Karnal bunt is a fungal disease of wheat ( Triticum aestivum ), durum wheat ( Triticum durum ), and triticale ( Triticum aestivum X Secale cereale ), a hybrid of wheat and rye. Karnal bunt is caused by the fungus Tilletia indica (Mitra) Mundkur and is spread primarily through the planting of infected seed. Some countries in the international wheat market regulate Karnal bunt as a fungal disease requiring quarantine; therefore, without measures taken by the Animal and Plant Health Inspection Service (APHIS) to prevent its spread, the establishment of Karnal bunt in the United States could have significant consequences with regard to the export of wheat to international markets.

The domestic quarantine and other regulations regarding Karnal bunt are set forth in §§ 301.89-1 through 301.89-16 (referred to below as the regulations) and are designed to prevent the spread of Karnal bunt. Paragraph (f) of § 301.89-3 describes the criteria under which a field and any surrounding non-infected acreage may be released from regulation for Karnal bunt. Currently, the regulations provide two ways for a field to be released from regulation, which are described in paragraphs (f)(1) and (f)(2). We are proposing to make modifications to each of those paragraphs in order to update and clarify the regulations.

Paragraph (f)(1) of the regulations currently provides that a field will be released from regulation for Karnal bunt when it is “no longer being used for crop production.” This criterion has normally applied when land is removed from agricultural use, e.g. , the land is sold and subdivided for home construction. To make it clear that this criterion applies to land permanently removed from agricultural use, rather than land that may have been only temporarily taken out of production, we would amend the regulations to specifically state that the field must have been permanently removed from crop production in order to be released from regulation for Karnal bunt.

Paragraph (f)(2) of the regulations currently states that a field will be released from regulation for Karnal bunt if each year for a period of 5 consecutive years, the field is subjected to any one of the following management practices (the practice used may vary from year to year):

• Planted with a cultivated non-host crop;

• Tilled once annually; or

• Planted with a host crop that tests negative, through the absence of bunted kernels, for Karnal bunt.

We are proposing to revise paragraph (f)(2) to state that a field will be released from regulation for Karnal bunt if the field is tilled at least once per year for a total of 5 years (the years need not be consecutive). After tilling, the field may be planted with a crop or left fallow. If the field is planted with a host crop, the crop must test negative, through the absence of bunted kernels, for Karnal bunt.

The main difference between the proposed text and the text in the current regulations is that the revised paragraph would not require the specific management practices to be carried out for 5 consecutive years. The current consecutive years requirement means that if a producer skipped a year or more— i.e. , did not plant or till the field in a given year—the producer would have to begin the 5-year time period again. However, no scientific basis exists to require producers to start over, as there is no effect, positive or negative, on the Karnal bunt status of the field if the management practices are not used. If a field was left untilled and fallow, or planted using no-till techniques, there may not be the reduction in the spore load in the soil that is realized with tilling, but there would also not be any increase in the spore load. Thus, if a farmer chose not to apply one of the management practices during a given year, we do not believe that it is necessary to restart the counting of years, thus negating any progress that may have been made toward the 5-year goal. Therefore, we would amend the regulations to remove the current requirement that the management practices be applied over 5 consecutive years.

Our additional proposed changes to the text of paragraph (f)(2) involve rewording the description of the management practices to make the requirements clearer. Each of the management practices listed in the current regulations involves tilling, but “tilled once annually” is listed as a discrete practice. As the other two management practices involve planting the field with a crop—either a cultivated non-host crop or a host crop that tests negative for Karnal bunt—it stands to reason that a field meeting the “tilled once annually” criterion would have been left fallow. Therefore, we are proposing to revise the description of management practices to provide that, for each year counted toward the 5 cumulative years, the field is tilled and either: (1) Planted with a non-host crop, (2) left fallow, or (3) planted with a host crop that tests negative, through the absence of bunted kernels, for Karnal bunt. While this proposed change to our description of the management practices would not alter the substance of the current regulations, we believe that it would serve to clarify the criteria that must be met in order for a field to be released from regulation for Karnal bunt.

This proposed rule has been reviewed under Executive Order 12866. The rule has been determined to be not significant for the purposes of Executive Order 12866 and, therefore, has not been reviewed by the Office of Management and Budget.

We are proposing to amend the Karnal bunt regulations regarding the requirements that must be met in order for a field or area to be removed from the list of regulated areas. The proposed changes would allow a field to qualify for release after 5 cumulative years of specified management practices, rather than 5 consecutive years as the current regulations provide. These proposed changes would clarify the existing regulations and provide growers in regulated areas with greater flexibility in their planting decisions.

Compared to the current regulations, the proposed change to 5 cumulative years using the specified management practices would afford regulated wheat producers greater flexibility in the planting cycle; they can elect not to till in a particular year without having to start over to satisfy the 5 consecutive years requirement for deregulation. However, as a practical matter, the proposed change should have little or no impact, as the “consecutive years” criterion has been in effect only since March 2004, near the end of the 2003-2004 crop season, and has not prevented any fields from being released that APHIS field personnel and managers determined were otherwise eligible for release from regulation.

The Regulatory Flexibility Act requires that agencies consider the economic impact of their rules on small businesses, organizations, and governmental jurisdictions. The Karnal bunt regulations have the potential to have the most impact on wheat producers. At the present time, parts of Texas, Arizona, and California are regulated for Karnal bunt. In Texas, there are approximately 285,000 agricultural acres and about 550 wheat producers under regulation. The equivalent figures for Arizona and California are, respectively, 278,000 acres (120 producers) and 56,000 acres (18 producers).

As determined by the Small Business Administration (SBA), the small entity size standard for wheat farming, which is defined as farms “primarily engaged in growing wheat and/or producing wheat seeds” (North American Industry Classification System code 11114), is $750,000 or less in annual receipts. Although the size of regulated wheat producers is unknown, they are likely to be small in size under SBA standards. This assumption is based on composite data for providers of the same and similar services. In 2002, Arizona had a total of 7,294 farms of all types. Of those farms, 91 percent had annual sales that year of less than $500,000, well below the SBA's small entity threshold. Similarly, the comparable percentages for Texas (228,926 total farms) and California (79,631 total farms) were 99 percent and 90 percent, respectively. (Source: SBA and NASS, 2002 Census of Agriculture.) Although many of these businesses are considered small under SBA standards, given the reason cited above, the proposed change should have little or no economic impact on small entities, wheat producers or otherwise.

Under these circumstances, the Administrator of the Animal and Plant Health Inspection Service has determined that this action would not have a significant economic impact on a substantial number of small entities.

This program/activity is listed in the Catalog of Federal Domestic Assistance under No. 10.025 and is subject to Executive Order 12372, which requires intergovernmental consultation with State and local officials. (See 7 CFR part 3015, subpart V.)

This proposed rule has been reviewed under Executive Order 12988, Civil Justice Reform. If this proposed rule is adopted: (1) All State and local laws and regulations that are inconsistent with this rule will be preempted; (2) no retroactive effect will be given to this rule; and (3) administrative proceedings will not be required before parties may file suit in court challenging this rule.

This proposed rule contains no information collection or recordkeeping requirements under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

Accordingly, we propose to amend 7 CFR part 301 as follows:

This final partial decision permanently adopts amendments to Pool plant provisions to ensure that producer milk originating outside the states that comprise the UMW order (Illinois, Iowa, Minnesota, North Dakota, South Dakota, Wisconsin, and the Upper Peninsula of Michigan) is providing consistent service to the order's Class I market, and to Producer milk provisions to eliminate the ability to pool, as producer milk, diversions to nonpool plants outside of the states that comprise the UMW marketing area. Additionally, this final partial decision permanently adopts a proposal to limit the transportation credit received by handlers to the first 400 miles of applicable milk movements.

This administrative action is governed by the provisions of Sections 556 and 557 of Title 5 of the United States Code and, therefore, is excluded from the requirements of Executive Order 12866.

The amendments to the rules proposed herein have been reviewed under Executive Order 12988, Civil Justice Reform. They are not intended to have a retroactive effect. If adopted, the proposed amendments would not preempt any State or local laws, regulations, or policies, unless they present an irreconcilable conflict with this rule.

The Agricultural Marketing Agreement Act of 1937 (the Act), as amended (7 U.S.C. 601-674), provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 608c(15)(A) of the Act, any handler subject to an order may request modification or exemption from such order by filing with the Department of Agriculture (Department) a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with the law. A handler is afforded the opportunity for a hearing on the petition. After a hearing, the Department would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has its principal place of business, has jurisdiction in equity to review the Department's ruling on the petition, provided a bill in equity is filed not later than 20 days after the date of the entry of the ruling.

In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ), the Agricultural Marketing Service has considered the economic impact of this action on small entities and has certified that this proposed rule will not have a significant economic impact on a substantial number of small entities. For the purpose of the Regulatory Flexibility Act, a dairy farm is considered a “small business” if it has an annual gross revenue of less than $750,000, and a dairy products manufacturer is a “small business” if it has fewer than 500 employees.

For the purposes of determining which dairy farms are “small businesses,” the $750,000 per year criterion was used to establish a production guideline of 500,000 pounds per month. Although this guideline does not factor in additional monies that may be received by dairy producers, it should be an inclusive standard for most “small” dairy farmers. For purposes of determining a handler's size, if the plant is part of a larger company operating multiple plants that collectively exceed the 500-employee limit, the plant will be considered a large business even if the local plant has fewer than 500 employees.

During August 2004, the month during which the hearing occurred, there were 15,608 dairy producers pooled on, and 60 handlers regulated by, the UMW order. Approximately 15,082 producers, or 97 percent, were considered small businesses based on the above criteria. Of the 60 handlers regulated by the UMW order during August 2004, approximately 49 handlers, or 82 percent, were considered “small businesses.”

The adoption of the proposed pooling standards serve to revise established criteria that determine those producers, producer milk and plants that have a reasonable association with and are consistently serving the fluid needs of the UMW milk marketing area. Criteria for pooling are established on the basis of performance levels that are considered adequate to meet the Class I fluid milk needs of the market and by doing so, determine those producers who are eligible to share in the revenue that arises from the classified pricing of milk. Criteria for pooling are established without regard to the size of any dairy industry organization or entity. The criteria established are applied in an identical fashion to both large and small businesses and do not have any different economic impact on small entities as opposed to large entities. The criteria established for transportation credits are also applied in an identical fashion to both large and small businesses and do not have any different economic impact on small entities as opposed to large entities. Therefore, the proposed amendments will not have a significant economic impact on a substantial number of small entities.

A review of reporting requirements was completed under the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was determined that these proposed amendments would have no impact on reporting, recordkeeping, or other compliance requirements because they would remain identical to the current requirements. No new forms are proposed and no additional reporting requirements would be necessary.

This decision does not require additional information collection that requires clearance by the Office of Management and Budget (OMB) beyond currently approved information collection. The primary sources of data used to complete the forms are routinely used in most business transactions. Forms require only a minimal amount of information which can be supplied without data processing equipment or a trained statistical staff. Thus, the information collection and reporting burden is relatively small. Requiring the same reports from all handlers does not significantly disadvantage any handler that is smaller than the industry average.

No other burdens are expected to fall on the dairy industry as a result of overlapping Federal rules. This rulemaking proceeding does not duplicate, overlap, or conflict with any existing Federal rules.

Prior documents in this proceeding:

Notice of Hearing: Issued June 16, 2004; published June 23, 2004 (69 FR 34963).

Notice of Hearing Delay: Issued July 14, 2004; published July 21, 2004 (69 FR 43538).

Tentative Partial Decision: Issued April 8, 2005; published April 14, 2005 (70 FR 19709).

Interim Final Rule: Issued May 26, 2005; published June 1, 2005 (70 FR 31321).

A public hearing was held upon proposed amendments to the marketing agreement and the order regulating the handling of milk in the Upper Midwest marketing area. The hearing was held, pursuant to the provisions of the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), and the applicable rules of practice (7 CFR part 900), at Bloomington, Minnesota, on August 16-19, 2004, pursuant to a notice of hearing issued June 16, 2004, published June 23, 2004 (69 FR 34963), and a notice of a hearing delay issued July 14, 2004, published July 21, 2004 (69 FR 43538).

The material issues, findings, conclusions and rulings of the tentative partial decision are hereby approved, adopted and are set forth herein. The material issues on the record of the hearing relate to:

1. Pooling Standards—Changing performance standards and diversion limits.

2. Transportation credits.

3. Determination of whether emergency marketing conditions existed that warranted the omission of a recommended decision and the opportunity to file written exceptions.

This final partial decision specifically addresses Proposals 1, 6 and features of Proposal 2 that are intended to better identify the milk of those producers who provide a reasonable and consistent service to the Class I needs of the UMW marketing area and thereby become eligible to pool on the UMW order. This decision also limits transportation credits received by handlers to the first 400 miles of applicable milk movements. Proposals 3, 4, 5, 7, a portion of Proposal 2 that addresses pooling and repooling, and a portion of Proposal 6 that addresses temporary loss of Grade A approval will be addressed in a separate decision. Hereinafter, any references to Proposal 2 will only pertain to the portions of the proposal that would limit the pooling of “distant” milk and amend transportation credit provisions, and references to Proposal 6 will only pertain to the “touch-base” standard portion of the proposal.

The following findings and conclusions on the material issues are based on evidence presented at the hearing and the record thereof:

Several proposed changes to the pooling standards of the UMW order, previously adopted on an interim basis, are adopted on a permanent basis by this final partial decision. Certain inadequacies of the current pooling provisions are resulting in large volumes of milk pooled on the UMW order which do not demonstrate a reasonable and consistent servicing of the UMW Class I market.

Specifically, the following amendments were adopted in the tentative partial decision and are adopted on a permanent basis in this final partial decision: (1) Only supply plants located in Illinois, Iowa, Minnesota, North Dakota, South Dakota, Wisconsin, and the Upper Peninsula of Michigan (hereinafter referred to as the “7-state milkshed”) may use milk delivered directly from producers’ farms for qualification purposes; and (2) Of diversions to nonpool plants, only diversions to those plants located in the 7-state milkshed will be considered producer milk under the order. These amendments to the pooling standards were contained in Proposals 1 and 2, as published in the hearing notice and as modified at the hearing.

Three proposals (Proposals 1, 2, and 6) seeking to limit the pooling of “distant” milk were considered in this proceeding. The proponents of these proposals are of the opinion that the current pooling provisions of the order enable milk to become pooled on the order that does not service the Class I needs of the UMW market. According to the proponents, such milk currently need only make an initial qualifying delivery to a pool plant to become pooled on the order. The witnesses assert that this is causing the unwarranted lowering of the order's blend price.

Proposal 1 was offered by Associated Milk Producers, Inc. (AMPI), Bongards' Creameries, Ellsworth Cooperative Creameries, and First District Association. Hereinafter, this decision will refer to these proponents as “AMPI, et al.” All are cooperative associations whose members’ milk is pooled on the UMW order.

Proposal 2 was offered by Mid-West Dairymen's Company on behalf of Cass-Clay Creamery, Inc. (Cass-Clay), Dairy Farmers of America, Inc. (DFA), Foremost Farms USA Cooperative (Foremost Farms), Land O'Lakes, Inc. (LOL), Manitowoc Milk Producers Cooperative (MMPC), Mid-West Dairymen's Company, Milwaukee Cooperative Milk Producers (MCMP), Swiss Valley Farms Company (Swiss Valley), and Woodstock Progressive Milk Producers Association. Hereinafter, this decision will refer to these proponents as “Mid-West, et al.” Although Foremost Farms was a proponent of Proposal 2, no testimony was offered on their behalf. At the hearing, Plainview Milk Products Cooperative and Westby Cooperative Creamery also supported the testimony of Mid-West, et al. The proponents of Proposal 2 are qualified cooperatives representing producers whose milk supplies the milk needs of the marketing area and is pooled on the UMW order.

Proposal 6, offered by Dean Foods Company (Dean), which also addresses the pooling of distant milk, is not adopted. Proposal 6 sought to increase the number of days that a dairy farmer's milk production would need to be delivered to a UMW pool plant from the current 1 day to 2 days before the milk of the dairy farmer would be eligible for diversion to a nonpool plant and have such diverted milk pooled on the order. This is commonly referred to by the industry as a “touch-base” standard. If this standard was not met for each of the months of July through November, Proposal 6 would have required that the touch-base standard be increased to 2 days for each of the months of December though June. If the July through November touch-base standard of Proposal 6 was met, there would be no touch-base standard applicable for the months of December through June. Additionally, Proposal 6 would also specify that if a producer lost association with the UMW order, except as caused by a loss in Grade A status, the producer would need to meet the 2-day touch-base standard in the intended month for qualifying as a producer on the order and for pooling eligibility.

During the hearing, Dean's witnesses made many modifications to their proposals which were further clarified in a post-hearing brief. In their brief, Dean explained that Proposal 6, as modified, intended that a dairy farmer's qualifying shipment could be made anytime during the month.

Currently, the UMW order provides that a supply plant can qualify as a pool plant of the order by delivering 10 percent of its total monthly milk receipts to a pool distributing plant, a producer-handler, a partially regulated distributing plant, or a distributing plant regulated by another Federal order. A supply plant may meet this requirement by shipping milk directly from dairy farms regardless of their location. Additionally, producer milk can be diverted to any nonpool plant, without regard to location, as long as the producer met the touch-base standard during the first qualifying month.

A witness appearing on behalf of AMPI, et al., testified in support of Proposal 1. The witness stated that since Federal order reform, and as a result of other Federal order hearings over the last several years, the UMW pooling provisions have allowed milk to be pooled on the order from as far as California, Idaho, Utah, Oregon, Colorado, Montana, Nebraska, Ohio, Indiana, and Georgia. The witness explained that a previous UMW decision, which became effective May 1, 2002, only resulted in prohibiting the ability to simultaneously pool the same milk on the UMW order and on a State-operated milk order that had marketwide pooling. The witness noted that during the same time period, however, amendments to the pooling standards of the Central and Mideast milk marketing orders resulted in a tightening of their pooling standards, moving milk formerly pooled on those two orders onto the UMW marketwide pool which reduced the blend price and producer price differential (PPD) received by UMW dairy farmers.

The AMPI, et al., witness testified that in December 2003, 263 million pounds, or 12.3 percent of producer milk, pooled on the UMW order was located in Idaho. The witness also noted that for the same month, Jerome County, Idaho, had the most producer milk of any county pooled on the UMW order. The witness was of the opinion that milk seeks to be pooled on the UMW order when it cannot qualify for pooling in its own geographic area. The witness explained that milk located far from the UMW area seeks to be pooled on the UMW order because the pooling provisions of the UMW order are so liberal and because it is economically advantageous to do so.

The AMPI, et al. , witness stated that current order provisions allow any handler whose producers have touched base at a UMW pool plant, to pool 10 times the amount of milk shipped to a distributing plant and divert up to 90 percent of its milk supply to any nonpool plant. The witness stressed that this has resulted in Idaho producers pooling their milk on the UMW order by simply meeting the one-day touch-base standard and then diverting future milk production to a nonpool plant nearer to their farms in Idaho.

The AMPI, et al. , witness compared the actual PPD versus a scenario in which a PPD was computed without Idaho milk. The witness noted that in 2003 the actual PPD was a negative 5 cents while under their scenario the estimated PPD without Idaho milk would have been a positive $0.19, a $0.24 total difference. The witness testified that UMW dairy farmers in effect received $36.5 million less for their milk in 2003 due to the $0.24 average difference in the actual versus estimated PPD. The witness asserted that Idaho milk was not physically supplying the market and was never intended to supply the market. The witness also added that additional Idaho milk not previously pooled on the UMW order could be pooled on the UMW order because of the termination of the Western milk marketing order on April 1, 2004.

The AMPI, et al. , witness stressed that Proposal 1 is not intended to prohibit the pooling of milk based on its distance from the UMW marketing area. The witness explained that any supply plant, regardless of its location, that delivers 10 percent of its producer receipts to a UMW distributing plant in the order would qualify their total receipts for pooling. The witness also explained that Proposal 1 would lessen the incentive to pool milk that does not demonstrate a consistent servicing of the UMW market's Class I needs.

A post-hearing brief submitted by AMPI asserted that $3 million per month is being siphoned off of the UMW marketwide pool by producers located long distances from the UMW and whose milk demonstrates no service to the UMW's fluid market. Their brief also reiterated that the termination of the Western order has resulted in a further lowering of blend prices received by UMW dairy farmers as more unpooled milk seeks easy and profitable pooling opportunities. The brief explained that the loss of income to UMW dairy farmers merits the need for an emergency action.

A witness appearing on behalf of Mid-West, et al. , testified in support of Proposal 2. The witness stated that milk located within the 7-state milkshed is already more than adequate to serve the fluid needs of the market. The witness asserted that Idaho milk is located too far from the market, in excess of 1,000 miles, to serve as a reliable reserve supply. The witness concluded that such milk should not be considered a consistent supply for the UMW marketing area. The Mid-West, et al. , witness explained that often when Idaho milk makes a pool qualifying one-day touch-base delivery to a distributing plant, milk produced and located within the marketing area has to be diverted from the distributing plant to accommodate the one-time physical receipt. The witness was of the opinion that this is tantamount to the local milk supply balancing the Idaho milk supply, rather than Idaho milk balancing the local milk supplies of the UMW market. Furthermore, the witness was of the opinion that if not for inadequate pooling provisions, milk located far from the market would not seek to be pooled because the cost of servicing the market would be prohibitive.

The Mid-West, et al. , witness said that typically the milk in Idaho pays a fee to a UMW handler for pooling and that these fees have become a significant revenue stream for some UMW handlers who seek to offset lower PPDs and increase their financial returns to producer members. The witness stated that in this way, milk located in the UMW marketing area is essentially used to qualify milk located in Idaho as UMW milk. Because Idaho milk is reported as a receipt by UMW handlers, it receives the benefit of the UMW PPD although it is never actually delivered to the UMW market except for the initial association. The witness said that in December 2003, more milk was pooled on the UMW order from Jerome County, Idaho, than from any other county in the country. The witness was of the opinion that the Idaho milk would not seek to be pooled if it had to meet the order's performance standards on its own merit because the cost of transporting it to a UMW distributing plant would exceed the monetary benefit of being pooled on the order. The witness insisted that the only way that milk located far from the market could be considered a reliable supplier to the UMW market is if it consistently provided service to the UMW fluid market on its own merit.

The Mid-West, et al. , witness stated that the impact on the PPD from the growing amount of Idaho milk pooled on the order has become significant. For example, the witness estimated that in September 2003, the PPD was reduced by $0.73. The witness stressed that while some entities were benefiting from the pooling of such milk by collecting pooling fees, all of the market's participants were being negatively affected because of the reduction in the PPD. The witness also noted that the termination of the Western order has only compounded the problem because milk once pooled and priced on the former Western order is seeking the price protection offered by another Federal milk order.

The Mid-West, et al. , witness maintained that it is the UMW's lenient performance standards that have enabled milk to participate and benefit from the UMW marketwide pool without demonstrating consistent and reliable service to the market. The witness also stressed that Proposal 2 does not treat in-area and out-of-area milk of a supply plant differently. The witness explained that both must ship 10 percent of their total milk receipts to a distributing plant to qualify as a pool plant for the order. Requiring this as a pooling standard for all supply plants, the witness said, will end the practice of using local milk supplies to qualify milk for pooling that has no physical tie to the marketing area.

A brief submitted by Mid-West, et al. , noted that less than one tenth of one percent of Idaho milk pooled on the UMW order was delivered to a pool distributing plant from April 2001 through May 2004 as evidence of such milk's lack of reasonable and consistent service to the UMW market. Furthermore, the brief noted that only 0.21 percent of the pooled Idaho milk pooled was delivered to a UMW pool plant of any type during the same time period. The brief contended that statistics prepared by the Market Administrator's office indicated that the UMW order's blend price had been reduced approximately 25 cents per hundredweight continuously since 2003 by pooling Idaho milk. The Mid-West, et al. , brief reiterated that Proposal 2 does not prevent milk located far from the marketing area from being pooled. Rather, explained the brief, it would establish an appropriate performance standard so that milk which does not consistently service the Class I needs of the UMW market could not be pooled on the order.

Exceptions to the tentative partial decision from Mid-West, et al. , commented that the adoption of standards to deter the pooling of out-of-area milk that does not provide a reliable and consistent service to the Class I market is appropriate.

A witness appearing on behalf of LOL testified in support of Proposal 2. The witness asserted that milk located in Idaho and pooled on the UMW market is lowering the UMW PPD, thereby negatively impacting LOL's local producers. However, as a supporter of performance-based pooling, the witness was of the opinion that Proposal 2 places additional standards on milk produced outside the 7-state milkshed. While the LOL witness was of the opinion that such pooling issues should be addressed at a national hearing, the witness nevertheless supported Proposal 2 because it addresses the low PPDs being received by UMW producers.

A witness appearing on behalf of MMPC testified in support of Proposal 2. The witness stated that MMPC has a small group of members located in Idaho that represent a significant amount of pooled milk on the UMW order. The witness explained that all members of MMPC pay a 2-cent per hundredweight checkoff on their milk for services provided by MMPC, and their Idaho members checkoff payment provides significant additional revenue to the cooperative. However, the witness said that all of the producer members of MMPC who pool their milk on the UMW order would be better off without pooling the milk from Idaho. According to the witness, the reduction in the PPD is greater than the 2-cent per hundredweight checkoff payment they receive for pooling Idaho milk.

A witness appearing on behalf of DFA also testified in support of Proposal 2. The DFA witness stated that the performance standards of the UMW order should limit the amount of milk pooled on the order to only that milk which can be reasonably considered a regular and consistent supply of the market.

The DFA witness offered various pooling scenarios to illustrate that milk located in Idaho would not seek to be pooled on the UMW order if such milk were expected to make regular and consistent deliveries to pool plants. For all the scenarios, the witness assumed a hauling rate of $2.10 per loaded mile, a $1.60 Class I differential, and a transportation credit of 400 miles. The witness said that under these assumptions, milk would likely not seek to be pooled on the UMW order because the costs incurred would exceed the revenue received by being pooled on the UMW order. Additionally, the witness said that if the pooling standards are not amended to establish an appropriate level of consistent service, more milk will seek to be pooled on the order and would result in a continued lowering of the order's blend price.

The DFA witness stressed that the order's performance standards must more clearly define what milk can reasonably be considered a consistent supply to the market. According to the witness, the underpinning logic of Federal order pricing is that milk supplies located closer to the market have a higher value than those farther away. Predecessor orders had location adjustments that were a mechanism for assigning differing values to milk depending on its distance to the market, explained the witness. Milk located farther from the marketing area was less valuable to the market, thus recognizing that more local milk supplies had a higher value because it cost much less to transport local milk supplies to the market, the witness said. The witness stated that location adjustments were once an important method of achieving pooling discipline. While there were no proposals regarding location adjustments under consideration, the witness explained, adoption of Proposal 2 would achieve a similar economic result—establishing a relationship between the value of milk and its distance from the market. The witness stressed that Proposal 2 would provide the framework to more accurately identify the milk of those producers which can reasonably be considered as reliable suppliers to the UMW fluid market.

A witness appearing on behalf of Cass-Clay testified in support of Proposal 2. Cass-Clay is a dairy farmer-owned cooperative located in the UMW marketing order that processes 45 percent of its total milk receipts into Class I products. The witness explained that Cass-Clay does pool distant milk for a fee which generates revenue to offset some of the negative PPDs received by UMW dairy farmers. According to the witness, the revenue generated from pooling fees has enabled Cass-Clay to support their members' mailbox price and retain membership in a highly competitive market. The witness also stated that Cass-Clay does not favor pooling Idaho milk and supports Proposal 2 because it would limit the ability to pool milk that is located far from the UMW marketing area.

A witness appearing on behalf of MCMP testified in support of Proposal 2. The witness was of the opinion that if distant producers want to collect money from the UMW marketwide pool, they should be regularly and consistently serving the UMW market. It was MCMP's position that Proposal 2 is fair and right for the market as a whole.

A witness appearing on behalf of the Galloway Company testified in support of Proposal 2. Galloway Company owns and operates a Class II manufacturing plant regulated by the UMW order. The witness was of the opinion that Proposal 2 would reduce the amount of milk pooled on the UMW order that is not actually serving the fluid market.

A witness appearing on behalf of the Wisconsin, North Dakota, and Minnesota Farmers Unions (Farmers Unions) testified in support of limiting the ability of milk to pool on the UMW order that is located far from the marketing area. However, the witness did not express support for any particular proposal. The witness said that pooling milk from far outside the UMW marketing area has had an adverse economic effect on producers who do regularly supply the UMW market. The witness stated that pooling such milk was placing an undue hardship on UMW dairy producers who regularly and consistently serve the Class I needs of the UMW market by reducing their revenue.

A dairy farmer, who is a Director on the DFA Central Area Council, testified in support of Proposal 2. The witness testified that milk produced far from the marketing area, such as Idaho, cannot regularly service the UMW market while still returning a profit to those dairy farmers. The witness was of the opinion that the UMW order should be modified to ensure that producer milk receiving the UMW blend price is actually serving the UMW market.

A witness appearing on behalf of Dean testified in opposition to Proposals 1 and 2. Dean owns and operates distributing plants regulated by the UMW order as well as UMW nonpool plants. The witness explained that Dean opposed the proposals because of the limitation on the transportation credit to 400 miles. Dean's post-hearing brief maintained its opposition to Proposal 1 stating that the proponents only want to address the problem of distant milk, not the issue of depooling. Furthermore, Dean's brief stressed its opposition to Proposal 2, insisting that it is a compromise position among the proponents and does not go far enough to ensure that all milk pooled on the order is consistently servicing the order's Class I market.

A Dean witness also testified in support of Proposal 6. The witness said the proposal would increase the current one time 1-day touch-base provision to 2 days in each of the months of July through November and if that standard was not met, the producer must deliver 2 days milk production in each of the months of December through June. Furthermore, the witness said that Proposal 6 also would establish a 2-day touch-base provision for a dairy farmer who lost producer status with the UMW order, except as a result of loss of Grade A status for less than 21 days, or who became a dairy farmer for other markets. The Dean witness asserted that increasing the touch-base standard to 2 days would ensure that more milk would be consistently available at pool plants to serve the fluid market. A second Dean witness also testified in support of Proposal 6. The witness asserted that the intent of the Federal order system is to ensure a sufficient supply of milk for fluid use and provide for uniform payments to producers who stand ready, willing, and able to serve the fluid market, regardless of how the milk of any individual is utilized. While some entities are of the opinion that the order system should ensure a sufficient milk supply to all plants, the Dean witness was of the opinion that the order system addresses only the need for ensuring a milk supply to distributing plants. The witness elaborated on this opinion by citing examples of order language that stress providing for a regular supply of milk to distributing plants as a priority of the Federal milk order program.

The Dean witness testified that for the Federal milk order system to ensure orderly marketing, orders need to provide adequate economic incentives that will attract milk to fluid plants and need to properly define regulations to determine the milk of those producers who can participate in the marketwide pool. The witness further opined that features are missing from the terms of the UMW order. In this regard, the witness said current pooling standards have allowed milk to become pooled on the order without demonstrating regular service to the Class I needs of the market.

Dean explained further in their post-hearing brief that when distant milk attaches to the UMW pool and dilutes the blend price, Class I handlers have to increase their premiums in an effort to offset the negative PPD so that they can retain their producers. This, argued Dean, results in inconsistent product costs between handlers. In conclusion, the Dean brief stressed that Proposal 6 does not establish different standards for in-area and out-of-area milk. Rather, the brief explained, it ensures that all milk will demonstrate regular and consistent service to the fluid market as a criterion for being pooled on the UMW order.

Exceptions to the tentative partial decision received from Dean expressed support for the adoption of pooling requirements that result in actual fluid milk deliveries to fluid milk plants.

A witness appearing on behalf of AMPI, et al., testified in opposition to Proposal 6. According to the witness, the 2-day touch base provision contained in Proposal 6 would only result in additional and unwarranted expense to UMW producers and promote the uneconomic movement of milk for the sole purpose of meeting an unneeded standard. Furthermore, the witness asserted, in a low Class I utilization order like the UMW, a 2-day touch-base standard is unreasonable.

