washington, DC 20460, or the Acid 
Rain Hotline at (202) 233-9620.

SUPPLEMENTARY INFORMATION: The contents of the preamble to the final 
rule are as follows:

I. Statutory Purposes of the Substitution and Reduced Utilization 
Provisions
II. Need to Modify the January 11, 1993 Regulations
A. The January 11, 1993 Regulations can be Read to Give Utilities 
the Ability to Bring Phase II Units Into Phase I and Create Excess, 
new Allowances
B. Under the January 11, 1993 Regulations, Entry of Phase II Units 
Into Phase I can Significantly Compromise the Emissions Reduction 
Goals of Title IV
III. Modifications of the January 11, 1993 Regulations
A. Substitution Plans
1. Limiting the Allowances Allocated to Each Substitution Unit
a. 1989 or 1990 SO2 Emissions Rate
b. Most Stringent Federal or State SO2 Emissions Limitation
c. Baseline
2. Limiting the Number of Substitution Units
3. Requirement That the Substitution Unit be Under Control of the 
Table A Unit's Owner or Operator
4. Other Changes
B. Reduced Utilization Plans
1. Limiting the Category of Units That can Qualify as Compensating 
Units
2. End-of-Year Review of the Need for Compensating Units
3. Reporting and Allowance Surrender
IV. Applicability of Rule Revisions to Existing Permit Applications
V. Administrative Requirements
A. Docket
B. Executive Order 12866
C. Paperwork Reduction Act
D. Regulatory Flexibility Act
E. Miscellaneous

I. Statutory Purposes of the Substitution and Reduced Utilization 
Provisions

    The provisions in sections 404(b) and (c) and 408(c)(1)(B) of the 
Act concerning substitution and reduced utilization plans have specific 
statutory purposes related to the achievement of the sulfur dioxide 
emissions reduction goals of title IV. The Agency maintains that 
Congress did not intend that these provisions provide utilities an 
ability to create excess, new allowances by bringing Phase II units 
into Phase I. Because the January 11, 1993 regulations implementing 
these provisions can be read to allow the creation of excess, new 
allowances in Phase I, the Agency is revising today the regulations to 
ensure that this does not occur. See 58 FR 60951 (defining ``excess, 
new allowances'').
    As discussed in the preamble of the November 18, 1993 proposal (58 
FR 60950-60951), Congress established substitution plans as a 
compliance option to increase units' compliance flexibility and reduce 
their overall costs of compliance in Phase I while still achieving the 
emissions reductions intended by Congress under title IV. A 
substitution plan allows the owner or operator of a unit listed in 
Table A of section 404 to reassign the unit's emissions reduction 
obligations to a designated non-Table A unit under the owner's or 
operator's control. Upon approval of the reassignment, the non-Table A 
unit becomes subject to all requirements for Phase I units with regard 
to sulfur dioxide and is allocated allowances. Emissions reductions by 
the non-Table A unit may therefore free up allowances, which may be 
used by the Table A unit (or any other unit) in lieu of making 
emissions reductions.
    Section 404(b)(5) of the Act expressly states that, with a 
substitution plan, the intended emissions reductions must still be 
achieved. That section requires that, in approving a substitution plan, 
the Administrator ensure that the substitution results in total 
emissions reductions at least equal to the total reductions that 
otherwise ``would have been achieved'' by these Table A and non-Table A 
units ``without such substitution.'' 42 U.S.C. 7651c(b)(5). EPA 
concludes that the substitution provision is intended to provide an 
alternative means of achieving Phase I reductions, not a mechanism for 
avoiding such emission reductions.
    The provision for reduced utilization plans has a statutory purpose 
that is also aimed at ensuring realization of emission reductions. As 
explained in the November 18, 1993 preamble (58 FR 60951), Congress 
recognized that the potential for circumvention of emission limitation 
requirements exists because in Phase I only a minority of all utility 
units are subject to such requirements. A Phase I unit could simply 
reduce its utilization by shifting its generation, and the emissions 
that would otherwise result, to a unit that was not required to use 
allowances to cover its emissions. Allowances allocated to the Phase I 
unit would be freed up for use without achievement, at either unit, of 
the intended emissions reductions.
    In section 408(c)(1)(B), Congress adopted a solution to this 
problem. Owners and operators of any Phase I unit that, for compliance 
purposes, propose reducing utilization of the unit below 1985-87 
utilization (i.e., its baseline) in order to comply with title IV are 
required to submit a reduced utilization plan. In such a plan, the 
owners and operators must designate the units that will provide 
generation to compensate for the reduced utilization of the Phase I 
unit or must account for the reduced utilization through energy 
conservation or improved unit efficiency. 42 U.S.C. 7651(c)(1)(B). Each 
compensating unit in an approved plan becomes subject to Phase I sulfur 
dioxide emissions limitations and is allocated allowances equal to that 
unit's baseline times the lesser of the 1985 actual or allowable 
emissions rate for the unit. The compensating unit will therefore have 
to use allowances to account for its emissions, including any increased 
emissions resulting from compensating generation that it provides for 
the Phase I unit.
    The Administrator approves or disapproves each plan (and 
compensating units proposed therein) after determining whether the plan 
meets the requirements of title IV, including achievement of the 
intended emissions reductions under the Acid Rain Program. 42 U.S.C. 
7651g(c)(2); see also 58 FR 60951. Thus, like the provisions for 
substitution plans, the provisions for designating compensating units 
in reduced utilization plans are intended to allow compliance 
flexibility but also to protect the emission reduction goals of title 
IV by requiring that plans not result in more emissions than would 
occur without the plans. In fact, if the reduced utilization plan 
provisions were interpreted to allow the creation of excess, new 
allowances, utilities could simply use such plans to circumvent the 
limitation on the creation of allowances under substitution plans by 
bringing the same Phase II units into Phase I as compensating units 
rather than substitution units.1
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    \1\This conclusion is not contradicted by the legislative 
history, cited by some commenters, discussing the compliance 
flexibility and potential cost savings resulting from use of the 
allowance market. See, e.g., Senate Rep. No. 101-228 at 316. Such 
generic discussion of the ability of units to over- or under- 
control emissions and to trade allowances does not address the 
specific issue of the entry of Phase II units into Phase I. 
Although, under the Partial Settlement in Environmental Defense Fund 
v. Carol M. Browner, No. 93-1203 and Alabama Power Co. v. U.S. EPA, 
No. 93-1611 (D.C. Cir. 1993) (signed May 4 and 20, 1993), many 
comments on the November 18, 1993 proposal were withdrawn, the 
Agency is responding--here or in a response-to-comment document--to 
the substance of all comments that were originally submitted. (This 
settlement is hereafter referred to as ``the May 4, 1994 
settlement''.)
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II. Need to Modify the January 11, 1993 Regulations

A. The January 11, 1993 Regulations can be Read to Give Utilities the 
Ability to Bring Phase II Units Into Phase I and Create Excess, New 
Allowances

    On January 11, 1993, EPA promulgated regulations that implemented 
the major provisions of title IV, including the substitution and 
reduced utilization provisions. As discussed in the November 18, 1993 
preamble (58 FR 60951-60953), these provisions can be read to provide 
utilities two alternative methods of bringing into Phase I, with few 
limitations, selected Phase II units and creating excess, new 
allowances. The Agency concludes that both provisions must be revised 
in order to eliminate this problem.
    Under Sec. 72.41 of the January 11, 1993 regulations, the 
designated representative for a unit on Table A may include in the 
Phase I permit application a substitution plan designating, as 
substitution units, one or more existing units that are Phase II units 
and so not on Table A. 40 CFR 72.41(b) (1993). There is no express 
requirement that the substitution unit make reductions beyond those 
that it would have made without the plan or actually provide allowances 
for the Table A unit and no express limit on the number of substitution 
units that a Table A unit may designate. Further, for the most part, 
the decision whether to designate a particular Phase II unit as a 
substitution unit is at the discretion of the utility. See 58 FR 60952.
    Section 72.43 of the January 11, 1993 regulations requires, under 
certain circumstances, that the designated representative for a Phase I 
unit submit a reduced utilization plan designating a compensating unit. 
Such a plan must be submitted if the owners and operators of the unit 
plan to reduce utilization of the unit below its baseline for purposes 
of complying with Phase I emissions limitations and to accomplish this 
by shifting generation to a non-Phase I unit. 40 CFR 72.43(b) (1993). 
Because of concern that utilities would be unable to designate 
compensating units and therefore might engage in uneconomic dispatching 
to avoid reduced utilization requiring such designations, the 
regulation establishes broad exceptions to the requirement to submit a 
plan. 40 CFR 72.43(e) (1993); see also 58 FR 60958-60959. There is no 
express requirement that the Phase I unit actually have any reduced 
utilization or the compensating unit actually provide any compensating 
generation to the Phase I unit. There is also no express limit on the 
number of compensating units that a Phase I unit may designate and no 
express bar on a compensating unit itself designating a compensating 
unit. Further, as with substitution units, a utility's decision to 
designate a compensating unit is largely discretionary. See 58 FR 
60952.
    Because utilities generally have broad discretion and flexibility 
in designating substitution and compensating units, such units will 
likely be designated only if early entry into Phase I is beneficial, 
e.g., where early entry creates new allowances because the units have 
lower actual emissions in Phase I than the allowances they will receive 
as substitution or compensating units. See 58 FR 60953 and n. 2. Before 
the enactment of title IV, some Phase II units had reduced emissions 
rates for economic or other reasons and some States had already adopted 
laws requiring their utilities to reduce emissions rates prior to Phase 
II. Such reductions occurred, or will occur, for reasons independent of 
the substitution and reduced utilization provisions. Under the January 
11, 1993 regulations, for each Phase I year that a substitution or 
reduced utilization plan is in effect, each substitution or 
compensating unit under the plan is allocated a number of allowances 
equal to the unit's baseline times the lesser of the 1985 actual or 
allowable emissions rate for the unit. 40 CFR 72.41(c)(3) and (d) and 
72.43(c)(4)(ii) and (d) (1993). Consequently, some Phase II units may 
enter Phase I as substitution or compensating units and convert 
emission rate reductions into excess, new allowances: i.e., allowances 
that would not otherwise be available and that reflect emission rate 
reductions that would occur even without plans allowing early entry 
into Phase I.
    The excess, new allowances may become available to affected units 
in Phase I and/or in Phase II and enable such units to avoid making 
emissions reductions that title IV would otherwise require them to 
make. These allowances may thereby diminish the emissions reductions 
that Congress intended to be achieved by virtue of title IV. In sum, as 
explained in the November 18, 1993 preamble, the January 11, 1993 
regulations transform the statutory substitution and reduced 
utilization provisions from provisions for facilitating and protecting 
anticipated emissions reductions under title IV into potential means of 
creating excess, new allowances that can be used to avoid such 
reductions. (58 FR 60953.)
    Because the regulations provide alternative means (through 
substitution plans or reduced utilization plans) of creating excess, 
new allowances, the regulations are contrary to Congressional intent 
and sections 404(b) and (c) and 408(c)(1)(B) of the Act and therefore 
must be modified to eliminate both alternatives.