The AMPI, et al., witness also testified that much of AMPI's Grade A milk is commingled with Grade B milk when it is picked up from the farm. Proposal 6 would require AMPI to pick up their Grade A and Grade B milk separately, explained the witness, and thus would be extremely costly and inefficient. The witness was of the opinion that the current order's one-time touch-base provision is sufficient for ensuring an adequate supply of milk for fluid use. Additionally, the witness said that the Market Administrator already has the authority to adjust supply plant shipping standards in the event that distributing plants have difficulty in obtaining adequate milk supplies to meet the market's Class I demands.

A post-hearing brief submitted by AMPI, et al., reiterated their opposition to Proposal 6. The brief contended that if Proposal 6 were adopted, select handlers would face increased handling and transportation costs to meet the new performance standard. The brief further argued that Proposal 6 would necessitate that supply plants invest more capital to build additional silo capacity used only to accommodate the increased volumes of producer milk needing to touch base.

A witness appearing on behalf of Wisconsin Cheesemakers Association (WCMA), also testified in opposition to Proposal 6. WCMA represents a group of dairy manufacturers and marketers in Wisconsin. According to the witness, 32 of WCMA's members operate 42 dairy facilities pooled on the UMW order. The witness was of the opinion that the implementation of Proposal 6 would not result in orderly marketing within the UMW order because the 2-day touch-base standard would cause uneconomic and inefficient shipments of milk solely for the purpose of meeting the new higher standard. Furthermore, the witness said the additional milk needed to be shipped to a pool supply plant would necessitate that additional silo capacity be built at plants to receive the additional milk volumes arising from establishing a higher touch-base standard.

A witness appearing on behalf of the National Family Farm Coalition, an organization which represents family farms located in 32 states, including those states comprising the UMW marketing area, testified in opposition to all proposals at the hearing. The witness was of the opinion that the entire Federal order system was in need of complete reform. The witness asserted that proponents of the proposals being heard were entities whose actions have lowered prices received by family farmers.

A post-hearing brief submitted by Alto Dairy (Alto), a cooperative with 580 members in Wisconsin and Michigan, expressed their opposition to Proposals 1, 2, and 6. The brief argued that the pooling of milk located far from the marketing area serves to equalize the blend prices between Federal orders and contended that a ban on such pooling in the UWM order would lead to similar bans in other Federal orders. The brief concluded that this would widen blend price differences among all Federal orders.

A brief submitted on behalf of Family Dairies USA (Family Dairies), expressed their opposition to Proposals 1, 2, and 6. Family Dairies is a cooperative handler regulated by the UMW order that operates a pool supply plant located in the marketing area. The brief expressed the opinion that these proposals essentially establish performance standards for out-of-area milk that are different from performance standards for in-area milk. The brief contended that establishing different standards based on location is discriminatory, is designed to erect trade barriers to distant milk, and is illegal. In their brief they argued that producers who bear large transportation costs to supply the fluid market, in effect, are not receiving uniform prices. In this regard, the brief asserted that Proposals 1, 2, and 6 violated uniform producer prices because of the transportation cost burden on distant producers.

Exceptions to the tentative partial decision from Grande Cheese Company (Grande) noted that the States of Indiana, Ohio and the southern peninsula of Michigan should be added to the states to which pooled milk may be diverted.

In exceptions to the tentative partial decision, Lamers Dairy, Inc. argued that the decision is a step in the right direction but does not go far enough in preventing disorderly marketing. Lamers was of the view that the order permits the pooling of far more milk on the order than that which could be considered a legitimate reserve supply of distributing plants. Supply plants which meet the performance standards of the order necessarily qualify all of the receipts of the supply plant for pooling. Accordingly, all of the receipts, including diversions of the supply plant, can reasonably be considered a legitimate reserve supply of those distributing plants.

Two proposals seeking an identical mileage limit for handlers receiving transportation credits for moving milk for Class I uses were adopted in the tentative partial decision and are adopted permanently in this final partial decision. While no handler is currently receiving a transportation credit for milk transported distances greater than 400 miles, the proposed 400-mile limit is reasonable to ensure that milk used in fluid products will be acquired from sources nearest to the distributing plants. Specifically, a transportation credit for milk delivered to distributing plants on the first 400 miles between the transferring and receiving plant was adopted in the tentative partial decision and is thereby adopted in this final partial decision on a permanent basis.

Currently, the UMW order provides for a transportation credit on bulk milk transferred from a pool plant to a pool distributing plant. The transportation credit is calculated by multiplying $0.0028 times the number of miles between the transferring plant and the receiving plant and is applied on a per hundredweight basis. An adjustment is made for the different Class I prices between the transferring and receiving plants. The transportation credit is paid to the receiving distributing plant to partially offset the cost of transporting milk.

A witness appearing on behalf of AMPI, et al. , testified in support of the transportation credit limit contained in Proposal 1. The witness said that in 2003 no pooled milk received a transportation credit that was transported over 400 miles. The AMPI, et al. , witness also testified that very little milk which did receive a transportation credit was shipped between 300 and 399 miles to the receiving distributing plant. The witness stressed that limiting the transportation credit to 400 miles would not disadvantage any handler currently delivering milk to a distributing plant.

A witness appearing on behalf of Mid-West, et al. , testified in support of the transportation credit limit contained in Proposal 2. The witness was of the opinion that milk located within the marketing area is more than adequate to supply the order's distributing plants. The witness said that adopting the proposed limit of 400 miles would not affect any current pool handlers receiving the credit. However, noted the witness, a mileage limit on the transportation credit would prevent any new supply plants that were located great distances from distributing plants from draining money from the producer settlement fund (PSF) in the future.

A brief submitted on behalf of Mid-West, et al. , maintained their position that placing a mileage limitation on receiving a transportation credit would avoid the potential of the UMW pool subsidizing the delivery of milk to UMW distributing plants from unneeded areas.

The witness appearing on behalf of LOL also expressed their support for establishing a transportation credit limit.

A witness appearing on behalf of Dean testified in opposition to limiting receipt of the transportation credit. The witness was of the opinion that the purpose of limiting receipt of the transportation credit was only to prevent distant milk from pooling on the UMW order. If milk is needed to supply distributing plants, the witness argued, then it should be pooled without regard to the distance it needs to be transported.

Exceptions to the tentative partial decision from Grande expressed opposition to limiting the transportation credit to 400 miles. They stated that such a limitation would create geographical barriers to dairy farmers seeking to sell milk to UMW distributing plants.

The record of this proceeding finds that several amendments to the pooling standards of the UMW order should be adopted on a permanent basis to more properly identify the milk of those producers that should share in the order's marketwide pool proceeds. Currently, milk located far from the UMW marketing area that demonstrates no consistent service to the Class I needs of the market is able to qualify for pooling on the UMW order. The addition of this milk to the order at lower classified use-values results in a lower blend price returned to those producers who consistently supply the Class I needs of the UMW market. Such milk does not demonstrate a reasonable level of performance in servicing the Class I milk needs of the UMW marketing area and therefore should not be pooled.

The pooling standards of all Federal milk marketing orders, including the UMW order, are intended to ensure that an adequate supply of milk is available to meet the Class I needs of the market and to provide the criteria for identifying the milk of those producers who are reasonably associated with the market as a condition for receiving the order's blend price. The pooling standards of the UMW order are represented in the Pool Plant, Producer, and the Producer milk provisions of the order and are performance based. Taken as a whole, these provisions are intended to ensure that an adequate supply of milk is available to meet the Class I needs of the market and provide the criteria for determining the producer milk that has demonstrated service to the Class I market and thereby should share in the marketwide distribution of pool proceeds.

Pooling standards that are performance based provide the only viable method for determining those eligible to share in the marketwide pool. It is primarily the additional revenue generated from the higher-valued Class I use of milk that adds additional income, and it is reasonable to expect that only those producers who consistently bear the costs of supplying the market's fluid needs should be the ones to share in the returns arising from higher-valued Class I sales so that costs can be recovered.

Pooling standards are needed to identify the milk of those producers who are providing service in meeting the Class I needs of the market. If a pooling provision does not reasonably accomplish this end, the proceeds that accrue to the marketwide pool from fluid milk sales are not properly shared with the appropriate producers. The result is the unwarranted lowering of returns to those producers who actually incur the costs of servicing and supplying the fluid needs of the market.

Pool plant standards, specifically standards that provide for the pooling of milk through supply plants, need to reflect the supply and demand conditions of the marketing area. This is important because producers whose milk is pooled on the order, regardless of utilization, receive the order's blend price. When a pooling feature's use deviates from its intended purpose, and its use results in pooling milk that cannot reasonably be considered as serving the fluid needs of the market, it is appropriate to re-examine the standard in light of current marketing conditions.

Unlike other consolidated orders established as a part of Federal milk order reform on the basis of the area in which Class I handlers compete with each other for the majority of their sales, the current consolidated UMW marketing area also was based primarily on a common procurement area. In this regard, it would be unreasonable to conclude that areas far from the UMW area, such as Idaho, are part of a common procurement area with those states that comprise the current UMW marketing area. The same is true for the states of Indiana, Ohio and the southern peninsula of Michigan. While it is the Class I use of milk by regulated handlers in the marketing area that provides additional revenue to the pool and not the procurement area, the procurement area was nevertheless envisioned to be the primary area relied upon by the order's distributing plants for a supply of milk.

The geographic boundaries of the UMW order were not intended to limit or define which producers, which milk of those producers, or which handlers could enjoy the benefits of being pooled on the order. What is important and fundamental to all Federal orders, including the UMW order, is the proper identification of those producers and the milk of those producers that should share in the proceeds arising from Class I sales. The UMW order's current pooling standards do not reasonably accomplish this.

The hearing record clearly indicates that the milk of producers located in areas distant from the marketing area is pooled on and receives the UMW order's blend price. Current inadequate supply plant performance standards enable milk which has de minimis physical association with the market and which demonstrates no consistent service to the market's Class I needs to be pooled on the UMW order. The inappropriate pooling of milk occurs because the order has inadequate diversion provisions that allow for milk to be diverted to a manufacturing plant located far from the marketing area. The ability for such milk to pool on the UMW order is made possible by distant handlers working out an arrangement with pooled handlers located within the UMW to pool the milk of the distant handler, often for a fee. The milk is included as part of the total receipts of the pooled handler even though such milk is diverted to plants located far from the marketing area.

Requiring milk originating outside of the 7-state milkshed to qualify for pooling separately by delivering milk to a UMW distributing plant or distributing plant unit is not needed to ensure that such milk is actually servicing the Class I needs of the market. The adopted changes of limiting diversions to plants physically located within the 7-state milkshed in conjunction with not permitting handlers to use in-area milk to qualify milk located outside the 7-state milkshed essentially accomplishes the intent of ensuring the proper identification of milk that services the Class I needs of the market. In their exceptions to the tentative decision, Mid-West, et al. , continued to endorse qualifying milk for pooling separately by delivering milk to a UMW distributing plant or distributing plant unit. This final partial decision maintains the conclusion that such a measure is not needed for the same reasons cited above.

Some entities on brief argued that requiring out-of-area milk to perform separately is a form of location discrimination and is a means of erecting trade barriers. This argument is without merit. Pooling standards for plants located outside the 7-state milkshed will not prohibit milk from being pooled if it meets the UMW's order pooling standards. The amended pooling provisions provide identical pooling standards to both in-area and out-of-area supply plants, as both must ship 10 percent to the Class I market. Nevertheless, for the reasons stated above, other changes to the pooling standards negate the need to provide for separate pooling standards for out-of-area milk.

The Federal milk order system has consistently recognized that there is a cost incurred by producers in servicing an order's Class I market, and the primary reward to producers for performing such service is receiving the order's blend price. The amended pooling provisions will ensure that milk seeking to be pooled and receive the order's blend price is consistently servicing the order's Class I needs. Consequently, the adopted pooling provisions will ensure the more equitable sharing of revenue generated from Class I sales among producers who bear the costs.

Changes to the order's diversion provisions are needed to ensure that milk pooled on the order not used for Class I purposes is part of the legitimate reserve supply of Class I handlers. Providing for the diversion of milk is a desirable and needed feature of an order because it facilitates the orderly and efficient disposition of milk when not needed for fluid use. However, it is necessary to safeguard against excessive milk supplies becoming associated with the market through the diversion process. Associating more milk than is actually part of the legitimate reserve supply of the diverting plant unnecessarily reduces the potential blend price paid to dairy farmers who service the market's Class I needs. Without reasonable diversion provisions, the order's performance standards are weakened and give rise to disorderly marketing conditions.

The hearing record clearly indicates that milk located far from the marketing area can be reported as diverted milk by a pooled handler and receive the order's blend price. Under the current pooling provisions, this can occur after a one-time delivery to a UMW pool plant. After the initial delivery, such milk need never again be delivered to a UMW pool plant. The record evidence confirms that usually this milk is delivered to a nonpool plant located as far from the marketing area as the diverted milk. This milk is never again physically associated with a plant in the marketing area, nor does it serve the Class I needs of the market.

Despite the comments by Grande, it is appropriate to permanently amend the order's diversion provisions so that diversions can be made only to plants physically located within the 7-state milkshed. Milk diverted to such plants better ensures that this milk is a legitimate reserve supply of the diverting handler and is readily available to service the Class I market when needed.

The Agricultural Marketing Agreement Act of 1937 (the Act) was amended by the Food Security Act of 1985 to provide authority for the establishment of marketwide service payments. Under the Act, as amended, marketwide service payments can be established to partially reimburse handlers for services provided of marketwide benefit by using money out of the PSF before a blend price is computed.

Class I sales add additional revenue to the marketwide pool, so ensuring an adequate supply of milk to distributing plants benefits, in general, all market participants. Consequently, a transportation credit was established in the pre-reform Chicago Regional order to reimburse a portion of the cost of transporting milk to a distributing plant for use in Class I products. The transportation credit provision was carried into the consolidated UMW order as part of Federal order reform.

Transportation credits in the current UMW order assist plants in obtaining a milk supply to fulfill Class I demand and promote the orderly marketing of milk. However, it is important that the transportation credit provision not be used as a method of circumventing the intent of other performance-based pooling standards. Establishing a mileage limit on the transportation credit will encourage distributing plants to use milk located in the nearby procurement area. The UMW has an abundance of milk within the marketing area beyond Class I demands and there should be no incentive given to attract milk for Class I use beyond that available within 400 miles of a distributing plant, a reasonable proxy for describing the common procurement area of the order's distributing plants. A handler may acquire a milk supply from far distances; however, the transportation credit would apply only to the first 400 miles of milk movement.

Evidence presented at the hearing, despite the comments by Grande, revealed that currently no distributing plant is receiving a transportation credit for milk located farther than 400 miles from their plant. Therefore, the adopted amendment should not alter any current UMW handler's business practices. The ability of handlers to use the transportation credit as a means of having milk that is not part of the procurement area meet the performance standards of the order will be limited. This limitation is consistent with the UMW order boundaries that were established based, in part, on the commonality of a milk procurement area. This is consistent with other changes adopted in this decision that stress meeting performance-based standards as a condition for receiving the order's blend price.

A proposal seeking to increase the order's touch-base standard as a means of ensuring that the Class I needs of the market are met is not adopted. While the touch-base standard is an important feature of an order's pooling standards, increasing the standard is not appropriate given the marketing conditions of the UMW marketing area. The UMW marketing area has an abundance of milk located within the marketing area and as a result, it's Class I utilization is relatively low. For example, during 2003, the order's Class I utilization averaged 24.2 percent. Increasing the touch-base standard is unwarranted because it would likely cause the uneconomic movement of milk for the sole purpose of meeting a higher standard.

Record evidence established that pooling standards of the UMW order were inadequate and were resulting in the erosion of the blend price received by producers who were serving the Class I needs of the market and were changed on an emergency basis. The unwarranted erosion of such producer blend prices stemmed from improper supply plant standards and the lack of appropriate limits on diversions of milk to only plants located within the 7-state milkshed.

It was also appropriate to establish a mileage limit on the transportation credit on an emergency basis to prevent the credit from being used to circumvent the amended pooling provisions contained in the interim decision regarding supply plant performance standards and diverted milk. Establishing a mileage limit ensured that other changes made to ensure consistent performance to the Class I market before milk was eligible to be pooled and receive the order's blend price were not weakened.

Consequently, it was determined that emergency marketing conditions existed in the Upper Midwest marketing area and the issuance of a recommended decision was omitted. As stated in the tentative partial decision, a separate decision will be issued addressing proposals concerning pooling and repooling of milk, temporary loss of Grade A status and increasing the maximum administrative assessment.

Briefs, proposed findings and conclusions were filed on behalf of certain interested parties. These briefs, proposed findings and conclusions, and the evidence in the record were considered in making the findings and conclusions set forth above. To the extent that the suggested findings and conclusions filed by interested parties are inconsistent with the findings and conclusions set forth herein, the requests to make such findings or reach such conclusions are denied for the reasons previously stated in this decision.

The findings and determinations hereinafter set forth supplement those that were made when the Upper Midwest order was first issued and when it was amended. The previous findings and determinations are hereby ratified and confirmed, except where they may conflict with those set forth herein.

(a) The tentative marketing agreement and the order, as hereby proposed to be amended, and all of the terms and conditions thereof, will tend to effectuate the declared policy of the Act;

(b) The parity prices of milk as determined pursuant to section 2 of the Act are not reasonable with respect to the price of feeds, available supplies of feeds, and other economic conditions which affect market supply and demand for milk in the marketing area, and the minimum prices specified in the tentative marketing agreement and the order, as hereby proposed to be amended, are such prices as will reflect the aforesaid factors, insure a sufficient quantity of pure and wholesome milk, and be in the public interest; and

(c) The tentative marketing agreement and the order, as hereby proposed to be amended, will regulate the handling of milk in the same manner as, and will be applicable only to persons in the respective classes of industrial and commercial activity specified in, the marketing agreement upon which a hearing has been held.

In arriving at the findings and conclusions, and the regulatory provisions of this decision, each of the exceptions received was carefully and fully considered in conjunction with the record evidence. To the extent that the findings and conclusions and the regulatory provisions of this decision are at variance with any of the exceptions, such exceptions are hereby overruled for the reasons previously stated in this decision.

Annexed hereto and made a part hereof is one document: A Marketing Agreement regulating the handling of milk. The order amending the order regulating the handling of milk in the Upper Midwest marketing area was approved by producers and published in the Federal Register on June 1, 2005 (70 FR 31321), as an Interim Final Rule. Both of these documents have been decided upon as the detailed and appropriate means of effectuating the foregoing conclusions.

It is hereby ordered that this entire final decision and the Marketing Agreement annexed hereto be published in the Federal Register .

March 2005 is hereby determined to be the representative period for the purpose of ascertaining whether the issuance of the order, as amended in the Interim Final Rule published in the Federal Register on June 1, 2005 (70 FR 31321), regulating the handling of milk in the Upper Midwest marketing area is approved or favored by producers, as defined under the terms of the order (as amended and as hereby proposed to be amended) who during such representative period were engaged in the production of milk for sale within the aforesaid marketing area.

This order shall not become effective unless and until the requirements of § 900.14 of the rules of practice and procedure governing proceedings to formulate marketing agreements and marketing orders have been met.

The findings and determinations hereinafter set forth supplement those that were made when the order was first issued and when it was amended. The previous findings and determinations are hereby ratified and confirmed, except where they may conflict with those set forth herein.

(a) Findings. A public hearing was held upon certain proposed amendments to the tentative marketing agreement and to the order regulating the handling of milk in the Upper Midwest marketing area. The hearing was held pursuant to the provisions of the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), and the applicable rules of practice and procedure (7 CFR part 900).

Upon the basis of the evidence introduced at such hearing and the record thereof, it is found that:

(1) The said order as hereby amended, and all of the terms and conditions thereof, will tend to effectuate the declared policy of the Act:

(2) The parity prices of milk, as determined pursuant to section 2 of the Act, are not reasonable in view of the price of feeds, available supplies of feeds, and other economic conditions which affect market supply and demand for milk in the aforesaid marketing area. The minimum prices specified in the order as hereby amended are such prices as will reflect the aforesaid factors, insure a sufficient quantity of pure and wholesome milk, and be in the public interest; and

(3) The said order as hereby amended regulates the handling of milk in the same manner as, and is applicable only to persons in the respective classes of industrial or commercial activity specified in, a marketing agreement upon which a hearing has been held.

It is therefore ordered, that on and after the effective date hereof, the handling of milk in the Upper Midwest marketing area shall be in conformity to and in compliance with the terms and conditions of the order, as amended, and as hereby amended, as follows:

The provisions of the order amending the order contained in the interim amendment of the order issued by the Administrator, Agricultural Marketing Service, on May 26, 2005, and published in the Federal Register on June 1, 2005 (70 FR 31321), are adopted without change and shall be and are the terms and provisions of this order.

The parties hereto, in order to effectuate the declared policy of the Act, and in accordance with the rules of practice and procedure effective thereunder (7 CFR part 900), desire to enter into this marketing agreement and do hereby agree that the provisions referred to in paragraph I hereof as augmented by the provisions specified in paragraph II hereof, shall be and are the provisions of this marketing agreement as if set out in full herein.

I. The findings and determinations, order relative to handling, and the provisions of §§ 1030.1 to 1030.86 all inclusive, of the order regulating the handling of milk in the Upper Midwest marketing area (7 CFR part 1030) which is annexed hereto; and

II. The following provisions: Record of milk handled and authorization to correct typographical errors.

(a) Record of milk handled. The undersigned certifies that he/she handled during the month of March 2005,__________hundredweight of milk covered by this marketing agreement.

(b) Authorization to correct typographical errors. The undersigned hereby authorizes the Deputy Administrator, or Acting Deputy Administrator, Dairy Programs, Agricultural Marketing Service, to correct any typographical errors which may have been made in this marketing agreement.

Effective date. This marketing agreement shall become effective upon the execution of a counterpart hereof by the Department in accordance with section 900.14(a) of the aforesaid rules of practice and procedure.

In Witness Whereof, The contracting handlers, acting under the provisions of the Act, for the purposes and subject to the limitations herein contained and not otherwise, have hereunto set their respective hands and seals.

The Office of Management and Budget (OMB) has waived the review process required by Executive Order 12866 for this action.

This proposed rule has been reviewed under Executive Order 12988, Civil Justice Reform. This rule is not intended to have a retroactive effect.

Section 11 of the Act provides that nothing in the Act may be construed to preempt or supersede any other program relating to beef promotion organized and operated under the laws of the United States or any State. There are no administrative proceedings that must be exhausted prior to any judicial challenge to the provisions of this rule.

Pursuant to requirements set forth in the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq. ), the Administration has considered the economic effect of this action on small entities and has determined that this proposed rule will not have a significant economic impact on a substantial number of small business entities. The effect of the Order upon small entities was discussed in the July 18, 1986 Federal Register [51 FR 26132]. The purpose of RFA is to fit regulatory actions to the scale of businesses subject to such actions in order that small businesses will not be unduly burdened.

There are approximately 270 importers who import beef or edible beef products into the United States and 198 importers who import live cattle into the United States. The majority of these operations subject to the Order are considered small businesses under the criteria established by the Small Business Administration (SBA) [13 CFR 121.201]. SBA defines small agricultural businesses as those with annual receipts of less than $5 million.

The proposed rule imposes no significant burden on the industry. It would merely update and expand the HTS numbers and categories to conform to recent updates in the numbers and categories used by USCBP. This proposed rule also adjusts the live animal equivalencies used to determine the amount of assessments collected on imported beef and beef products. This adjustment reflects an increase in the average dressed weight of cows slaughtered under Federal inspection that has occurred since the inception of the Beef Checkoff Program. Total import assessments collected under the Beef Checkoff Program in 2004 were $8,322,145 including both live cattle and beef and beef products. The Department estimates that the proposed adjustment for 2005 could result in a decrease in importer assessment of approximately $800,000. Accordingly, the Administrator of AMS has determined that this action will not have a significant impact on a substantial number of small entities.

In accordance with OMB regulations [5 CFR part 1320] that implement the Paperwork Reduction Act of 1995 [44 U.S.C. Chapter 35], the information collection and recordkeeping requirements contained in the Order and Rules and Regulations have previously been approved by OMB under OMB control number 0581-0202 and merged into OMB control number 0581-0093.

The Act authorized the establishment of a national beef promotion and research program. The final Order was published in the Federal Register on July 18, 1986, (51 FR 21632) and the collection of assessments began on October 1, 1986. The program is administered by the Cattlemen's Beef Promotion and Research Board (Board) appointed by the Secretary of Agriculture (Secretary) from industry nominations composed of 104 cattle producers and importers. The program is funded by a $1-per-head assessment on producer marketing of cattle in the United States and on imported cattle as well as an equivalent amount on imported beef and beef products.

Importers pay assessments on imported cattle, beef, and beef products. USCBP collects and remits the assessment to the Board. The term “importer” is defined as “any person who imports cattle, beef, or beef products from outside the United States.” Imported beef or beef products is defined as “products which are imported into the United States which the Secretary determines contain a substantial amount of beef including those products which have been assigned one or more of the following numbers in the Tariff Schedule of the United States.”

In 1989, USCBP implemented a new numbering system, the Harmonized Tariff Schedule (HTS), to replace the Tariff Schedule of the United States (TSUS) system. The Department updated the TSUS to HTS, in a final rule, published in the Federal Register on April 20, 1989, (54 FR 15915) to conform with updates made by USCBP. Since the inception of HTS, it has undergone many changes. First, the original 11 digit system has been replaced with a 10 digit system. Additionally, most of the categories regarding imported beef and beef products have been subdivided and the new categories have been assigned HTS numbers. One of the purposes of this proposed rule is to update, expand, and revise the table found under § 1260.172 (7 CFR § 1260.172) to reflect the current HTS numbers.

As a result of these changes to HTS, there are 20 new categories that cover imported live cattle subject to assessment compared with the previous 8 categories. The 30 categories identifying imported beef and beef products have been expanded to 54 categories. The chart, as published in the April 20, 1989, Federal Register final rule [54 FR 15918], is as follows:

This rule proposes to update and expand the chart published in the 1989 final rule to conform with recent changes to the HTS numbering system and revises the live weight equivalents used to calculate import assessments. Importers are currently paying the same assessment level for imported beef and beef products that was established when the Order was first published in 1986. At that time, the average dressed weight of cows slaughtered under Federal inspection was determined to be 509 pounds. The Department determined that using the average dressed weight of domestic cows slaughtered under Federal inspection would be most suitable because about 90 percent of imported beef and beef products were similar to domestic cow beef.

The Act requires that assessments on imported beef and beef products be determined by converting such imports into live animal equivalents to ascertain the corresponding number of head of cattle. Carcass weight is the principle factor in calculating live animal equivalents. Under the Order the Board may increase or decrease the level of assessments for imported beef and beef products based upon revised determination of live animal equivalencies.

The trend in cattle weight has been increasing. This is attributed to many factors such as genetic improvements, more refined feeding programs, better animal health, and better overall management. The weight of cattle will more than likely increase or hold steady. At the time the Order was published, the average dressed weight of cows slaughtered under Federal inspection in 1985 was 509 pounds compared to an average of 614 pounds for calendar year 2004.

The Department has received two recommendations concerning importer assessments. The Meat Importers Council of America (MICA) requested to increase the live animal equivalency rate that would reduce the amount of assessments collected from importers of beef and beef products. MICA suggests using the dressed cow weight for calendar year 2000 to recalculate levels of assessments. This average would be 579 pounds. In updating the average dressed cow weight for calendar year 2004, the average would be 614 pounds. The Board has recommended using an average dressed cow weight from 1987 to the most current data. The Board states that “establishing an average over this period of time takes into account short term highs and lows due to the cattle cycle, weather effects, and feed prices.” This average would be 555 pounds.

After consideration of both recommendations, the Department has concluded that it is preferable to calculate the average using the past 5-year average dressed weight of all cows slaughtered in the U.S. under Federal inspection.

There is not a consistent calculation method among the various countries regarding average carcass weights of cattle slaughtered for export, the Department proposes that the average carcass weight, which will be used in calculating the live animal equivalents, will be the 5-year average (2000, 2001, 2002, 2003, and 2004) carcass weight of cows slaughtered in the United States. The average carcass weight of domestic cattle is not subject to variations in carcass weights resulting from possible differing methods of calculation in any of the exporting countries. Historically, since the majority of cattle are imported from Canada and Mexico and the majority of beef and beef products are imported from Canada, Australia, and New Zealand, the average U.S. dressed cow weight would be the most suitable because of the similarity of domestic cow beef and beef products from these exporting countries.

Additionally, an average over this period of time achieves the goal of reflecting current genetics, production practices, and technology while also reflecting normal marketing conditions. A shorter time period, such as the most recent year, is subject to unusual marketing conditions. For example, severe drought or a sudden dip in milk prices may lead to a substantial shift in the normal marketing patterns for cull beef and dairy cows. A longer period, such as 10 or 15 years, does not achieve the goal of reflecting changes in animal genetics and industry production practices.

Accordingly, the Department has determined that the most recent 5-year weighted average balances the need to adjust for current genetics and technology while minimizing the influence of atypical marketing conditions on the average carcass weights of cows coming to slaughter. The 5-year weighted average would be 592 pounds.

Further, the Department has used standard conversion factors for determining the amount of a particular type of beef or beef product represents a carcass. These conversions factors take into account the removal of bone, weight lost in cooking or other processing, and the non-beef components of beef products. The conversion factors have been utilized to determine the rate of assessment charged to importers. The rate of assessment is calculated by dividing the conversion factor by the average carcass weight and multiplying the result by the $1-per-head assessment rate. The current rates being assessed by USCBP, as well as the most current HTS numbers, are as follows:

The proposed assessment rates for imported beef and beef products are set forth in the regulatory text of § 1260.172. In 2004, importers' contribution to the program totaled $8,322,145 including both live cattle and beef and beef products. The Department estimates that the proposed adjustment for 2005 could results in a decrease in importer assessment of approximately $800,000.

A 60-day comment period is provided for interested persons to comment.

For the reasons set forth in the preamble, it is proposed that title 7 of the CFR part 1260 be amended as follows:

How do I comment on this proposed AD? We invite you to submit any written relevant data, views, or arguments regarding this proposal. Send your comments to an address listed under ADDRESSES. Include the docket number, “FAA-2005-20803; Directorate Identifier 2005-CE-19-AD” at the beginning of your comments. We will post all comments we receive, without change, to http://dms.dot.gov , including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this proposed rulemaking. Using the search function of our docket Web site, anyone can find and read the comments received into any of our dockets, including the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). This is docket number FAA-2005-20803; Directorate Identifier 2005-CE-19-AD. You may review the DOT's complete Privacy Act Statement in the Federal Register published on April 11, 2000 (65 FR 19477-78) or you may visit http://dms.dot.gov .

Are there any specific portions of this proposed AD I should pay attention to? We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. If you contact us through a nonwritten communication and that contact relates to a substantive part of this proposed AD, we will summarize the contact and place the summary in the docket. We will consider all comments received by the closing date and may amend this proposed AD in light of those comments and contacts.

Where can I go to view the docket information? You may view the AD docket that contains this proposal, any comments received, and any final disposition in person at the DMS Docket Offices between 9 a.m. and 5 p.m. (eastern standard time), Monday through Friday, except Federal holidays. The Docket Office (telephone 1-800-647-5227) is located on the plaza level of the Department of Transportation NASSIF Building at the street address stated in ADDRESSES. You may also view the AD docket on the Internet at http://dms.dot.gov . The comments will be available in the AD docket shortly after the DMS receives them.

Has FAA taken any action to this point? Reports of cracks found in the center of gravity (CG) release hook attachment brackets caused us to issue AD 2004-08-13, Amendment 39-13582 (69 FR 21402, April 21, 2004). AD 2004-08-13 applies to Grob Models G103 TWIN ASTIR, G103 TWIN II, G103 TWIN III ACRO, and G103C Twin III SL sailplanes. That AD currently requires you to replace the center of gravity (CG) release hook attachment brackets with brackets of improved design.

What has happened since AD 2004-08-13 to initiate this proposed action? The Luftfahrt-Bundesamt (LBA), which is the airworthiness authority for Germany, notified FAA of the need to change AD 2004-08-13. The LBA reports that the actions required in AD 2004-08-13 should also apply to Model G103A TWIN II ACRO sailplanes.

What is the potential impact if FAA took no action? A cracked CG release hook attachment bracket, if not prevented, could lead to abnormal or uncontrolled sailplane release. This condition could result in reduced or loss of sailplane control.

Is there new service information that applies to this subject? Grob has issued Service Bulletin No. MSB315-62/2, dated March 9, 2005.

What are the provisions of this service information? The service bulletin includes procedures for inspecting and replacing the CG release hook attachment brackets for Models G103 TWIN ASTIR, G103 TWIN II, G103A TWIN II ACRO, and G103C TWIN III ACRO sailplanes.

What action did the LBA take? The LBA previously classified Grob Service Bulletin No. MSB315-62, dated January 21, 2002, as mandatory and issued German AD No. 2002-067, effective date: March 21, 2002, to ensure the continued airworthiness of these sailplanes in Germany.

Did the LBA inform the United States under the bilateral airworthiness agreement? These Grob Models G103 TWIN ASTIR, G103 TWIN II, G103A TWIN II ACRO, G103C TWIN III ACRO, and G103C Twin III SL sailplanes are manufactured in Germany and are type-certificated for operation in the United States under the provisions of section 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement.

Under this bilateral airworthiness agreement, the LBA has kept us informed of the situation described above.

What has FAA decided? We have examined the LBA's findings, reviewed all available information, and determined that AD action is necessary for products of this type design that are certificated for operation in the United States.

Since the unsafe condition described previously is likely to exist or develop on other Grob Models G103 TWIN ASTIR, G103 TWIN II, G103A TWIN II ACRO, G103C TWIN III ACRO, and G103C Twin III SL sailplanes of the same type design that are registered in the United States, we are proposing AD action to prevent abnormal or uncontrolled sailplane release due to cracked CG release hook attachment brackets. This condition could result in reduced or loss of sailplane control.

What would this proposed AD require? This proposed AD would supersede AD 2004-08-13, Amendment 39-13582 (69 FR 21402, April 21, 2004) with a new AD. This proposed AD would retain the actions exactly and currently required in AD 2008-08-13 actions for Models G103 TWIN ASTIR, G103 TWIN II, G103C TWIN III ACRO, and G103C Twin III SL sailplanes and would add Model G103A TWIN II ACRO sailplanes to the applicability.

How does the revision to 14 CFR part 39 affect this proposed AD? On July 10, 2002, we published a new version of 14 CFR part 39 (67 FR 47997, July 22, 2002), which governs FAA's AD system. This regulation now includes material that relates to altered products, special flight permits, and alternative methods of compliance. This material previously was included in each individual AD. Since this material is included in 14 CFR part 39, we will not include it in future AD actions.

How many sailplanes would this proposed AD impact? We estimate that this proposed AD affects 136 sailplanes in the U.S. registry.

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

We invite you to send us any written relevant data, views, or arguments regarding this proposal. Send your comments to an address listed under ADDRESSES. Include “Docket No. FAA-2005-21331; Directorate Identifier 2005-NE-07-AD” in the subject line of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of the proposed AD. We will consider all comments received by the closing date and may amend the proposed AD in light of those comments.

We will post all comments we receive, without change, to http://dms.dot.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this proposed AD. Using the search function of the DOT docket Web site, anyone can find and read the comments in any of our dockets, including the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). You may review the DOT's complete Privacy Act Statement in the Federal Register published on April 11, 2000 (65 FR 19477-78) or you may visit http://dms.dot.gov.

You may examine the docket that contains the proposal, any comments received and, any final disposition in person at the Docket Management Facility Docket Offices between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Office (telephone (800) 647-5227) is located on the plaza level of the Department of Transportation Nassif Building at the street address stated in ADDRESSES. Comments will be available in the AD docket shortly after the Docket Management Facility receives them.

On October 16, 2003, ECi informed the FAA that an engine experienced an in-flight engine failure and uncommanded shutdown. The failure occurred after 50 hours time-in-service (TIS) after an engine overhaul. The engine overhaul included replacing the engine crankshaft, the connecting rods, and the connecting rod bearings. We conducted a post-accident investigation that included an engine teardown. The engine teardown showed that one connecting rod and one connecting rod bearing were destroyed. The three remaining connecting rod bearings had an unusual “tank tread” pattern around the surface that mates with the crankshaft journal. A visual examination of the three remaining connecting rods revealed the journal bores had the same “tank tread” pattern found on the mating surface of the bearings.

We approved reciprocating engine connecting rods, P/N AEL 11750, for use on Lycoming 360 and 540 series reciprocating engines under a Parts Manufacturer Approval (PMA). The Airmotive Engineering Corp, Division of Engine Components Incorporated, holds the PMA. ECi markets the parts as ECi parts. We determined the ECi engineering drawings for the connecting rods contain inadequate criteria to control circularity of the bearing bore. Because of that, the manufacturing process used to machine the bore resulted in excessive scalloping. The scalloping resulted in excessive variation in the circularity necessary for the proper functioning of the connecting rods. We also determined the inspection methods that ECi used to inspect the newly manufactured connecting rods were not sufficiently accurate to identify the manufacturing defects in circularity.

We obtained four new ECi connecting rods from the field and two new ECi connecting rods directly from ECi. A U.S. Government test facility measured the connecting rods using high-precision test measuring equipment. The test facility found the journal bores in all of the connecting rods had excessive scalloping. Our analysis of measurements from the test facility show that the scalloping prevents proper fitting between the connecting rod and it's associated rod bearing. The poor fit between these critical engine components results in a significant reduction in performance and fatigue strength. Journal bores with excessive surface scalloping or machine chattering can result in two adverse conditions:

(1) Poor contact between the journal bore and it's bearing substantially reduces heat transfer from the bearing. The resulting increase in bearing temperature substantially reduces the fatigue strength of the bearing.

(2) The scalloping or machine chattering prevents adequate development of the hydrodynamic oil film needed to lubricate and cool the bearing. This allows metal-to-metal contact between the bearing and the connecting rod journal

On December 22, 2003, ECi made a design drawing revision to better define dimensions and improve the quality control for the manufacture of the connecting rod, P/N AEL 11750. We have not received any reports of service difficulties for connecting rods, P/N AEL 11750, produced after January 2004 with the improved design.

This condition, if not corrected, could result in fatigue failure of the connecting rod and uncommanded shutdown of the engine.

We have evaluated all pertinent information and identified an unsafe condition that is likely to exist or develop on other products of this same type design. We are proposing this AD, which would require:

• Replacing certain serial-numbered ECi connecting rods, P/N AEL 11750, with 1,500 or more hours TIS on the connecting rod, within 50 hours TIS after the effective date of the AD.

• Replacing certain serial-numbered ECi connecting rods, P/N AEL 11750, with fewer than 1,500 hours TIS on the connecting rod, before accumulating 1,500 hours TIS on the connecting rod.

This proposed AD would also prohibit installing any ECi connecting rod, P/N AEL 11750, with a serial number 54/6 or lower, into any engine after the effective date of the AD.

We estimate that this proposed AD would affect about 2,800 Lycoming Engines 360 and 540 series reciprocating engines installed on aircraft of U.S. registry. We also estimate that it would take about 4 work hours per engine to perform the proposed actions, and that the average labor rate is $65 per work hour. Required parts would cost about $450 per connecting rod. Based on these figures, we estimate the total cost of the proposed AD to U.S. operators to be $1,988,000. ECi has indicated that they might provide operators and repair stations credit for returned connecting rods.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, Section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We have determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify that the proposed regulation:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and

3. Would not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

We prepared a regulatory evaluation of the estimated costs to comply with this proposed AD. See the ADDRESSES section for a location to examine the regulatory evaluation.

Under the authority delegated to me by the Administrator, the Federal Aviation Administration proposes to amend 14 CFR part 39 as follows:

How do I comment on this proposed AD? We invite you to submit any written relevant data, views, or arguments regarding this proposal. Send your comments to an address listed under ADDRESSES . Include the docket number, “FAA-2005-22206; Directorate Identifier 2005-CE-45-AD” at the beginning of your comments. We will post all comments we receive, without change, to http://dms.dot.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this proposed rulemaking. Using the search function of our docket Web site, anyone can find and read the comments received into any of our dockets, including the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). This is docket number FAA-2005-22206; Directorate Identifier 2005-CE-45-AD. You may review the DOT's complete Privacy Act Statement in the Federal Register published on April 11, 2000 (65 FR 19477-78) or you may visit http://dms.dot.gov .

Are there any specific portions of this proposed AD I should pay attention to? We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. If you contact us through a nonwritten communication and that contact relates to a substantive part of this proposed AD, we will summarize the contact and place the summary in the docket. We will consider all comments received by the closing date and may amend this proposed AD in light of those comments and contacts.

Where can I go to view the docket information? You may view the AD docket that contains the proposal, any comments received, and any final disposition in person at the DMS Docket Offices between 9 a.m. and 5 p.m. (eastern time), Monday through Friday, except Federal holidays. The Docket Office (telephone 1-800-647-5227) is located on the plaza level of the Department of Transportation Nassif Building at the street address stated in ADDRESSES. You may also view the AD docket on the Internet at http://dms.dot.gov . The comments will be available in the AD docket shortly after the DMS receives them.

What events have caused this proposed AD? The Luftfahrt-Bundesamt (LBA), which is the airworthiness authority for Germany, recently notified FAA that an unsafe condition may exist on certain DG Flugzeugbau GmbH Models DG-800B and DG-500MB sailplanes. The LBA reports that sheared off bolt heads have been found in the engine compartment of approximately 20 of the specified sailplanes. These bolts connect the starter ring gear to the lower drive belt pulley adapter. Failure of this connection could render the engine inoperative.

What is the potential impact if FAA took no action? The bolts currently used to connect the starter ring gear to the drive belt pulley adapter may shear off and the bolt heads could fall into the engine compartment. Failure of this connection could render the engine inoperative. Consequently, this failure could lead to loss of control of the sailplane.

Is there service information that applies to this subject? DG-Flugzeugbau GmbH has issued Working Instruction No. 1 for TN 873/30, dated June 9, 2004; and Technical Note No. 873/30 and No. 843/22, approved by LBA on June 29, 2004, and approved by the European Aviation Safety Agency on July 9, 2004.

What are the provisions of this service information? The service information includes procedures for:

What action did the LBA take? The LBA classified this service information as mandatory and issued German AD Number D-2004-347, dated July 2, 2004, to ensure the continued airworthiness of these sailplanes in Germany.

Did the LBA inform the United States under the bilateral airworthiness agreement? These DG Flugzeugbau GmbH Models DG-800B and DG-500MB sailplanes are manufactured in Germany and are type-certificated for operation in the United States under the provisions of section 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement.

Under this bilateral airworthiness agreement, the LBA has kept us informed of the situation described above.

What has FAA decided? We have examined the LBA's findings, reviewed all available information, and determined that AD action is necessary for products of this type design that are certificated for operation in the United States.

Since the unsafe condition described previously is likely to exist or develop on other DG Flugzeugbau GmbH Models DG-800B and DG-500MB sailplanes of the same type design that are registered in the United States, we are proposing AD action to prevent the bolts currently used to connect the starter ring gear to the drive belt pulley adapter from shearing off and the bolt heads falling into the engine compartment. Failure of this connection could render the engine inoperative. Consequently, this failure could lead to loss of control of the sailplane.

What would this proposed AD require? This proposed AD would require you to incorporate the actions in the previously-referenced service information.

How does the revision to 14 CFR part 39 affect this proposed AD? On July 10, 2002, we published a new version of 14 CFR part 39 (67 FR 47997, July 22, 2002), which governs FAA's AD system. This regulation now includes material that relates to altered products, special flight permits, and alternative methods of compliance. This material previously was included in each individual AD. Since this material is included in 14 CFR part 39, we will not include it in future AD actions.

How many sailplanes would this proposed AD impact? We estimate that this proposed AD affects 7 sailplanes in the U.S. registry.

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

What authority does FAA have for issuing this rulemaking action? Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, Section 106 describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority.

We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this AD.

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

Would this proposed AD involve a significant rule or regulatory action? For the reasons discussed above, I certify that this proposed AD:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and

3. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

We prepared a summary of the costs to comply with this proposed AD (and other information as included in the Regulatory Evaluation) and placed it in the AD Docket. You may get a copy of this summary by sending a request to us at the address listed under ADDRESSES . Include “AD Docket FAA-2005-22206; Directorate Identifier 2005-CE-45-AD” in your request.

How do I comment on this proposed AD? We invite you to submit any written relevant data, views, or arguments regarding this proposal. Send your comments to an address listed under ADDRESSES . Include the docket number, “FAA-2005-22157; Directorate Identifier 2005-CE-44-AD” at the beginning of your comments. We will post all comments we receive, without change, to http://dms.dot.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this proposed rulemaking. Using the search function of our docket Web site, anyone can find and read the comments received into any of our dockets, including the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). This is docket number FAA-2005-22157; Directorate Identifier 2005-CE-44-AD. You may review the DOT's complete Privacy Act Statement in the Federal Register published on April 11, 2000 (65 FR 19477-78) or you may visit http://dms.dot.gov.

Are there any specific portions of this proposed AD I should pay attention to? We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. If you contact us through a nonwritten communication and that contact relates to a substantive part of this proposed AD, we will summarize the contact and place the summary in the docket. We will consider all comments received by the closing date and may amend this proposed AD in light of those comments and contacts.

Where can I go to view the docket information? You may view the AD docket that contains the proposal, any comments received, and any final disposition in person at the DMS Docket Offices between 9 a.m. and 5 p.m. (eastern time), Monday through Friday, except Federal holidays. The Docket Office (telephone 1-800-647-5227) is located on the plaza level of the Department of Transportation NASSIF Building at the street address stated in ADDRESSES . You may also view the AD docket on the Internet at http://dms.dot.gov. The comments will be available in the AD docket shortly after the DMS receives them.

What events have caused this proposed AD? The Luftfahrt-Bundesamt (LBA), which is the airworthiness authority for Germany, recently notified FAA that an unsafe condition may exist on all Glaser-Dirks Flugzeugbau GmbH Models DG-100 and DG-400 sailplanes and certain DG Flugzeugbau GmbH Models DG-500 Elan Series and DG-500M sailplanes. The LBA reports that on a Model DG-100 sailplane the universal bearing of the lower rudder mounting slipped out of the bearing support and the rudder fell out. Further, the LBA reports that this kind of failure may occur on other DG series sailplanes.

What is the potential impact if FAA took no action? The universal bearing slipping out could result in the rudder separating from its support. This failure could lead to loss of sailplane control during flight operations.

Is there service information that applies to this subject? DG Flugzeugbau has issued Technical Note No. 301/23 issue 2, 323/14 issue 2, 348/18 issue 2, 359/21 issue 2, 370/9 issue 2, 826/44 issue 2, 843/21 issue 2, 866/10 issue 2, dated June 11, 2004, amended July 7, 2004.

What are the provisions of this service information? The service bulletin includes procedures for:

What action did the LBA take? The LBA classified this service bulletin as mandatory and issued German AD Number D-2004-348R1, dated September 16, 2004, to ensure the continued airworthiness of these sailplanes in Germany.

Did the LBA inform the United States under the bilateral airworthiness agreement? These Glaser-Dirks Flugzeugbau GmbH Models DG-100 and DG-400 sailplanes and certain DG Flugzeugbau GmbH Models DG-500 Elan Series and DG-500M sailplanes are manufactured in Germany and are type-certificated for operation in the United States under the provisions of section 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement.

Under this bilateral airworthiness agreement, the LBA has kept us informed of the situation described above.

What has FAA decided? We have examined the LBA's findings, reviewed all available information, and determined that AD action is necessary for products of this type design that are certificated for operation in the United States.

Since the unsafe condition described previously is likely to exist or develop on other Glaser-Dirks Flugzeugbau GmbH Models DG-100 and DG-400 sailplanes and certain DG Flugzeugbau GmbH Models DG-500 Elan Series and DG-500M sailplanes of the same type design that are registered in the United States, we are proposing AD action to prevent the universal bearing of the lower rudder mounting slipping out of the bearing support. The universal bearing slipping out could result in the rudder separating from its support. This failure could lead to loss of sailplane control during flight operations.

What would this proposed AD require? This proposed AD would require you to modify or replace the complete rudder mount assembly and ensure that the securing washer, castellated nut, and new split pins are installed.

How does the revision to 14 CFR part 39 affect this proposed AD? On July 10, 2002, we published a new version of 14 CFR part 39 (67 FR 47997, July 22, 2002), which governs FAA's AD system. This regulation now includes material that relates to altered products, special flight permits, and alternative methods of compliance. This material previously was included in each individual AD. Since this material is included in 14 CFR part 39, we will not include it in future AD actions.

How many sailplanes would this proposed AD impact? We estimate that this proposed AD affects 75 sailplanes in the U.S. registry.

What would be the cost impact of this proposed AD on owners/operators of the affected sailplanes? We estimate the following costs to do this proposed replacement of the complete rudder mount assembly. We have no way of determining the number of sailplanes that may need this replacement:

We estimate the following costs to do this proposed modification of the complete rudder mount assembly. We have no way of determining the number of sailplanes that may need this modification:

What authority does FAA have for issuing this rulemaking action? Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, Section 106 describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority.

We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this AD.

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

Would this proposed AD involve a significant rule or regulatory action? For the reasons discussed above, I certify that this proposed AD:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and

3. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

We prepared a summary of the costs to comply with this proposed AD (and other information as included in the Regulatory Evaluation) and placed it in the AD Docket. You may get a copy of this summary by sending a request to us at the address listed under ADDRESSES . Include “AD Docket FAA-2005-22157; Directorate Identifier 2005-CE-44-AD” in your request.

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

Throughout this document wherever “we,” “us,” or “our” is used, we mean the EPA.

The EPA is proposing to approve revisions to the MECT program for NO X emissions in the HGB ozone nonattainment area (consisting of Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, and Waller counties) published at Texas Administrative Code (TAC) Title 30, Chapter 101 General Air Quality Rules, Subchapter H, Division 3, sections 101.350-101.354, 101.356-101.360, and 101.363. EPA is also proposing approval of the subsections in 30 TAC Chapter 116, Control of Air Pollution by Permits for New Construction or Modification, which provide cross-references to the MECT program. The sections of Chapter 116 we are proposing to approve are sections 116.111(a)(2)(L), 116.115(b)(2)(C)(iii), 116.176, 116.610(a)(6), and 116.615(5)(C). These revisions were provided in SIP revisions submitted to EPA on April 12, 2001; January 31, 2003; and December 6, 2004. The revisions make the following changes to the MECT:

• The revisions make changes necessary to accomplish the shift in attainment strategy from 90 percent control of industrial sources to 80 percent control in the HGB area. For a further discussion of this change in control strategy, please see the supporting record for our separate action on the attainment demonstration (RME Docket R06-OAR-2005-TX-0018).

• The revisions expand the applicability of the MECT to additional sources.

• The revisions provide for the use of discrete emission reduction credits (DERCs) and mobile source DERCs (MDERCs) in lieu of MECT allowances, subject to our separate action on the Discrete Emission Credit Banking and Trading program as explained below.

• The revisions include a variety of minor changes to correct grammar and reorganize the rule text for readability.

• The revisions to the Texas Commission on Environmental Quality's (TCEQ's) Chapter 116 permitting rules incorporate cross-references to the MECT program in Chapter 101.

The MECT program is a significant element of the control strategy for the HGB area to comply with the Clean Air Act (CAA) requirements to achieve the ozone attainment standard. As such, the revisions to the MECT and the corresponding sections in Chapter 116 must be evaluated as an integral component of the HGB control strategy to reduce NO X emissions. We are proposing approval of these revisions to the rules that establish the MECT program, but because of the relationship of the rules to the attainment demonstration, we will not finalize approval of the rules until the revisions to the attainment demonstration are approved. Further revisions allowing DERC and MDERC use in the MECT program will not be fully approved until the rules for DERC and MDERC generation and use have been approved. The rules for DERC and MDERC use and generation and the attainment demonstration are being considered in separate Federal Register notices. If our separate actions on the DERC program and the attainment demonstration cannot be finally approved, the MECT program will continue to operate as outlined in our November 14, 2001, final approval of the program (66 FR 57252).

The MECT program was adopted as a State regulation on December 6, 2000. The program is mandatory for stationary facilities that emit NO X in the HGB area which are subject to emission specifications in TCEQ NO X rules at 30 TAC Chapter 117.106, 117.206 and 117.475, and which are located at a site where they have a collective design capacity to emit 10 tons per year or more of NO X . The program sets a cap on NO X emissions beginning January 1, 2002, with a final reduction to the cap occurring in 2007. Facilities are required to meet NO X allowances on an annual basis. An allowance is the authorization to emit one ton of NO X during a control period; a control period is the calendar year. Facilities may purchase, bank or sell their allowances. The amount of NO X allowances is determined by a formula which uses emission rates established in 30 TAC Chapter 117. These emission rates and resulting emission reductions were relied on in the HGB attainment demonstration submitted in 2000. The rules at that time were to reduce overall industrial NO X emissions by approximately 90 percent. The MECT program has a provision to allow a facility to use emission reduction credits (ERCs) generated through the TCEQ Emission Credit Banking and Trading program to permanently increase the allowances for the individual facility subject to the MECT if the credits were generated for NO X in the HGB area before December 1, 2000. The MECT also has a provision to allow a facility to use DERCs and MDERCs generated through the TCEQ Discrete Emission Credit Banking and Trading program in lieu of allowances if they are generated in the HGB area. EPA published a final rule approving the MECT program (except for the use of DERCs and MDERCs in the MECT, which we deferred acting on until our action on the DERC program) on November 14, 2001 (66 FR 57252). Texas has subsequently revised the MECT program in SIP submittals dated July 15, 2002, January 31, 2003, and December 6, 2004.

The TCEQ submitted a MECT revision to EPA on July 15, 2002, establishing a new section 101.357, to allow the use of emission reductions generated through the Texas Emission Reduction Program as MECT allowances. EPA is not reviewing or proposing to act on this revision to the MECT program in this document.

Today's action does address several revisions to the MECT that TCEQ submitted to EPA on January 31, 2003, and December 6, 2004. These revisions made changes to support the shift from 90 percent control of industrial sources to 80 percent control in the HGB ozone nonattainment area, expanded the applicability of the MECT, updated and revised the provision of the MECT allowing for the use of DERCs and MDERCs in lieu of MECT allowances, and included a variety of non-substantive changes to correct grammar and reorganize the rule text for readability.

The shift from 90 percent to 80 percent control of industrial sources in the HGB nonattainment area is one of a number of changes made in Texas' mid-course review of the HGB ozone attainment plan. The current plan was approved on November 14, 2001, and called for approximately a 90 percent control of industrial NO X emissions. As a result of a review of the modeling and data, including an intensive summer study in 2000, TCEQ has revised the plan to decrease the importance of NO X reductions and to add controls on highly-reactive volatile organic compounds. The MECT, in section 101.353, has been revised to support the shift in attainment strategy from approximately 90 percent to approximately 80 percent NO X reductions.

To determine the approvability of the change from 90 percent to 80 percent, EPA must consider its impact on the area's attainment plan, and whether it is consistent with section 110(l) of the Clean Air Act. We are examining these questions in our separate action on the revisions to the HGB attainment demonstration, which is being processed concurrently with this action. EPA will not take final action on the changes to the MECT related to the change from 90 percent to 80 percent until final approval of the attainment demonstration is published. Please note that although the MECT was developed as part of the one-hour ozone attainment demonstration, and EPA has revoked the one-hour ozone standard, the MECT remains a necessary component of the SIP under EPA's anti-backsliding provisions of the Phase I rule (40 CFR 51.905(a)(1)). For a further discussion and review of how the anti-backsliding provisions are being met and other issues related to the change in ozone attainment strategy from 90 percent to 80 percent NO X control, please see the supporting record for our separate action on the attainment demonstration (RME Docket R06-OAR-2005-TX-0018).

The next revisions we are addressing in this action involve the expansion of the applicability of the MECT to cover all facilities in the HGB ozone nonattainment area that are either at a site that meets the definition of major source at 30 TAC section 117.10, or at a site where they collectively have an uncontrolled design capacity to emit ten tons or more of NO X per year. Additionally, once a source has become classified as a major source the source will always be subject to the MECT.

The final substantive revision to the MECT that we are considering in this action involves the sections of the MECT providing for the use of DERCs and MDERCs in lieu of MECT allowances. Under the Texas Discrete Emission Credit Banking and Trading program (referred to as the DERC program), a source can generate short-term emission credits by reducing its emissions. Reductions from stationary sources are generated as discrete emission reduction credits (DERCs), and reductions from mobile sources are generated as mobile discrete emission reduction credits (MDERCs). DERCs and MDERCs are quantified, banked and traded in terms of mass (tons) and may be generated and used statewide. Sources can certify reductions of all criteria pollutants, with the exception of lead, but the MECT rules only allow NO X and VOC DERCs and MDERCs to be used in lieu of MECT allowances. The EPA and the TCEQ Executive Director must approve a demonstration that the use of VOC DERCs or MDERCs would be equivalent to the use of NO X allowances in reducing ozone. In our November 14, 2001, Federal Register action, EPA deferred acting on these provisions until we proposed action on the DERC program. EPA is now considering action on the DERC program in a separate action (RME Docket R06-OAR-2005-TX-0029). TCEQ's revisions to section 101.356 of the MECT establish limits on the quantity of DERCs that can be used in a given control period and on the quantities that TCEQ can allow a given source to use for demonstrating compliance. The use of DERCs and MDERCs in the MECT program will not be Federally approved until the approval of both the revisions to section 101.356 being reviewed here and of the DERC program generally, which is being reviewed in a separate action.

Generally, SIP rules must be enforceable and must not relax existing requirements. See Clean Air Act sections 110(a), 110(l), and 193.

A guidance document that we used to define evaluation criteria is “Improving Air Quality with Economic Incentive Programs” (EPA-452/R-01-001, January 2001) (EIP Guidance). This guidance applies to discretionary EIPs adopted to attain national ambient air quality standards (NAAQS) for criteria pollutants, but the EIP Guidance is not EPA's final action on discretionary EIPs. Final action as to any such EIP occurs when EPA acts on it after its submission as a SIP revision. Because the EIP Guidance is non-binding and does not represent final agency action, EPA is using the guidance as an initial screen to determine whether potential approvability issues arise. A more detailed review of the MECT revisions as compared to the EIP Guidance is in the Technical Support Document (TSD) for the TCEQ Mass Emissions Cap and Trade Program for the HGB Nonattainment Area. The TSD is available at the location given in the ADDRESSES section of this document.

As described in detail in the EIP Guidance, EPA has identified three fundamental principles that apply to all EIPs: integrity, equity, and environmental benefit. The integrity principle provides that emission reductions in EIPs must be surplus, enforceable, quantifiable, and permanent. The equity principle consists of both general equity and environmental justice. The third principle provides that all EIPs should show environmental benefit, whether through faster attainment, more rapid reductions, or greater emission reductions. In our previous approval action, EPA evaluated the MECT against these three principles, specific concerns applicable to multi-source cap-and-trade programs, and applicable CAA requirements. See 66 FR 38231 (July 23, 2001); 66 FR 57252 (Nov. 14, 2001). In the current action, to evaluate the MECT revisions EPA conducted a line-item comparison of the Federally approved and newly adopted state rule language. This comparison included a discussion of applicable EIP Guidance provisions and CAA requirements. Our complete analysis of the MECT revisions is contained in the TSD for this action.

To support the shift from a 90 percent to an 80 percent NO X control strategy, TCEQ revised the MECT at section 101.353 to include new emission reduction factors for the allocation of allowances. The changes to the reduction factors are based on the corresponding changes to the HGB attainment demonstration. The analysis behind the new reduction factors is evaluated in the TSD reviewing the revisions to the attainment demonstration (RME Docket R06-OAR-2005-TX-0018). EPA will not finally approve these changes until the attainment demonstration revisions including the relaxation of NO X control to 80 percent are approved. Comments on the appropriateness of the changes from 90 to 80 percent should be directed to the attainment demonstration docket.

The revisions to MECT applicability at sections 101.350 and 101.351 are approvable because they are not inconsistent with the CAA and because they strengthen the SIP in two ways. First, applicability is now based on the uncontrolled design capacity. By basing the inclusion of facilities on the uncontrolled design capacity, TCEQ has strengthened the cap by preventing sources from installing control equipment to remain outside of the cap. Second, TCEQ has established that once a source is subject to the MECT it will always be subject to the MECT. Combined, these revisions will help ensure that the intended emission reductions will occur and also establish a more viable allowance trading market by increasing and maintaining the number of sources subject to the MECT.

In our initial MECT approval (66 FR 57252, Nov. 14, 2001), EPA deferred action on the use of DERCs and MDERCs for compliance with the MECT until our action on the DERC rule. In addition to the original MECT submission, TCEQ has submitted revisions to section 101.356 twice since EPA's approval of the MECT program. In this document and the corresponding TSD, we are reviewing and proposing to approve the use of DERCs and MDERCs in TCEQ's MECT program for the HGB area. We will review and act on TCEQ's rules for generation and use of DERCs and MDERCs in a separate action (RME Docket R06-OAR-2005-TX-0029). The use of DERCs and MDERCs in the MECT program will not be Federally approved until the approval of both the revisions to section 101.356 being reviewed here and the DERC program in 30 TAC Chapter 101, Subchapter H, Division 4 being reviewed in a separate action. Here, EPA is only taking specific comment on the use of DERCs and MDERCs as allowances in the MECT program. Under the Texas program, DERCs and MDERCs can be used for a variety of other purposes. Comments on the generation of DERCs or MDERCs or on the use of DERCs or MDERCs for purposes other than as MECT allowances should be directed to the docket on the DERC rule (RME Docket R06-OAR-2005-TX-0029).

The DERC and MDERC program is what EPA describes as an open market trading (OMT) program. Section 4.1 of the EIP Guidance explains that certain types of EIPs may not be combined because their characteristics and requirements are incompatible. By way of example, it states that an OMT program and a multi-source cap-and-trade program are incompatible and thus should not be combined. Therefore, the fact that the MECT program provides for the use of DERCs and MDERCs in lieu of allowances at section 101.356(h), with corresponding provisions in the DERC rule at section 101.376(b), is contrary to the statement in the EIP Guidance.

The EIP Guidance discourages the use of OMT credits in a multi-source cap-and-trade program based on concerns that the use of OMT credits in the cap program could potentially undermine the integrity of the cap, thus preventing the goals that the cap was established to achieve. EPA is concerned that including OMT credits in a cap-and-trade system could lead to:

• The possibility that more OMT credits will be used in a given year than are generated;

• The possibility that sources will shift production from one source to another, generating credits at the reduced source while no real net benefit in air quality is achieved; and

• The possibility that reductions at unregulated sources will not be real reductions and that they will be used to offset increases at regulated sources.

When a program includes elements that are not consistent with the approaches outlined in our guidance, EPA may still approve the rule if it is consistent with CAA requirements and the rationales underlying the provisions in EPA guidance. In this case, we must determine whether the use of OMT credits (DERCs or MDERCs) in lieu of allowances will, because of the above concerns, undermine the goal of the MECT program, which is attainment of the one-hour ozone standard in the HGB area. EPA should also consider whether there are adequate safeguards to ensure that the additional flexibility provided by the interplay between the DERC and MECT programs will not undermine the HGB rate or progress (ROP) plan and attainment demonstration. We approved the HGB ROP plan on February 14, 2005 (70 FR 07407). The HGB area met its ROP target by a wide margin (over 100 tons per day) so the institution of DERCs in the MECT would not be expected to interfere with ROP.

The reduction in industrial NO X emissions relied on in the attainment demonstration is achieved by the MECT program, which provides a finite cap on NO X emissions. Beginning in 2005, the amount of allowances (the authorization to emit one ton of NO X during a control period, which is the calendar year) under the cap decreases to the final cap level in 2007. The final 2007 cap level was established based on photochemical modeling and other evidence as necessary for the area to meet the one-hour ozone standard. Even after the change from 90 percent to 80 percent NO X control strategy, the final MECT level is among the most stringent levels of NO X controls on industrial emissions in the United States.

Because of the stringency of the needed NO X controls, Texas linked the DERC and MECT programs, in an effort to provide additional flexibility to sites subject to the program while encouraging the development and use of cleaner technologies to reduce NO X emissions from sources not covered by the cap-and-trade program. Only DERCs and MDERCs generated in the HGB area are available for use in lieu of allowances.

At the time the MECT rules were developed, the number of DERCs available for use in the HGB area totaled over 37,000 tons (all generated by stationary sources; no MDERCs had been generated). Additionally, sources had the ability to make early reductions and continue banking DERCs until the January 1, 2002, implementation date of the MECT. After implementation of the MECT, sources subject to the cap no longer had the ability to generate DERCs because those reductions would take the form of unused allowances. The potential for capped sites to hold these banked DERCs for use in 2005 and beyond was significant enough to negatively impact the HGB ROP plan and attainment demonstration. To guard against more DERCs being used in a given year than are being generated, which might affect the goal of attainment, Texas included the following provisions in the MECT rule limiting the use of NO X DERCs in lieu of allowances.