B. Under the January 11, 1993 Regulations, Entry of Phase II Units Into 
Phase I can Significantly Compromise the Emissions Reduction Goals of 
Title IV

    The potential number of excess, new allowances created by 
substitution and compensating units under the January 11, 1993 
regulations may be sufficient to compromise significantly the 
achievement of the emissions reductions intended by Congress under 
title IV. The Agency estimates that entry into Phase I of Phase II 
units that will benefit from becoming substitution or compensating 
units and that reduced emissions rates between 1985 and 1991 for 
economic or other reasons or were required by federal or State law as 
of November 15, 1990 to reduce emissions rates between 1985 and 1995 
will create about 200,000 allowances per year in Phase I in excess of 
emissions without such entry.2 See 58 FR 60953 and n. 4; and 
Calculation of Potential Impacts of Phase I Substitution Units, ICF 
Inc. at 5 (July 7, 1993). Thus, the current substitution and reduced 
utilization provisions will potentially result in the creation of 
excess, new allowances authorizing additional emissions of 1,000,000 
tons of sulfur dioxide in all of Phase I.
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    \2\This is a conservative estimate of the potential for creation 
of excess, new allowances. Assuming that all 250 designated 
substitution and compensating units in existing permit applications 
are activated as substitution units for all of Phase I, about 
385,000 excess, new allowances will be created per year under the 
January 11, 1993 regulations. Assuming all existing Phase II units 
(about 2,000 units) will become substitution units for all of Phase 
I, almost 1,000,000 excess, new allowances will be created per year 
in Phase I under the January 11, 1993 regulations. See Estimates of 
Allowances Impact of Proposed Permits Rule Revisions and Alternative 
Regulatory Scenarios at 3, 8, and 52 (Oct. 20, 1993) (comparing 
``totals'' for allowance allocations under ``existing'' rule and 
``proposed'' rule). The Agency's 200,000-allowance estimate reflects 
the assumption that only those units (about 200 to 300 units) with 
projected 1995 emissions lower than their 1985 level will be likely 
to become substitution units under the current regulations. See 
Calculation of Potential Impacts of Phase I Substitution Units at B-
4 (``total'' of units with ``SO2 decrease'' under ``CAT7'') 
(July 7, 1993). That estimate also assumes that some allowances that 
will be created will result from reduced utilization and will be 
subject to surrender to EPA under Secs. 72.91 and 72.92 of the 
regulations. Id. at 7 and 9.
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    Congress expected the emission limitations in title IV to result in 
annual SO2 emissions reductions of 2.8 to 4.4 million tons in 
Phase I. Senate Rep. No. 101-228 at 327; Cong. Rec. S16980 (Oct. 27, 
1990).3 EPA estimates that the expected reductions by Phase I 
units alone during Phase I are about 2.4 million tons in 1995 and 1996 
and about 3.5 million tons in 1997, 1998, and 1999. Memorandum from T. 
Larry Montgomery to Brian J. McLean (Oct. 15, 1993). As discussed 
above, the statutory language and legislative history demonstrate that 
Congress did not intend these reductions to be eroded by substitution 
or reduced utilization plans. Yet, under the current regulations, Phase 
I units can avoid some of these reductions by offsetting their 
emissions in Phase I with excess, new allowances resulting from such 
plans. The use of 200,000 excess, new allowances per year in Phase I 
will negate a significant portion (i.e., 6 to 8 percent) of estimated, 
expected reductions for Phase I units.
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    \3\Because, as discussed above, Congress did not intend the 
substitution and compensating unit provisions to create excess, new 
allowances, commenters erred in claiming that such allowances 
account for the 2.8 to 4.4 million ton range for estimated Phase I 
reductions in SO2. Rather, the range reflected, inter alia, 
uncertainty over what emissions decreases or increases would occur 
at Phase II units that would not be subject to emissions limitations 
until Phase II. Because of the lack of emissions limitations on such 
units in Phase I, the Phase I emissions of these units and the 
impact on total Phase I reductions could only be projected.
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    Alternatively, banking these new allowances for use in Phase II 
will diminish the intended emissions reduction impact of the 8.95 
million ton cap established by Congress for Phase II. See 58 FR 60954-
60955 (explaining the importance of the Phase II cap). The carryover 
and use of the excess, new allowances created by early entry of Phase 
II units into Phase I can result in emissions exceeding the cap for 
each of the first five years of Phase II by as much as 200,000 tons.
    The magnitude of potential erosion of expected emissions reductions 
supports the Agency's conclusion, based on statutory language and 
legislative history, that Congress did not intend to allow substitution 
or compensating units to create allowances for pre-Phase II emissions 
reductions that would have been achieved in the absence of substitution 
and reduced utilization plans.4 The Agency's conclusion is also 
supported by Congress' approach in sections 404(e), 405, and 410 of the 
Act. As discussed in the November 18, 1993 preamble (58 FR 60954), the 
fact that in those sections Congress carefully limited the ability of 
Phase II units to obtain additional allowances for pre-Phase II 
reductions strongly suggests that sections 404(b) and (c) and 
408(c)(1(B) should not be interpreted to allow allowance allocations 
for all such reductions.
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    \4\Thus, contrary to the assertion of some commenters, the 
Agency's modification of the current regulations is not based on 
circular reasoning. The statutory language and legislative history 
demonstrate that Congress did not intend for substitution or reduced 
utilization plans to result in fewer reductions than without the 
plans. The analysis that such plans under the January 11, 1993 
regulations can result in about 200,000 excess, new allowances per 
year in Phase I shows the potential magnitude of the problem and 
supports today's modification of the regulations to ensure 
consistency with the statute.
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III. Modifications of the January 11, 1993 Regulations

A. Substitution Plans

    The Agency is modifying the January 11, 1993 regulations concerning 
substitution plans by limiting the allowances allocated to a 
substitution unit to the baseline times the lesser of: the 1985 actual 
SO2 emissions rate; the 1985 allowable SO2 emissions rate; 
the greater of 1989 or 1990 actual SO2 emissions rate; or the most 
stringent federal or State allowable SO2 emissions rate for Phase 
I as of November 15, 1990, the date of enactment of title IV of the 
Act. In addition, the final regulations eliminate the language in the 
January 11, 1993 regulations providing that a Phase II unit that lacks 
any common owner or operator but has a common designated representative 
with a Phase I unit can, without anything more, be designated as a 
substitution unit.
1. Limiting the Allowances Allocated to Each Substitution Unit
    The final rule limits the number of allowances allocated to each 
substitution unit by calculating the allocation using the lesser of the 
unit's 1985 SO2 emissions rate or an SO2 emissions rate that 
is reasonably representative of what would have been achieved without 
the substitution plan. Specifically, a substitution unit will be 
allocated allowances equal to baseline times the lesser of: the unit's 
1985 actual SO2 emissions rate; the unit's 1985 allowable SO2 
emissions rate; the greater of the unit's 1989 or 1990 actual SO2 
emissions rate; or the most stringent federal or State allowable 
SO2 emissions rate as of November 15, 1990 applicable to the unit 
in 1995-99. The January 11, 1993 regulations consider only the unit's 
1985 actual or allowable SO2 emissions rate.
    As discussed above, section 404(b)(5) requires that the 
substitution plan include a demonstration that the ``reassigned tonnage 
limits [under the plan] will, in total, achieve the same or greater 
emissions reduction than would have been achieved by the original 
affected unit and the substitute unit or units without such 
substitution.'' 42 U.S.C. 7651c(b)(5). The Agency interprets this 
provision to require that the plan achieve total reductions equal to or 
greater than both (i) the Table A unit's reduction obligation in Phase 
I and (ii) the reductions that the substitution unit would have made if 
it had not entered Phase I, including reductions made, or mandated by 
federal or State law adopted, prior to the passage of title IV.
    The preamble of the January 11, 1993 regulations sets forth a 
different interpretation of section 404(b)(5) that the Agency concludes 
is erroneous. As EPA explained in the November 18, 1993 preamble (58 FR 
60954-60955):
    In the January 11, 1993 preamble, the Agency stated that any 
reductions in emissions rate that have been, or will be, made at the 
substitution unit after 1985 without the substitution plan (e.g., 
reductions for economic reasons or required by federal or State law) 
``will not have resulted from title IV'' and so should ``not be counted 
as reductions that would have occurred without the plan.'' 58 FR 3601 
(emphasis added). The difficulty with this interpretation is that it 
appears to read out of section 404(b)(5) the requirement to ensure that 
a substitution plan does not negate reductions ``that would have been 
achieved by * * * the substitute unit * * * without such 
substitution.'' 42 U.S.C. 7651c(b)(5). In the absence of the plan, the 
substitution unit would not be subject to title IV until Phase II. If 
only reductions required by title IV were considered under section 
404(b)(5), the amount of reductions that would have been achieved by 
the substitution unit without the plan (i.e., the reductions in Phase 
I) would always be zero * * *. The reference to such reductions would 
therefore be meaningless. In interpreting the Act, it should not be 
presumed that Congress adopted meaningless language.
    Some commenters on the November 18, 1993 proposal suggested a third 
interpretation of section 404(b)(5). They claimed that the provision 
addresses only situations where, as part of the substitution plan, 
allowances that would be allocated to the substitution unit are instead 
allocated by EPA to the Table A unit. Specifically, the commenters 
alleged that the terms ``reassigned tonnage limits'' and ``such 
substitution'' in section 404(b)(5) are synonymous and refer only to 
the ``allocation of a number of allowances to the Table A unit in 
addition to those that the Table A unit would otherwise receive.'' 
Comments of UARG at 33 n. 54 and 34. Accordingly, it is argued that 
section 404(b)(5) requires only that the number of additional 
allowances that are allocated under the plan to the Table A unit cannot 
be greater than the number of allowances that are subtracted from the 
allocation that the substitution unit would otherwise receive under the 
plan.
    The Agency rejects this interpretation, which is inconsistent with 
the substitution plans that the commenters themselves have submitted to 
the Agency and which would reduce section 404(b)(5) to a triviality. As 
the commenters noted, section 404(b) describes a substitution plan as 
``a proposal to reassign, in whole or in part, the affected [Table A] 
unit's sulfur dioxide reduction requirements to any other unit(s)'' 
under the control of the owner or operator of the Table A unit. 42 
U.S.C. 7651c(b) and Comments of UARG at 33. According to the 
commenters, such reassignment occurs only where allowances otherwise 
allocated to a substitution unit are instead allocated to the Table A 
unit. Id. at 34 and 40-1. This is allegedly the only circumstance to 
which section 404(b)(5) would apply.
    If the commenters' interpretation were correct, then only those 
plans that actually provide for such an additional allocation of 
allowances to the Table A unit would be substitution plans, as defined 
by section 404(b). However, although Sec. 72.41(c)(4)(ii) of the 
January 11, 1993 regulations provides the option to redistribute 
allowance allocations in this way, such redistribution is not required 
by Sec. 72.41. Moreover, EPA has not received a single substitution 
plan for any units that includes such a redistribution of allowance 
allocations. See 58 FR 32667-32670 (June 11, 1993); 58 FR 34582 (June 
25, 1993); 58 FR 38373-38375 (July 16, 1993); 58 FR 39543-39544 (July 
23, 1993); 58 FR 40812-40813 (July 30, 1993); 58 FR 42065-42069 (Aug. 
6, 1993); and 58 FR 43110 (Aug. 13, 1993) (summarizing the allowance 
allocations under the proposed plans, none of which included any 
redistribution of allowances from a substitution unit to a Table A 
unit). Under the commenters' approach, none of the substitution plans 
submitted to date are ``proposals to reassign * * * reduction 
requirements'' under section 404(b). Further, the commenters' 
interpretation of section 404(b)(5) would reduce that provision to a 
trivial requirement that EPA cannot give more additional allowances to 
the Table A unit than it takes from the substitution unit.\5\
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    \5\Apparently, EPA could, under the commenters' interpretation, 
allocate fewer additional allowances to the Table A unit than are 
subtracted from the substitution unit's allowance allocation.
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    When section 404(b)(5) is properly interpreted, these problems 
evaporate. The term ``reassigned tonnage limits'' refers to the total 
allowance allocations made, in every substitution plan, to the Table A 
and substitution units under the plan and not simply to redistributed 
allowances. Thus, section 404(b)(5) requires that each substitution 
plan must result in ``the same or greater'' reductions of sulfur 
dioxide emissions as would have been made by the Table A and 
substitution units without a substitution plan.\6\ 42 U.S.C. 
7651c(b)(5).
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    \6\The commenters relied on Senate Report No. 101-228 (at 307 
and a floor statement by Senator Baucus (136 Cong. Rec. S16980 
(daily ed. Oct. 27, 1990) to support the claim that section 
404(b)(5) requires consideration only of the emissions reductions 
that would be achieved by the Table A unit, and not those by the 
substitution unit, in the absence of the plan. Such reliance is 
misplaced because section 404(b)(5) explicitly requires that the 
emissions reductions at both the Table A and the substitution units 
without the plan be considered. 42 U.S.C. 7651c(b)(5).
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    The Agency concludes that section 404(b)(5) must be interpreted to 
take into account, and avoid allocating allowances to the substitution 
unit for, reductions that would otherwise have been made at the 
substitution unit since 1985 in the absence of a substitution plan. The 
Agency maintains that there are two categories of reductions that would 
otherwise have been made and that therefore should be excluded from the 
allocation of allowances to substitution units: (1) emissions rate 
reductions that were made voluntarily, for economic or other reasons, 
by a substitution unit after 1985 and before enactment of title IV; and 
(2) emissions rate reductions by a substitution unit between 1985 and 
2000 that were mandated by federal or State law as of the enactment of 
title IV.
    a. 1989 or 1990 SO2 emissions rate. With regard to the first 
category of emissions reductions, EPA is modifying the January 11, 1993 
regulations to provide that substitution units will not be allocated 
allowances for voluntary emissions rate reductions made before 
enactment of title IV: i.e., reductions before title IV's enactment 
that were not mandated by federal or State law and that were made for 
economic or other reasons. To the extent a unit's emissions rate 
reductions are caused by economic or other factors that would have 
existed in Phase I even if the unit did not become a substitution unit, 
such reductions would have occurred without a substitution plan and 
therefore must be taken into account under section 404(b)(5) and 
excluded from allowance allocations. In theory, any reductions made by 
a unit between 1985 and 1999 could potentially be in response to such 
factors and, if so, could be considered as reductions that would have 
occurred without the substitution plan.
    The Agency maintains that there must be a bright line drawn to 
determine whether a unit's voluntary reductions in emissions rate would 
occur even if the unit were not a substitution unit. It would be 
difficult to make accurate case-by-case determinations, concerning a 
large number of units, as to whether the owners and operator of a 
particular unit took actions after 1985 to reduce its emissions rate in 
anticipation of the unit becoming a substitution unit. Such 
determinations would require analyzing economic and other factors that 
may be involved (e.g., fuel costs, the timing for retrofitting of 
pollution controls, and the regulatory benefits and risks of becoming a 
substitution unit), balancing the factors favoring or disfavoring 
action to reduce the emissions rate, and judging what the owners and 
operator would have done in the past concerning the unit's emissions in 
the absence of substitution plans.\7\ See Comments of Environment 
Defense Fund and the Natural Resources Defense Council at 16 (submitted 
Feb. 10, 1994). Similar determinations would presumably have to be made 
for each approved substitution unit, and allowance allocations might 
have to be adjusted, each time the owners and operators of the unit 
take actions after approval of the substitution plan that reduce the 
unit's emissions rate in Phase I.
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    \7\Thus, particularly where there are a large number of units 
involved, the Agency does not agree with those commenters that 
claimed that a showing that post-1990 reductions would not have 
occurred in the absence of a substitution plan would be ``easily'' 
evaluated. Id.
---------------------------------------------------------------------------