First, beginning in 2005, annual use of DERCs within the MECT is limited to 10,000 DERCs collectively for all sites within the HGB area. This provision eliminates the potential for sites subject to the MECT to use a large quantity of DERCs in a single year and negatively impact the HGB ROP plan and attainment demonstration. All requests to use DERCs (or MDERCs) in the MECT must be made by October 1 of the control period for which the DERCs (or MDERCs) would be used. In terms of the 10,000 DERC limit, TCEQ will approve requests to use DERCs in the amount of 250 tons or less for a given control period. After October 1, when all requests to use DERCs have been received, TCEQ determines how to respond to any requests to use DERCs in an amount exceeding 250 tons. TCEQ may reduce any such request so that the total amount of all DERCs used collectively does not exceed 10,000. If all the requests to use DERCs in a given control period are less than the 10,000 limit, TCEQ will then address requests for more than 250 tons. For these requests, TCEQ determines the number of remaining DERCs under the 10,000 limit that were not approved in the requests of 250 tons or less. These extra DERCs may be apportioned based on the percentage of DERCs in excess of 250 requested for use by those sites relative to the total amount of extra DERCs available.

Second, depending on when the DERCs were generated, the MECT rule requires the use of DERCs at specified ratios. Beginning in 2005, DERCs generated before January 1, 2005, are required to be used at a ratio of four DERCs to one allowance. The ratio of DERCs to allowances increases to a 10 to 1 ratio for DERCs generated before 2005 and used in the 2007, or subsequent, control periods. By way of example, if DERC usage equaling the full 10,000 limit is approved for use in the 2007 control period, the overall cap would be increased by 1,000 allowances. Any DERCs generated after January 1, 2005, are available for use within the MECT at a one to one ratio, but are still included in the 10,000 DERC collective limit. We believe these ratios guard against the possibility that the availability of historic reductions would permit the use of more DERCs in a year than are generated, which could interfere with attainment or reasonable further progress.

As a further safeguard against the possibility of undermining the attainment demonstration by allowing the use of more DERCs in any given year than are generated, TCEQ added an additional 2.7 tons per day into the attainment model beyond the emissions that would be allowed based on source allocations. This additional 2.7 tons per day represents the maximum amount of pre-2005 DERCs available for use in the attainment year 2007. To arrive at this number, TCEQ divided the 10,000 DERC limit by 10 to yield a total of 2.7 tons per day that could be reintroduced into the cap. DERCs generated after 2005 by sources outside of the cap could not be quantified as those reductions would be generated through voluntary measures. TCEQ therefore assumed that all DERCs that would be used in the 2007 control period were pre-2005 DERCs. Including these added emissions in the attainment modeling is analogous to cap-and-trade programs that set aside a percentage of the modeled emissions for new source growth or other purposes.

The MECT program also provides that MDERCs can be used in lieu of allowances at a ratio of one MDERC to one allowance. MDERCs are not included in the 10,000 DERCs limit in any given control period. TCEQ incorporated MDERCs into the MECT to provide incentives for mobile reductions. Although there is no set limit for MDERC usage under the MECT, from our experience with open market trading programs, we can reasonably predict that a relatively small quantity of MDERCs will be generated. Consistent with our prediction, we note that only 60 tons of MDERCs have been banked as of August 1, 2005.

TCEQ has also committed to making certain revisions to the DERC program to ensure that the DERCs used are real, surplus, and consistent with the assumptions in the attainment demonstration. These revisions will include:

• Prohibiting the generation of DERCs from permanent shutdowns (See RME Docket R06-OAR-2005-TX-0029);

• Ensuring that reductions can only come from process changes or the installation of control equipment that result in less emissions per unit of production, thus preventing reductions from production shifting as a method of DERC generation;

• Clarifying the provisions that allow for public comment and EPA approval of quantification protocols to ensure that the reductions used for DERC generation are quantifiable.

Additionally, section 101.363 requires TCEQ to audit the MECT program every three years. If the use of DERCs or MDERCs is shown to negatively impact attainment, TCEQ will remove this flexibility from the program.

With the restrictions outlined above, we believe that permitting the use of DERCs and MDERCs in lieu of allowances provides additional flexibility in compliance with the MECT program without undermining the goal of attaining the one-hour ozone standard in the HGB area. EPA also believes that the restrictions placed on the use of DERCs and MDERCs in the MECT will prevent such use from damaging the integrity of the MECT program and the HGB attainment demonstration. Because the basis for the use of DERCs and MDERCs in the MECT is, in part, the modeling and attainment demonstration for the HGB area, EPA cannot grant a final approval of this provision of the MECT program until EPA issues a final approval of the attainment modeling provided as a mid-course review SIP revision. The attainment demonstration and DERC program are being concurrently proposed for approval (RME Dockets R06-OAR-2005-TX-0018 and R06-OAR-2005-TX-0029).

The additional revisions to the MECT at sections 101.352, 101.354, 101.359, and 101.360 are also approvable because they are consistent with the EIP Guidance and meet the requirements of section 110(l) of the Clean Air Act as explained below. In section 101.352(b), the TCEQ changed the date for the true-up period from February 1st following the control period to March 1st, beginning with the first control period of January 1, 2003. This revision corrected a typographical error in the Federally approved MECT that ended the true-up period on February 1st and determined compliance with the cap on March 1st. Section 7.4 of the EIP Guidance also recommends a true-up period of 60 days for control periods up to a year. The revision to section 101.352(e) further refines the group of facilities that can use MECT allowances for the correlating one to one portion of NSR offsets as only new or modified facilities that are not considered existing facilities under section 101.350(e). The majority of the revisions to section 101.354 are corrections to grammar and section numbering. The new section 101.354(e) is a measure to strengthen the SIP by discouraging demand shifting. If a facility subject to the MECT shifts production or activity to a facility not subject to the MECT, the TCEQ will deduct allowances from the MECT facility equal to the increase in emissions that resulted from the demand shifting. The revisions to section 101.359 establish expanded reporting requirements for facilities subject to the MECT and provide for the imposition of penalties on facilities that miss reporting deadlines. The revisions to section 101.360 provide more detail on the requirements for level of activity reporting. Our full review of these revisions can be found in the TSD.

The new subsections of Chapter 116, sections 116.111(a)(2)(L), 116.115(b)(2)(C)(iii), 116.176, 116.610(a)(6), and 116.615(5)(C), submitted by TCEQ on April 12, 2001, are approvable. These subsections establish the permitting requirements for the facilities subject to the MECT. Collectively, these subsections reinforce the requirements of the MECT program by stating that facilities must possess allowances before operation and that an owner or operator of a new facility must identify the source of allowances it will rely on in the permit.

Section 110(l) of the Clean Air Act states:

As a general matter, the satisfaction of the environmental benefit principle and the other integrity principles applicable to trading programs will tend to demonstrate that a trading program will be consistent with section 110(l). Here, however, as previously noted, the revisions to the MECT are a part of a revised ozone attainment strategy for the HGB area. In addition, we are reviewing the limited use of DERCs in the MECT. The revised strategy's reduced level of industrial NO X control and the effect of the use of DERCs in the MECT are being evaluated separately in the HGB attainment demonstration for the 1-hour ozone standard. The section 110(l) analysis for our action on the MECT therefore relies on the analysis conducted for the HGB attainment demonstration.

EPA reviewed the MECT program revisions with respect to the expectations of the EIP Guidance document and the requirements of the Clean Air Act. EPA has concluded after review and analysis that the revisions to the MECT program are approvable. EPA is proposing to approve the revisions to sections 101.350-354, and 101.360 submitted by TCEQ on January 31, 2003, for rule log number 2002-044-101-AI; and the revisions to sections 101.356 and 101.359 submitted by TCEQ on December 6, 2004, for rule log number 2003-064-101-AI. EPA has also reviewed the subsections in 30 TAC Chapter 116 which provide cross-references to the MECT program, and has concluded that these subsections are necessary for the implementation of the MECT program. We are proposing to approve sections 116.111(a)(2)(L), 116.115(b)(2)(C)(iii), 116.176, 116.610(a)(6), and 116.615(5)(C) submitted by TCEQ on April 12, 2001, for rule log number 2000-047-116-AI.

We will not take final action on these rules, however, until we finally approve the attainment demonstration. In addition, revisions allowing DERC use in the MECT program will not be fully approved until the rules for DERC generation and use have been approved. The rules for DERC generation and use and the attainment demonstration are being considered in separate actions.

When submitting comments, remember to:

1. Identify the rulemaking by File ID number and other identifying information (subject heading, Federal Register date and page number).

2. Follow directions—The agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulations (CFR) part or section number.

3. Explain why you agree or disagree; suggest alternatives and substitute language for your requested changes.

4. Describe any assumptions and provide any technical information and/or data that you used.

5. If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced.

6. Provide specific examples to illustrate your concerns, and suggest alternatives.

7. Explain your views as clearly as possible, avoiding the use of profanity or personal threats.

8. Make sure to submit your comments by the comment period deadline identified.

Do not submit this information to EPA through regulations.gov or e-mail. Clearly mark the part or all of the information that you claim to be CBI. For CBI information in a disk or CD ROM that you mail to EPA, mark the outside of the disk or CD ROM as CBI and then identify electronically within the disk or CD ROM the specific information that is claimed as CBI). In addition to one complete version of the comment that includes information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the official file. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this proposed action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. For this reason, this action is also not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001). This proposed action merely proposes to approve state law as meeting Federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this proposed rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). Because this rule proposes to approve pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Public Law 104-4).

This proposed rule also does not have tribal implications because it will not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes, as specified by Executive Order 13175 (65 FR 67249, November 9, 2000). This action also does not have Federalism implications because it does not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999). This action merely proposes to approve a state rule implementing a Federal standard, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This proposed rule also is not subject to Executive Order 13045 “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997), because it is not economically significant.

In reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. In this context, in the absence of a prior existing requirement for the State to use voluntary consensus standards (VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA, when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the Clean Air Act. Thus, the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. This proposed rule does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

Throughout this document wherever “we,” “us,” or “our” is used, we mean the EPA.

EPA is proposing to approve the following revisions to the approved 1-hour ozone attainment plan for the HGB area:

• TCEQ's revised demonstration, submitted December 2004, that the 1-hour ozone standard will be achieved in 2007.

• The revised motor vehicle emissions budgets associated with the revised attainment demonstration.

• TCEQ's revised demonstration that all reasonably available control measures have been adopted for the HGB area.

• Revisions to satisfy the enforceable commitments contained in the previously approved SIP (November 2001, 66 FR 57160). With respect to its original enforceable commitment to reduce NO X emissions, TCEQ has instead substituted reductions in HRVOCs for a portion of these NO X reductions and shown that the HRVOC reductions are as effective in reducing ozone levels.

• Revisions to the industrial NO X rules submitted January 2003, which included several miscellaneous changes and the reduction in stringency from a nominal 90% to 80% control.

• Revisions to the Texas Inspection and Maintenance (I/M) rules that drop three counties from the I/M program. In addition, several miscellaneous changes are proposed for approval.

• Repeal of the vehicle idling rule.

• Repeal of the Small Spark Engine Operating Restrictions.

• Revisions to the Speed Limit Strategy.

• Revisions to the voluntary mobile emissions program (VMEP).

To replace the above measures being repealed or relaxed, Texas has adopted the following new control measures:

• Annual Cap on HRVOC emissions.

Inhaling even low levels of ozone can trigger a variety of health problems including chest pains, coughing, nausea, throat irritation, and congestion. It can also worsen bronchitis and asthma and reduce lung capacity. EPA has established National Ambient Air Quality Standards (NAAQS) for ozone. The standard of 0.12 ppm averaged over a 1-hour period was adopted in 1979. In July 1997, EPA adopted a revised standard of 0.08 ppm averaged over an 8-hour period. In the Phase I Implementation Rule (April 30, 2005, 69 FR 23951) for the 8-hour standard, EPA provided for revocation of the 1-hour standard for most areas including HGB on June 15, 2005. Also, EPA established anti-backsliding provisions to insure that areas maintain the progress expected under the requirements of the 1-hour standard as areas transition to developing programs to meet the 8-hour standard.

On November 14, 2001, EPA approved the 1-hour ozone attainment plan for the HGB nonattainment area. This plan relied primarily on reductions in emissions of NO X to project attainment. The plan included a wide variety of controls on NO X emissions including an approximately 90% reduction in industrial NO X emissions, vehicle inspection and maintenance in eight counties, and the Texas Emission Reduction Program (TERP). The plan, however, did not contain sufficient adopted control measures as needed to demonstrate attainment. Because the State had adopted NO X measures more stringent than any where else in the country and was unable to identify specific NO X measures by which to achieve all of the needed emission reductions, the State included an enforceable commitment to adopt rules to achieve the 56 tpd of additional emission reductions which were necessary to demonstrate attainment. The additional measures were to be adopted in two phases; measures to achieve 25% of the needed reductions were to be adopted by December 2002 with measures to achieve the remaining emission reductions to be adopted by May 2004. In addition, Texas committed to perform a mid-course review, evaluating the modeling, inventory data and other tools and assumptions used to develop the plan and make adjustments to the plan to provide for timely and cost effective attainment. If, based on the mid-course review, more or fewer NO X reductions were necessary, Texas committed to provide the revised analysis to EPA for review.

Texas, however, was sued in State court on its plan for the Houston area. The litigants alleged that the controls on industrial NO X emissions of approximately 90% would not be effective and that instead the State should be controlling releases of HRVOCs. Texas entered into a settlement agreement with the litigants whereby one facet of the mid-course review was accelerated to determine if the point source NO X controls could be relaxed and replaced with controls on HRVOCs. This study and any consequent rule changes were to be completed by December 2002.

The following submissions which impact the HGB attainment plan are being considered :

January 28, 2003: This submission responded to the State's settlement agreement to provide an accelerated evaluation of whether the industrial NO X controls could be relaxed and controls on HRVOCs could be substituted. Based on the study, the commission adopted relaxed controls on NO X emissions from industrial sources and new controls on HRVOCs. Texas also adopted a number of minor revisions to the general VOC rules. Finally, the State also provided a demonstration that TERP emission reductions would be sufficient to achieve the 25% of the NO X reductions needed to demonstrate attainment (i.e., about 14 tpd).

October 16, 2003: This submission delayed compliance for the I/M program in Chambers, Liberty and Waller Counties. (RME R06-OAR-2005-TX-0035)

October 6, 2004: This submission repealed the I/M program in Chambers, Liberty and Waller Counties.(RME R06-OAR-2005-TX-0035)

November 16, 2004: This submission repealed a ban on morning operations of lawn service contractors.

December 17, 2004: This submission was submitted to meet the State's commitment to provide a mid-course review SIP. Based on the updated analysis, the State further tightened controls on HRVOCs in Harris county and revised or repealed a number of NO X control measures including, the vehicle idling prohibition (Docket R06-OAR-2005-TX-0013), the speed limit strategy, the voluntary mobile emissions program (VMEP) and the commitment to achieve NO X reductions reductions beyond the initial 25% provided in January 2003 ( i.e. , revoked the State's commitment to achieve 42 tpd of the NO X reductions that were included in the enforceable commitment as part of the prior attainment demonstration).

To be approved, the revisions to the attainment demonstration must meet several requirements. First, the State submission must demonstrate that the revised plan, as a whole, will result in attainment of the 1-hour as expeditiously as practicable but no later than 2007. This is necessary, even though the 1-hour standard was revoked on June 15, 2005, because the approved SIP commits the State to adopt 56 tons/day of additional NO X reductions unless, based on the mid-course review analysis, the area can show attainment of the 1-hour standard by 2007 with a different mix of emission reductions. 1 In Section II.A. we discuss TCEQ's revised 1-hour attainment demonstration. Second, the measures in the revised control strategy must meet the requirements for being creditable under the Clean Air Act and must be permanent, surplus, quantifiable and enforceable and achieve the necessary amount of reductions. The new and revised measures are discussed in Section II.B. and II.C. Some of these control measures have been or are being reviewed in separately proposed rules. Before the revisions to the attainment plan can be finally approved, all of the control measures relied on in the attainment plan must also be approved. Third, the State must show that the revised control strategy includes all reasonably available control measures (RACM). This showing is discussed in Section II.D. Fourth, the State must show, as required by section 110(l) of the Clean Air Act, that the revisions to the plan will not interfere with attainment or reasonable further progress or any other applicable requirement of the Act. Compliance with 110(l) is discussed in Section II.E. Finally, the State must show that it has met all of the enforceable commitments contained in the approved SIP. (Instead of meeting the enforceable commitment to achieve the remaining 42 tpd NO X reductions, the State has adopted controls on HRVOCs and submitted modeling to demonstrate that the 42 tons/day of NO X reductions is not necessary for the HGB area to attain by November 2007.) Enforceable commitments are discussed in Section II.F.

As required by the Clean Air Act, Texas has used photochemical grid modeling in its demonstration that the control strategy for the HGB area will achieve attainment by 2007. Also, as allowed under EPA policy, TCEQ has introduced other evidence, referred to as weight of evidence, to supplement the modeling analysis. The modeling provided in the mid-course review SIP revision builds on modeling performed for the January 2003 SIP revision which TCEQ submitted in support of reducing the stringency of the industrial NO X rules and adopting measures for the control of HRVOCs.

The SIP revision actually relies on two sets of modeling analyses. First, the SIP relies on modeling performed by the TCEQ that is intended to simulate the routine emissions that occur in the HGB area and determine the level of routine emissions that can be allowed in the area to provide for attainment. Second, the SIP relies on modeling that was provided through a collaborative effort (known as project H13) of the Houston Advanced Research Center, the TCEQ, the University of Texas and the University of North Carolina. The project H13 report was entitled, “Variable Industrial VOC Emissions and Their Impact on Ozone Formation in the Houston Galveston Area,” April 16, 2004. This second modeling effort was used to estimate the impact of non-routine emission events on ozone levels. This two pronged approach is consistent with observations that indicate that Houston's air quality problems stem from the combination of two phenomena, normal routine emissions and large non-routine releases of HRVOC emissions. For a more complete description of the modeling procedures and EPA's evaluation of these procedures, see the Technical Support Document (TSD) in the Docket for this action (RO6-OAR-2005-TX-0018).

Photochemical grid models are the state-of-the-art method for predicting the effectiveness of control strategies in reducing ozone levels. The model uses a three-dimensional grid to represent conditions in the area of interest. In this case, TCEQ has developed a grid system that stretches from beyond Austin to the west, to Georgia to the east, to Nebraska to the north and into the Gulf of Mexico to the south. The model uses nested grid cells of 36 km on the outer portions, 12 km in east Texas and portions of nearby States and a 4 kilometer grid cell covering the HGB and Beaumont Port Arthur (BPA) areas. For more information on the modeling domain, please see the TSD. The model simulates the movement of air and emissions into and out of the three-dimensional grid cells (advection and dispersion); mixes pollutants upward and downward among layers; injects new emissions from sources such as point, area, mobile (both on-road and nonroad), and biogenic into each cell; and uses chemical reaction equations to calculate ozone concentrations based on the concentration of ozone precursors and incoming solar radiation within each cell.

Air quality planners choose an historical episode of high ozone levels to apply the model. Running the model requires large amounts of data inputs regarding the emissions and meteorological conditions during an episode. Modeling to duplicate conditions during an historical episode is referred to as the base case modeling and is used to verify that the model system can predict the historical ozone levels with an acceptable degree of accuracy. If the model can predict the ozone levels in the base case, it can then be used to project the response of future ozone levels to proposed emission control strategies.

Texas chose an historical episode, August 19-September 6, 2000, that encompassed the time period of the Texas Air Quality Study (TxAQS) 2000. During this study, researchers from around the country participated in an intensive study of ozone formation in the HGB area, collecting additional meteorological and chemical data. This study has provided a wealth of information to test the assumptions in the model. EPA believes that the extended episode from August 19-September 6, 2000, is an acceptable episode for development of the 1-hour attainment plan. It encompasses 13 exceedance days and contains a variety of meteorological conditions which resulted in high concentrations of ozone in the area as measured on both a 1-hour and 8-hour basis.

Model performance is a term used to describe how well the model predicts the ozone levels in an historical episode. As models have to make numerous simplifying assumptions and the system being modeled is very complex, model predictions will never be perfect. EPA has developed various diagnostic, statistical and graphical analyses that TCEQ has performed to evaluate the model's performance and determine if the model is working adequately to test control strategies. For a subset of days, August 25, 26, 29, 30, 31, September 1-4 and 6, TCEQ deemed the model's performance adequate for control strategy development to address routine emissions. EPA agrees that the overall model performance is adequate but notes that the model tends to under-predict on high days and over-predict on low days raising some uncertainty in the control strategy modeling. At least part of the under prediction has been attributed to non-routine emissions not captured in the modeling. This is discussed further in the section on alternative design values. It is also worth noting that, to achieve adequate performance, TCEQ adjusted the amount of HRVOC emissions in the model above the reported emission inventory values based on ambient measurements which demonstrated that reported HRVOC emissions were underestimated. This adjustment is discussed in more detail in later sections.

The results of modeling the revised control strategy are shown in Table 1.

Table 1 shows that on all of the days except August 31, the modeled control strategy was predicted to bring the area under or very near the one-hour standard of 125 ppb. The modeling, however, incorporates only routine emissions in the future case and reported non-routine emissions in the base case. As will be discussed in more detail in later sections, TCEQ believes that large non-routine emission events not included in the modeling also contribute to high ozone levels in the HGB area. These non-routine emission events explain, in part, the model's under-prediction on several days such as August 25th, 30th, and September 1st.

As discussed in the weight of evidence section regarding alternative design values, the TCEQ believes that without the influence of emission events, an alternative design value of 144 ppb can be estimated. If 144 ppb is a reasonable representation of the area's ozone levels due to routine emissions, then the modeling results in Table 1 indicate sufficient reductions in ozone levels due to routine events. In addition to the modeling results and the alternative design value approach which is explained later in this notice, TCEQ has presented other evidence to demonstrate that attainment will be reached. These additional demonstrations are included in the weight of evidence section.

To address the part of the ozone levels due to non-routine emissions, TCEQ established a short term limit of 1200 lb/hr on emissions of HRVOCs. The development of this limit is discussed in the next section on emission event modeling. The purpose of this limit is to reduce the frequency of non-routine emission events sufficiently so that emission events impacting peak ozone levels will be reduced in frequency to less than 1 event per year and thus will not impact attainment of the 1-hour standard.

We recognize that there is considerable uncertainty regarding the impact of emission events on peak ozone. As we discuss in the next section on emission event modeling, the project H13 study seems to indicate a smaller impact of emission events on peak ozone levels than the alternative design value approach. The projected smaller impact could stem from the following reasons. First, the H13 study looked at the impact of emission releases after the institution of NO X controls, whereas the alternative design value analysis performed by TCEQ is based on historic data before the institution of controls. Thus, the impact of emission events in the past is likely to be larger than events in the future when there is less NO X with which to react. Second, the frequency of events was based only on detected and reported events. Past monitoring and reporting techniques may not have detected all events. The improved HRVOC reporting rules should help address this possible problem. Finally, project H13's assumptions regarding the frequency of events looked only at events occurring at the most sensitive times and location. Larger events occurring at slightly less sensitive times and locations could also be impacting peak ozone. On the other hand, it is likely that the alternative design value approach overstates the impact of emission events. Some of the rapid rises in monitored ozone that are filtered out in the alternative design value approach could be caused by narrow continuous plumes of ozone sweeping across a monitor as winds shift direction. Weighing the available information, EPA believes that the occurrence of emission events in the HGB area that are not included in the model contribute at least in part to the model's under prediction of some measured ozone levels. The short-term limit will address these non-routine emission events. In addition, the controls on routine emissions will provide the reductions in the ozone due to routine emissions necessary to reach attainment. In addition, Texas has considered other weight of evidence information indicating there will be more improvement in air quality than can be expected demonstrated by the modeling of routine emissions.

Traditionally ozone control plans have been based on the assumption that emissions for an area do not change significantly from day to day and differences in pollution levels are caused by changes in the meteorological conditions between days. This assumption has been reexamined for the Houston area because of the number of non-routine emissions that are reported in the Houston area from the refining and petrochemical industry.

The project H13 report, “Variable Industrial VOC Emissions and Their Impact on Ozone Formation in the Houston Galveston Area,” April 16, 2004, looked at the potential impact of emission releases in the area. It determined, by examining the TCEQ emission events data base and records of emissions from sources with monitors on flares and cooling towers, that “variability in HRVOC emissions from point sources is significant and due to both variability in continuous emissions and discrete emission events.” The area wide variability had the following characteristics:2-3 times per month HRVOC emissions variability > 10,000 lbs/hour,2-3 times per month HRVOC emissions variability 5,000-10,000 lbs/hour, daily HRVOC emissions variability > 100 lbs/hour.

Based on the above findings, the researchers then examined the impact that emissions variability could have on peak ozone levels by modeling the impact of emission events of various sizes at various locations and times. It was determined that an event of 1,000 lbs in the most sensitive area and during the most sensitive time could have a 1-2 ppb impact on the peak ozone level within the fine grid modeling domain. Larger events would have correspondingly larger impacts on ozone levels. A 10,000 lb release at the most sensitive place could have a 10-20 ppb impact on ozone levels.

The study, based on assumptions regarding the frequency of ozone conducive weather conditions, the time window most sensitive to releases and the location of most sensitive releases, presented the results of a Monte Carlo simulation to estimate the probability and expected magnitude of emission events that would impact peak ozone levels. The report states that if no actions were taken to reduce emissions variability, an air quality plan should anticipate that at least one event per year of 1,000 lbs would happen at the right time and the right place to impact peak ozone. Based on this finding, TCEQ adopted a short-term limit on HRVOC emissions designed to reduce the magnitude and frequency of emissions events. This is not to say that a 1-2 ppb increase in ozone is not significant, but that with the short term limit, the occurrence of non-routine events at the times and places to impact peak ozone will be diminished sufficiently as not to impact attainment with the 1-hour ozone standard. Because facilities would be expected to take action to avoid events of 1,200 lbs/hr, the frequency of such events in the future will be lower than in the past and therefore less than 1 event per year impacting peak ozone should be expected. As discussed, some non-routine emissions, in the past, may not have been detected or reported in which case the actual frequency of events impacting peak ozone levels may be higher than projected in project H13, which as discussed previously, would help explain the under-prediction in the routine modeling. The improved monitoring requirements in chapter 115 should serve to prevent undetected HRVOC releases in the future and the specter of enforcement will cause facilities to take measures to prevent emission events. This is further discussed in the section on the short term and long term cap.

TCEQ has followed acceptable procedures for the development of the base case inventory, following or building upon EPA guidance. Despite these efforts, one of the findings of the TexAQS 2000 study was that observed concentrations of certain compounds, especially light olefins such as ethylene and propylene, were much larger than represented in the reported emission inventory. This conclusion has been reviewed and documented in numerous scientific journals. For more information on these studies see the TSD.

Emissions of these compounds principally come from the petrochemical industry. While it is clear that the reported emissions are too low, the ambient data does not show, however, which types of facilities and equipment are the source of the underestimated emissions. Various methods have been attempted to estimate the actual emissions of VOCs in the HGB area based on the available ambient measurements. TCEQ decided to use data from aircraft flights which indicated NO X emissions were similar to VOC emissions when considered on a molar basis. Therefore, TCEQ adjusted the molar emission rate of HRVOC emissions at each facility to match the NO X emission rate. This adjustment is more fully described in Chapter 3 of the SIP revision. The adjustment had the effect of substantially increasing the level of HRVOC emissions in the modeled emissions inventory. Prior to adjusting the inventory, the model did not perform well. Model performance was improved after the adjustment. The adjusted inventory became the basis for achieving acceptable model performance and for the control strategy development.

Clearly, this type of across-the-board adjustment of emissions is not the preferable way to estimate emissions and makes control strategy targeting and development difficult. Unfortunately, using established methods for estimating source emissions has been demonstrated to be inaccurate. As support for their adjustment approach, TCEQ points out the amount of emissions added to the inventory is corroborated by a study conducted by Environ ATop Down Evaluation of the Houston Emissions Inventory Using Inverse Modeling” (Yarwood et al. , 2003) which indicated that approximately the right amount of reactivity had been added to the model and that further adjustment was not warranted under the then-current model formulation.

EPA believes that the approach Texas has taken to estimate the inventory of HRVOCs is acceptable given the information that is available. This conclusion is supported by the available aircraft data and Environ inverse modeling study. Clearly, this is an area that should be improved as the State develops future SIP revisions.

It was the consensus at a conference of emissions inventory experts held in Clear Lake, Texas in 2001, that the errors in the inventory were most likely from errors in the estimates of emissions from cooling towers, flares, fugitive emissions and start-up, shutdown and malfunction events. Texas has moved forward to improve the inventory of HRVOCs in all of these areas by requiring monitoring of cooling towers, flares, pressure relief devices and process vents in HRVOC service. This source monitoring, which will be in place by the end of 2006, should dramatically reduce the amount of error in the HRVOC inventory by more directly measuring both continuous emissions and emissions events. In addition, for all VOCs, Texas is now requiring that correlation equations be used for the estimation of fugitive emissions. This will reduce the amount of error in fugitive emission estimates.

Texas elected to adjust the reported emission rates of only HRVOCs. Other less-reactive chemicals are also released from flares, cooling towers, fugitive sources and during start up/shutdown and malfunction events and traditional emissions estimation techniques for less-reactive VOCs are the same as those for HRVOC. Thus, it is reasonable to suspect that these chemicals are also under-represented in the inventory. If these chemicals are under-represented in the inventory, the degree of underestimation may be less than for HRVOCs. One reason is that the processes that emit HRVOCs, such as ethylene plants, are often under very high pressures and this may increase the degree of underestimation more than would occur for emissions in lower pressure processes as one would expect leaks under higher pressures would tend to release a greater mass of emissions than lower pressure leaks. Also, many less-reactive VOCs are much lower in volatility than the HRVOCs which could also serve to reduce the amount of emissions underestimation.

There is some evidence from ambient measurements that the less-reactive chemicals are underestimated in the emission inventory, but there are not yet the number of peer reviewed studies regarding these other VOCs that exist for HRVOCs making determination of appropriate adjustment factors problematic. Therefore, Texas chose not to adjust the reported inventory for the less-reactiveVOCs for the attainment demonstration modeling because of the lack of information regarding the appropriate level of emissions. TCEQ did conduct a study of ambient data, referred to in the SIP revision, indicating that emissions might be underestimated by a factor of 4.8. Based on this study, Texas performed a sensitivity run with the model to evaluate the impact potential errors in less-reactive VOC emissions might have on projected attainment. This sensitivity analysis indicated that the addition of less-reactive VOCs using a factor of 4.8 could have an impact of 2-29 ppb on the peak ozone depending on the day. The performance of the model, however, was slightly worsened by the addition of the less-reactive VOCs indicating that possibly too much reactivity had been added. Other analyses performed by the University of North Carolina (Role of Modeling Assumptions in Mid-Course Review, HARC 12.2004.8HRB, 2005) adjusting only fugitive emissions of less-reactive VOCs by lower factors indicated no more than a 0.5 ppb increase in ozone levels. The main differences between the analyses were the assumptions regarding the amount of additional less-reactive VOCs and the amount of HRVOCs in the model.

EPA is proposing to accept the attainment demonstration based on TCEQ's approach to less reactive VOCs, because of the uncertainty on what adjustments might be appropriate and what impact those adjustments might have on the model. We understand that TCEQ is continuing to evaluate ambient data to determine what adjustments to the inventory might be appropriate. Texas has also undertaken a stakeholder process to identify additional ways to improve the emissions inventory. This stakeholder process will be vital to the improvement of future SIP revisions. EPA expects that future SIPs revisions will be based on improved emissions inventories of both less-reactive VOCs and HRVOCs. We note that the move to require the correlation equations for the estimation of less-reactive VOC will serve to improve the estimate of fugitive emissions. Improvements to the emission estimates for cooling towers and flares in less reactive VOC service should also be considered. Roles should also be found for emerging remote sensing technologies that have been shown to detect leaks from sources which have not been traditionally considered such as barge hatches and fittings on floating roof storage tanks.