    The Agency concludes that the best approach to developing a 
reasonable approximation of what a unit's emissions rate would be in 
Phase I in the absence of a substitution plan is to treat all voluntary 
emissions rate reductions after 1985 and through 1990 (the year in 
which title IV of the Act was passed) as reductions that would have 
occurred in Phase I in the absence of a substitution plan. Prior to 
enactment of the Clean Air Act Amendments of 1990, utilities had no 
reasonable expectation that emissions reductions would generate 
nationally tradable allowances under the Act. The reductions were not 
made in response to the availability of allowances under substitution 
plans. December 31, 1990 (rather than November 15, 1990, the specific 
date of title IV's enactment) is used as the cut-off point for 
determining what reductions that would have occurred without the plan 
because emissions rate data is available on a calendar year basis. Even 
though some reductions after 1990 perhaps would have occurred without 
the plan, it would be difficult to sort out, for a large number of 
units, the impact of the availability of substitution plans for the 
period after the substitution provision was enacted.
    Further, reductions reflected in a unit's 1989 or 1990 SO2 
emissions rate will be treated as representative of reductions that 
would continue to be made up through 1999. In the November 18, 1993 
proposal, the Agency proposed to use the 1990 actual SO2 emissions 
rate as the measure of emissions reductions made before passage of 
title IV. The 1990 rate was proposed because, as the emissions rate 
closest to November 15, 1990, it is more likely to reflect all the 
reductions made prior to passage of title IV. The rate for an earlier 
year is less likely to reflect all reductions made before passage of 
title IV. However, several commenters expressed concern that a unit's 
emissions rate for a single year (i.e., 1990) might be unusually low 
and therefore unrepresentative of its emissions rate prior to the 
passage of title IV. These commenters suggested that, if post-1985 
emissions rates are used, the Agency should use a formula that allows 
consideration of actual emissions rates for 1988, 1989, and 1990. See 
Comments of Utility Air Regulatory Group at 45 (submitted Feb. 10, 
1994); Comments of Northern States Power Company at 6 (submitted Feb. 
10, 1994). Other commenters claimed that the 1990 emission rate may be 
lower than the 1985 emission rate because of normal variability in the 
sulfur content of coal or in scrubber performance. They suggested a 
case-by-case determination of whether such variability accounts for the 
lower 1990 emissions rate.
    Balancing these factors, the final rule uses the greater of the 
1989 or 1990 actual SO2 emissions rate to reflect pre-title IV 
emissions rate reductions. A unit's 1989 or 1990 emissions rate (which 
are the most recent, actual rates prior to the enactment of title IV) 
will be treated as representative of its emissions rate in Phase I in 
the absence of a substitution plan. This provides some flexibility to 
avoid using a single and perhaps unrepresentative year. All voluntary 
emissions rate reductions made after 1990 will be treated as reductions 
that would not otherwise have occurred.
    Several commenters opposed the use of any post-1985 actual 
emissions rate in limiting allowance allocations to substitution units. 
Commenters argued the use of the 1990 actual emissions rate is 
arbitrary. Allegedly, this approach is arbitrary because it assumes 
that emissions-reducing actions that were taken before 1991 for 
economic reasons will not necessarily continue to be taken after 
passage of the Clean Air Act Amendments of 1990, which changed the 
economics of such actions. Commenters stated that utilities might 
redirect low sulfur coal from the potential substitution unit to 
another unit and burn higher sulfur coal at the former unit. They also 
suggested that when the lower sulfur coal contract expires, the utility 
might contract for higher sulfur coal.
    There are several problems with these commenters' arguments. A 
reduction in a unit's 1989 or 1990 emissions rate from 1985 could be 
the result of several types of actions, including the addition of 
pollution control equipment or the use of low sulfur coal. To the 
extent that the reduction reflects a capital investment in pollution 
control equipment, it is reasonable to assume that the equipment will 
probably remain in place and continue to be used. Even where the 
reductions were achieved through the use of low sulfur coal, the use of 
such coal or switching to high sulfur coal requires, in many cases, 
capital investment in new equipment. This reduces the likelihood that 
emissions reductions made before enactment of title IV would be 
reversed after passage of title IV.
    Moreover, in section 404(b)(5), Congress required EPA to ensure 
that the reductions achieved under each substitution plan be ``the same 
or greater than'' the reductions that would otherwise be achieved 
without the substitution plan. 42 U.S.C. 7651c. Because of the 
paramount importance apparently placed on the goal of achieving 
intended emissions reductions, Congress required the Agency to adopt an 
approach that would ensure no fewer reductions with substitution plans 
than without such plans but that could result in more reductions with 
than without the plans. In light of this statutory requirement and the 
difficulty of determining what reductions would have been made without 
substitution plans, the Agency concludes that the 1989 or 1990 actual 
emissions rate is a reasonable proxy for a unit's Phase I emissions 
rate without the substitution plan. To the extent that the Agency's 
approach of using 1989 or 1990 emissions rate overstates the reductions 
that would be achieved without the plan, the approach errs in a 
direction that ensures achievement of the paramount statutory objective 
and is consistent with section 404(b)(5).
    In contrast, commenters' preferred alternative--using only 1985 
actual or allowable emissions rates--would guarantee, in some cases, 
violation of the statutory objective of no fewer reductions with, than 
without, the plan. One particularly graphic example of that result is 
where a Phase II unit is voluntarily and permanently shutdown between 
1985 and 1991 and is brought into Phase I as a substitution unit. 
Without a substitution plan, the unit would emit no sulfur dioxide and 
receive no allowances in Phase I. With the plan, the unit would still 
have no emissions but would be allocated a significant number of new 
allowances reflecting its 1985 emissions and other units could use the 
newly created allowances to authorize emissions that would not 
otherwise have been allowed. See, e.g., 58 FR 38375 (noticing permit 
application with plan designating, as substitution units, Poston units 
1, 2, and 3, which were permanently shut down in 1987). The Agency's 
use of the most recent actual emissions rates prior to passage of title 
IV is a reasonable approach to achieving the purposes of section 
404(b)(5).
    Commenters also argued that the Agency's approach penalizes those 
utilities that were ``environmentally * * * progressive'' and will 
discourage voluntary emissions reductions in the future. Comments of 
the Class of '85 Regulatory Response Group at 8 (submitted Feb. 10, 
1994). However, each utility that made emissions reductions at Phase II 
units after 1985 and before the date (January 1, 2000) such reductions 
are required under title IV already benefits in Phase II of the Acid 
Rain Program, during which the units are allocated allowances 
reflecting in part the 1985 emissions rate. See Comments of Northern 
States Power Company at 3 (noting that allocations to most of the 
utility's units in Phase I and Phase II exceed 1990 emissions levels). 
The issue here is whether, if such a utility elects to bring selected 
Phase II units into Phase I, the utility should receive additional 
benefit (in the form of extra allowances for pre-title IV reductions) 
that violates section 404(b)(5) of the Act. The Agency believes that 
the approach in the final rule is a reasonable implementation of 
section 404(b)(5).
    b. Most stringent federal or State SO2 emissions limitation. 
In addition to limiting a substitution unit's allowance allocation 
using the unit's 1989 or 1990 SO2 emissions rate, EPA is also 
modifying the January 11, 1993 regulations to provide that a 
substitution unit will be allocated allowances based on an emissions 
rate that does not exceed the most stringent SO2 emissions 
limitation imposed in Phase I by federal or State law, as of November 
15, 1990. By definition, emissions rate reductions that were mandated 
prior to title IV's enactment and that are required regardless of 
whether the unit is a substitution unit are reductions that would have 
occurred in the absence of the plan.
    The agency recognizes the difficulty of determining whether any 
particular federal or State emissions reduction requirement (whether a 
tightening or a loosening of emissions limitations), adopted after 
title IV's enactment, would have been adopted in the absence of 
substitution plans under title IV.8 This is similar to the problem 
of determining whether voluntary emissions rate reductions after 1990 
would have been made without a substitution plan, except that, with 
regard to federal or State emissions limitations, political factors 
favoring or disfavoring imposition of the limitations would have to be 
weighed. Consequently, the Agency maintains that a bright line, based 
on title IV's date of enactment, should be established and that 
emissions rate reductions that were mandated by federal or State law 
adopted after November 15, 1990 should not be treated as reductions 
that would otherwise have occurred. As explained in the preamble of the 
November 18, 1993 proposal (58 FR 60956), the most stringent allowable 
rate for purposes of substitution-unit allowance allocations will be 
the most stringent rate as of November 15, 1990 after conversion to 
pounds per mmBtu but without any annualization.
---------------------------------------------------------------------------

    \8\In contrast, State emissions limitations adopted prior to 
passage of title IV do not raise the same question about whether 
they would have been adopted in the absence of title IV. Such 
emissions limitations, e.g., the Massachusetts acid rain law passed 
in 1985, were in fact adopted in the absence of any federal acid 
rain program. The Massachusetts statute included a provision stating 
that the Massachusetts legislature intended that reductions made 
under that statute be credited to Massachusetts' share of required 
reductions if a federal acid rain program was established in the 
future. Massachusetts, Acts of 1985, Chap. 590 Sec. 9. Some 
commenters challenged, as contrary to the intent of the 
Massachusetts law, the use of the Massachusetts emissions 
limitations to limit allowance allocations under title IV. However, 
Congressional intent, not the intent of the Massachusetts 
legislature, is relevant to interpreting title IV.
---------------------------------------------------------------------------

    Some commenters argued that the Agency should distinguish between 
federal emissions limitations and State emissions limitations and 
consider only federal limitations in allocating allowances to 
substitution units. They alleged that it is unfair to ``penalize'' 
utilities in States ``tak[ing] the lead in controlling air emissions'' 
and that title IV references federal, but not State, emissions 
limitations. Comments of Dairyland Power Cooperative at 2 (submitted 
Jan. 26, 1994). However, section 404(b)(5) requires that emissions 
reductions with the substitution plan be no less than reductions 
without the plan and does not distinguish between reductions without 
the plan that are due to State law from those due to federal law. Thus, 
contrary to the commenters, there is no basis for considering only 
federal, and ignoring State, emissions limitations in applying section 
404(b)(5). Further, the Agency reiterates that:

    [S]ince reliance on substitution plans is optional and the use 
of the most stringent allowable rate (in conjunction with the 1985 
actual or allowable rate and the [1989 or] 1990 actual rate) to 
allocate allowances under such plans is necessary to meet statutory 
emissions reduction goals, it is difficult to see how such use of 
the most stringent allowable rate could be viewed as unfair to 
utilities located in States that mandated reductions. This approach 
simply prevents the creation of excess, new allowances and thereby 
ensures that reductions mandated by such States are not used to 
increase emissions elsewhere above the levels that title IV was 
intended to achieve.

58 FR 60956.

    Using federal or State emissions limitations to limit a particular 
substitution unit's allowance allocation raises certain questions, 
particularly where some emissions limitations are not unit specific. 
For example, under some State laws (e.g., the acid rain laws for 
Massachusetts and Wisconsin), a utility has a maximum average emissions 
rate for its units in the State. Under other State laws (e.g., for New 
Hampshire and Minnesota), a utility has a total tonnage emissions cap 
for all its units in the State. Maximum average emissions rates or 
maximum total tonnage limits allow utilities the flexibility to exceed 
such maximum rates or limits at individual units so long as the maximum 
rates or limits are met on a utility-wide basis. Since individual units 
may exceed such maximum rates or limits, the Agency concludes that it 
should not treat the maximum rates or limits as the most stringent 
limitation for each individual unit. However, while utility-wide 
limitations provide some flexibility, such limitations impose bounds on 
the emissions of individual units, albeit bounds that depend on the 
emissions from other units owned or operated by the same utility. There 
is no basis for ignoring the fact that a unit may have to make 
emissions reductions because of a utility-wide limitation, just as it 
may have to reduce emissions because of a unit-specific limitation.
    Consequently, the final revised rule provides that the Agency will 
develop a method for using both the unit-specific and non-unit-specific 
emissions limitations to limit the allocation of allowances to a 
substitution unit. This method will not treat non-unit-specific 
limitations as if they were unit specific and will not allow allocation 
of allowances for reductions that were necessary to meet non-unit-
specific limitations. Because there are significant differences among 
State laws and the manner in which they express non-unit-specific 
emissions limitations, the final revised rule gives the Agency the 
authority to develop this method on a case-by-case basis for each 
proposed substitution unit. This approach will give the Agency the 
flexibility to take account of variations among States and will allow 
interested parties an opportunity, e.g., in proceedings on individual 
permits, to comment on the method that the Agency proposes to use with 
regard to a particular non-unit-specific limitation.
    Several commenters made specific recommendations concerning the 
method that EPA should use to apply the unit-specific limitations under 
Wisconsin's acid rain law. Under the Wisconsin law, each major utility 
that generates electricity in the State must achieve an annual average 
sulfur dioxide emissions rate that does not exceed 1.2 lbs per mmBtu 
starting in 1995 from all fossil fuel-fired boilers under the utility's 
ownership or control. A Wisconsin utility that meets certain 
requirements may trade emissions with another Wisconsin utility. One 
utility accepts--and adds to its annual emissions--emissions from 
another utility, which subtracts those emissions from its annual 
emissions and thereby reduces its annual average emissions rate in 
order to meet the utility-wide limit. Some commenters suggested that, 
in initially allocating allowances to substitution units in Wisconsin, 
EPA consider only those Federal and State limitations that are 
expressed as unit-specific limitations and not the utility-wide limits 
under Wisconsin's acid rain law. These commenters supported an end-of-
year review in which each Wisconsin utility will have to demonstrate 
whether, if the allowances allocated to its substitution units in 
Wisconsin are treated as emissions by those units, the utility will 
still be in compliance for that year with 1.2 lbs per mmBtu limit. In 
this demonstration, the utility will sum the actual annual emissions of 
each boiler owned or controlled by the utility, except in the case of a 
substitution unit where the allocated allowances will be used. Where 
emissions were traded for the year, traded emissions will be subtracted 
by one utility from, and added by another utility to, the sum of 
emissions and allowances. The total will be divided by the sum of the 
annual mmBtu utilization of all the boilers involved. To the extent 
that the result exceeds 1.2 lbs per mmBtu, the utility will be required 
to surrender, and EPA will deduct, allowances allocated to the 
substitution units for that year. No commenters supported imposing 
limits on the ability to transfer the substitution unit's allowances 
prior to the end-of-year review. However, one commenter opposed the use 
of any end-of-year review to apply the Wisconsin utility-wide emissions 
limit.
    The Agency is not deciding in the instant rulemaking what 
particular procedure will be used for applying non-specific emissions 
limitations and whether to adopt an approach involving end-of-year 
review. However, such review may be the best way to take account of the 
flexibility that the Wisconsin acid rain law and other State provisions 
provide to individual units in meeting State emissions limitations. The 
final revised rule, therefore, allows EPA to decide on a case-by-case 
basis, e.g., in individual permit proceedings on proposed substitution 
units, whether to require end-of-year review to apply non-unit-specific 
emissions limitations. The final revised rule also authorizes the 
Agency to require allowance surrender, and make allowance deductions, 
by the allowance transfer deadline as a result of such review.9
---------------------------------------------------------------------------

    \9\Contrary to one commenter's claim, the fact that section 
402(3) of the Act defines ``allowance'' as ``an authorization * * * 
to emit * * * one ton of sulfur dioxide'' in no way bars the 
imposition of a requirement, consistent with other sections of the 
Act, to surrender allowances. 42 U.S.C. 7651a(3). Section 403(f) of 
the Act states that an allowance allocated under title IV is ``a 
limited authorization to emit sulfur dioxide in accordance with the 
provisions of this title.'' 42 U.S.C. 7651b(f).
---------------------------------------------------------------------------