The EPA's 1996 guidance entitled “Guidance on Use of Modeled Results to Demonstrate Attainment of the Ozone NAAQS” allows for the use of alternative analyses, called weight-of-evidence (WOE), to provide additional evidence that the proposed control strategy, although not modeling attainment, is nonetheless expected to achieve attainment by the attainment date. More specifically, the intent of this guidance was to be cognizant of the ozone NAAQS, which allows for the occurrence of some exceedances and to consider potential uncertainty in the modeling system. Thus, even though the specific control strategy modeling may predict some areas to be above the NAAQS, this does not necessarily mean that with the implementation of the control strategy, monitored attainment will not be achieved. As with other predictive tools, there are inherent uncertainties associated with modeling and its results. For example, there are uncertainties in the meteorological and emissions inputs and in the methodology used to assess the severity of an exceedance at individual sites. The EPA's guidance recognizes these limitations, and provides a means for considering other evidence to help assess whether attainment of the NAAQS is likely.

Since the future control case modeling in the Texas SIP revision predicts some areas still exceeding the ozone NAAQS, the TCEQ elected to supplement the control strategy modeling with WOE analyses. Texas submitted the following analysis as WOE: August 31st rare meteorology; additional reductions that were not modeled; comprehensive ozone metrics and ambient trends; alternative design value and addressing short-term excursions; and unusual wildfire activity. Each of these is discussed below.

A combination of unusual meteorological conditions, extremely high temperatures and winds from the west, occurred on August 31, 2005. The record high temperatures recorded during the August 30-September 5, 2000 period, with several days of maximum temperature ≥104°F (40°C), have occurred in this geographic area only once before in the previous 57 years. On August 31st, the Houston Intercontinental Airport observed its highest temperature ever recorded in the month of August. High temperatures throughout the region led to higher than normal estimated biogenic emissions as the calculation of biogenic emissions is a strong function of temperature. Texas calculated that biogenic emissions within the HGB area were approximately 400 tons/day higher on August 31st than on August 25th which had more moderate temperatures. The elevated biogenic emissions in rural areas west of Houston were also high and, because of somewhat atypical winds from the west, available for transport into HGB. Texas used the source apportionment tool (OSAT) to analyze the contributing emissions to high ozone. The OSAT tool indicated that on the 31st, 78 ppb of the peak ozone could be attributed to biogenics as compared to 24 ppb that could be attributed to biogenics on the 25th. Other days of the episode also had high temperatures but only when combined with the west winds did the unusual impact of biogenics result. Texas points out that winds from the west are not typical of the days that have high ozone in Houston which usually occur on days with a flow reversal due to the land sea breeze effect.

EPA agrees that the meteorological conditions on August 31st, which combined record high temperatures and winds from the west, were not typical of the conditions that lead to high ozone in the HGB area. The higher than normal biogenic emissions and winds from the west appear to have caused the 31st to be a day that did not respond well to the adopted control strategy which is weighted toward control of point sources that are predominant in eastern Harris County. This strategy has been effective in reducing ozone levels on other days of the episode. On the 31st, it appears much of the elevated ozone resulted from the increased biogenic emissions mixing with the NO X emissions present in the western portion of the HGB area. In this portion of the area, NO X emissions are primarily from on- and off-road mobile sources. To control ozone levels on days with routine conditions similar to August 31st would require substantial additional controls on mobile and area sources beyond the levels in the current strategy. But because the conditions on the 31st are atypical, we believe the HGB area can attain and a shift in strategy is not warranted.

EPA's rules at 40 CFR 50, Appendix I permit the Regional Administrator to exclude values caused by stratospheric ozone intrusion or natural events in determining whether a NAAQS has been exceeded or violated. Additionally, EPA's long-standing policy and guidance on the handling of air quality data affected by exceptional or natural events permits special consideration to be given to recorded air quality measurements that are affected by unusual events under certain circumstances. See, e.g. , “Guidance on the Identification and Use of Air Quality Data Affected by Exceptional Events (July 1986)”. However, this guidance and other guidance distinguish between those types of events which directly produce emissions of a pollutant or its precursors and meteorological conditions that may affect concentrations of a pollutant emitted by sources. In particular, EPA guidance provides that no consideration is given in determining whether the NAAQS are exceeded or violated for such things as inversions, stagnation of air masses, high temperatures or lack of rainfall. This language has recently been codified in an amendment to section 319 of the Clean Air Act by P.L. 109-59 [SAFETEA]. However, a reasonable distinction may be drawn between the determination of whether NAAQS are exceeded or violated during times when such meteorological conditions exist and the meteorological and emissions data sets used in prospective demonstrations of attainment. In the latter, our policy has been for States to examine the typical conditions that lead to high ozone when modeling to determine whether their control strategies are sufficient to provide for attainment and maintenance of NAAQS. (U.S. EPA, (1996), “Guidance on Use of Modeled Results to Demonstrate Attainment of the Ozone NAAQS”, EPA-454/B-95-007.) In this case, the combination of conditions on the 31st are not typical and, in fact are quite rare. Therefore, EPA does not believe a shift in control strategy is warranted to address the unusual conditions on August 31st that are expected to occur so infrequently as to be unlikely to impact the area's ability to attain the NAAQS.

The TCEQ believes potential additional emissions reductions will take place as a result of programs which have been and will be implemented in the HGB area but which are not reflected in the modeling. These reductions are not included in the modeling because, at present, these reductions are not quantifiable. Emission reductions that were not included in the model should improve the probability of HGB achieving attainment of the ozone NAAQS. First, as industries improve their monitoring capabilities and reduce their HRVOC emissions, the TCEQ anticipates collateral reductions of other VOCs that are present in HRVOC streams. For instance, the TCEQ developed regulations requiring owner/operator of flares in HRVOC service to install flow-meters and comply with maximum tip velocity and minimum heat content requirements to ensure proper combustion by the flare. The tip velocity and heat content requirements apply at all times, not only when the flare is combusting HRVOC streams. Because many of these flares are also used for non-HRVOC streams, the regulations will often result in a reduction of less-reactive VOCs as well. Similarly, TCEQ has improved the leak detection and repair program for streams with more than 5% HRVOC content. When leaks from streams containing both HRVOCs and less reactive VOCs are repaired, other less-reactive VOCs will also be reduced. EPA agrees that these collateral reductions are likely to occur, but we believe the potential benefit of these unmodeled emission reductions has been partially lost because TCEQ allows emission reductions of less-reactive VOCs to offset small increases in HRVOCs using the Maximum Incremental Reactivity (MIR) scale (see Section II.B.4.). It is likely that some of the benefit will be realized because we do not expect that many companies will implement the additional monitoring of less reactive VOCs that would be necessary to establish baselines necessary to participate in the trading program. Also, under the TCEQ rules, less reactive fugitive emissions reductions cannot be credited toward HRVOC increases so collateral reductions in fugitive emissions should be fully realized. Another issue is the uncertainty in the less-reactive VOC inventory. As discussed in the section on emissions inventory uncertainty, it may be that less-reactive VOCs are under-represented in the base case inventory. Because of uncertainty about the inventory, these collateral reductions may not serve to reduce VOC emissions below what was assumed in the model. These collateral reductions will serve to reduce the degree of any potential under-representation in the inventory and thus reduce this area of uncertainty in the attainment demonstration.

A second program that should result in additional reductions is the Environmental Monitoring Response System (EMRS). The TCEQ and the HRVOC regulated community have expanded the real-time ambient monitoring network of specific VOCs in the HGB area. A primary goal of EMRS is to prevent HRVOC emissions from creating situations that may lead to high levels of ozone. The near real time monitoring and response built into the program, which is further described in the TSD, will provide rapid feed back that should help identify and quickly correct the releases that can lead to high levels of ozones. EPA believes this added scrutiny of ambient VOC levels will result in improved overall program effectiveness, and could identify previously unknown sources of emissions that could be controlled to further reduce emissions.

The TCEQ believes that additional reductions will also be achieved through its public web-based access to an emission event database incorporating lower reportable quantities of VOCs beyond just the HRVOCs of most concern. This database puts facility performance regarding unauthorized emission releases at the public's fingertips. As public awareness of the number and amount of these releases increases, industry is expected to respond in a manner similar to its response to the Toxics Release Inventory program which has resulted in large reductions in Toxic emissions. EPA agrees awareness and documentation of these events should prompt industry to begin to evaluate the causes of these events and institute an enhanced program to ensure that the potential of an event is significantly minimized.

Texas believes the projected emissions for electric generating units outside the nonattainment area are probably too high. The current HGB SIP attainment demonstration modeling only excludes from the future case emissions projections for units that have formally indicated an intent to cease operation or that will be retired/reduced under agreed orders. The future projected case modeling inventory may include sources that will in fact be retired in (and/or prior to) 2007 as newer, more cost effective plants come online as Texas utilities continue the transition to a fully deregulated market. If this occurs, additional reductions could result which are not accounted for in the current SIP because the newer facilities would have lower emission rates. EPA agrees that deregulation will encourage the retirement of less efficient plants. Some of the benefit of this process may already be incorporated in the projections because Texas has projected newly permitted units will operate at 75% capacity in its projection of future emissions for electric utility emissions. It may be that newly permitted plants operate closer to full capacity as less efficient plants are curtailed or retired such that overall projected emission levels do not decrease as much. Some reductions should still occur because the newer plants will be cleaner than the older plants. A factor that weighs toward the projections of future emissions outside the nonattainment being too low is the findings of a report on emissions from offshore facilities too recent to be included in the SIP which indicates that projected emissions from these facilities may be significantly higher than what was modeled. Considering these factors together, EPA believes that NO X emissions outside the nonattainment area are slightly if at all less than projected and provide little additional evidence the area will attain.

Texas also believes that NO X emission projections inside the nonattainment area are overestimated. Inside the eight county nonattainment area, the Mass Emissions Cap and Trade (MECT) program for NO X applies. For sources with permits in hand when the first cap allocations were established but which had not yet operated, TCEQ issued allowances based on the allowable emissions in the permit (so called “allowable allowances”). Allowable allowances are those allocated to sources based on permits issued prior to the initiation of the MECT program, but not in operation for sufficient time to establish a baseline. During the interim period, until a baseline is established, sources operate complying with the “allowable allowances.” Then, based on the actual emissions during the baseline period, the State grants “actual allowances.” Because typically these facilities are not operating at their full allowable rates, but significantly below those values, a source will get fewer “actual allowances” than the “allowable allowances” it was granted based on the permit. Therefore, as these newly permitted facilities establish baselines from which to grant “actual” allowances, the NO X cap in the HGB will decrease overall. The TCEQ examined the 2002 and 2003 permit database and found that only 33 to 39 percent of the allowable allowances for permitted facilities were used. The modeling was based on the “allowable allowances” because it was not possible to predict how much lower the actual allowances will be than allowable allowances. The number of allowable allowances is not insignificant. The TCEQ registry currently carries 18,658 allowable allowances for 2007 which could translate into a potential additional NO X emissions reduction beyond what was modeled of up to 31 tpd if current trends for the conversion of allowable allowances to actual allowances continue. EPA agrees that as allowable allowances are converted to actual allowances, actual emissions will be less than the emissions that were modeled which should result in greater improvement in air quality than projected in the model.

In summary, EPA believes that TCEQ has provided sufficient evidence that NO X emission levels will be lower than those projected in the model and thus, air quality improvements should be better than predicted by the model. We also believe the reductions that will occur due to collateral VOC reductions and brought about by the EMRS system and emission events data base will reduce the uncertainty in the model due to uncertainty in the VOC inventory.

Based on the ambient data, the 1-hour ozone design values for the HGB area have decreased significantly from 260 ppb in 1982 to 175 ppb in 2003. Texas used this initial data to estimate a trend that demonstrated that attainment of the 1-hour standard would be reached sometime after 2020. The area's design value dropped significantly during the 1980s, then flattened out during the 1990s, hovering around 200 ppb. Design values recently have resumed their downward trend and are at the lowest values seen in at least the last twenty years. EPA notes that the 2004 design value has further decreased to 169 ppb. The current trend may be partly due to meteorological conditions in recent years, but it is almost certainly accelerated by emission reductions made since the 2000 SIP revision. If the design value continues to drop at a rate comparable to that seen in the most recent five-year period, then attainment would occur sometime around 2010. But the amount of emissions reductions is expected to increase each year until 2007 as a result of rules adopted in the 2000 SIP revision and in this SIP revision. Consequently, the design values are expected to decrease more rapidly as 2007 approaches. This simplistic analysis alone by no means proves the area will attain the standard by 2007, but EPA agrees the recent design value trends are consistent with reaching attainment by 2007.

As discussed previously, the attainment strategy is based on a two pronged approach, control of routine emissions and a short-term limit to control emission events. The TCEQ believes the traditional modeling does not replicate ozone produced by the sudden sharp increases in HRVOC emissions that can occur in the HGB area due to non-routine emission releases. TCEQ argues that this technical deficiency provides an explanation for why the model's peak simulated ozone concentrations were all below the HGB area's design value in 2000. The actual design value calculated for the years 1999-2001 was 182 ppb, while base case simulated peak ozone concentrations were below 160 ppb on every day but August 31st. The TCEQ believes that the influence from short-term releases should be removed from the area's design value to determine the design value based on routine emissions. This alternative design value theoretically will more closely correspond to the routine urban ozone formation captured by the model. To remove the influence of short-term releases, TCEQ applied Blanchard's technique (Statistical Characterization of Transient High Ozone Events Interim Report; December 21, 2001) to the 1999-2001 AIRS data. This technique uses a threshold of a 40 ppb rise in ozone concentration in 1 hour to distinguish between sudden rises in ozone from the more typical case where ozone increases more gradually. Removing all days with identified sudden ozone concentration increases (SOCI), an alternate design value of 144 ppb was calculated by TCEQ. The base case includes seven days with modeled peak ozone greater than 144 ppb, so the modeled peaks, in fact, correspond well with the (non-SOCI) design value and in fact the model may be over-predicting the ozone resulting from routine emissions. If the model is over-predicting the ozone due to routine emissions in the base case, then it is likely the model is over-predicting the ozone due to routine emissions in the future case projections providing additional evidence that the control strategy will sufficiently reduce the ozone from routine emissions.

EPA considers the alternative design value approach one tool in evaluating the possible impact of non-routine emission releases, particularly releases of HRVOCs on the design value. By removing the days that have rapid ozone formation and therefore are possibly the result of large releases, it is possible to get a sense of the potential impact of large emission releases on the design value. We are not convinced, as yet, that all occasions where ozone rises by 40 ppb from one hour to the next are caused by releases. Some of these events could be caused by continuous plumes of ozone sweeping across a monitor as winds shift direction. Wind shifts are a common occurrence in the HGB area and are likely responsible for some of these SOCI events. The TCEQ analysis also did not screen out widespread exceedences unlikely to be the result of a non-routine event. Still, we agree that emission events do impact the design value to a degree that is difficult to quantify. Therefore, we agree that considering the alternative non-SOCI design value provides additional evidence that the future design value will reach the standard in the future case as Texas has developed a strategy to control both routine and event emissions, thus reducing both contributions to the design value.

Wildfire Activity: In 2000, there was an unusually large amount of wildfire activity in Southeast Texas due to drought conditions and extreme temperatures in the August-September time frame. This is documented in Section 3.7.2 of the SIP that shows that more than 5 times as many acres burned in 2000 as in any of the other years between 1999 and 2003. It is not expected the number and scope of fires modeled in the current SIP attainment demonstration modeling would be reasonably expected in future years. A sensitivity analysis was conducted to quantify the impact of wildfires on the future year ozone level in the HGB indicating wildfire activity does have an impact on the HGB future ozone levels ( i.e. , 0.1 ppb to 1.7. ppb). EPA agrees that the amount of wildfire activity was unusual in 2000 and should not generally be expected in most years. Therefore, we agree that this is additional evidence that indicates improved probability that the area will attain in future years because the projected modeled emissions are higher due to wildfires than should generally be encountered in future years.

EPA believes that the combination of photochemical modeling and other evidence (WOE) indicates that the revised control strategy will bring the area into attainment. This demonstration is based on new information not available at the time the currently approved SIP was developed and represents a significant improvement over past efforts to model Houston. Specific improvements include:

• Improved representation of Houston's complex meteorology.

• Recognition of the importance of HRVOCs.

• Recognition that HRVOCs are underestimated in the emissions inventory.

• Recognition of the potential impact of emissions variability on ozone levels.

EPA believes that the modeling projects significant improvement due to reductions in routine emissions. EPA believes TCEQ has shown through the modeling of routine emissions that the portion of the ozone due to routine emissions will be sufficiently reduced. The modeling of routine emissions does not predict attainment on all days. The circumstances that led to the very high exceedance on August 31, have been shown to be unusual and thus EPA concludes the 31st should not be used to drive the control strategy. On other days of the episode, ozone levels have been shown to be reduced to below or just slightly above the standard. The wildfires that occurred during the episode also are a rare event occurring because of the high temperatures and drought conditions. Removing the influence of wildfires from the modeling brings all of the days with the exception of August 31 within 3.8 ppb of the standard. Texas has provided evidence that additional emission reductions will occur of both VOC and NO X . EPA particularly believes the expected additional NO X reductions will provide additional ozone benefit that could offset the small amount the modeling of routine emissions shows the area to be above the standard. The additional reductions in VOC expected from collateral reductions due to the HRVOC rules and due to the implementation of the EMRS system and the event reporting data base should at least partially mitigate any errors in the non-HRVOC inventory used for the attainment modeling.

The model's under-prediction of high ozone levels using routine emissions have been examined by TCEQ. TCEQ has proposed that two phenomena (routine and non-routine emissions) drive the HGB design value and that it is appropriate to estimate an alternative design value that does not include the effects of non-routine emissions. If TCEQ's estimated alternative design value (144 ppb) is an accurate representation of the design value due to routine emissions, then the control strategy modeling should reduce ozone levels due to routine emissions below the ozone standard. TCEQ addresses the non-routine emissions with the short-term limit that is expected to reduce the contribution to the HGB area's ozone level due to non-routine emissions such that non-routine emissions should not occur frequently enough at sensitive locations and times to impact the area's attainment of the 1-hour standard. As discussed in the TSD, the alternative design value probably overestimates, to some degree, the impact of short-term releases but still provides evidence that the current strategy to reduce routine emissions should be successful in addressing that portion of the 1-hour problem due to routine emissions and supports TCEQ's two pronged approach to achieving attainment of the 1-hour standard.

Finally, EPA believes the evaluation of ambient data trends indicates that the area is on a track that is consistent with achieving attainment of the one-hour standard by 2007.

TCEQ has adopted the following new control measures since the previously approved SIP revision:

• Annual Cap on HRVOC emissions

• Hourly (short-term) limit on HRVOC emissions

• Improved requirements for HRVOC fugitive emissions

• Requirements for Portable Gasoline containers

As discussed in Section II.A.1, Texas relied primarily on two sets of modeling in developing its control strategy. One set of modeling, performed by TCEQ, is largely a traditional model formulation that examines the routinely variable emissions which occur in the HGB area. Through this modeling, TCEQ established that NO X emissions would not have to be reduced as much as previously planned and routine emissions of highly-reactive VOC emissions would have to be reduced. Through the second set of modeling, examining the impact of large non-routine releases of HRVOCs, it was established that the frequency and magnitude of large non-routine releases of HRVOCs should also be reduced.

To reduce the routine emissions of highly-reactive VOCs, Texas adopted an HRVOC emissions cap-and-trade (HECT) program. This program establishes an annual cap on emissions of ethylene, propylene, butadiene and butenes from cooling tower heat exchange systems, flares, and vent gas streams in Harris County. The rules establishing the cap-and-trade system are contained in 30 TAC Chapter 101, Subchapter H, Division 6. The rules establishing the monitoring and record keeping necessary to determine compliance with the HECT are contained in 30 TAC , Chapter 115, Subchapter H. EPA has reviewed the monitoring rules and proposed approval of the Chapter 115 rules. (See E-Docket R6-OAR-2005-TX-0014 ) EPA is reviewing the HECT program rules with respect to EPA's Economic Incentive Program guidance and a separate proposed rule is being developed. (See E-Docket R06-OAR-2005-TX-016) Because the emission reductions achieved by the HECT program are relied on in the attainment demonstration, EPA cannot finalize an approval of the attainment demonstration unless or until the HECT program and the Chapter 115 rules have been approved. In this document, we discuss how the controls on HRVOCs have been modeled and support the attainment demonstration.

In projecting the HRVOC emissions that would occur after the HECT annual cap was implemented, TCEQ included a 5 percent safety factor in the attainment demonstration modeling. In other words, rather than model the levels established by the cap, Texas included 5 percent additional emissions of HRVOCs in the model. This safety factor was necessary because of the uncertainty that is introduced into the modeling by using an annual cap to achieve a short-term standard such as the National Ambient Air Quality Standard for ozone. On any given day more sources could be operating above their annual average emissions than below their annual average emissions. The 5 percent safety margin provides some room to account for this day-to-day variation in routine emissions.

As discussed previously, a large number of scenarios were simulated in the Project H13 work, examining the impact of releases of various sizes, times and locations. This study demonstrated that releases at the worst-case place and time of 1000 lb/hour could have a 1-2ppb impact on peak ambient ozone levels. To minimize frequency of these events, TCEQ established an hourly limit on emissions from process vents, flares, cooling towers and pressure relief devices. The hourly limit on emissions is 1200 lbs/hour and is established at §§ 115.722 and 115.761.

Texas has included features in the rules defining the interaction between the annual cap and short-term limit that are unique to the HECT. Typically, all emissions during the year would be counted toward compliance with an annual cap. In establishing a cap-and-trade system for the petrochemical industry in the HGB area, TCEQ felt it necessary to consider the possibility of major upsets. TCEQ believed that non-routine emissions from process upsets, while likely to occur, are not predictable and therefore could make management of emissions under an annual cap difficult. Therefore, TCEQ established in its rule that emissions above the 1200 lb/hr short-term limit are not counted toward compliance with the annual cap but rather expected to be controlled by the short term limit. TCEQ was particularly concerned about the potential situation where a single large release could force a smaller source to shut down for the remainder of the year because its allowances had been exhausted.

Although EPA agrees that a forced shutdown of smaller sources is possible, it believes that many upsets can be avoided by a source through the development and implementation of operation and maintenance plans that address start-up, shutdown and malfunction of process equipment and application of good air pollution control practices such as required by 40 CFR 60.18(d). EPA notes that application of the aforementioned procedures would significantly reduce the emissions associated with such start-up, shutdown and malfunction events and could avoid a the need for a forced shutdown. In addition, planning and management of emissions by the source including participation in the credit market should also avoid a forced shutdown while ensuring compliance with the annual cap.

Emissions above the short-term limit would still be subject to enforcement as a violation of the short-term limit, but only 1200 lbs would be reported for compliance with the annual cap during those hours where emissions exceed 1200 lbs. It is our expectation that the root cause of the conditions giving rise to the emissions above the short-term cap will be identified and corrected. Moreover, the source is still required to use good air pollution control practices consistent with the applicable NSPS (40 CFR 60.11(d)) and MACT standards or other applicable Federal or State programs.

The structure of the Texas HECT program, which does not require emissions above the short-term limit to be counted against the long-term cap, is a significant departure from past practices for cap-and-trade programs such as the Title IV Acid Rain program and the Houston NO X cap-and-trade programs. EPA's Economic Incentive Program guidance regarding mass emissions cap-and-trade programs indicates that all sources in the program should account for all of their emissions. See section 7.4 of the EIP Guidance. We believe, in this instance, the approach of not counting emissions above the short-term limit toward the annual cap has both advantages and disadvantages as discussed below. We are inviting comment on approving a program with this structure, as we remain concerned about excess emissions resulting from poor operation and/or poor maintenance.

We believe the structure of the TCEQ HECT rule has the advantage that it establishes a clear procedure for how emissions during non-routine events will be handled. For every hour during a large emissions event, the source will include 1200 lbs toward meeting its annual cap. This will avoid disputes about the validity of data during large emission events, when monitoring may be less reliable. The rule clearly defines the procedures to be followed during an emission event. Sources will have no choice but to ensure that at the end of the compliance period they have sufficient allowances to cover all of the emissions up to the 1200 lb limit, or else face deductions from their compliance account and other potential penalties. In addition, emissions above that level would be subject to enforcement under the short term limit.

On the other hand, the structure of the rule has the disadvantage that some of the incentive to prevent large releases is lost by excluding emissions above the short-term limit from the annual cap. In addition, some of the incentive for reducing the size of large events, when they occur, may also be lost. With the annual cap-and-trade program's exclusion of emissions above the hourly (short-term) limit, it is probable that fewer violations of the annual cap will occur than if the exclusion had not been provided. For sources that would have violated the annual cap if emissions above the short-term limit were considered, it may be harder to promote systemic changes at those sources to reduce overall emissions.

Having looked at the advantages and disadvantages, we are proposing approval of the program. We are proposing approval because, even though it provides an exclusion for non-routine emissions above short-term limit from the annual cap, it provides new enforceable limits that are an improvement on the status quo, and we believe the annual cap in conjunction with the short term limit will achieve the goals of the attainment demonstration as indicated by the modeling analysis. The annual cap should result in the necessary reductions in routine emissions and the short-term cap should result in the necessary reduction in the amount and frequency of non-routine emission events. We note that the program rules require TCEQ to audit the HECT program every three years, and facilities have to provide compliance reports annually, so it will be readily apparent if the goals of the rules are being achieved.

We believe the program will achieve the necessary reductions in routine emissions because the size of the short-term limit is such that only truly non-routine emissions will not be counted toward the annual cap. Based on evaluation of the emission rates that were modeled in the January 2003 SIP, the 1200 lb/hour limit is expected to be about ten times larger than the average hourly emission rate at the largest sources of HRVOCs. This order of magnitude difference between the short-term limit and the average annual hourly emissions ensures that sources will not routinely operate near or above the short-term limit, thus achieving the goal of reducing routine emissions.

Also, while the structure of the HRVOC rules anticipates that emission events will not be completely eliminated, EPA believes that it provides sufficient disincentives that sources will reduce the frequency and magnitude of large emissions events such that emission events would not be expected to frequently impact peak ozone levels. The Project H13 report estimated from historic information that it is probable that at least one event will occur annually at a time and location to impact peak ozone. This indicates that while emission events are frequent in the Houston area, emission releases at the place and time that impact peak ozone do not occur nearly as frequently. As noted elsewhere, it is possible that events are more frequent than found in the project H13 report as past monitoring practices may not have detected all releases.

It is necessary to reduce the frequency of emission events so that emission events do not interfere with attainment of the 1-hour NAAQS, which only allows an average of one exceedence per year. Based on the study, we believe the hourly emission limit will achieve this goal. After the institution of the short term limit, EPA expects that emissions events impacting peak ozone levels will be reduced in frequency to fewer than one per year. The frequency of emission events will be reduced as facilities take actions to prevent violations of the short term limit such as adding additional flare gas recovery capacity so more releases can be captured and routed back to the process. Sources that fail to take appropriate actions and which violate the short term limit will be subject to enforcement. While events may occur that impact ozone levels at other locations than where the peak ozone level occurs, these events, because they are occurring in areas with lower ozone levels, would not be expected to impact attainment of the 1-hour NAAQS.

Again, EPA recognizes that the approach of providing this partial exclusion for emissions above the short-term cap is a departure from practices in other cap and trade programs such as the acid rain program and our guidance. We currently believe this approach is only warranted in consideration of the Houston area's unique situation that combines an extensive petrochemical complex and the availability of the extensive data and analysis that were generated by the intensive ozone study, TxAQS 2000 and in conjunction with a short-term limit. Consideration of this novel approach is warranted in order to balance the need to reduce both routine and upset emissions of HRVOC, but also recognizes that large upset emissions may never be completely eliminated in the petrochemical industry. Because of the uniqueness of this approach, however, we invite comment on our proposed approval of this facet of the Texas plan.

One feature of the Texas rules for capping HRVOCs is that sources can make reductions in other less-reactive VOCs to generate allowances for the HRVOC cap. The VOC reductions are used to generate emission reduction credits (ERCs), in accordance with the Emission Credit Banking and Trading Program, referred to as the ERC rule, established at 30 TAC Chapter 101, Subchapter H, Division 1. These ERCs can then be converted to allowances under the HECT program. The amount of allowances is determined based on the ratio of the reactivity for the speciated VOCs being reduced to the reactivity of an HRVOC. Reactivity values are obtained from the Maximum Incremental Reactivity Scale (MIR), California Code of Regulations, Title 17, Chapter 1, Section 94700, concerning MIR values for Compounds. The amount of allowances that can be generated is limited to 5% of a facility's cap. To generate less-reactive VOC emission reduction credits, sources must meet the same monitoring requirements for the less-reactive VOC streams that are required for HRVOCs streams.

As mentioned earlier, EPA is evaluating the HECT rule in a separate Federal Register notice being developed concurrently. In addition, EPA is evaluating TCEQ's ERC rule in a separate Federal Register also being developed concurrently. (See E-dockets R06-OAR-2005-TX-0016 and R06-OAR-2005-TX-0006). Since this attainment demonstration depends on the reductions achieved by the HECT program, we cannot approve the attainment demonstration unless the HECT rules are first approved. Also, the conversion of ERCs to HECT allowances will not be approved until the underlying ERC rules are approved.

Below we describe the impact of the conversion of allowances based on the MIR scale on the attainment demonstration. EPA has generally classed VOCs into two groups: reactive and non-reactive. All reactive VOCs have traditionally been treated equally for regulatory purposes. The findings of the TxAQS study, indicate that reactivity of certain chemicals and their prevalence in the HGB area are causing a disproportionate impact on ozone levels in the area. Thus, these HRVOCs were targeted for control. Texas is making an allowance for a small increase in HRVOCs (up to 5%) above the new emissions levels to be offset with larger reductions in less-reactive VOCs. Modeling sensitivity analyses were performed by the University of Texas and documented in a report, titled “Survey of Technological and Other Measures to Control HRVOC Event Emissions.” In this report, trades of less-reactive VOCs much larger than would be allowed with the 5% cap were considered. In the sensitivity runs, the impacts ranged from a 2.1 ppb increase to a 3 ppb decrease in the peak ozone, depending on the episode day and the assumptions made about the less-reactive chemical that was reduced. The researchers looked at the impact of adding between 15 and 33 tpd of HRVOC to the model while removing the requisite amount of less reactive VOCs. Under the rule, capping trades at a 5% increase in highly reactive VOCs, an increase of less than 2 tpd of HRVOCs would be all that could be allowed. Therefore, the impact of the actual program will be quite small.

We believe that the generation of HRVOC allowances of up to 5% of a sources annual cap using reductions in less-reactive VOCs will not interfere with the area's ability to attain the NAAQS. We are proposing approval because the impact on the attainment demonstration will be very small. In addition, for sources that participate in the program, it will have the advantage of implementing additional source monitoring on less-reactive VOCs. Our proposed approval does not represent a general endorsement of the use of the MIR scale for use in SIPs. In this instance, with the aforementioned technical support, we believe this is an acceptable approach which is consistent with EPA's recently issued “Interim Guidance on the Control of Volatile Organic Compounds in Ozone State Implementation Plans” (August 25, 2005). EPA will continue investigating how best to incorporate reactivity in the regulation of VOCs.

For purposes of estimating emissions for compliance with the Cap, the TCEQ rule requires companies to assume that properly operated flares achieve 99% destruction efficiency for C2 and C3 hydrocarbons and 98% destruction efficiency for all other hydrocarbons. To insure these destruction efficiencies are achieved, the TCEQ rules require sources to monitor continuously to demonstrate compliance with the operating parameters of 40 CFR 60.18. Sources not operating in compliance with 60.18 are subject to enforcement. In addition, during periods when a flare operates outside the parameters of 60.18, companies are to assume 93% destruction efficiency. EPA has proposed approval of these rules. (See E-Docket R6-OAR-2005-TX-0014 ) The assumptions regarding destruction efficiency impact the projected emissions in the model. TCEQ has provided the justification for these assumptions in Appendix L of the SIP. TCEQ relies on data from flare studies initiated by EPA in the early 1980's that indicate that a properly operated flare should achieve destruction efficiencies of 98%. (Flare Efficiency Study, July 1983, PB83-261644, Evaluation of Efficiency of Industrial Flares: Test Results, May, 1984, PB84-199371) These studies provided the basis for the development of 40 CFR 60.18. Texas used the data from these studies on ethylene and propylene to estimate that for these chemicals destruction efficiencies of 99% should be achieved by a properly operated flare.