    The Agency maintains that it is unnecessary to impose, pending any 
end-of-year review, limitations on the ability to transfer a 
substitution unit's allowances. The risk that a substitution unit will 
not have allowances in its Allowance Tracking System account to cover 
the deduction is small. As of the allowance transfer deadline, the 
unit's account must contain, in any event, sufficient allowances to 
cover its emissions for the prior year. The deduction of allowances 
resulting from the substitution unit's end-of-year review must be made 
before the Agency determines whether the unit's emissions exceeded its 
available allowances. Consequently, the failure of the substitution 
unit to have sufficient allowances to cover any deduction resulting 
from the end-of-year review will constitute a violation of Sec. 72.41 
(and so the Clean Air Act itself) and will result in excess emissions 
and trigger excess emissions penalties. Not only are limitations on 
transferability unnecesssary, but also they would reduce the compliance 
flexibility that Congress intended to provide through substitution 
plans. The final rule therefore does not impose any limits of 
transferability, pending any end-of-year review.
    In sum, the Agency concludes that a substitution unit should be 
allocated allowances based on the lesser of four emissions rates for 
the unit: 1985 actual SO2 emissions rate; 1985 allowable SO2 
emissions rate; the greater of 1989 or 1990 actual SO2 emissions 
rate, or the most stringent Federal or State allowable SO2 
emissions rate applicable in 1995-99 as of November 15, 1990. The first 
two emissions rates are set forth in section 404(b)(2) of the Act. The 
latter rates are added in order to ensure, in accordance with section 
404(b)(5), that a substitution plan will result in at least the same 
amount of reductions that would have occurred without the plan.
    This approach requires the submission to EPA of data on the 1989 
and 1990 emissions rates and the emissions limitations for 1995-99. For 
the reasons set forth in the November 18, 1993 preamble (58 FR 60956), 
the Agency maintains that section 404(b) provides adequate authority to 
require submission of this data and to use the data to calculate the 
allowance allocation under the plan.
    c. Baseline. Under the final revised rule, a substitution unit's 
allowance allocation is calculated by multiplying the lower of the 
above-discussed emissions rates by the baseline, which reflects 1985-87 
utilization. The January 11, 1993 regulations used baseline (and only 
the 1985 actual or allowable SO2 emissions rate) to calculate the 
allowance allocation. In the November 18, 1993 preamble, the Agency 
discussed the options of basing allocations on utilization at the time 
a permit application is submitted or requiring utilities to project 
what future utilization of the substitution units would be in Phase I 
without the substitution plan and using the projected utilization to 
allocate allowances. No commenters supported the use of projected 
utilization, and those that specifically addressed the matter preferred 
continued use of baseline. For the reasons set forth in the preamble 
(58 FR 60956-57), the Agency concludes that a substitution unit's 
baseline should continue to be used to calculate the allowance 
allocation.
2. Limiting the Number of Substitution Units
    The Agency rejects modifications of the January 11, 1993 
regulations making upfront approval of the designation of substitution 
units and allocation of allowances to such units contingent on an end-
of-year review of the need for such units for each year that the plan 
was in effect. Under such an approach, the Agency would allow only 
those designations of substitution units that actually proved to be 
needed. No commenters supported that approach.
    Because allowance allocations for substitution units are limited as 
discussed above, the Agency concludes that requiring end-of-year review 
of the need for substitution units and thereby limiting the number of 
such units is unnecessary. If a substitution unit is not allocated 
allowances for emissions rate reductions that would have occurred 
without a substitution plan, then the unit will use up all or most of 
its allocated allowances unless the unit made new emissions rate 
reductions that would not otherwise have been made. To the extent that 
a substitution unit frees up allowances by making such new emissions 
rate reductions, section 404(b)(1)(5) is not violated. See 58 FR 60957. 
In short, because today's final rule prevents any substitution unit 
from creating new, excess allowances, there is no need to impose 
further requirements limiting the number of substitution units.
3. Requirement That the Substitution Unit Be Under Control of the Table 
A Unit's Owner or Operator
    The January 11, 1993 regulations provide that the statutory 
requirement that the substitution unit be under the control of the 
Table A unit's owner or operator is satisfied where such units have 
only a common designated representative. This was based on the 
determination that a common designated representative qualifies, in 
such cases as an operator. 40 CFR 72.41(b)(1)(i); see also 42 U.S.C. 
7651c(b). In the November 18, 1993 preamble, the Agency proposed to 
reverse its interpretation that having a common designated 
representative, without more, meets this statutory requirement and to 
revise the regulations accordingly. 58 FR 60957-60958. The Agency today 
adopts the reasoning, set forth in the November 18, 1993 preamble (Id.) 
and in the preamble of the Acid Rain regulations on nitrogen oxides (59 
FR 13554-55), that a designated representative is not, merely by 
holding that position, also an operator.
    In the preamble of the January 11, 1993 regulations, the Agency 
stated that, under some circumstances, a designated representative's 
``duties and level of responsibility can be equivalent to that of an 
operator.'' 58 FR 3600. One such case, identified by the Agency, was 
where a designated representative represents multiple sources 
participating in a substitution plan and otherwise lacking the same 
owner or operator. In that case, the designated representative's 
responsibilities are allegedly ``broad enough to bring him or her 
within the definition of operator.'' Id. As discussed in the November 
18, 1993 proposal and the March 22, 1994 final NOX rule, a 
designated representative's responsibilities in a multi-source 
substitution plan are not actually any broader or more complex than 
they are under other compliance options. Therefore, there is no basis 
for treating a designated representative in such a substitution plan 
any differently than a designated representative under any other 
compliance option. In all such cases, a designated representative is 
not an operator. The final revised rule reflects this conclusion by 
eliminating language from the January 11, 1993 regulations that 
provided that units with a common designated representative, and 
nothing more, could participate in a substitution plan.
    Some commenters note that, although Sec. 72.41(b)(1)(i) requires 
that the substitution and Table A units have ``the same owner or 
operator'' (40 CFR 72.41(b)(1)(i) (1993)), section 404(b) itself states 
that the substitution unit must be ``under the control of the owner or 
operator'' of the Table A unit. They argue that, in implementing 
section 404 (b) and (c), the Agency should focus on whether there is 
such control. They suggest that the ownership of the units is not 
necessarily determinative of whether the control requirement is met. 
They allege that, on one hand, where the units have multiple owners 
only one of which is in common, the control requirement may not be met. 
On the other hand, where the units lack the same owner or operator, the 
control requirement allegedly may be met through contractual 
arrangements under which the owner and operator of the substitution 
unit commit, inter alia, to make emissions reductions and deliver 
allowances to the owner and operator of the Phase I unit.
    In this final rule, the Agency is not addressing these additional 
issues concerning under what circumstances a proposed substitution unit 
is considered to be under the control of the owners or operator of a 
Phase I unit. EPA is addressing these issues, and the related comments, 
in a separate direct final rule in this Federal Register. In order to 
preserve these issues for resolution, the Agency is adopting, in 
today's final rule, the statutory language requiring that the owner or 
operator of the Phase I unit ``control'' the substitution unit that it 
designates.
4. Other Changes
    The Agency has adopted several other minor changes to clarify the 
current Sec. 72.41. For example, as discussed above, a substitution 
plan may distribute allowances between the substitution unit and the 
Table A unit. The final rule makes it clear in Sec. 72.41(c)(4)(ii) 
that, where there is more than one Table A unit in a plan, allowances 
may be distributed from a substitution unit only to the Table A unit 
that designated that substitution unit. The final rule also eliminates 
the superfluous, but potentially confusing, final sentence in that 
section of the January 11, 1993 rules because the sentence simply 
repeats the limitation in Sec. 72.41(c)(3)(ii) on the total number of 
allowances available under a substitution plan. See 40 CFR 
72.41(c)(4)(ii) (1993).

B. Reduced Utilization Plans

    The January 11, 1993 regulations implementing substitution and 
reduced utilization plans pose similar problems concerning the creation 
of excess, new allowances. However, because section 408(c)(1)(B) of the 
Act (unlike sections 404(b) and (c)) specifies the formula for 
allocating allowances, the Agency is adopting a different approach in 
modifying the requirements for compensating units than the one adopted 
today for substitution units. In order to ensure that reduced 
utilization plans are used as a means of accounting for emissions from 
load shifting from Phase I units and not as a method of creating 
excess, new allowances through early entry of Phase II units into Phase 
I, the Agency must limit the circumstances under which Phase II units 
can become compensating units.
    In the November 18, 1993 notice of proposed rulemaking, the Agency 
suggested two options for limiting the designation of compensating 
units: the first option requiring that the compensating units be 
actually needed to compensate for reduced utilization and involving an 
end-of-year review of need; and the second option limiting up-front the 
category of units that can qualify to become compensating units. The 
Agency is today rejecting the first option and is adopting the second 
option with some modifications.
1. Limiting the Category of Units That Can Qualify as Compensating 
Units
    Under the option (Option 2 in the November 18, 1993 proposal) 
adopted today with some changes, the category of units that may be 
designated as compensating units is limited to those units whose 
designation cannot create excess, new allowances. The final revised 
rule provides that a unit can be designated as a compensating unit only 
if (1) the unit's baseline multiplied by the lesser of the unit's 1985 
actual or allowable SO2 emissions rate does not exceed (2) the 
baseline multiplied by the lesser of (i) the greater of the unit's 1989 
or 1990 actual SO2 emissions rate or (ii) the unit's most 
stringent federally enforceable or State enforceable SO2 emissions 
limitation for SO2 for 1995-99 as of November 15, 1990 plus (iii) 
the lesser of 10 percent of the tonnage calculated under (1) or 200 
tons.
    Consistent with its conclusions concerning substitution units, the 
Agency maintains that excess allowances may be created by the 
designation, as a compensating unit, of any Phase II unit whose 
baseline, multiplied by what its annual SO2 emissions rate in 
Phase I would be in the absence of the designation, is less than the 
annual allowances allocated to the unit as a compensating unit. Even if 
such a Phase II unit increases its own generation to provide 
compensating generation, the unit may be able to use its own allowance 
allocation to cover its own emissions without making any more emission 
rate reductions than it would have otherwise made. In addition, the 
unit may have extra allowances to transfer, sell, or bank for future 
use. In order to prevent the creation of excess, new allowances, such 
units will not be allowed to be designated as compensating units.
    For the reasons discussed above, the Agency concludes that excess, 
new allowances are created when Phase II units entering Phase I (e.g., 
compensating units) are allocated allowances for emissions rate 
reductions made, or mandated by federal or State law adopted, before 
passage of title IV. The general approach in the final rule is to bar, 
from becoming compensating units, those units that would otherwise 
receive such allocations if they were compensating units. Units that 
qualify as compensating units will be allocated allowances under the 
formula in section 408(c)(1)(B), i.e., baseline times the 1985 actual 
or allowable emissions rate.10
---------------------------------------------------------------------------

    \1\0Thus, despite the claim of some commenters, Option 2 of the 
proposal does not change the allocation formula, which applies once 
it is determined that a unit qualifies as a compensating unit.
---------------------------------------------------------------------------

    Contrary to some commenters, section 408(c)(1)(B) does not require 
the Administrator to approve whatever units a utility designates as 
compensating for reduced utilization. The Administrator must approve 
only those compensating-unit designations that are consistent with the 
purposes of title IV. 42 U.S.C. 7651h(c)(2). Section 408(c)(1)(B) does 
not expressly require the Administrator to consider a unit's 1989 or 
1990 actual emissions rate or its most stringent emissions limitation. 
However, in reviewing proposed compensating units using these factors, 
the Agency is implementing section 408(c)(1)(B) in a way that precludes 
``a pattern or practice''--i.e., designation of compensating units that 
would receive excess, new allowances--``that is counter to the intent 
of section 404 and * * * title [IV of the Act].'' Senate Rep. 101-228 
at 334.
    This approach is similar to that adopted with regard to 
substitution units except that, while the final rule allows units to 
become substitution units and adjusts their allocations, the final rule 
completely bars certain units from becoming compensating units. 
Consistent with the provisions concerning substitution units, the 
provisions for compensating units use the greater of the unit's 1989 or 
1990 emissions rate as reasonably reflecting voluntary emissions 
reductions made before passage of title IV. Similarly, the provisions 
for substitution units and the provisions for compensating units take 
the same approach (including the treatment of non-unit-specific 
emissions limitations) to using the most stringent federal or State 
emissions limitations. See section III(A)(1)(b) of this preamble.
    However, because some units could otherwise be completely barred 
from becoming compensating units because of very small differences 
(e.g., due to normal variability in coal quality) between their 1985 
emissions and their actual or mandated emissions as of the passage of 
title IV, the Agency is building some extra flexibility into the 
provisions governing compensating units. The final rule allows the 
designation of compensating units whose baseline times the 1985 
emissions rate is greater by only a very small amount (i.e., the lesser 
of 10 percent or 200 tons) than their baseline times the lesser of 
their 1989 (or 1990) emissions rate or their most stringent emissions 
limitation for Phase I. The flexibility band is measured in tons of 
emissions in order to ensure that the potential for creating excess, 
new allowances is restricted. Further, the flexibility band is also 
limited as a percentage of 1985 emissions because the band must apply 
to all potential compensating units, which can vary significantly in 
size and thus in total emissions. Using only a percentage limit or only 
a specific tonnage would have an inconsistent impact on units of 
different sizes.
    Because of the inherent unreliability of projected utilization 
figures (discussed above in section III(A)(1)(c) of this preamble), 
baseline, not projected utilization, will be used to determine whether 
a unit qualifies as a compensating unit. If a utilization projection 
less than baseline were used to determine that a unit qualified as a 
compensating unit but subsequently the unit had a higher actual 
utilization in Phase I that would have otherwise disqualified the unit, 
the unit could create excess, new allowances.
    In order to be approved, the designation of a compensating unit, of 
course, must meet the requirements in the January 11, 1993 regulations 
for reduced utilization plans as well as the additional requirement 
imposed in today's final revised rule. After determining that a 
particular proposed compensating unit meets all these upfront 
requirements, the Agency will approve the designation and allocate 
allowances for the unit. The Agency will not conduct any end-of-year 
review of the need for the compensating unit.
    If a designated representative of a Phase I unit has no Phase II 
unit that will provide compensating generation and that meets all the 
upfront requirements for designation, the designated representative 
will not be required to submit a reduced utilization plan designating a 
compensating unit. The allowance surrender provisions in Secs. 72.91 
and 72.92 will continue to apply.
2. End-of-Year Review of the Need for Compensating Units
    Under the rejected option (Option 1 in the November 18, 1993 
proposal), units would have been allowed to remain as compensating 
units and would have retained allocated allowances only where the 
compensating units were actually needed to account for reduced 
utilization. See 58 FR 60959-60961. The Agency proposed in Option 1 to 
modify the reduced utilization provisions by granting upfront approval 
of a reduced utilization plan with compensating units but making 
approval contingent on an end-of-year determination by the 
Administrator that each compensating unit was needed for the year. A 
unit designated as a compensating unit would have become a Phase I unit 
and would have been allocated allowances upon upfront approval of the 
reduced utilization plan. However, a compensating unit would not have 
been allowed to transfer allowances allocated for any given year in 
Phase I unless and until an end-of-year determination of need was made 
for that unit for that year. If the unit was not shown to be needed, 
the unit would have been retroactively de-designated for the year and 
the allowances allocated for the year would have been deducted.
    Under Option 1, a unit could be deemed, in the end-of-year review, 
to be needed as a compensating unit only for years in which: the Phase 
I unit actually had utilization below baseline; the Phase I units in 
the initial Phase I unit's dispatch system actually had total net 
utilization below the sum of their baselines after taking account of 
all sulfur-generation acquired by the dispatch system; and the proposed 
compensating unit actually provided compensating generation to that 
dispatch system. Further, the Administrator would determine how much 
compensating generation each compensating unit proposed for any Phase I 
unit potentially could have provided. The only compensating unit 
designations that would be allowed for any Phase I units in the 
dispatch system would be designations of compensating units whose 
potential excess generation would have been necessary to meet the 
potential need for compensating generation for the dispatch system as a 
whole.
    The Agency is rejecting Option 1 because Option 2 is a simpler 
approach that ensures that, consistent with title IV and Congressional 
intent, compensating units cannot be used to create excess, new 
allowances. In contrast to Option 2, Option 1 would require designated 
representatives to make complicated end-of-year demonstrations of need, 
summarized above, and EPA to review and evaluate those demonstrations. 
Trading of allowances allocated to compensating units would be 
inhibited in that such trading would be barred pending completion of 
the Agency's review.11 Further, while Option 1 would reduce the 
number of compensating units and thus the total amount of excess, new 
allowances that they could create, that option would not entirely 
eliminate the problem: those compensating units meeting the 
requirements of Option 1 could still create some excess, new 
allowances. Finally, the vast majority of commenters supported the use 
of Option 2 over Option 1.
---------------------------------------------------------------------------