Emission estimates from flares will always be a source of uncertainty because emissions from flares cannot be directly measured with today's technology. EPA is proposing to accept the estimates used for flare destruction efficiency for use in the attainment demonstration because the estimates are based on the best information available. We, however, remain concerned about the uncertainty created in the attainment demonstration by having a significant source of emissions which cannot be directly measured.

We note that some operating parameters for flares such as steam and air assist ratios are not covered specifically by 40 CFR 60.18 but some studies have indicated these parameters can impact flare efficiency. Because of the prevalence of flares in the HGB area, we believe Texas should strongly consider, for both flares in HRVOC service and general VOC service, requirements for monitoring steam and air assist ratios to insure that operators maintain these parameters, not covered by 40 CFR 60.18, in a range to insure optimum combustion. We also encourage TCEQ to pursue new technology such as the Fourier Transform Infrared Spectrophotometer which would eventually allow the direct measurement of destruction efficiency in the field.

For a number of years, TCEQ has implemented a leak detection and repair program as part of its program to control VOCs. When TCEQ determined that additional reductions of HRVOCs were needed, they established a number of new requirements for leak detection and repair of components in HRVOC service. The changes include, among other things, the following improvements:

• Inclusion of connectors in the program.

• Inclusion of other non-traditional potential leak sources such as heat exchanger heads and man-way covers.

• Elimination of allowances for skipping leak detection periods for valves.

• Requirements for third party audits to help insure that effective leak surveys and repairs are conducted.

• Requirements that “extraordinary” efforts be used to repair valves before putting them on the delay of repair list.

For a full discussion of the improvements to the program, see the Technical Support Document for this action. We have proposed approval of these changes. (See E-Docket R6-OAR-2005-TX-0014 )

The nature of fugitive emissions introduces a great deal of uncertainty in estimating fugitive emission rates. Much of this uncertainty is unavoidable given the impossibility of estimating emissions from each leaking component. In this SIP revision, TCEQ has increased the amount of modeled HRVOC emissions above reported levels based on ambient measurements as described previously. As part of this adjustment, fugitive emissions were also increased above reported levels. Below we explain why this increase in the modeled emissions to match ambient measures may have been necessary because of possible problems with assumptions regarding control efficiency and rule effectiveness for fugitive emissions that were made in the State's emissions inventory. EPA also believes these past practices are being improved to reduce the uncertainty of future estimates.

Control Efficiency: Past TCEQ emission inventory practices allowed companies the option of using average Synthetic Organic Chemical Manufacturing Industry emission factors in combination with estimated control efficiencies to estimate emissions. Since this approach does not employ the data on the number of leaking components or the concentrations of leaks, it potentially misjudges emissions. The control efficiencies TCEQ has allowed sources to assume are higher than EPA has projected for similar control programs. For example, in past estimates for a similar program to the Texas program, EPA had estimated a 92% control efficiency, where Texas has allowed sources to assume a 97% control efficiency. See the TSD for a more complete discussion. The adjustment to the inventory based on ambient measurements could account for discrepancies in assumed control efficiencies.

Rule Effectiveness: Rule effectiveness is a concept that tries to account for difference between reported emissions and actual emissions. Sources generally assume ideal program implementation in reporting emissions when actual program implementation may be less than ideal. In the case of fugitive emissions, a 100% rule effectiveness would assume that facilities are completely accurate in their component counts and detect and repair all of the leaking components. Clearly, in practice, 100% effectiveness is only a goal that can be strived for. Again, the adjustment to the emissions inventory based on ambient measurement is necessary, in part, due to rule effectiveness issues.

It is EPA's understanding that, prior to adjusting the inventory, TCEQ assumed a rule effectiveness of 100% for sources that participated in its special inventory. 3 Because of the number of sources in the special inventory, it is believed that the rule effectiveness is nearly 100%. EPA's National Enforcement Investigations Center has performed leak surveys at refineries and has generally found more leaking equipment than estimated by facilities. Surveys at 17 refineries across the country found on average that facilities found 1.7% of their components to be leaking. Where as the NEIC surveys found on average 5% leaking components. Emissions based on the NEIC surveys were 2.4 times as high as the emission estimates based on the facility surveys.

Taken together, the control efficiency and rule effectiveness determine the overall program effectiveness. TCEQ's addition of imputed emissions based on actual ambient measurements is one way to account for the program effectiveness issues described above and other potential problems such as leaks from non-traditional components such as heat exchanger bonnets and man-way covers.

The changes to the program will make strides to address these issues. First, TCEQ has expanded the leak detection and repair program to include connectors and non-traditional components. This will increase the probability that leaks from unsurveyed equipment will be detected and repaired. Second, TCEQ is requiring, starting with the 2004 inventory, that all sources use correlation equations instead of assuming a control efficiency. Correlation equations are the most sophisticated approach to estimating emissions, short of bagging studies on each valve. As a result, future emission estimates will be based on the actual leaks found. In addition, the institution of third party audits should improve the performance of leak survey technicians so that more leaks are detected and repaired. Finally, more valves will be repaired as companies are required to employ “extraordinary efforts” to repair a leaking valve before allowing the repair to be delayed until the next shutdown. New technologies for repair, coming under the heading of “extraordinary efforts” should greatly reduce the number of valves that go unrepaired.

In summary, EPA believes that part of the reason it was necessary to adjust the base inventory to increase the emissions above reported levels based on ambient measurements, was to account for problems in assumptions for control efficiency, rule effectiveness and leaks from non-traditional components. The changes to the program will address each of these areas. EPA believes that the combination of the improvements to the program and the institution of third party audits can result in the projected 64% reduction in emissions. The addition of new components to the program and the requirement for extraordinary repair effort will improve the control efficiency. The requirement for third party audits and other changes will improve the rule effectiveness. EPA's policy on credit for rule effectiveness improvements requires that States commit to perform a study to determine if the rule effectiveness improvements are in practice realized. In response to comments on this issue, TCEQ has committed to conducting a rule effectiveness study based on the third party audit program after the program has progressed and data is available. EPA notes the first third party audits will be completed December 31, 2005. EPA would expect a rule effectiveness study summarizing the results of the first third party audits could be completed during the 2006 calender year. Using the rule effectiveness study and the results of the improved emission inventory estimates based on correlation equations, Texas will be able to determine if the emissions targets that have been modeled have been reached. In addition, this data will be useful in developing the 8-hour attainment plan.

EPA is proposing to approve the emission reductions that have been projected for the improved leak detection and repair rules. Our approval is based on the improvements to the fugitive rule and Texas' commitment to perform a rule effectiveness study and use improved emission inventory techniques to estimate future emissions to confirm the effectiveness of the program.

TCEQ has adopted standards for portable fuel containers sold in the State which provide requirements to prevent leaks and spills. EPA has approved the TCEQ rules on February 10, 2005 (70 FR 7041). TCEQ has projected 2.9 tons/day of emission reductions. We are proposing approval of the modeling with the inclusion of these projected emission reductions.

Texas has revised a number of control strategies that were included in the approved State Implementation Plan. A description of the revisions follows.

Industrial NO X Controls: Texas revised its NO X rules to relax the controls from a nominal 90% control to 80% control. Both the 90% level of control and the 80% level of control are far more stringent than the levels of control EPA previously approved as meeting the NO X RACT requirements of Section 182 (65 FR 53172, September 1, 2000). Therefore, the 90% level of control is a discretionary control measure as considered in the Phase 1 rules because the 90% level of control was not mandated by Subpart 2 of the Clean Air Act but was chosen as necessary for the area to demonstrate attainment of the 1-hour standard. Discretionary measures are not subject to the antibacksliding provisions of the Phase 1 rule, but any revisions of such measures are subject to Section 110(l) of the Act. In Section II.E., we discuss the revised plan's compliance with Section 110(l) of the Act. In Section II.B., we discuss why we believe, taken together with other changes, the plan continues to demonstrate attainment of the 1-hour standard. In section II.D., we explain why we believe this measure is not necessary to meet the Act's RACM requirement. For the above reasons, we are proposing approval of the revisions to the TCEQ Chapter 117 rules reducing the stringency from a nominal 90% control to a nominal 80% control.

In addition to a change in stringency of the rules, TCEQ made a number of less significant changes that are discussed in appendix 1 of the TSD. These changes include the repeal of outdated sections, rule clarifications, stylistic changes in response to Texas Register guidelines, minor changes to monitoring requirements, corrections to cross references and improved recordkeeping requirements for consistency with Title V requirements. We are also proposing approval of these less substantive changes.

Vehicle Inspection and Maintenance Program in Three Rural Counties: TCEQ has dropped the requirement for I/M in Waller, Liberty and Chambers Counties. These counties are not included in the urbanized area and are therefore not required by Subpart 2 of the Act to implement an I/M program. Therefore, I/M in these three counties is a discretionary measure that is not subject to the antibacksliding provisions of the Phase 1 rule, but any revisions to the SIP approved I/M requirements must comply with section 110(l) of the Act. In Section II.E., we discuss the revised plan's compliance with Section 110(l) of the Act. In Section II.B we discuss why we believe, taken together with other changes, the plan continues to demonstrate attainment of the 1-hour standard. In section II.D., we explain why we believe this measure is not necessary for the area to meet the Act's RACM requirement. Therefore, EPA is proposing to approve the repeal of the I/M program for these three counties.

The TCEQ also made a number of nonsubstantive changes to the I/M program that are discussed in Appendix 2 of the TSD. These changes were corrections to cross references and stylistic changes. We are also proposing approval of these additional nonsubstantive changes.

Removal of Small, Spark-Ignition Engine Operating Restrictions: TCEQ has dropped this requirement which would have prohibited commercial lawn services from operating during the morning hours. This measure is not required by Subpart 2 of the Clean Air Act. Therefore, it is a discretionary measure that is not subject to the antibacksliding provisions of the Phase 1 rule, but any revision to the approved SIP must comply with section 110(l) of the Act. In Section II.E., we discuss the plan's compliance with Section 110(l) of the Act. In Section II.B., we discuss why we believe, taken together with other changes in the plan, the revised plan continues to demonstrate attainment of the 1-hour standard. In section II.D., we explain why we believe this measure is not necessary to meet the Act's RACM requirement. Therefore, EPA is proposing approval of this change.

Speed Limit Strategy from a 55 mph Maximum Speed Limit to a 5 Mile Reduction in Speed Limits from Previous Levels: The Texas legislature repealed TCEQ's authority to implement speed limits for environmental purposes. Texas Department of Transportation had already reduced speeds in the HGB area by 5 mph from 70 mph to 65 mph and from 65 to 60. These reductions in speed limits of 5 mph remain in place, but the reductions that would have been achieved by reducing speed limits on all roads further to 55 mph will not be achieved. Calculated using Mobile 6, the reductions from this measure are much smaller than as calculated under Mobile 5 in the previous SIP. This measure is not required by Subpart 2 of the Clean Air Act. Therefore, it is a discretionary measure that is not subject to the antibacksliding provisions of the Phase 1 rule, but any revision to the approved SIP must comply with section 110(l) of the Act. In Section II.E., we discuss the plan's compliance with Section 110(l) of the Act. In Section II.B., we discuss why we believe, taken together with other changes in the plan, the revised plan continues to demonstrate attainment of the 1-hour standard. In section II.D., we explain why we believe this measure is not needed to meet the Act's RACM requirement. For the above reasons, EPA is proposing approval of this revision of the State's plan.

Removal of the Vehicle Idling Restriction: This measure that would have prohibited prolonged idling of heavy duty diesel vehicles has been repealed. This measure is not required by Subpart 2 of the Clean Air Act. Therefore, it is a discretionary measure which is not subject to the antibacksliding provisions of the Phase 1 rules, but any revision to the approved SIP must comply with section 110(l) of the Act. In Section II.E., we discuss the plan's compliance with Section 110(l) of the Act. In Section II.B., we discuss why we believe, taken together with other changes in the plan, the revised plan continues to demonstrate attainment of the 1-hour standard. In section II.D., we explain why we believe this measure is not necessary to meet the Act's RACM requirement. For the above reasons, we are proposing approval of this change.

Revision to Delay the Compliance Date for Gas Fired Water Heaters and Small Boilers: This rule is not being repealed, but its compliance date has been delayed from December 31, 2004 to January 1, 2007. This rule requires new water heaters sold in Texas to achieve lower NO X emission rates. A delay in the compliance date results in reduced emission reductions because there is less time for old water heaters to be replaced with new water heaters through normal turnover. Texas has accounted for these lost reductions in its attainment modeling. This measure is not required by Subpart 2 of the Clean Air Act. Therefore, it is a discretionary measure that is not subject to the antibacksliding provisions of the Phase 1 rule, but any revision to the approved SIP must comply with section 110(l) of the Act. In Section II.E., we discuss the plan's compliance with Section 110(l) of the Act. In Section II.B., we discuss why we believe, taken together with other changes in the plan, the revised plan continues to demonstrate attainment of the 1-hour standard. In section II.D., we explain why we believe earlier implementation of this measure is not necessary to meet the Act's RACM requirement.

We are not proposing approval of this change to the rules for control of water heaters at this time. It is a Statewide rule and the changes to the rule impact other areas of the State and we have not yet analyzed the above issues in areas of the State other than Houston. We note only that the changes to the water heater rules do not impact the approvability of the Houston mid-course review SIP revision.

Revisions to the Voluntary Measures: Texas has revised the voluntary mobile emissions program (VMEP) portion of the State Implementation Plan. This portion of the plan, which was approved in 2001, was projected to achieve 23 tpd of emission reduction through various voluntary and often innovative measures. Experience and the recalculation of the benefits with Mobile 6 has resulted in a much lower expectation for the program which now is expected to only achieve 10.6 tpd of emission reductions. The details of changes to the program are contained in appendix O of the SIP. These measures are not required by Subpart 2 of the Clean Air Act and therefore, are discretionary measures that are not subject to the antibacksliding rules provisions of Phase 1 rule, but revisions to the approved 1-hour SIP must comply with section 110(l) of the Act. In Section II.E., we discuss the plan's compliance with Section 110(l) of the Act. In Section II.B., we discuss why we believe, taken together with other changes in the plan, the revised plan continues to demonstrate attainment of the 1-hour standard. In section II.D, we explain why we believe these measures are not necessary for the area to meet the Act's RACM requirement. For the above reasons, EPA is proposing approval of the revisions to the VMEP measures.

Section 172(c)(1) of the Clean Air Act requires that each nonattainment plan provide for the implementation of all reasonably available control measures as expeditiously as practicable (including such reductions in emissions from existing sources in the area as may be obtained through the adoption, at a minimum of reasonably available control technology) and shall provide for attainment of the national primary ambient air quality standards. EPA has provided guidance interpreting section 172(c)(1) of the Act. See 57 FR 13498, 13560, April 16, 1992. In that guidance, EPA indicates that potentially available control measures, which would not advance the attainment date for an area or contribute to reasonable further progress, would not be considered RACM under the Act. EPA's guidance also indicates that States should consider all potentially available measures to determine whether they are reasonably available for implementation in the area including whether or not they would advance attainment. Further, the guidance calls for states to indicate in their SIP submissions whether measures considered are reasonably available or not, and if so the measures must be adopted as RACM. Finally, the guidance indicates that States could reject potential RACM measures either because they would not advance the attainment date or would cause substantial widespread and long-term adverse impacts or for various reasons related to local conditions. See “Guidance on Reasonably Available Control Measures (RACM) Requirement and Attainment Demonstration Submissions for Ozone Nonattainment Areas,” John Seitz, Director, Office of Air Quality Planning and Standards, November 30, 1999.

In EPA's November 14, 2001 notice approving the plan for the HGB nonattainment area, EPA approved the analysis showing the plan was implementing all Reasonably Available Control Measures. The NO X reduction requirements of that plan were so substantial no additional RACM measures could be identified in time for adoption as a part of that plan and the State had to make an enforceable commitment to adopt additional NO X measures which were expected to be feasible in the near future. Now, based on the findings of the mid-course review, Texas has determined that the NO X reductions necessary for attainment, while still substantial, are not as great and that control of HRVOCs is a more effective way of reducing ozone. In section II.A. of this notice, we discuss how EPA found that the revised plan for HGB will achieve attainment of the 1-hour standard, based on the controls that will be in place by the beginning of the ozone season of 2007. Both NO X and HRVOC controls, necessary for attainment, will be fully implemented the last year of the strategy. In the last year of the strategy, the point source controls alone will achieve an estimated 39 tpd of NO X reductions (based on review of the TCEQ's Mass Cap-and-Trade Registry). Reductions in on- and off-road emissions will also occur. Therefore, to advance attainment, additional reductions on the order of 39 tpd would have to be achieved before the ozone season of 2006. In Section 5.4 of the State Implementation Plan, Texas explains why even with the repeal and revision of the measures described in Section II.C., Texas believes the RACM requirement is still being met. What follows is a summary of EPA's evaluation of each of the revisions.

Industrial NO X Controls: TCEQ has relaxed the NO X rules for a number of NO X point source categories. The original controls achieved a nominal 90% reduction in point source emissions, with some categories reducing more than 90% and some less than 90%. The new rules, being considered here today, achieve a nominal 80% control. It is a convenient short hand to refer to the control levels as 90% or 80% even though this does not accurately state the level of reduction for individual source categories. TCEQ has argued that the 90% controls would not advance attainment because the current 80% control levels are scheduled to be implemented in 2007 and it would not be reasonable to expect that a more stringent 90% control could be implemented faster to advance attainment. EPA previously agreed that the most expeditious schedule for the 90% controls would be by 2007. EPA continues to believe that to be the case so that implementation of 90% controls would not advance attainment and therefore is not RACM. Even at the 80% control level, the TCEQ rules are still similar in stringency to the control levels implemented in California which have generally been considered the most stringent in the country. (See the Technical Support Document for more information)

Repeal of the I/M Program in 3 Rural Counties: Texas has chosen to reduce the scope of its I/M program from eight counties to five counties. The three counties that are being dropped are Chambers, Liberty and Waller Counties. These are the most rural counties in the nonattainment area. The program was scheduled to be implemented in 2005. Using Mobile6, Texas has estimated that the program would achieve 0.87 tpd of emission reductions which is a smaller reduction estimate than the Mobile 5 estimate included in the 2000 SIP and is less than .2% of the projected emissions for the area in 2007. Because of the small amount of emission reductions, implementation of I/M in these three counties would not be expected to advance attainment. Thus, EPA proposes that implementation of I/M in these three counties is not required to meet the RACM requirement.

Removal of Small Spark Operating Restrictions: This measure would prohibit lawn and garden service contractors for operation in the morning hours from 6 a.m. to 10 a.m.—a time during which emissions have been found to contribute most significantly to ozone production. This measure was due to be implemented in 2005. Texas decided that attainment could be reached without the implementation of this measure. The measure was estimated to achieve the equivalent of 7.7 tons/day of NO X emission reductions. As such, its implementation would not advance the attainment date. Therefore, EPA believes the morning lawn service ban should not be considered a reasonably available control measure for the HGB area.

Speed Limit Strategy: The approved SIP provides for the speed limits in the eight county area to be reduced to 55 mph. Later, TCEQ decided to delay the implementation of the 55 mph until 2005, but would implement speed limits that are 5 mph lower than the previous speed limits, lowering 70 mph speed limits to 65 mph and 65 mph limits to 60 mph starting in 2001. In the 2004 SIP revision, TCEQ decided to make permanent the interim limits and forgo lowering the speed limits to 55 mph. Based on Mobile 6, lowering speeds all the way to 55 mph would be expected to reduce emissions 2-3 tons/day. This is a lower estimate of emission reductions than predicted by Mobile 5 in the 2000 SIP revision. This small amount of emission reduction would not advance attainment in the Houston area and therefore this measure is not considered RACM.

Vehicle Idling Restriction: Texas is dropping a rule that prohibits idling of heavy duty vehicles for more than five minutes in the Houston area. The measure was estimated to reduce NO X emissions by 0.48 tpd. Texas decide that attainment could be reached without the implementation of this measure. This small amount of emission reduction would not advance attainment for the area and therefore should not be considered RACM.

Delay in Compliance for the Water Heater Rule: In this case, TCEQ still intends to implement the rule, but has delayed compliance until 2007. Since the adoption of the current rule, two American National Standards Institute (ANSI) standards (the flammable vapor ignition resistance standard and the lint, dirt, and oil standard); the United States Department of Energy (DOE) energy efficiency standard; and the EPA insulation foam ban have been implemented. The ANSI lint, dirt, and oil standard and the flammable vapor ignition resistance standard were effective on July 1, 2003, and were established for gas-fired water heater safety reasons. The DOE energy efficiency standard was effective on January 20, 2004. The EPA foam ban was effective on January 1, 2003, and affects gas-fired water heaters, as water heater manufacturers have historically used hydrochlorofluorocarbon as a blowing agent for creating foam insulation. The implementation of these standards has delayed the progression of the water heater technology and design. Therefore, a design that meets the 10 ng/J emission limit in the Texas rule will not be available for sale in the market by the January 1, 2005.

Because the new federal standards affect the design of new water heaters and have made it impractical for the industry to meet Texas's NO X limits for water heaters in a timely manner, EPA agrees that this measure is being implemented as expeditiously as is technically practicable. In other words, earlier implementation is not technically practicable and therefore, since it would be infeasible, it would not advance attainment and would not be RACM.

Section 110(l) of the Clean Air Act says:

“Each revision to an implementation plan submitted by a State under this Act shall be adopted by such State after reasonable notice and public hearing. The Administrator shall not approve a revision of a plan if the revision would interfere with any applicable requirement concerning attainment and reasonable further progress (as defined in section 171), or any other applicable requirement of this Act.”

Texas must consider whether the new strategy which relies on fewer reductions of NO X and more reductions of VOC will interfere with attainment or reasonable further progress or any other applicable requirement under the Act. A strict interpretation of this requirement would allow EPA to approve a SIP revision removing a SIP requirement only after determining, based on a completed attainment demonstration, that it would not interfere with applicable requirements concerning attainment and reasonable further progress. As discussed above, Texas has completed a revised attainment demonstration with respect to the 1-hour standard. Attainment demonstrations for the 8-hour standard are not due for several years. EPA recognizes that prior to the time areas are required to submit full attainment demonstrations for the 8-hour ozone standard, this strict interpretation could prevent any changes to the SIP control measures. EPA does not believe this strict interpretation is necessary or appropriate.

Prior to the time that attainment demonstrations are due for the 8-hour ozone standard, it is unknown what suite of control measures a State will choose to adopt for a given area to attain that standard. For example, different mixes of NO X or VOC and industrial or mobile source controls may result in attainment. During this period, to demonstrate no interference with the 8-hour NAAQS, EPA believes it is appropriate to allow States to substitute equivalent emission reductions to compensate for the control measures being removed from the approved SIP. EPA believes preservation of the status quo air quality during the time new attainment demonstrations are being developed will prevent interference with the States' obligations to develop timely attainment demonstrations and to attain as expeditiously as practicable.

“Equivalent” emission reductions mean reductions which result in equal or greater air quality benefit than those reductions being removed. To show the compensating emission reductions are equivalent, modeling or adequate justification must be provided (EPA Memorandum from John Calcagni, Director Air Quality Management Division, to the Air Directors in EPA Regions 1-10, September 4, 1992). The compensating emission reductions must represent actual, new emission reductions achieved in a contemporaneous time frame in order to preserve the status quo. In addition, the emission reductions must be permanent, quantifiable, and surplus to be approved into the SIP.

As discussed previously, Texas has chosen to substitute actual, reductions of HRVOCs for some of the NO X reductions in the approved SIP. This approach is evaluated below with respect section 110(l) and the criteria described above.

Contemporaneous: While contemporaneous is not defined in the Clean Air Act, a reasonable interpretation is that the compensating control measures be implemented within one year of the time frame for the control measure being replaced. In this case, the new control measures being used as substitutes are being implemented in virtually the same time frames as the measures being replaced. The new measures have the following compliance dates: tighter controls on HRVOC fugitive emissions—March 31, 2004, HRVOC cap-monitoring 2005, full cap compliance 2006, gas can rule-2007. The measures being replaced, which are listed in section II.D., with the exception of the vehicle idling ban, all had compliance dates in the approved SIP of 2005 or later. In particular the largest emission reduction change by far, the difference between 90% and 80% control on NO X , was not scheduled to be put in place until 2007. It is worth noting that reductions that would have been achieved by controls adopted to meet the enforceable commitment to reduce NO X did not have a specified compliance date. The commitment only provided that the measures would be adopted by May 2004 and compliance would be achieved as expeditiously as possible but no later than the beginning of the ozone season in 2007. Therefore, it can be assumed the emission reductions from the NO X enforceable commitments, had they been implemented, would not have occurred before the 2005-2006 time frame, a time frame similar to that for the measures to control HRVOCs which Texas has adopted as a substitute. With regard to the vehicle idling restrictions, the compliance date for this rule was May of 2001. It was projected to achieve 0.48 tpd of emission reductions. It was discontinued effective December 23, 2004. The improved HRVOC fugitive controls which began implementation in March of 2004, more than offset the small reductions lost by the discontinuation of the motor vehicle idling program after December 23, 2004.

Equivalent: To demonstrate that the emission reductions were equivalent, the TCEQ used the photochemical model to demonstrate that the total collection of strategies in the current SIP revision is equivalent or better in 8-hour ozone reduction effectiveness as compared with the total collection of strategies in the SIP that was approved in 2001 including the reductions that would have occurred due to measures to meet the enforceable commitments. Several 8-hour ozone metrics were calculated. The results indicated that the revised SIP is slightly more effective in reducing 8-hour ozone than the previously approved SIP in both average relative reduction factor (0.931 vs. 0.940) and in average future design value (107 vs 108 ppb). Although some monitoring stations fare slightly worse under the new control strategy, others fare slightly better. In addition, for both peak 8-hour ozone concentration and exposure metrics, the benefits of the new strategy exceed those of the old on every day except September 6, where the old strategy is slightly better. Considering, the modeled predicted area of exceedance, however, the comparison is less clear-cut. The older strategy shows more of a benefit on six of ten days and the new strategy shows a greater benefit on three days. Both strategies indicate the same benefit on one day. In summary, EPA believes that the new strategy and the old strategy are approximately equivalent in eight hour ozone benefit, with the new strategy slightly more effective in reducing the peak ozone values and the old strategy slightly more effective in reducing the predicted area of exceedence. Taking all of the metrics into consideration and recognizing the uncertainties in the modeling, we believe that Texas has demonstrated that the new strategy is equivalent to the old strategy in 8-hour ozone benefit.

Permanent: The emission reductions from the HRVOC rules are permanent as sources will have to maintain compliance with new measures indefinitely.

Enforceable: EPA is reviewing the enforceability of the substitute measures in separate rules. The Gas Can Rule was approved on February 10, 2005, 70 FR 7041. EPA has proposed approval of the fugitive emission controls and improved monitoring requirements for HRVOCs on April 7, 2005, 70 FR 17640 . Finally, concurrent with this Federal Register notice EPA is proposing approval of the HECT program. In each of these rulemakings, EPA will evaluate whether the substitute rules are enforceable, considering such issues as whether the rules have adequate test methods, monitoring requirements, record keeping requirements and whether the State has adequate enforcement authority to ensure the limits are achieved. As discussed elsewhere, the revisions to the attainment plan including the NO X rule repeals and revisions that reduce the projected amount on NO X emission reductions cannot be approved unless final approval of the substitute rules is completed. If approved, these substitute rules will be federally enforceable and enforceable by the public through citizen suit.

In summary, we believe the substitute measures result in equivalent 8-hour benefit and that the new measures are contemporaneous, enforceable and permanent. Therefore, we believe approval of these revisions to the approved SIP will not interfere with attainment of the 8-hour standard.

The 1-hour standard was revoked on June 15, 2005 for the HGB area. The approved SIP, however, committed the State to adopt control measures of 56 tpd, unless the State could show that these NO X reductions were not needed for attainment of the 1-hour standard. We have discussed, in Section II.A., EPA's evaluation of the revised 1-hour attainment demonstration and are proposing approval of that strategy as demonstrating attainment of the 1-hour standard.

Texas submitted, and EPA has approved, revisions to the rate of progress plan (February 14, 2005 70 FR 7407) based on the revised strategy. These revisions will ensure that 1-hour ROP is met for each 3-year period out to the 1-hour attainment date. (See the Federal Register cited above for further explanation of the approved ROP demonstration.)

The HGB area currently meets all other National Ambient Air Quality Standards besides ozone. The plan revisions being considered would not be expected to impact compliance with the CO, SO 2 or lead NAAQs as these pollutants are not affected by these rules.

The revisions to the NO X rules do affect emissions of NO2 and thus could potentially impact attainment with the NO 2 standard. The HGB area, however, meets the NO 2 standard at today's level of NO 2 emissions and the revised plan will still reduce NO 2 emissions considerably from today's levels and thus will not interfere with maintenance of the NO 2 standard.

Similarly, the HGB area currently meets the NAAQS for PM fine. NO X and VOCs are precursors to the formation of PM fine. The revised plan will result in additional NO X and VOC reductions beyond today's levels. Therefore, the revised plan will not interfere with the continued attainment of the PM fine standard.

Section 110(l) applies to all requirements of the Act. Below are requirements potentially affected by TCEQ's rule change and a brief discussion of EPA's analysis.

Reasonably Available Control Technology (RACT) requirements: EPA has previously approved the NO X and VOC rules in the HGB area as meeting the Act's RACT requirements. The revised NO X rules remain substantially more stringent than the previously approved RACT requirements. The new HRVOC rules build on the previously approved RACT requirements. In addition, these revisions do not impact the major sources applicability cutoffs. Therefore, these revisions do not interfere with the implementation of RACT.

Inspection and maintenance programs (I/M): This revision drops three counties from the I/M program. These counties are not included in the urbanized area as defined by the Census Bureau. Thus, I/M is not required to be implemented in these counties and thus these revisions do not interfere with meeting the I/M requirements of the Act.

Air Toxics: There are no federal ambient standards for air toxics and these rules do not impact compliance with any federal MACT standards so these rule revisions do not interfere with compliance with any air toxics standards. We note that air toxic levels of butadiene and formaldehyde are expected to decrease as a result of the revised plan. Butadiene emissions are directly regulated by the new HRVOC rules. Formaldehyde is formed from ethylene in the photochemical reactions leading to ozone.

An enforceable commitment is a written commitment that is approved into the SIP that is enforceable against the State. In the SIP approved in November 2001, there were enforceable commitments to achieve additional NO X reductions and enforceable commitments to incorporate the latest information into the SIP.

To be enforceable, commitments must be approved as part of the SIP and, therefore, the State must have given notice and taken comment on the commitment, held a public hearing and submitted it as a SIP revision. The commitments must be specific as to the state agency's future plans for adoption of specified control measures. The dates for implementation of, or compliance with, the future to-be-adopted specified control measures must be included in the commitments and be as expeditious as practicable. If the State does not follow through with the commitment, EPA can find that the State failed to implement the SIP. Further, the public can seek enforcement of the obligations under Section 304(a) of the CAA.

In the approved SIP, there are a number of enforceable commitments. In this section we evaluate whether these enforceable commitments have been met. The State made the following commitments which were approved in the November 2001 Federal Register .

• To perform a mid-course review (including evaluation of all modeling, inventory data, and other tools and assumptions used to develop this attainment demonstration) and to submit a mid-course review SIP revision, with recommended mid-course corrective actions, to the EPA by May 1, 2004.

Discussion: Texas provided the mid-course review in the December 2004 submission. It included new modeling with new more recent episodes based on the Texas 2000 study. Virtually all of the inputs to the model were updated and improved, making the 2004 SIP the best modeling ever performed for the Houston area. Additionally, the State submitted control measures that, based on the demonstration, will result in attainment of the 1-hour standard as expeditiously as practicable. Therefore, EPA believes the commitment for a mid course review has been satisfied.

• To perform new mobile source modeling for the HG area, using MOBILE6, EPA's on-road mobile emissions factor computer model, within 24 months of the model's release.

Discussion: The midcourse review modeling employed MOBILE6 for the on-road mobile source inputs satisfying this commitment.

• If a transportation conformity analysis is to be performed between 12 months and 24 months after the MOBILE6 release, transportation conformity will not be determined until Texas submits an MVEB which is developed using MOBILE6 and which we find adequate.

Discussion: This commitment was not applicable because transportation conformity was not performed during the time period.