    \1\1Because the Agency is rejecting all the limitations, 
discussed in the November 18, 1993 proposal, on the trading of 
allowances allocated to compensating or substitution units, the 
Agency has decided not to adopt any revisions to Sec. 73.52 in the 
Allowance System rule.
---------------------------------------------------------------------------

3. Reporting and Allowance Surrender
    The November 18, 1993 proposal included a number of changes --both 
substantive and nonsubstantive changes--to Secs. 72.43 and 72.91 
concerning reporting and allowance surrender requirements. 58 FR 60961-
60962 (describing these changes). These changes are included in the 
final revised rule.
    Commenters addressed only two of these changes. Under the proposal 
and the final revised rule, where a sulfur-free generator is designated 
outside a unit's dispatch system, the designated representative must 
submit, as part of the reduced utilization plan, the contractual 
agreements governing the ``acquisition'' of electricity by the unit's 
dispatch system from that generator. In addition, where a shift of 
generation from any designated sulfur-free generator (whether the 
generator is within or outside the dispatch system) is claimed, the 
designated representative must document that at least the amount 
claimed to have been shifted was actually ``acquired'' by the unit's 
dispatch system from the generator. The January 11, 1993 regulations 
referred to the contractual agreements governing and documentation 
concerning the ``purchase'', rather than the ``acquisition'', of 
electricity from sulfur-free generators. See 48 FR 3672 and 3682 
(Secs. 72.43(c)(4)(iv) and 72.91(a)(6) (1993)). Commenters supported 
this change adopted in the November 18, 1993 proposal. Some sulfur-free 
generators have multiple owners and may be owned in part by the unit's 
dispatch system. In such cases, the unit's dispatch system may not 
acquire electricity from the generator through a ``purchase'' but 
rather may acquire the electricity based on its ownership share. 
Further, it is important to ensure that multiple owners of sulfur-free 
generators claim only their respective shares of the sulfur-free 
generation. Consequently, the Agency is requiring documentation 
concerning the ``acquisition,'' which encompasses not only 
``purchases'' (as under the January 11, 1993 rule) but also 
acquisitions based on ownership. Further, the requirement to document 
actual acquisition applies to all designated sulfur-free generators.
    One commenter stated that the documentation required, under the 
proposal, for acquisition of sulfur-free generation is more stringent 
than necessary. The commenter noted that, under the proposal, the 
designated representative must demonstrate that electricity was 
actually acquired from ``a particular sulfur-free generator.'' Comments 
of Oglethorpe Power Corporation at 7. Allegedly, it is ``extremely 
difficult to trace energy back'' to the sulfur-free generator. Id. The 
commenter further alleged that requiring that ``a unit power or similar 
power sale agreement'' govern the acquisition will result in 
``significant regulatory or other approval delays.'' Id. at 6. The 
commenter suggested that, instead of these requirements, the Agency 
require that the designated representative of the Phase I unit simply 
obtain the consent of an owner of the sulfur-free generator to claim, 
for purposes of the reduced utilization plan, some or all of that 
owner's share of generation from the sulfur-free generator. In order to 
ensure that the designated representative does not make such claims 
without actually getting the consent of the generator-owner, the 
commenter urged that EPA require that a copy of any reduced utilization 
plan involving a sulfur-free generator be given to all owners of the 
generator and the designated representative of the Phase I unit certify 
to EPA that the necessary consent was obtained. Id. at 5.
    Under the commenter's approach, a Phase I unit would be relieved of 
the obligation to surrender allowances simply because it obtained the 
consent of an owner of a sulfur-free generator to ``claim'' some of 
that owner's electricity from the generator. As explained by the 
commenter, there would not have to be any actual acquisition of 
electricity by the dispatch system of the Phase I unit from the sulfur-
free generator. However, the rationale for allowing the Phase I unit to 
avoid surrendering allowances if it designates a sulfur-free generator 
is that the Phase I unit is replacing the reduction in its own 
generation below its 1985-87 level with electricity from a source 
(i.e., a sulfur-free generator) that does not emit any sulfur dioxide 
when producing that electricity. To the extent the Phase I unit 
replaces its own reduced generation with electricity from units that 
emit sulfur dioxide in the process, allowances must be surrendered in 
order to account for the emissions consequences of the reduced 
utilization of the Phase I unit. Otherwise, the Phase I unit could bank 
its unused allowances ``notwithstanding the fact that actual emissions 
reductions had not been paid for or achieved'' at that unit. 56 FR 
63019.
    The Agency recognizes that the complexity of the movement of 
electricity through interconnected transmission and distribution 
systems make it difficult to determine precisely the source of 
compensating generation. 56 FR 63023. That does not mean that all 
efforts, in the allowance surrender procedure, to reflect actual 
electricity transactions and to approximate resulting emissions should 
be abandoned. Under the commenter's approach, ``paper'' claims to 
sulfur-free generation that may have no actual, underlying energy 
transactions could be used to avoid allowance surrender. Such an 
approach would run contrary to the rationale for allowing the 
designation of sulfur-free generators and therefore is rejected.
    Thus, the final revised rule includes the requirements that the 
designated representative of the Phase I unit submit: Contractual 
agreements that expressly provide for the acquisition of electricity by 
the unit's dispatch system from the designated sulfur-free generator 
outside the dispatch system, which generator must be identified in the 
agreements; and documentation that such acquisition from the identified 
generator actually took place. (Similarly, to ensure that claims of 
compensating generation are based on actual transactions, the same 
approach is taken for compensating units outside the dispatch system. 
See 58 FR 60961 (proposing parallel treatment of sulfur-free generators 
and compensating units).)
    In light of these requirements, commenter's concern--that Phase I 
units lacking a common owner with a sulfur-free generator may claim to 
have acquired from the generator electricity that is actually sulfur-
free generation retained by an owner of the generator--is misplaced. A 
sulfur-free generator can be designated only by those Phase I units 
that meet certain requirements. A Phase I unit whose dispatch system 
includes the generator may designate that generator.12 If the 
generator is outside the dispatch system of a Phase I unit, the Phase I 
unit may designate the generator if the dispatch system has a contract 
specifically providing for the acquisition of electricity from the 
particular generator. A contact to purchase power from the dispatch 
system of an owner of the sulfur-free generator, where the sulfur-free 
generator is not specified as the source of the power, is not 
sufficient. If the dispatch system of the Phase I unit has a contract 
specifically to purchase power generated at the sulfur-free generator 
and the contract is with a third party that is not an owner of the 
generator, the designated representative must show that the third party 
in turn has an agreement with an owner of the generator specifically to 
purchase power from the generator. Further, Sec. 72.91(a) (5) and (6) 
require that the designated representative document the amount of power 
actually acquired from the sulfur-free generator and that the 
designated representatives of all Phase I units claiming generation 
from the same generator must agree on apportionment of the available 
generation. It is difficult to see how a Phase I unit could take credit 
for electricity legitimately claimed by an owner of the sulfur-free 
generator. Consequently, it is unnecessary to impose the additional 
requirements suggested by the commenter.
---------------------------------------------------------------------------

    \1\2No contract to acquire power from the sulfur-free generator 
is required if the generator is in the Phase I unit's dispatch 
system. Since a given sulfur-free generator can be included in only 
one dispatch system, Phase I units in any other dispatch system must 
have such a contract in order to desigate the generator.
---------------------------------------------------------------------------

IV. Applicability of Rule Revisions to Existing Permit Applications

    In the November 18, 1993 proposal, the Agency requested comment on 
how to address any reliance by owners and operators on the January 11, 
1993 regulations. The Agency noted that it had proposed in draft Acid 
Rain permits to approve for 1995, under the January 11, 1993 
regulations, those substitution plans and those reduced utilization 
plans with compensating units that EPA determined to be in compliance 
with those regulations. 58 FR 60962. In a subsequent extension of the 
period for comments on the November 18, 1993 proposal, the Agency 
requested comments on whether any of the allowances allocated to 
substitution or compensating units under the January 11, 1993 
regulations should be returned to EPA at some future time. 59 FR 3660 
(Jan. 26, 1994).
    In the November 18, 1993 proposal, it was also noted that, in the 
draft permits, EPA had proposed to defer action on those compliance 
options with regard to 1996-1999 pending completion of the instant 
rulemaking. 58 FR 60962-60963. In notices of draft permits, the Agency 
had stated that it intended to take this approach for all substitution 
and reduced utilization plans submitted before July 16, 1993 but that, 
with regard to such plans submitted on or after July 16, 1993, it 
intended to defer action for all of Phase I on those compliance options 
until completion of the rulemaking. 58 FR 38371 (July 16, 1993); 58 FR 
39542-39543 (July 23, 1993); 58 FR 40812 (July 30, 1993); 58 FR 42065 
(Aug. 6, 1993); 58 FR 43107 (Aug. 13, 1993).
    The Agency had explained in draft permits, notices of draft 
permits, and the November 18, 1993 proposal that it was taking the 
position that it had the authority under the January 11, 1993 
regulations to defer action on compliance options. See, e.g., 58 FR 
60963. Nevertheless, the Agency proposed, in the November 18, 1993 
notice of proposed rulemaking, to add language to Secs. 72.62 and 72.82 
of the January 11, 1993 regulations ``making this authority more 
explicit.'' Id.
    However, the Agency concludes that it is no longer necessary to 
defer action for any period on any substitution or reduced utilization 
plans that have been submitted. The Agency has already issued direct 
final permits addressing these plans for all years during 1995-1999 for 
which the plans were proposed. See, e.g., 59 FR 37755 (July 25, 1994); 
59 FR 38454 (July 28, 1994); 59 FR 39339 (Aug. 2, 1994); and 59 FR 
39767 (Aug. 4, 1994). Most of the permits automatically became final. 
Significant, adverse comment was received on several permits, which 
were reproposed and have now been issued in final form. See 59 FR 
49395-49396 (Sept. 28, 1994). As provided in the May 4, 1994 
settlement, the substitution and compensating units designated in the 
plans are allocated allowances in Phase I under settlement provisions 
consistent with today's final revised rule and receive for one or two 
years any additional allowances (referred to, in the settlement, as 
``excess'' allowances) that would be provided under the January 11, 
1993 regulations. Consistent with the May 4, 1994 settlement, 
allowances equal to the number of additional allowances allocated for 
one or two years will be deducted from a future year subaccount in the 
unit's Allowance Tracking System account.
    Consequently, the Agency is withdrawing its position, set forth in 
draft permits, notices of draft permits, and the November 18, 1993 
proposal, that it has the authority under the January 11, 1993 
regulations to defer action on compliance options. The Agency is taking 
no position at this time on whether it has such authority. Further, 
under these circumstances, the Agency is not adopting the revisions to 
Secs. 72.62 and 72.82 as proposed on November 18, 1993. The comments 
that were submitted on these proposed revisions and on the Agency's 
authority to defer action on compliance options are therefore no longer 
relevant and require no response at this time.
    Moreover, the Agency is not addressing, in this rulemaking, 
questions concerning whether and how to apply today's final revised 
rule to permit applications submitted to the Agency prior to the 
effective date of the final revised rule. These matters--including the 
question of whether allowances allocated to substitution or 
compensating units under the January 11, 1993 rules should be returned 
to EPA in the future--were addressed when, as noted above, the final 
permits were issued with regard to these permit applications. The 
Agency considered, in the individual permit application proceedings, 
both the comments on this matter submitted in this rulemaking and those 
comments submitted on the draft permits.