• To adopt rules that achieve at least the additional 56 tpd of NO X emission reductions that are needed for the area to show attainment of the 1-hour ozone standard.

See below.

• To adopt measures to achieve 25% of the needed additional reductions (56 tpd) and submit those adopted measures to EPA as a SIP revision by December 2002.

Discussion: This commitment required TCEQ to find measures to achieve an additional 14 tons/day of NO X emission reductions and to submit adopted control measures by December 2002. In the January 28, 2003 submission, TCEQ provided the demonstration that the TERP program meets EPA's requirements as an economic incentive program and will achieve the required 14 tons/day of emissions reductions. EPA has approved the TERP program in a separate Federal Register action which discusses how the TERP program meets the EIP requirements (August 19, 2005, 70 FR 48647 ). Through the attainment year of 2007, 38.8 tons/day of emission reductions are projected for the TERP program based on a $5,000/ton cost effectiveness. The total obligation for emission reductions from TERP is 32.9 tpd. TERP originally replaced two measures: a morning construction ban (6.7 tpd NO X equivalent) and accelerated introduction of Tier II/III equipment 12.2 tpd). After allocating 18.9 tpd from TERP to replace these two measures, the program still is projected to produce an additional 19.9 tpd of reductions which is sufficient to provide the additional 14 tpd of emissions reductions needed to meet the enforceable commitment. Thus, EPA believes the enforceable commitment to achieve 25% of the 56 tpd of NO X reductions has been satisfied.

We note two developments with the program. The average cost effectiveness of TERP projects, to date, is $5500/ton and the Texas legislature moved to cut some of the funding for the program in the last session. TCEQ may have to shift some of the TERP funding from other areas such as Corpus Christi or Victoria, which currently meet the 8-hour ozone standard to the HGB area to insure that the emission reduction targets are met.

• To adopt measures for the remaining needed additional reductions and submit these adopted measures to EPA as a SIP revision by May 1, 2004.

Discussion: Texas determined that these additional NO X reductions would not be necessary for the area to attain. Instead, as discussed elsewhere in this document, TCEQ has instead adopted and has begun implementing a strategy to reduce emissions of HRVOCs. EPA believes that the new strategy will attain the one-hour standard. This is further discussed in Section II.B. regarding the review of the attainment demonstration and Section II.E regarding whether section 110(l) of the Act has been met.

• That the rules will be adopted as expeditiously as practicable and the compliance dates will be expeditious.

Discussion: TCEQ adopted its measures for the control of HRVOC first in 2002 and has revised them three times since then. The compliance dates in the rules are based on the need to develop monitoring plans, quality assurance/quality control programs, install the monitors, and develop control plans based on the monitoring results. EPA believes that the implementation of these new measures is as expeditious as practicable.

• That the State would concurrently revise the Motor Vehicle Emissions Budgets (MVEBs) and submit them as a revision to the attainment SIP if additional control measures reduce on-road motor vehicle emissions. Texas stated that measures which could limit future highway construction, such as growth restrictions, may not be included.

Discussion: Texas has revised the mobile source budget to account for TERP reductions and other adjustments to the mobile source emissions estimates.

Summary: Based on the above analysis, we propose that TCEQ has satisfied the requirements of the enforceable commitments contained in the approved HGB SIP.

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

The MVEBs established by this plan and that the EPA is proposing to approve are contained in Table 2. The development of the MVEBs are discussed in section 3.5 of the SIP and reviewed in the TSD. We are proposing approval because we find the MVEB to be consistent with the attainment plan.

When submitting comments, remember to:

1. Identify the rulemaking by File ID number and other identifying information (subject heading, Federal Register date and page number).

2. Follow directions—The agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulations (CFR) part or section number.

3. Explain why you agree or disagree; suggest alternatives and substitute language for your requested changes.

4. Describe any assumptions and provide any technical information and/or data that you used.

5. If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced.

6. Provide specific examples to illustrate your concerns, and suggest alternatives.

7. Explain your views as clearly as possible, avoiding the use of profanity or personal threats.

8. Make sure to submit your comments by the comment period deadline identified.

Do not submit this information to EPA through regulations.gov or e-mail. Clearly mark the part or all of the information that you claim to be CBI. For CBI information in a disk or CD ROM that you mail to EPA, mark the outside of the disk or CD ROM as CBI and then identify electronically within the disk or CD ROM the specific information that is claimed as CBI). In addition to one complete version of the comment that includes information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the official file. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this proposed action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. For this reason, this action is also not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001). This proposed action merely proposes to approve state law as meeting Federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this proposed rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). Because this rule proposes to approve pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4).

This proposed rule also does not have tribal implications because it will not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes, as specified by Executive Order 13175 (65 FR 67249, November 9, 2000). This action also does not have Federalism implications because it does not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999). This action merely proposes to approve a state rule implementing a Federal standard, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This proposed rule also is not subject to Executive Order 13045 “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997), because it is not economically significant.

In reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. In this context, in the absence of a prior existing requirement for the State to use voluntary consensus standards (VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA, when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the Clean Air Act. Thus, the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. This proposed rule does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

Throughout this document wherever “we,” “us,” or “our” is used, we mean EPA.

EPA is proposing approval of the Highly Reactive Volatile Organic Compound Emissions Cap and Trade (HECT) Economic Incentive Program (EIP), published at Texas Administrative Code (TAC) Title 30, Chapter 101 General Air Quality Rules, Subchapter H, Division 6, Sections 101.390-101.394, 101.396, 101.399-101.401, and 101.403. These revisions were submitted to EPA on December 17, 2004. Once approved, the HECT EIP will be an element of the Texas State Implementation Plan (SIP) for the Houston/Galveston/Brazoria (HGB) ozone nonattainment area.

The HECT program was adopted as a State regulation on December 01, 2004. The Texas Commission on Environmental Quality (TCEQ) developed the program as part of its mid-course review of the 1-hour ozone attainment plan for the HGB ozone nonattainment area. The mid-course review showed that ozone reductions comparable to those achieved by the 90 percent reduction in industrial nitrogen oxide (NO X ) emissions required in the November 2001 (66 FR 57160) approved SIP could be achieved through a combination of 80 percent reduction in industrial NO X emissions and additional targeted control of certain highly-reactive volatile organic compounds (HRVOCs). TCEQ has chosen to revise its attainment strategy accordingly, decreasing the emphasis on NO X control and requiring additional reductions of HRVOCs. The HECT program is part of TCEQ's plan for achieving those additional HRVOC reductions.

Ground-level ozone forms when volatile organic compounds (VOCs) react with NO X compounds in the presence of sunlight. Some VOCs react more quickly in the photochemical reaction than other VOCs; which can result in rapid spikes of ozone formation. TCEQ has identified a number of VOCs in the HGB nonattainment area that behave in this manner: ethylene; propylene; all isomers of butene, alpha-butylene, and beta-butylene; and 1,3-butadiene. These VOCs are now classified by TCEQ as HRVOCs in 30 TAC Chapter 115.

The HECT program is part of the revised Texas plan to reduce ozone levels through the reduction of HRVOCs. The purpose of this document is to explain our proposed action on the HECT and why we believe the HECT is consistent with the Clean Air Act and with our policies on trading programs. In this document, we are not reviewing the impact on the HGB ozone attainment demonstration of the State's request to change from 90 percent to 80 percent NO X control. We are evaluating that change in strategy and its relationship to section 110(l) of the Clean Air Act in our review of the revisions to the overall attainment demonstration (RME Docket R06-OAR-2005-TX-0018). When we take final action on the attainment demonstration, we will also take final action on the HECT, in a separate rule.

The HECT program is similar to the multi-source emissions cap-and-trade program described in EPA's EIP Guidance “Improving Air Quality with Economic Incentive Programs” (EPA-452/R-01-001, January 2001). A multi-source emissions cap-and-trade program is designed to limit the total emissions from a certain category or group of sources to a level needed for an area to attain or maintain a national ambient air quality standard (NAAQS) and to allow sources flexibility in complying with their emission limits. In the HECT, TCEQ has established an annual HRVOC cap at the level relied on for attainment of the NAAQS for 1-hour ozone in 2007 in the revised attainment demonstration. As noted above, we are evaluating the merits of that demonstration in a separate rule (RME Docket R06-OAR-2005-TX-0018).

Under the HECT, in Harris County TCEQ has defined an HRVOC as one or more of the following VOCs: 1,3-butadiene; all isomers of butene, alpha-butylene, and beta-butylene; ethylene; and propylene. In Brazoria, Chambers, Fort Bend, Galveston, Liberty, Montgomery, and Waller Counties, an HRVOC is defined as ethylene and propylene. These compounds were identified based on their reactivity and prevalence in the HGB emissions inventory.

The HECT applies to each site in the HGB area that is subject to requirements in 30 TAC Chapter 115, Subchapter H, Division 1 for Vent Gas Control or Division 2 for Cooling Tower Heat Exchange Systems. EPA proposed approval of these HRVOC controls at 70 FR 17640, April 07, 2005. The HECT rule, at 30 TAC section 101.391, incorporates the definition of “site” at 30 TAC section 122.10: “the total of all stationary sources located on one or more contiguous or adjacent properties, which are under common control or the same person (or persons under common control).” Any HRVOC-emitting vent gas streams, flares, and cooling tower heat-exchange systems at these sites will be subject to the HECT and considered covered facilities. A site can have one covered facility or any combination of covered facilities. Each site that meets these requirements, or elected to opt in by April 30, 2005, will always be subject to the HECT.

Sites in the HGB area that have the potential to emit ten tons per year or less of HRVOCs from all covered facilities at the site are exempt from the HECT. These exempt sites had the opportunity to opt in to the HECT by notifying the TCEQ Executive Director in writing by April 30, 2005. Two sites in the HGB area submitted the opt-in notification to the TCEQ. No additional exempt sites will be eligible to opt in.

Additionally, all sites in Brazoria, Chambers, Fort Bend, Galveston, Liberty, Montgomery, and Waller Counties (the “seven surrounding counties”) are exempt from all HECT requirements other than the Level of Activity Certification requirements of 30 TAC section 101.401. When TCEQ proposed the HECT program, industry commented that the representations for HRVOC emissions in their air permits were significantly lower than the HRVOC cap that would be imposed on the seven county area. Sites in these seven surrounding counties agreed to take enforceable permit limits on propylene and/or ethylene instead of participating in the cap and trade program. In responding to comments on the proposal, TCEQ stated that it would only consider retaining the exemption if each site with a potential to emit more than 10 tpy of HRVOC established enforceable limits. The documentation establishing such enforceable limits was due to TCEQ by April 30, 2005. TCEQ will review these Level of Activity Certifications for sites in these counties to ensure that the enforceable limits achieve reductions comparable to those that would occur under the cap. Section 101.392 allows TCEQ to end this exemption by issuing public notice of its revocation.

The cap consists of allowances allocated by the TCEQ Executive Director to each facility in the HECT by January 1 of each year, beginning with January 1, 2007. Allocations are determined based on a site's contribution to overall level of activity and the area cap for HRVOCs. An allowance is the authorization to emit one ton of HRVOC emissions during a control period; the control period is the calendar year. The initial HECT control period begins January 1, 2007. A facility can choose to operate at, above, or below its allowance budget. A source operating below its allowance budget can bank or trade its allowances for use only in the next control period. A source operating above its allowance budget must purchase excess allowances from another source to demonstrate compliance with the cap. Beginning March 1, 2008, and no later than March 1 following the end of every control period, each facility must hold a quantity of allowances in its compliance account that is equal to or greater than the total emissions of HRVOCs emitted during the control period just ending. If a facility's actual emissions of HRVOCs during a control period exceed the amount of allowances held in the compliance account on March 1, allowances for the next control period will be reduced by an amount equal to the emissions exceeding the allowances in the compliance account, plus an additional 10 percent. This deduction does not preclude any additional enforcement action by the TCEQ. Additionally, if the site's compliance account does not contain sufficient allowances to cover this deduction, the TCEQ Executive Director may issue a notice of deficiency to the owner or operator. The owner or operator will then have 30 days from the notice of deficiency to purchase or transfer sufficient allowances to cover its compliance obligation. The HECT includes a provision to allow a facility to use emission reduction credits (ERCs) of less-reactive VOCs generated under the Texas Emission Credit Banking and Trading program (the “ERC rule”) in lieu of HECT allowances if the ERCs are generated in the HGB area and the generating facility meets additional monitoring and reporting requirements. The HECT also includes a provision that exempts HRVOC emissions that are above the short-term HRVOC limit established in 30 TAC Chapter 115 from being counted towards a site's annual cap.

Generally, SIP rules must be enforceable and must not interfere with attainment, reasonable further progress or any applicable requirement of the Clean Air Act. See Clean Air Act sections 110(a), 110(l), and 193.

A guidance document that we used to define evaluation criteria is “Improving Air Quality with Economic Incentive Programs” (EPA-452/R-01-001, January 2001) (EIP Guidance). This guidance applies to discretionary EIPs adopted by a State as part of a SIP to attain national ambient air quality standards (NAAQS) for criteria pollutants, but the EIP Guidance is not EPA's final action on discretionary EIPs. Final action as to any such EIP occurs when EPA acts on it after its submission as a SIP revision. Because the EIP Guidance is non-binding and does not represent final agency action, EPA is using the Guidance as an initial screen to determine whether potential approvability issues arise. A more detailed review of the HECT program as compared to the EIP Guidance is in the Technical Support Document (TSD) for the TCEQ Highly Reactive Volatile Organic Compound Emissions Cap and Trade Program for the HGB Nonattainment Area. The TSD is available at the location given in the ADDRESSES section of this document.

As described in detail in the EIP Guidance, EPA has identified three fundamental principles that apply to all EIPs: (1) Integrity (meaning that credits are based on emission reductions that are surplus, enforceable, quantifiable, and permanent), (2) equity, and (3) environmental benefit. The fundamental principles can apply to an EIP in its entirety (the programmatic level) or to individual sources (the source-specific level). EPA evaluated the HECT EIP against these three fundamental principles, specific concerns applicable to multi-source cap-and-trade programs, and applicable Clean Air Act requirements. Our complete analysis of the HECT EIP is contained in the TSD for this action.

The integrity principle consists of the qualities of surplus, enforceable, quantifiable, and permanent.

Integrity Element One—Surplus. The first element of integrity is to determine whether the emissions reductions targeted by the EIP are surplus. Emission reductions are surplus if they are not otherwise relied on by the State in any other air quality-related programs including: the SIP, SIP-related requirements such as transportation conformity, other adopted TCEQ measures not in the SIP, and Federal rules that focus on reducing precursors of criteria pollutants such as new source performance standards. Additionally, if the multi-source emission cap-and-trade program is claiming reductions, the State must demonstrate that the cap on all emissions is below the threshold that would have been set for the affected sources before the program was implemented. The surplus element does not apply to the individual sources participating in a multi-source emission cap-and-trade program because sources have the option of making reductions or purchasing unused allowances from other facilities in the cap-and-trade program.

At the programmatic level, EPA has determined that the HECT program satisfies the integrity element of surplus. TCEQ established the cap on HRVOC emissions based on historical activity levels, air quality data, and modeling completed during the mid-course SIP review. To address uncertainty in the HRVOC inventory, TCEQ included a five percent buffer in the cap. The development of the cap level and the 5 percent buffer ensures that the cap will result in overall HRVOC emission reductions in the HGB area. Section 101.393 of the HECT specifically requires that reductions be surplus in a programmatic sense, by stating that allowances under the HECT may only be used for the purposes described in the rule.

The VOC ERCs eligible for conversion into HECT allowances must also meet the surplus criteria of the ERC rule at 30 TAC Chapter 101, Subchapter H, Division 1. EPA is not evaluating the ERC rule in this document. For further discussion of how the Division 1 ERCs are surplus, please refer to our separate action on the ERC Rule at RME Docket R06-OAR-2005-TX-0006.

For the above reasons, and as further explained in the TSD, EPA has concluded that the HECT is consistent with Clean Air Act requirements and EPA Guidance expectations for the integrity element of surplus.

Integrity Element Two—Enforceable. The generation and use of emission reductions and other required actions in the EIP are enforceable on a programmatic basis if they are independently verifiable and if the EIP defines program violations and identifies those liable for violations. For enforceability, both the State and EPA should have the ability to apply penalties and secure appropriate corrective actions where applicable. Citizens should also have access to all the emissions-related information obtained from the source so that citizens can file suits against sources for violations. Required actions must be practicably enforceable. At the source-specific level, the source must be liable for violations; the liable party must be identifiable; and the State, the public, and EPA must be able to independently verify a source's compliance. Additionally, EIPs that involve trading must incorporate provisions for assessing liability, provisions to assess penalties against participating sources, and provisions for sources with Title V permits. In multi-source emission cap-and-trade EIPs, each source owner or operator must be responsible for owning enough allowances to cover its emissions for the given time period and for providing clear title to the allowances it transfers.

EPA has determined that the HECT program is enforceable. The monitoring and testing protocols established in 30 TAC Chapter 115 are adequate for independent verifications of emission reductions and for demonstrating practicable enforceability. Additionally, the VOC ERCs that are eligible for conversion into HECT allowances must be quantified using the monitoring and testing methods under sections 115.725 or 115.764 and must meet the recordkeeping and reporting requirements under sections 115.726 and 115.766. An owner or operator can violate the HECT by either not having enough allowances to cover its actual emission level for a control period or by failing to submit an Annual Compliance Report on time, as defined at sections 101.394(e) and 101.400(b). The liable party is either the owner or operator of a subject facility. Information to be made available to the public is addressed at sections 101.399(b)(3), 101.399(c)(3), 101.399(d)(3), 101.403(a)(3), and 101.403(b). The allowance banking and trading provisions in section 101.399 also provide clear title to the allowances transferred.

Penalties, corrective action, and citizen filing of lawsuits are not addressed in the HECT rules but are in separate State laws and regulations. In particular, Texas Water Code section 7.051 provides for the assessment of administrative penalties by TCEQ, and section 7.032 provides for injunctive relief by TCEQ. The TCEQ enforcement rule at 30 TAC section 70.5 incorporates remedies found in the state statutes (Texas Water Code and the Texas Health and Safety Code), and permits referrals to EPA for civil, judicial or administrative action. It is our conclusion the TCEQ has adequate legal authority to enforce the HECT program. Once we approve the HECT rule into the SIP, EPA will be able to enforce it under section 113 of the Clean Air Act. Recordkeeping requirements specific to the HECT program are set forth at section 101.400.

For the above reasons, and as further explained in the TSD, EPA has concluded that the HECT is consistent with Clean Air Act requirements and EPA Guidance expectations for the integrity element of enforceability.

Integrity Element Three—Quantifiable. On a programmatic basis, emissions and emission reductions attributable to an EIP are quantifiable if the source can reliably and replicably measure or determine them. The generation or use of emission reductions by a source or group of sources is quantifiable on a source-specific basis if the sources can reliably calculate the amount of emissions and/or emission reductions occurring during the implementation of the program, and replicate the calculations. Additionally, individual sources participating in a multi-source emission cap-and-trade program must also quantify total emissions per unit of time. All EIPs should incorporate provisions for predicting results, addressing uncertainty, approving quantification protocols, and emission quantification methods.

EPA has determined that the HECT program addresses the necessary provisions for quantifiability. Emissions and/or emission reductions under the HECT follow the monitoring and testing protocols in Chapter 115, thus satisfying the need to be reliably and replicably measured. Sections 115.725 and 115.764 require sites to install and operate continuous monitoring systems. Sources subject to the HECT will quantify total emissions per unit time by submitting the required Annual Compliance Report detailing actual HRVOC emissions during the control period.

Integrity Element Four—Permanent. To satisfy the permanence element of the integrity principle, a compliance flexibility EIP must ensure that no emission increases (compared to emissions if there was no EIP) occur over the time defined in the SIP. For a programmatic reduction EIP, the emissions reductions are permanent if the State is able to ensure that the reductions occur over the duration of the EIP, and for as long as the reductions are relied on in the SIP.

EPA has determined that the HECT program meets the definition of a compliance flexibility EIP because it provides sites with flexibility in meeting existing SIP requirements and lowers the cost of implementing a SIP. The HECT also meets the definition of a programmatic reduction EIP because the cap is established at a level that will achieve emission reductions beyond what are currently in the SIP. The HECT rules and other elements of the HGB attainment demonstration are designed to ensure that programmatic reductions occur over the duration of the HECT program, and for as long as they are relied on in the SIP. The TCEQ Executive Director will allocate allowances (the authorization to emit one ton of HRVOC) each year on January 1, starting January 1, 2007. The integrity element of permanence does not apply to individual sources participating in the HECT because sources have the option to make reductions or purchase unused allowances from other sources program. We conclude that the HECT EIP satisfies the integrity element of permanence.

Equity Element One—General Equity. General equity means that an EIP ensures that all segments of the population are protected from public health problems and no segment of the population receives a disproportionate share of a program's disbenefits.

The HECT EIP is designed to benefit all communities in the HGB area. The cap in Harris County permanently caps emissions of four HRVOCs—ethylene, propylene, 1,3-butadiene, and all isomers of butenes. Not only will the HECT reduce the amount of ozone precursors emitted in Harris County, it permanently caps emissions of a hazardous air pollutant. The enforceable limits in the seven surrounding counties for ethylene and propylene, which are the result of permit limits agreed to between TCEQ and the affected sites, will also reduce emissions of ozone precursors. Additionally, section 101.394(e) requires an owner or operator of a facility that emits more HRVOCs than its allowance holding to surrender an amount of allowances equal to the exceedance plus an additional 10 percent as an environmental benefit. We conclude that the HECT meets the requirements for general equity.

Equity Element Two—Environmental Justice. The environmental justice element applies if the EIP covers VOCs and could disproportionately impact communities populated by racial minorities, people with low incomes, and/or Tribes. EIPs that include hazardous air pollutants (HAPs) must also satisfy the expectations of Appendix 16.2 of the EIP Guidance, which addresses prevention and/or mitigation of impacts from potential or actual trades involving HAPs, ensuring that sufficient information is made available for meaningful review and participation, public participation, and periodic program evaluations.

The HECT is designed to permanently cap emissions of four HRVOCs, including one HAP (1,3-butadiene). EPA has evaluated the HECT with respect to the HAP Framework and EIP Guidance and determined that the environmental justice element of equity has been met.

Compliance with the HAP Framework element for the prevention and/or mitigation of localized impacts from potential or actual trades involving HAPs is demonstrated through the HECT audit program established in section 101.403. Under this section, the TCEQ Executive Director may limit or discontinue trading of allowances as a remedy for problems resulting from trading in a localized area of concern. Additionally, the TCEQ Executive Director must approve all trades of HECT allowances.

Compliance with the HAP Framework element for sufficient information is demonstrated further by section 101.399, which provides that all information regarding price and quantity of allowances trades must be available to the public. Additionally, the required annual compliance reports and periodic program audits must be available to the public.

The HECT program satisfies the HAP Framework element for public participation in the development, implementation, and evaluation of the program. In the development of the HECT rules, TCEQ held public hearings in Austin, Beaumont, and Houston. TCEQ also has an extensive stakeholder list of approximately 150 contacts who receive copies of all TCEQ rulemaking actions for comment and participation in development. During the implementation of the HECT EIP, the public has the opportunity to view the Annual Compliance Reports submitted by each source and the end of year reports prepared by the TCEQ in accordance with section 101.403(b). Public participation is incorporated into the evaluation of the HECT EIP at section 101.403(a)(3), which provides for public participation in the audit of the HECT rule.

The final element of the HAP Framework, program evaluations, is satisfied at section 101.403, which establishes the HECT audit program. The rule requires a program audit every three years, with emphasis on the impact on attainment and compliance by the participants. The audit results must be available for public inspection.

As an added measure that demonstrates general equity and environmental justice, TCEQ has developed the Toxicological Risk Assessment (TARA) Effects Evaluation Procedure. Under this process, which is authorized under section 382.0518(b)(2) of the Texas Health and Safety Code, TCEQ may not grant a permit to a facility and a facility may not begin operating unless it is demonstrated that emissions will not have an adverse impact on public health and welfare. This demonstration is accomplished by (1) establishing off-property ground-level-air concentrations of constituents resulting from the proposed emissions, and (2) evaluating these concentrations for the potential to cause adverse health or welfare effects. The TARA Effects Evaluation is used to evaluate the use of HECT allowances in an air permit. The TCEQ guidance document “How to Determine the Scope of Modeling and Effects Review for Air Permits” (RG-324, Oct. 2001) has a detailed discussion of the TARA Effects Evaluation procedures.

All EIPs must be environmentally beneficial. The HECT demonstrates an environmental benefit by setting a cap on HRVOCs that will help the HGB area in achieving attainment of the NAAQS as expeditiously as practicable. Additionally, the HECT places a cap on emissions of a HAP (1,3-butadiene), thereby lowering the emissions of this toxic chemical in the HGB area. Sources that emit more HRVOCs than they have allowances will also be required to surrender the amount equal to the exceedance plus 10 percent as an environmental benefit.

In addition to determining the programmatic and source-specific integrity elements for an EIP, it is important to determine whether the EIP generates emission reductions in a manner consistent with other EIPs functioning in the same area. One feature of the HECT combines two of the State of Texas' Emissions Banking and Trading Programs, in that it allows a participating facility to convert reductions of less-reactive VOCs, generated and banked according to the 30 TAC Chapter 101, Subchapter H, Division 1 Emission Credit Banking and Trading rule, into a yearly HECT allocation. The site's owner or operator quantifies the VOC emission reduction credits (ERCs) by performing the expanded monitoring and testing methods under 30 TAC sections 115.725 or 115.764 and using the recordkeeping and reporting outlined in 30 TAC sections 115.726 and 115.766. ERCs eligible for this conversion must be generated from a reduction at a site in the HGB area; from a reduction strategy implemented after December 31, 2004; and from a reduction in VOC species other than those defined as HRVOCs under 30 TAC Chapter 115.10. Additionally, the VOC ERCs must be real, quantifiable, surplus, enforceable, and permanent as specified in the ERC rule at section 101.302 at the time the ERC is converted. Section 101.399 of the HECT specifies that VOC reductions from the installation of best available control technology do not qualify for conversion into HRVOC allocations. This restriction on ERC generation is in addition to the surplus requirements of section 101.302. To satisfy the criteria of the ERC program, the reductions must be surplus to required local, State, and Federal programs such as the application of maximum achievable control technology, new source performance standards, or lowest achievable emission rate.

The conversion of less-reactive VOC ERCs into HRVOC allowances is limited to five percent of the site's initial HRVOC allocation, and is based on VOC to HRVOC conversion ratios specified by the Maximum Incremental Reactivity (MIR) scale. The MIR scale is based on research by Dr. William Carter and others at University of California at Riverside, who sought a method of quantifying the reactivity differences among VOCs (Carter, 1995; Carter et al. , 1995). The MIR is a measure of the number of grams of ozone that can be formed from one gram of the subject VOC, under ideal conditions. To determine the relative importance of different VOCs from a reactivity perspective, reactivity-weighted concentrations of specific compounds or groups of compounds were calculated. Reactivity-weighted concentrations take into consideration the substances' capability to form ozone as well as their measured ambient concentrations.

As further discussed in the TSD for this rule and in the attainment demonstration TSD, the program feature allowing generation of HRVOC allowances using reductions in less-reactive VOCs does not prevent approval of the program, because the expected impact on the attainment demonstration is expected to be minimal. Texas is making an allowance for a small increase in HRVOCs (up to 5 percent) to be offset with larger reductions in less-reactive VOCs. Modeling sensitivity analyses were performed by the University of Texas and documented in a report, titled “Survey of Technological and Other Measures to Control HRVOC Event Emissions.” In this report, trades of less-reactive VOCs much larger than would be allowed with the 5 percent cap were considered. In the sensitivity runs, the impacts ranged from a 2.1 ppb increase to a 3 ppb decrease in the peak ozone, depending on the episode day and the assumptions made about the less-reactive chemical that was reduced. The researchers looked at the impact of adding between 15 and 33 tpd of HRVOC to the model while removing the requisite amount of less-reactive VOCs. Under the rule, capping trades at a 5 percent increase in highly-reactive VOCs, an increase of less than 2 tpd of HRVOCs would be all that could be allowed. Therefore, the impact of the actual program is expected to be minimal.

In addition, for sources that participate in the program, this feature will have the advantage of implementing additional source monitoring on less-reactive VOCs. EPA proposed approval of the monitoring and testing methods in 30 TAC sections 115.725 and 115.764 and the recordkeeping and reporting requirements in 30 TAC sections 115.726 and 115.766 on April 07, 2005 (70 FR 17640). Based on the above modeling that indicates that this limited conversion of less-reactive VOCs will have a minimal impact on ozone levels, EPA concludes that even with this feature, the HECT program provides compliance flexibility and a significant strengthening of the SIP by contributing to reduced ozone levels in the HGB area.

Our proposed approval does not represent a general endorsement of the use of the MIR scale for use in SIPs that contain EIPs. In this instance, with the aforementioned technical support, we believe this is an acceptable approach, which is consistent with EPA's recently issued “Interim Guidance on the Control of Volatile Organic Compounds in Ozone State Implementation Plans” (August 25, 2005). EPA will continue to investigate how best to incorporate reactivity concepts and consider changes to existing policy.

Texas has included features in the adopted HRVOC rules defining the interaction between the annual cap and short-term limit (established at 30 TAC Chapter 115, Subchapter H) that are unique to the HECT. Typically, all emissions during the year would be counted toward compliance with an annual cap. In establishing a cap-and-trade system for the petrochemical industry in the HGB area, TCEQ felt it necessary to consider the possibility of major upsets. TCEQ believed that non-routine emissions from process upsets, while likely to occur, are not predictable and therefore could make management of emissions under an annual cap difficult. Therefore, TCEQ established in its rule that emissions above the 1200 lb/hr short-term limit are not counted toward compliance with the annual cap but rather are expected to be controlled by the short-term limit. TCEQ was particularly concerned about the potential situation where a single large release could force a smaller source to shut down for the remainder of the year because its allowances had been exhausted.

Although EPA agrees that a forced shutdown of smaller sources is possible, it believes that many upsets can be avoided by a source through the development and implementation of operation and maintenance plans that address start-up, shutdown and malfunction of process equipment and application of good air pollution control practices such as required by 40 CFR 60.18(d). EPA notes that application of these procedures would significantly reduce the emissions associated with such start-up, shutdown, and malfunction events and could avoid the need for a forced shutdown. In addition, planning and management of emissions by the source, including participation in the allowance market, should also avoid a forced shutdown while ensuring compliance with the annual cap.

Emissions above the short-term limit would still be subject to enforcement as a violation of the short-term limit, but only 1200 lbs would be reported for compliance with the annual cap during those hours where emissions exceed 1200 lbs. It is our expectation that the root cause of the conditions giving rise to the emissions above the short-term cap will be identified and corrected. Moreover, the source is still required to use good air pollution control practices consistent with the applicable NSPS (40 CFR 60.11(d)) and MACT standards or other applicable Federal or State programs.

The structure of the Texas HECT program, which does not require emissions above the short-term limit to be counted against the annual cap, is a significant departure from past practices for cap-and-trade programs such as the Title IV Acid Rain program and the Houston NO X cap-and-trade program. EPA's EIP Guidance regarding multi-source emissions cap-and-trade programs indicates that all sources in the program must account for all of their emissions. See section 7.4 of the EIP Guidance. We believe, in this instance, that the approach of not counting emissions above the short-term limit toward the annual cap has both advantages and disadvantages as discussed below. We are inviting comment on the appropriateness of approving a program with this structure, as we remain concerned about excess emissions resulting from poor operation or poor maintenance.

We believe that the structure of the HECT rule has the advantage of establishing a clear procedure for how emissions during non-routine events will be handled. For every hour during a large emissions event, the source will include 1200 lbs toward meeting its annual cap. This will avoid disputes about the validity of data during large emission events, when monitoring may be less reliable. The rule clearly defines the procedures to be followed during an emission event. Sources will have no choice but to ensure that at the end of the compliance period they have sufficient allowances to cover all of the emissions up to the 1200 lb limit, or else face deductions from their compliance account and other potential penalties. In addition, emissions above that level would be subject to enforcement under the short-term limit.