V. Administrative Requirements

A. Docket

    The docket is the organized and complete file of all the 
information considered by EPA in the development of this rulemaking. 
The Agency notes that, consistent with the May 4, 1994 settlement, 
several parties withdrew comments or portions of comments that they had 
submitted concerning matters addressed in the November 18, 1993 
proposal. Along with the preamble of the proposal and final rule, the 
contents of the docket--except for interagency review materials and all 
comments or portions of comments that were withdrawn prior to the date 
of the Administrator's signature on this final rule--will constitute 
the record in case of judicial review. See 42 U.S.C. 7607(d)(7)(A).

B. Executive Order 12866

    Under Executive Order 12866, 58 FR 51735 (Oct. 4, 1993), the 
Administrator must determine whether the regulatory action is 
``significant'' and therefore subject to Office of Management and 
Budget (OMB) review and the requirements of the Executive Order. The 
Order defines ``significant regulatory action'' as one that is likely 
to result in a rule that may:
    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities;
    (2) Create a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.
    Pursuant to the terms of Executive Order 12866, it has been 
determined that this rule is a ``significant regulatory action'' 
because the rule seems to raise novel legal or policy issues. As such, 
this action was submitted to OMB for review. Any changes made in 
response to OMB suggestions or recommendations are documented in the 
public record. Any written comments from OMB to EPA and any written EPA 
response to those comments are included in the docket. The docket is 
available for public inspection at the EPA's Air Docket Section, which 
is listed in the ADDRESSES section of this preamble.

C. Paperwork Reduction Act

    The information collection requirements in this rule have been 
approved by OMB under the Paperwork Reduction Act, 44 U.S.C. 3501, et 
seq., and have been assigned control number 2060-0258.
    This collection of information has an estimated burden averaging 
from 8 to 16 hours per response for about 124 responses. These 
estimates include time for reviewing instructions, searching existing 
data sources, gathering and maintaining the data needed, and completing 
and reviewing the collection of information.
    An Information Collection Request document and estimates of the 
public reporting burden were prepared in connection with the January 
11, 1993 regulations. 56 FR 63098; 58 FR 3650. The regulation 
modifications contained in today's proposal will not significantly 
change the reporting burden that was previously estimated.
    Send comments regarding this burden analysis or any other aspect of 
this collection of information, including suggestions for reducing the 
burden, to Chief, Information Policy Branch, EPA, 401 M Street, S.W. 
(Mail Code 2136), Washington, DC 20460; and to the Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Washington, DC 20503, marked ``Attention: Desk Officer for EPA.''

D. Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601, et seq., requires 
each federal agency to consider potential impacts of its regulations on 
small business ``entities.'' Under 5 U.S.C. 604(a), an agency issuing a 
notice of proposed rulemaking must prepare and make available for 
public comment a regulatory flexibility analysis. Such an analysis is 
not required if the head of an agency certifies that a rule will not 
have a significant economic impact on a substantial number of small 
entities, pursuant to 5 U.S.C. 605(b).
    In the preamble of the January 11, 1993 regulations, the 
Administrator certified that those regulations, including the 
provisions revised by today's final rule, would not have a significant 
impact. 58 FR 3649. The final rule revisions adopted today are not 
significant enough to change the economic impact addressed in the 
preamble of the January 11, 1993 regulations, which were certified as 
not having a significant impact. The revisions will prevent the 
creation of about 200,000 excess, new allowances and thus will have an 
annual impact of about $318,000 per year in Phase I, i.e., 200,000 
allowances times $159 (the weighted average winning bid for 1995 
allowances in the EPA 1994 Allowance Auction on March 28, 1994. See 59 
FR 19712, 19714 (Apr. 25, 1994)). Pursuant to the provisions of 5 
U.S.C. 605(b), I hereby certify that the revised rule will not have a 
significant, adverse impact on a substantial number of small entities.

E. Miscellaneous

    In accordance with section 117 of the Act, publication of this rule 
was preceded by consultation with any appropriate advisory committees, 
independent experts, and federal departments and agencies.

List of Subjects in 40 CFR Part 72

    Environmental protection, Acid rain, Air pollution control, 
Electric utilities, Permits, Reporting and recordkeeping requirements, 
Sulfur dioxide.

    Dated: November 14, 1994.
Carol M. Browner,
Administrator.

    For the reasons set forth in the preamble, chapter I of title 40 of 
the Code of Federal Regulations is amended as follows.

PART 72--[AMENDED]

    1. The authority citation for part 72 is revised to read as 
follows:

    Authority: 42 U.S.C. 7601 and 7651, et seq.

    2. Section 72.41 is amended by revising paragraphs (b)(1)(i), 
(c)(3) introductory text, (c)(3)(i)(B), (c)(3)(i)(C), (c)(3)(ii), 
(c)(4)(ii), (d)(2), and (e)(1)(i) and adding paragraphs (c)(3)(i)(D), 
(c)(3)(iii), and (d)(3) to read as follows:


Sec. 72.41  Phase I substitution plans.

* * * * *
    (b)(1) * * *
    (i) Each unit under paragraph (a)(2) of this section is under the 
control of the owner or operator of each unit under paragraph (a)(1) of 
this section that designates the unit under paragraph (a)(2) of this 
section as a substitution unit; and
* * * * *
    (c) * * *
    (3) Demonstration that the total emissions reductions achieved 
under the substitution plan will be equal to or greater than the total 
emissions reductions that would have been achieved without the plan, as 
follows:
    (i) * * *
    (B) Each of the following: the unit's 1985 actual SO2 
emissions rate; the unit's 1985 allowable SO2 emissions rate; the 
unit's 1989 actual SO2 emissions rate; the unit's 1990 actual 
SO2 emissions rate; and, as of November 15, 1990, the most 
stringent unit-specific federally enforceable or State enforceable 
SO2 emissions limitation covering the unit for 1995-1999. For 
purposes of determining the most stringent emissions limitation, 
applicable emissions limitations shall be converted to lbs/mmBtu in 
accordance with appendix B of this part. Where the most stringent 
emissions limitation is not the same for every year in 1995-1999, the 
most stringent emissions limitation shall be stated separately for each 
year.
    (C) The lesser of: the unit's 1985 actual SO2 emissions rate; 
the unit's 1985 allowable SO2 emissions rate; the greater of the 
unit's 1989 or 1990 actual SO2 emissions rate; or, as of November 
15, 1990, the most stringent unit-specific federally enforceable or 
State enforceable SO2 emissions limitation covering the unit for 
1995-99. Where the most stringent emissions limitation is not the same 
for every year during 1995-1999, the lesser of the emissions rates 
shall be determined separately for each year using the most stringent 
emissions limitation for that year.
    (D) The product of the baseline in paragraph (c)(3)(i)(A) of this 
section and the emissions rate in paragraph (c)(3)(i)(C) of this 
section, divided by 2000 lbs/ton. Where the most stringent emissions 
limitation is not the same for every year during 1995-1999, the product 
in the prior sentence shall be calculated separately for each year 
using the emissions rate determined for that year in paragraph 
(c)(3)(i)(C) of this section.
    (ii)(A) The sum of the amounts in paragraph (c)(3)(i)(D) of this 
section for all substitution units to be governed by the plan. Except 
as provided in paragraph (c)(3)(ii)(B) of this section, this sum is the 
total number of allowances available each year under the substitution 
plan.
    (B) Where the most stringent unit-specific federally enforceable or 
State enforceable SO2 emissions limitation is not the same for 
every year during 1995-1999, the sum in paragraph (c)(3)(ii)(A) of this 
section shall be calculated separately for each year using the amounts 
calculated for that year in paragraph (c)(3)(i)(D) of this section. 
Each separate sum is the total number of allowances available for the 
respective year under the substitution plan.
    (iii) Where, as of November 15, 1990, a non-unit-specific federally 
enforceable or State enforceable SO2 emissions limitation covers 
the unit for any year during 1995-1999, the designated representative 
shall state each such limitation and propose a method for applying the 
unit-specific and non-unit-specific emissions limitations under 
paragraph (d) of this section.
    (4) * * *
* * * * *
    (ii) A list showing any annual distribution of the allowances in 
paragraph (c)(3)(ii) of this section from a substitution unit to a unit 
under paragraph (a)(1) of this section that, under the plan, designates 
the substitution unit.
* * * * *
    (d) * * *
    (2) In no event shall allowances be allocated to a substitution 
unit, under an approved substitution plan, for any year in excess of 
the sum calculated and applicable to that year under paragraph 
(c)(3)(ii) of this section, as adjusted by the Administrator in 
approving the plan.
    (3) Where, as of November 15, 1990, a non-unit-specific federally 
enforceable or State enforceable SO2 emissions limitation covers 
the unit for any year during 1995-1999, the Administrator will specify 
on a case-by-case basis a method for using unit-specific and non-unit-
specific emissions limitations in allocating allowances to the 
substitution unit. The specified method will not treat a non-unit-
specific emissions limitation as a unit-specific emissions limitation 
and will not result in substitution units retaining allowances 
allocated under paragraph (d)(1) of this section for emissions 
reductions necessary to meet a non-unit- specific emissions limitation. 
Such method may require an end-of-year review and the adjustment of the 
allowances allocated to the substitution unit and may require the 
designated representative of the substitution unit to surrender 
allowances by the allowance transfer deadline of the year that is 
subject to the review. Any surrendered allowances shall have the same 
or an earlier compliance use date as the allowances originally 
allocated for the year, and the designated representative may identify 
the serial numbers of the allowances to be deducted. In the absence of 
such identification, such allowances will be deducted on a first-in, 
first-out basis under Sec. 73.35(c)(2) of this chapter.
    (e) * * *
    (1) Emissions Limitations. (i) Each substitution unit governed by 
an approved substitution plan shall become a Phase I unit from January 
1 of the year for which the plan takes effect until January 1 of the 
year for which the plan is no longer in effect or is terminated. The 
designated representative of a substitution unit shall surrender 
allowances, and the Administrator will deduct allowances, in accordance 
with paragraph (d)(3) of this section.
* * * * *
    3. Section 72.43 is amended by revising paragraphs (a) introductory 
text, (a)(1) introductory text, (b)(1) introductory text, 
(b)(1)(ii)(A), (b)(3)(i), (c)(4)(i), (c)(4)(ii), (c)(4)(iv), (d), and 
(f)(1)(ii) and adding paragraph (a)(2) to read as follows:


Sec. 72.43  Phase I reduced utilization plans.

    (a) Applicability. This section shall apply to the designated 
representative of:
    (1) Any Phase I unit, including.
* * * * *
    (2) Any affected unit that:
    (i) Is not otherwise subject to any Acid Rain emissions limitation 
or emissions reduction requirements during Phase I; and
    (ii) Meets the requirement, as set forth in paragraphs (c)(4)(ii) 
and (d) of this section, that for each year for which the unit is to be 
covered by the reduced utilization plan, the unit's baseline divided by 
2,000 lbs/ton and multiplied by the lesser of the unit's 1985 actual 
SO2 emissions rate or 1985 allowable SO2 emissions rate does 
not exceed the sum of
    (A) The lesser of 10 percent of the amount under paragraph 
(a)(2)(ii) of this section or 200 tons, plus
    (B) The unit's baseline divided by 2,000 lbs/ton and multiplied by 
the lesser of: The greater of the unit's 1989 or 1990 actual SO2 
emissions rate; or, as of November 15, 1990, the most stringent 
federally enforceable or State enforceable SO2 emissions 
limitation covering the unit for 1995-1999.
    (b)(1) The designated representative of any unit under paragraph 
(a)(1) of this section shall include in the Acid Rain permit 
application for the unit a reduced utilization plan, meeting the 
requirements of this section, when the owners and operators of the unit 
plan to:
* * * * *
    (ii) * * *
    (A) Shifting generation of the unit to a unit under paragraph 
(a)(2) of this section or to a sulfur-free generator; or
* * * * *
    (3)(i) Improved unit efficiency measures shall be implemented in 
the unit after December 31, 1987. Such measures include supply-side 
measures listed in appendix A, section 2.1 of part 73 of this chapter.
* * * * *
    (c) * * *
    (4) * * *
    (i) Identification of each compensating unit or sulfur-free 
generator.
    (ii) For each compensating unit.
    (A) Each of the following: The unit's 1985 actual SO2 
emissions rate; the unit's 1985 allowable emissions rate; the unit's 
1989 actual SO2 emissions rate; the unit's 1990 actual SO2 
emissions rate; and, as of November 15, 1990, the most stringent unit-
specific federally enforceable or State enforceable SO2 emissions 
limitation covering the unit for 1995-1999. For purposes of determining 
the most stringent emissions limitation, applicable emissions 
limitations shall be converted to lbs/mmBtu in accordance with appendix 
B of this part. Where the most stringent emissions limitation is not 
the same for every year in 1995-1999, the most stringent emissions 
limitation shall be stated separately for each year.
    (B) The unit's baseline divided by 2,000 lbs/ton and multiplied by 
the lesser of the unit's 1985 actual SO2 emissions rate or 1985 
allowable SO2 emissions rate.
    (C) The unit's baseline divided by 2000 lbs/ton and multiplied by 
the lesser of: The greater of the unit's 1989 or 1990 actual SO2 
emissions rate; or, as of November 15, 1990, the most stringent unit-
specific federally enforceable or State enforceable SO2 emissions 
limitation covering the unit for 1995-1999. Where the most stringent 
emissions limitation is not the same for every year in 1995-1999, the 
calculation in the prior sentence shall be made separately for each 
year.
    (D) The difference between the amount under paragraph (c)(4)(ii)(B) 
of this section and the amount under paragraph (c)(4)(ii)(C) of this 
section. If the difference calculated in the prior sentence for any 
year exceeds the lesser of 10 percent of the amount under paragraph 
(c)(4)(ii)(B) of this section or 200 tons, the unit shall not be 
designated as a compensating unit for the year. Where the most 
stringent unit-specific federally enforceable or State enforceable 
SO2 emissions limitation is not the same for every year in 1995-
1999, the difference shall be calculated separately for each year.
    (E) The allowance allocation calculated as the amount under 
paragraph (c)(4)(ii)(B) of this section. If the compensating unit is a 
new unit, it shall be deemed to have a baseline of zero and shall be 
allocated no allowances.
    (F) Where, as of November 15, 1990, a non-unit-specific federally 
enforceable or State enforceable SO2 emissions limitation covers 
the unit for any year in 1995-1999, the designated representative shall 
state each such limitation and propose a method for applying unit-
specific and non-unit-specific emissions limitations under paragraph 
(d) of this section.
* * * * *
    (iv) For each compensating unit or sulfur-free generator not in the 
dispatch system of the unit reducing utilization under the plan, the 
system directives or power purchase agreements or other contractual 
agreements governing the acquisition, by the dispatch system, of the 
electrical energy that is generated by the compensating unit or sulfur-
free generator and on which the plan relies to accomplish reduced 
utilization. Such contractual agreements shall identify the specific 
compensating unit or sulfur-free generator from which the dispatch 
system acquires such electrical energy.
* * * * *
    (d) Administrator's Action. (1) If the Administrator approves the 
reduced utilization plan, he or she will allocate allowances, as 
provided in the approved plan, to the Allowance Tracking System account 
for any designated compensating unit upon issuance of an Acid Rain 
permit containing the plan, except that, if the plan is conditionally 
approved, the allowances will be allocated upon revision of the permit 
to activate the plan.
    (2) Where, as of November 15, 1990, a non-unit-specific federally 
enforceable or State enforceable emissions limitation covers the unit 
for any year during 1995-1999, the Administrator will specify on a 
case-by-case basis a method for using unit-specific and non-unit 
specific emissions limitations in approving or disapproving the 
compensating unit. The specified method will not treat a non-unit-
specific emissions limitation as a unit-specific emissions limitation 
and will not result in compensating units retaining allowances 
allocated under paragraph (d)(1) of this section for emissions 
reductions necessary to meet a non-unit-specific emissions limitation. 
Such method may require an end-of-year review and the disapproval and 
de-designation, and adjustment of the allowances allocated to, the 
compensating unit and may require the designated representative of the 
compensating unit to surrender allowances by the allowance transfer 
deadline of the year that is subject to the review. Any surrendered 
allowances shall have the same or an earlier compliance use date as the 
allowances originally allocated for the year, and the designated 
representative may identify the serial numbers of the allowances to be 
deducted. In the absence of such identification, such allowances will 
be deducted on a first-in, first-out basis under Sec. 73.35(c)(2) of 
this chapter.
* * * * *
    (f) * * *
    (1) * * *
    (ii) The designated representative of any Phase I unit (including a 
unit governed by a reduced utilization plan relying on energy 
conservation, improved unit efficiency, sulfur-free generation, or a 
compensating unit) shall surrender allowances, and the Administrator 
will deduct or return allowances, in accordance with paragraph (d)(2) 
of this section and subpart I of this part.
* * * * *
    4. Section 72.91 is amended by revising paragraphs (a)(3)(iii) 
introductory text (formula is unchanged), (a)(3)(iv), (a)(4), (a)(5), 
(a)(6), and (b)(2) and adding paragraph (a)(7) to read as follows:


Sec. 72.91  Phase I unit adjusted utilization.

    (a) * * *
    (3) * * *
    (iii) ``Shifts to designated sulfur-free generators'' is the 
reduction in utilization (in mmBtu), for the calendar year, that is 
accounted for by all sulfur-free generators designated under the 
reduced utilization plan in effect for the calendar year. This term 
equals the sum, for all such generators, of the ``shift to sulfur-free 
generator.'' ``Shift to sulfur-free generator'' shall equal the amount, 
to the extent documented under paragraph (a)(6) of this section, 
calculated for each generator using the following formula:
* * * * *
    (iv) ``Shifts to designated compensating units'' is the reduction 
in utilization (in mmBtu) for the calendar year that is accounted for 
by increased generation at compensating units designated under the 
reduced utilization plan in effect for the calendar year. This term 
equals the heat rate, under paragraph (a)(3) of this section, of the 
unit reducing utilization multiplied by the sum, for all such 
compensating units, of the ``shift to compensating unit'' for each 
compensating unit. ``Shift to compensating unit'' shall equal the 
amount of compensating generation (in Kwh), to the extent documented 
under paragraph (a)(6) of this section, that the designated 
representatives of the unit reducing utilization and the compensating 
unit have certified (in their respective annual compliance 
certification reports) as the amount that will be converted to mmBtus 
and used, in accordance with paragraph (a)(4) of this section, in 
calculating the adjusted utilization for the compensating unit.
    (4) ``Compensating generation provided to other units'' is the 
total amount of utilization (in mmBtu) necessary to provide the 
generation (if any) that was shifted to the unit as a designated 
compensating unit under any other reduced utilization plans that were 
in effect for the unit and for the calendar year. This term equals the 
heat rate, under paragraph (a)(3) of this section, of such unit 
multiplied by the sum of each ``shift to compensating unit'' that is 
attributed to the unit in the annual compliance certification reports 
submitted by the Phase I units under such other plans and that is 
certified under paragraph (a)(3)(iv) of this section.
    (5) Notwithstanding paragraphs (a)(3) (i), (ii), and (iii) of this 
section, where two or more Phase I units include in ``plan 
reductions'', in their annual compliance certification reports for the 
calendar year, expected kilowatt hour savings or reduction in heat rate 
from the same specific conservation or improved unit efficiency 
measures or increased utilization of the same sulfur-free generator:
    (i) The designated representatives of all such units shall submit 
with their annual reports a certification signed by all such designated 
representatives. The certification shall apportion the total kilowatt 
hour savings, reduction in heat rate, or increased utilization among 
such units.
    (ii) Each designated representative shall include in the annual 
report only the respective unit's share of the total kilowatt hour 
savings, reduction in heat rate, or increased utilization, in 
accordance with the certification under paragraph (a)(5)(i) of this 
section.
    (6)(i) Where a unit includes in ``plan reductions'' under paragraph 
(a)(3) of this section the increase in utilization of any sulfur-free 
generator, the designated representative of the unit shall submit, with 
the annual compliance certification report, documentation demonstrating 
that an amount of electrical energy at least equal to the ``shift to 
sulfur-free generator'' attributed to the sulfur-free generator in the 
annual report was actually acquired by the unit's dispatch system from 
the sulfur-free generator.
    (ii) Where a unit includes in ``plan reductions'' under paragraph 
(a)(3) of this section utilization of any compensating unit, the 
designated representative of the unit shall submit with the annual 
compliance certification report, documentation demonstrating that an 
amount of electrical energy at least equal to the ``shift to 
compensating unit'' attributed to the compensating unit in the annual 
report was actually acquired by the unit's dispatch system from the 
compensating unit.
    (7) Notwithstanding paragraphs (a)(3)(i), (ii), (iii), and (iv), 
(a)(4), and (a)(5) of this section, ``plan reductions'' minus 
``compensating generation provided to other units'' shall not exceed 
``baseline'' minus ``actual utilization.''
    (b) * * *
    (2) Notwithstanding paragraph (b)(1)(i) of this section, where two 
or more Phase I units include in the confirmation report the verified 
kilowatt hour savings or reduction in heat rate from the same specific 
conservation or improved unit efficiency measures:
    (i) The designated representatives of all such units shall submit 
with their confirmation reports a certification signed by all such 
designated representatives. The certification shall apportion the total 
kilowatt hour savings or reduction in heat rate among such units.
    (ii) Each designated representative shall include in the 
confirmation report only the respective unit's share of the total 
savings or reduction in heat rate in accordance with the certification 
under paragraph (b)(2)(i) of this section.
* * * * *
[FR Doc. 94-28708 Filed 11-21-94; 8:45 am]
BILLING CODE 6560-50-P