On the other hand, the structure of the rule has the disadvantage that some of the incentive to prevent large releases is lost by excluding emissions above the short-term limit from the annual cap. In addition, some of the incentive for reducing the size of large events, when they occur, may also be lost. With the annual cap-and-trade program's exclusion of emissions above the hourly (short-term) limit, it is probable that fewer violations of the annual cap will occur than if the exclusion had not been provided. For sources that would have violated the annual cap if emissions above the short-term limit were considered, it may be harder to promote systemic changes at those sources to reduce overall emissions.

Having looked at the advantages and disadvantages, we are proposing approval of the HECT program. We are proposing approval because, even though it provides an exclusion for non-routine emissions above the short-term limit from the annual cap, it provides new enforceable limits that are an improvement on the status quo. We believe the annual cap in conjunction with the short-term limit will achieve the goals of the attainment demonstration as indicated by the modeling analysis. The annual cap should result in the necessary reductions in routine emissions and the short-term limit should result in a reduction in the amount and frequency of non-routine emission events. We note that the program rules require TCEQ to audit the HECT program every three years, and facilities have to provide compliance reports annually, so it will be readily apparent if the goals of the HECT program are being achieved.

We believe the program will achieve the necessary reductions in routine emissions because the size of the short-term limit is such that only truly non-routine emissions will not be counted toward the annual cap. Based on evaluation of the emission rates that were modeled in the January 2003 SIP, the 1200 lb/hour limit is expected to be about ten times larger than the average hourly emission rate at the largest sources of HRVOCs. This order of magnitude difference between the short-term limit and the average annual hourly emissions ensures that sources will not routinely operate near or above the short-term limit, thus achieving the goal of reducing routine emissions.

Also, while the structure of the HRVOC rules anticipates that emission events will not be completely eliminated, EPA believes that it provides sufficient disincentives that sources will sufficiently reduce the frequency and magnitude of large emissions events such that emission events would not be expected to frequently impact peak ozone levels. The University of Texas report “Variable Industrial VOC Emissions and Their Impact on Ozone Formation in the Houston Galveston Area,” April 16, 2004, estimated from historic information that it is probable that at least one event will occur annually at a time and location to impact peak ozone. This indicates that while emission events are frequent in the Houston area, emission releases at the place and time that impact peak ozone do not occur nearly as frequently. It is necessary to reduce the frequency of emission events so that emission events do not interfere with attainment of the 1-hour NAAQS, which only allows an average of one exceedence per year. Based on the study, we believe the hourly emission limit will achieve this goal. After the institution of the short-term limit, EPA expects that emissions events impacting peak ozone levels will be reduced in frequency to fewer than one per year. While other events may occur that impact ozone levels at other locations than where the peak ozone level occurs, these events, because they are occurring in areas with lower ozone levels, would not be expected to impact attainment of the 1-hour NAAQS.

Again, EPA recognizes that the approach of providing this partial exclusion for emissions above the short-term limit is a departure from past practice and our EIP Guidance. We currently believe this approach is only warranted in consideration of the HGB area's unique situation that combines an extensive petrochemical complex and the availability of the extensive data and analysis. Consideration of this novel approach is warranted to balance the need to reduce both routine and upset emissions of HRVOC, but also recognizes that large upset emissions may never be completely eliminated in the petrochemical industry. Because of the uniqueness of this approach, however, we invite comment on of our proposed approval of this facet of the Texas plan.

Section 110(l) of the Clean Air Act states:

As a general matter, the satisfaction of the environmental benefit principle and the other integrity principles applicable to trading programs will tend to demonstrate that a trading program will be consistent with section 110(l). In the case of the HECT program, we are proposing approval of a new set of measures instituting new controls on a class of VOCs that are more stringent than previous controls on VOCs. The HECT rules being proposed for approval provide no relief from any previously approved VOC rule or any other applicable requirement. Therefore, the proposed approval of the HECT rules is consistent with section 110(l).

Here, however, as previously noted, the revisions to the HECT are a part of a revised ozone attainment strategy for the HGB area. In addition, we are reviewing the limited use of ERCs in the HECT. The revised strategy's reduced level of industrial NO X control and the effect of the use of ERCs in the HECT are being evaluated separately in the HGB attainment demonstration for the 1-hour ozone standard. The section 110(l) analysis for our action on the HECT therefore relies on the analysis conducted for the HGB attainment demonstration. Based on our analysis of the attainment demonstration, we conclude that the HECT, in conjunction with all other controls in the attainment demonstration, satisfies section 110(l).

EPA reviewed the HECT SIP submittal with respect to the expectations of the EIP Guidance document and the requirements of the Clean Air Act. EPA has concluded after review and analysis that the HECT EIP is approvable. EPA is proposing to approve the new sections 101.390-101.394, 101.396, 101.399, 101.401, and 101.403 submitted by TCEQ on December 17, 2004, for rule log number 2004-0058-101-AI. These rules provide new requirements that will reduce emissions of HRVOCs in the HGB ozone nonattainment area.

We will not take final action on these rules until we finally approve the attainment demonstration. Additionally, the HECT program cannot be finally approved until the EPA finalizes approval of the 30 TAC Chapter 115 HRVOC rules that provide the enforceable monitoring and recordkeeping requirements sufficient to demonstrate practicable enforceability and quantifiability. Provisions allowing ERC use in the HECT program will also not be fully approved until the rules for ERC generation and use have been approved. The attainment demonstration and the Chapter 115 and ERC rules are being considered in separate Federal Register notices.

When submitting comments, remember to:

1. Identify the rulemaking by File ID number and other identifying information (subject heading, Federal Register date and page number).

2. Follow directions—The agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulations (CFR) part or section number.

3. Explain why you agree or disagree; suggest alternatives and substitute language for your requested changes.

4. Describe any assumptions and provide any technical information and/or data that you used.

5. If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced.

6. Provide specific examples to illustrate your concerns, and suggest alternatives.

7. Explain your views as clearly as possible, avoiding the use of profanity or personal threats.

8. Make sure to submit your comments by the comment period deadline identified.

Do not submit this information to EPA through regulations.gov or e-mail. Clearly mark the part or all of the information that you claim to be CBI. For CBI information in a disk or CD-ROM that you mail to EPA, mark the outside of the disk or CD-ROM as CBI and then identify electronically within the disk or CD-ROM the specific information that is claimed as CBI. In addition to one complete version of the comment that includes information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the official file. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

The Office of Management and Budget (OMB) has exempted this regulatory action from Executive Order 12866, “Regulatory Planning and Review.” (58 FR 51735 (October 4, 1993)). This proposed rule is not a “significant energy action” as defined in Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355 (May 22, 2001)), because it is not likely to have a significant adverse effect on the supply, distribution, or use of energy. This proposed action merely proposes to approve state law as meeting Federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this proposed rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). Because this rule proposes to approve pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, EPA has determined that this rule does not contain a Federal mandate that may result in expenditures of $100 million or more for State, local, or tribal governments in the aggregate, or on the private sector, in any one year. Thus, today's rule is not subject to the requirements of sections 202 and 205 of the Unfunded Mandates Reform Act of 1995 (UMRA) (Pub. L. 104-4). In addition, EPA has determined that this rule contains no regulatory requirements that might significantly or uniquely affect small governments in accordance with section 203 of UMRA.

This proposed rule also does not have tribal implications because it will not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes, as specified by Executive Order 13175, “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, (November 9, 2000)). This action also does not have federalism implications because it does not have substantial direct effects on the States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132, “Federalism” (64 FR 43255, (August 10, 1999)). This action merely proposes to approve a state rule implementing a Federal standard, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This proposed rule also is not subject to Executive Order 13045, “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, (April 23, 1997)). EPA interprets Executive Order 13045 as applying only to those regulatory actions that are based on health or safety risks, such that the analysis required under section 5-501 of the Order has the potential to influence the regulation. This proposed rule is not subject to Executive Order 13045 because it approves a state program.

Section 12 of the National Technology Transfer and Advancement Act (NTTAA) of 1995 (15 U.S.C. 272 note) requires Federal agencies to evaluate existing technical standards when developing a new regulation. To comply with NTTAA, EPA must consider and use “voluntary consensus standards” (VCS) if available and applicable when developing programs and policies unless doing so would be inconsistent with applicable law or otherwise impractical. In reviewing a SIP submission, EPA has no authority under the Clean Air Act, in the absence of a prior existing requirement for the State to use VCS, to disapprove a SIP submission for failure to use VCS. Thus, it would be inconsistent with applicable law for EPA to use VCS in place of a SIP submission that otherwise satisfies the provisions of the Clean Air Act and further consideration of VCS is not required. Under the Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq. ), OMB must approve all “collections of information” by EPA. The Act defines “collection of information” as a requirement for “answers to * * * identical reporting or recordkeeping requirements imposed on ten or more persons.” (44 U.S.C. 3502(3)(A)). This proposed rule does not impose an information collection burden under the provisions of the PRA.

Throughout this document wherever “we,” “us,” or “our” is used, we mean EPA.

EPA is proposing approval of the Emission Credit Banking and Trading program, also referred to as the Emission Reduction Credit (ERC) program, enacted at Texas Administrative Code (TAC) Title 30, Chapter 101 General Air Quality Rules, Subchapter H, Division 1, sections 101.300-101.304, 101.306, 101.309, and 101.311. Also in this document, EPA is proposing approval of section 115.950 in 30 TAC Chapter 115, Control of Air Pollution from Volatile Organic Compounds, which cross-references the ERC program. EPA is also proposing approval of the definition of “facility” published at 30 TAC Chapter 116, Control of Air Pollution by Permits for New Construction or Modification, Subchapter A, section 116.10(4). These revisions were provided in SIP revisions dated July 22, 1998; December 20, 2000; July 15, 2002; January 31, 2003, and December 06, 2004.

In the ERC program, a source generates emission credits (ECs) from voluntary reductions that are surplus to any applicable local, state, and/or federal requirements. Emission credit is a generic term that encompasses reductions from stationary sources, emission reduction credits (ERCs), and reductions from mobile sources, mobile emission reduction credits (MERCs). Reduction strategies generating ECs are required to be permanent and will be made enforceable by a signed commitment from the generating facility. The source can then use these ECs later, or trade them to another source to use later. ECs can be used as an alternative means of compliance with the reduction requirements of 30 TAC Chapters 114, 115, and 117 (relating to Control of Air Pollution from Motor Vehicles; Control of Air Pollution from Volatile Organic Compounds; and Control of Air Pollution from Nitrogen Compounds), as offsets for Nonattainment New Source Review permits, or as annual allocations under the Mass Emission Cap and Trade Program (30 TAC Chapter 101, Subchapter H, Division 3, section 101.356). Once applied to a facility for use, an EC is valid for the life of that facility.

Eligible EC generator categories include facilities (including area sources); mobile sources; or any facility, including area sources, or mobile sources associated with actions by Federal agencies under 30 TAC 101.30 (relating to Conformity of General Federal Actions to SIPs). The ERC rule, at 30 TAC section 101.300(13), incorporates the definition of “facility” at 30 TAC section 116.10: “a discrete or identifiable structure, device, item, equipment, or enclosure that constitutes or contains a stationary source including appurtenances other than emission control equipment.” ERCs and MERCs must be reviewed by the state to determine if they are creditable and certified by the TCEQ Executive Director before inclusion in the TCEQ ERC Registry. Additionally, ERCs and MERCs must be shown to be surplus at the time of use before being applied to a use strategy.

Under the ERC rules, reductions of criteria pollutants, excluding lead, or of precursors of criteria pollutants for which an area is designated nonattainment, may qualify as ECs. Reductions of one pollutant may not be used to meet the reduction requirements for another pollutant, unless urban airshed modeling demonstrates that one ozone precursor may be substituted for another subject to approval by the TCEQ Executive Director and the EPA. Or, as provided in the ERC rules, if the facility generating the emission reductions is located outside the United States, one pollutant may be substituted for another if the substitution results in a greater health benefit and is of equal or greater benefit to the overall air quality of the area as determined by the TCEQ Executive Director. Additionally, the substitution must be from the reduction of an air contaminant for which the area has been designated as nonattainment or which leads to the formation of a criteria pollutant for which an area has been designated as nonattainment, and must be for any air contaminant for which the area has been designated as nonattainment or leads to the formation of a criteria pollutant for which the area has been designated as nonattainment. The user of the ECs generated outside the United States must demonstrate that the use of the reduction does not cause localized health impacts, as determined by the TCEQ Executive Director; submit all supporting information for calculations and modeling, and any additional information requested by the Executive Director; and must be located within 100 kilometers of the Texas—Mexico border. An EC must be used in the nonattainment area in which it is generated unless the user has obtained prior written approval of the Executive Director and EPA. This approval requirement would, of course, apply to all transactions involving reductions made outside of the United States. Except for ECs generated outside of the United States, only emission reductions generated in nonattainment areas can be certified. Please see section I.C.7 for a discussion of issues associated with international trading.

In this action, when we refer to this program as “the ERC rule” or “the ERC program” we are speaking of the entire Emission Credit Banking and Trading program, which encompasses both ERCs and MERCs.

The ERC rules establish a type of Economic Incentive Program (EIP). This program provides flexibility for sources in complying with certain State and Federal requirements. The ERC program was first adopted by the State at 30 TAC section 101.29 on December 23, 1997, for use with volatile organic compound (VOC) and nitrogen oxides (NO X ) requirements in ozone nonattainment areas. Effective January 18, 2001, section 101.29 was repealed and Chapter 101, Subchapter H, Divisions 1, 3, and 4 were created for the ERC, Mass Emissions Cap and Trade (MECT) in the Houston/Galveston/Brazoria (HGB) ozone nonattainment area, and Discrete Emission Credit Banking and Trading (DERC) programs, respectively. The submittal effective April 14, 2002, amended the geographic scope of the ERC program to include provisions for reductions generated outside the United States at section101.302. The submittal effective January 17, 2003, completely reorganized the ERC and DERC program rules into more standardized formats parallel to each other, with a rule structure that followed a process of recognizing, quantifying, and certifying reductions as credits while explaining the guidelines for trading and using creditable reductions. This submittal amended sections 101.300, 101.301, 101.302, 101.303, 101.304, 101.306, 101.309, and 101.311. The most recent submittal of December 06, 2004, amended sections 101.300, 101.302, 101.303, 101.304, and 101.311; expanding the ERC program to cover reductions of criteria pollutants (excluding lead) or precursors of criteria pollutants for which an area is designated nonattainment. The ERC program adoption and the subsequent revisions were submitted to EPA for approval into the SIP; however, this proposed approval is the first time we have acted on this program. In doing so we are acting on the original submission and all subsequent revisions through the December 06, 2004, submittal.

Generally, SIP rules must be enforceable and must not relax existing requirements. See Clean Air Act sections 110(a), 110(l), and 193.

A guidance document that we used to define evaluation criteria is “Improving Air Quality with Economic Incentive Programs” (EPA-452/R-01-001, January 2001) (EIP Guidance). This guidance applies to discretionary economic incentive programs (EIPs) adopted to attain national ambient air quality standards (NAAQS) for criteria pollutants, but the EIP Guidance is not EPA's final action on discretionary EIPs. Final action as to any such EIP occurs when EPA acts on it after its submission as a SIP revision. Because the EIP Guidance is non-binding and does not represent final agency action, EPA is using the guidance as an initial screen to determine whether potential approvability issues arise. A more detailed review of the ERC Program as compared to the EIP Guidance is in the Technical Support Document (TSD) for the TCEQ Emission Credit Banking and Trading Program. The TSD is available as specified in the section of this document identified as ADDRESSES.

Fundamental principles that apply to all EIPs are integrity (meaning that credits are based on emission reductions that are surplus, enforceable, quantifiable, and permanent), equity, and environmental benefit. These fundamental principles can apply to an EIP in its entirety (the programmatic level) or to individual sources (the source-specific level). EPA evaluated the ERC EIP against these three fundamental principles and applicable Clean Air Act requirements. Our complete analysis of the ERC program is contained in the TSD for this action.

The integrity principle consists of the qualities of surplus, enforceable, quantifiable, and permanent. Each element applies to the ERC EIP at the programmatic and source-specific level.

Integrity Element One—Surplus. The element of surplus as it applies to the ERC program provides that programmatic emission reductions are surplus as long as they are not otherwise relied on in any other air quality-related programs including: the SIP, SIP-related requirements such as transportation conformity, other adopted TCEQ measures not in the SIP, and federal rules that focus on reducing precursors of criteria pollutants such as new source performance standards. In addition to the programmatic concerns, if emission reductions are to be surplus at a source-specific level then the creation of the reductions cannot be required by a consent decree. Emission reductions measured by sources on a prospective basis are surplus if the projected baseline emissions from the source or group of sources are properly accounted for in the applicable inventory or by using an acceptable baseline.

The ERC program satisfies the surplus criteria at both the programmatic and source-specific levels. For reductions to be certified as either ERCs or MERCs, the reduction must be enforceable, permanent, quantifiable, real, and surplus at the time of generation and use according to section 101.302(c). Surplus is defined in the ERC program at section 101.300(30) to be an emission reduction that is not otherwise required of a facility or mobile source by any local, state, or federal law, regulation, or agreed order and has not been otherwise relied upon in the SIP. Additionally, mobile sources must have been included in the attainment demonstration baseline emissions inventory as specified in section 101.302(c)(2)(E). Section 101.303(b) specifies that the baseline for ERC generation may not exceed the quantity of emissions reported in the most recent year of emissions inventory used in the SIP. Also, for reductions being certified for use as new source review (NSR) offsets, the baseline emissions may not exceed the quantity of emissions reported in the emissions inventory used in the SIP in place at the time the reduction strategy was implemented.

Integrity Element Two—Enforceable. Emission reductions use, generation, and other required actions in the EIP are enforceable on a programmatic basis if they are independently verifiable, define program violations, and identify those liable for violations. For enforceability, both the state and EPA should have the ability to apply penalties and secure appropriate corrective actions where applicable. Citizens should also have access to all the emissions-related information obtained from the source so that citizens can file suits against sources for violations. Required actions must be practicably enforceable in accordance with other EPA guidance on practical enforceability. At the source-specific level, the source must be liable for violations, the liable party must be identifiable, and the state, the public, and EPA must be able to independently verify a source's compliance. In addition to addressing the enforcement concerns discussed above, trading EIPs must incorporate provisions for assessing liability, provisions to assess penalties against participating sources, and provisions for sources with Title V permits.

The ERC program submittal satisfies the enforceable element of the integrity principle. ERCs will be made enforceable:

• By amending or altering a New Source Review permit to reflect the emission reduction and set a new maximum allowable emission limit;

• By voiding an NSR permit, when a facility has been shut down;

• For any facility authorized by standard permit, standard exemption, or permit by rule, by certifying the emission reduction and the new maximum allowable emission limit on a PI-8 Form, Special Certification Form for Exemptions and Standard Permits, or other form deemed equivalent by the executive director;

• For any facility not required to have a permit authorization by permit, standard permit, standard exemption, or permit by rule, by certifying the emission reduction and the new maximum allowable emission limit on an OPC-RE1 Form, Certified Registration of Emissions Form for Potential to Emit, or other form considered equivalent by the TCEQ Executive Director, or by obtaining an agreed order setting a new maximum allowable emission limit.

The enforceability of MERCs is addressed at section 101.304(e)(4), where MERCs will be made enforceable by obtaining an agreed order that sets a new maximum allowable mobile source emission limit.

The monitoring and testing protocols established in 30 TAC Chapters 115 and 117 are adequate for independent verifications of emission reductions certified as ERCs or MERCs and for demonstrating practicable enforceability. Citizens' access to all emissions-related information is addressed in section 101.302(h), which provides that all information submitted with notices, reports, and trades regarding the nature, quantity, and sales price of emissions associated with the use, generation, and transfer of an ERC or MERC is public information and may not be submitted as confidential. The rule also requires that all nonconfidential notices and information regarding the generation, availability, use, and transfer of ERCs and MERCs shall be immediately made available to the public.

Penalties, corrective action, and citizen lawsuits are not addressed in the ERC rules, but are in separate laws and regulations. In particular, Texas Water Code section 7.051 provides for the assessment of administrative penalties by the TCEQ, and section 7.032 provides for injunctive relief by the TCEQ. The TCEQ enforcement rule at 30 TAC section 70.5 incorporates remedies found in the state statutes (Texas Water Code and the Texas Health and Safety Code), and permits referrals to EPA for civil, judicial or administrative action. It is our conclusion that TCEQ has adequate legal authority to enforce its ERC program. Once we approve the ERC rule into the SIP, EPA will be able to enforce it under section 113 of the Clean Air Act. Recordkeeping requirements specific to the ERC rule are set forth at section 101.302(g).

For the above reasons, and as further explained in the TSD, EPA has concluded that the ERC program is consistent with Clean Air Act requirements and EIP Guidance expectations for the integrity element of enforceability.

Integrity Element Three—Quantifiable. On a programmatic basis, emissions and emission reductions attributable to an EIP are quantifiable if the source can reliably and replicably measure or determine them. The generation or use of emission reductions by a source or group of sources is quantifiable on a source-specific basis if the sources can reliably calculate the amount of emissions and emission reductions occurring during the implementation of the program, and replicate the calculations. All EIPs should incorporate provisions for predicting results, addressing uncertainty, approving quantification protocols, and emission quantification methods.

The ERC program meets the quantifiable criteria, because its rules require that reductions certified as ERCs or MERCs be quantifiable, which is defined as an emission reduction that can be measured or estimated with confidence using replicable methodology. As protocols for making these determinations, the ERC program refers to the emission quantification requirements of 30 TAC Chapter 115 and Chapter 117. These monitoring requirements are reliable and replicable and have previously been approved by EPA. Generators/users wanting to use other quantification protocols must follow the quantification requirements at section 101.302(d)(1)(C), which include a requirement for EPA adequacy review of such alternate protocols. Under this section, if a facility or mobile source wishes to use a quantification protocol that has not been approved by EPA, the protocol must go through a 30 day public comment period. The TCEQ will make the protocol available on the agency's website during the public comment period. The TCEQ then submits the protocol and any comments received to the EPA for a 45 day adequacy review. During this 45 day period, EPA can approve or disapprove the protocol through a letter to the TCEQ. Outside of the 45 day time period, the EPA will propose a disapproval in the Federal Register if appropriate. After EPA has proposed a disapproval in the Federal Register , the quantification protocol will not be accepted for use.

Integrity Element Four—Permanent. To satisfy the permanence element of the integrity principle, a compliance flexibility EIP must ensure that no emission increases occur over the time defined in the SIP. On a source-specific basis, the permanence expectations are met if the sources participating in the EIP commit to action or achieve reductions for a future period of time as defined in the EIP.

The ERC program meets the permanence expectation at both the programmatic and source-specific levels. The rules at sections 101.303(d) and 101.304(e) describe the certification procedures to ensure that ERCs and MERCs generated are permanent so that the reduction will be effective for the life of the source.

In addition to determining the programmatic and source-specific integrity elements for an EIP, it is important to determine whether the EIP generates emission reductions in a manner consistent with other EIPs functioning in the same area. EPA published a final rule approving the HGB Mass Emissions Cap and Trade (MECT) program on November 14, 2001 (66 FR 57252). With this action, EPA approved the use of ERCs within the MECT at § 101.356(h). Subsequent revisions to the MECT rules submitted on January 31, 2003, and December 6, 2004, have reorganized the MECT rules such that the provisions for ERC usage are now found at § 101.356(i), but the substance of the provision for ERC use in the MECT is the same as the version EPA approved.

The MECT program was adopted by Texas in December 2000 as a compliance mechanism for the stringent NO X control requirements adopted under rules contained in the December 2000 revision to the HGB SIP. In addition to providing flexibility in complying with the NO X control requirements, the MECT also provides a finite cap on NO X emissions at a level demonstrated as necessary for the HGB area to attain the NAAQS for ozone. The amount of allowances (the authorization to emit one ton of NO X ) under the cap gradually decreases beginning in 2002 to the final cap level in 2007. The final 2007 cap level was developed through the Control Case modeling that included a controlled 2007 future case point-source emissions inventory along with the addition of emissions from NO X increases permitted after 1997 and increases in NO X emissions attributable to the use of banked discrete emission credits and ERCs.

Emission reduction credits may be converted into a yearly allocation of allowances under the MECT at the rate of one ERC to one allowance per year only if the ERCs were generated before December 1, 2000, and provided that:

1. The ERC is quantifiable, real, surplus, enforceable, and permanent as required in § 101.302 at the time the ERC is converted;

2. The ERC was generated in the HGB area;

3. The ERC was generated from a reduction in NO X ;

4. The ERC has not expired; and

5. The owner of the ERC has prior approval from the TCEQ Executive Director.

These ERCs, all generated before December 1, 2000, total 1.7 tons per day of additional NO X emissions that have been included in the attainment demonstration by TCEQ.

TCEQ has also included a provision for ERC usage in the Highly-Reactive VOC Emissions Cap and Trade (HECT) program, submitted to EPA on December 17, 2004. The HECT is a mandatory cap on emissions of ethylene, propylene, 1,3-butadiene, and all isomers of butenes for covered facilities, at a site subject to 30 TAC Chapter 115, Subchapter H. The HECT has a provision to allow a facility to convert credits of less-reactive VOCs generated through the ERC rule into a yearly HRVOC allocation. ERCs eligible for this conversion must be generated:

1. From a reduction at a site in the HGB area;

2. From a reduction strategy implemented after December 31, 2004; and

3. From a reduction in VOC species other than those defined as HRVOCs under 30 TAC Chapter 115.10.

VOC reductions from the installation of best available control technology do not qualify for conversion into HRVOC allocations. Additionally, the ERCs must be real, quantifiable, surplus, enforceable, and permanent as specified in the ERC rule at § 101.302 at the time the ERC is converted. The conversion of less-reactive VOC ERCs into HRVOC allowances is limited to 5 percent of the site's initial HRVOC allocation and is based on the Maximum Incremental Reactivity (MIR) Scale.

EPA will evaluate the HECT and the generation of ERCs based on reactivity in a separate rulemaking (RME Dockets R06-OAR-2005-TX-0018 and R06-OAR-2005-TX-0033). The ERC rule does not specifically state that ERCs can be used in the HECT, but addresses this cross-over at section 101.306(a)(7) where ERCs can be used for compliance with other requirements as allowable within the guidelines of local, state, and federal laws. TCEQ has informed EPA in a letter dated September 8, 2005, that it will revise the language in section101.306 to specify that ERCs may be used within the HECT program as an annual allocation of allowances as provided under 30 TAC section 101.399.

The combination of the ERC and MECT and the ERC and HECT programs not only caps the NO X or HRVOC emissions in the HGB area at a level demonstrated as necessary for attainment of the ozone standard, but also attempts to provide flexibility while ensuring protection of the HGB SIP.

The equity principle is composed of two elements—general equity and environmental justice.

Equity Element One—General Equity. General equity means that an EIP ensures that all segments of the population are protected from public health problems and no segment of the population receives a disproportionate share of a program's disbenefits.

The ERC program satisfies the general equity element. Consideration of health impacts from emission credit use is included throughout the ERC rule. A facility wishing to use reductions of one pollutant to meet the reduction requirement of another pollutant must use urban airshed modeling to obtain TCEQ and EPA approval. If the facility generating the reductions is located outside the United States, the substitution must result in a greater health benefit and be of equal or greater benefit to the overall air quality of the area. EPA approval is necessary any time a reduction from outside the nonattainment area is requested for use. We expect that such review would occur through a SIP revision. Stakeholder involvement and public participation is an additional measure to ensure adequate protection from disproportionate impacts. The public information requirements in section 101.302(h) and the information that must be submitted to the TCEQ for inclusion in the credit registry on the use and banking of ECs in sections 101.306 and 101.309 demonstrates the importance of public participation in the ERC program.

Equity Element Two—Environmental Justice. The environmental justice element applies if an EIP covers VOCs and could disproportionately impact communities populated by racial minorities, people with low incomes, or Tribes. EIPs that include hazardous air pollutants (HAPs) must also address the concerns described in Appendix 16.2 of the EIP Guidance (the “HAP Framework”), which discusses how to prevent and/or mitigate impacts from trades involving HAPs, the need to make sufficient information available for meaningful review and participation, public participation, and periodic program evaluations.

Because the ERC program allows for the generation and use of ECs from VOCs and/or HAPs, we evaluate it with respect to the environmental justice element, including the HAP Framework. We conclude that the ERC program meets our expectations for environmental justice. First, as outlined above under General Equity, the ERC program provides for public participation. Second, the program satisfies the HAP Framework. It addresses the HAP Framework issues through the ERC audit program, under which TCEQ may discontinue trading of ECs as a remedy for problems in a localized area of concern; in public information requirements and the requirements for the credit registry on the use and banking of ECs; and through public participation requirements. TCEQ held four public hearings in the course of developing the program, and maintains a list of stakeholders who receive copies of all TCEQ rulemaking actions for comment and participation in development. Also, during implementation of the ERC program, the public has the opportunity to participate in the approval process for alternate quantification protocols, and in the periodic audit of the ERC program required by the rule.

As an added measure that demonstrates general equity and environmental justice, TCEQ has developed the Toxicological Risk Assessment (TARA) Effects Evaluation Procedure. Under this process, which is authorized under section 382.0518(b)(2) of the Texas Health and Safety Code, TCEQ may not grant a permit to a facility unless it is demonstrated that emissions will not have an adverse impact on public health and welfare. This demonstration is accomplished by (1) establishing off-property ground-level air concentrations of constituents resulting from the proposed emissions, and (2) evaluating these concentrations for the potential to cause adverse health or welfare effects. The TARA Effects Evaluation is used to evaluate the use of ECs in an air permit. The TCEQ guidance document “How to Determine the Scope of Modeling and Effects Review for Air Permits” (RG-324, Oct. 2001) has a detailed discussion of TARA Effects Evaluation procedures.

All EIPs must be environmentally beneficial, as demonstrated through achieving more rapid emission reductions or faster attainment than would have occurred without the EIP. The ERC program satisfies the environmental benefit principle by requiring a user of ECs to retire 10 percent more credits than are needed. Additionally, the approved EC generation strategies also provide an environmental benefit by achieving more rapid emission reductions than would have occurred without the ERC program. The approved EC generation strategies include permanent facility shutdowns that results in a loss of capability to produce emissions; the installation and operation of pollution control equipment that reduces emissions below the level required of the facility; a change in the manufacturing process that reduces emissions below the level required of the facility; a permanent curtailment in production that reduces the facility's capability to produce emissions; or pollution prevention projects that produce surplus emission reductions.

Certain geographic restrictions apply to EC generation and use. These restrictions are found at section 101.302(f). Generally, only emission reductions generated in nonattainment areas can be certified. As a threshold requirement, an emission reduction must be used in the nonattainment area in which it is generated unless the user has obtained prior written approval of the TCEQ Executive Director and EPA. In addition to this written approval, one of the following must occur:

• A demonstration must be approved by the Executive Director and EPA that shows that the emission reductions achieved in another county, State, or nation provide an improvement to air quality in the county of use; or

• The emission credit was generated in a nonattainment area that has an equal or higher nonattainment classification than the nonattainment area of use, and a demonstration has been approved by the Executive Director and EPA to show that the emissions from the nonattainment area where the emission credit is generated contribute to a violation of the NAAQS in the nonattainment area of use; or

• A facility using emission reductions generated outside the United States that have been determined by the Executive Director to be real, permanent, enforceable, quantifiable, and surplus to any applicable international, Federal, State, or local law and the result would provide a greater health benefit to the area as determined by the Executive Director; and the facility demonstrates that the use of the reduction does not cause localized health impacts; submits all supporting information for calculations and modeling and any additional information requested; and is located within 100 km of the Texas-Mexico border.

Although the threshold EPA approval requirement of section 101.302(f) ensures that EPA approval is necessary for any of the above types of trades, TCEQ has agreed to clarify the language in section 101.302(f) so that EPA approval is more clearly required for all transactions involving emission reductions generated in another state or nation, as well as those transactions from one nonattainment area to another or from attainment counties into nonattainment areas.

EPA has addressed the possibility of cross-jurisdictional trades, such as those in section 101.302, in Appendix 16.16 of the Economic Incentive Program Guidance. Satisfaction of the provisions of Appendix 16.16 is necessary to ensure that cross-jurisdictional trades are consistent with the fundamental integrity, equity, and environmental benefit principles described in the EIP guidance. The EPA review and approval authority contained in section 101.302(f) will be the mechanism by which EPA ensures that inappropriate trades do not take place. In particular, EPA intends to require a further SIP revision (either a detailed trading program, such as an interstate MOU, or a trade-specific submission) before approving any international trades, interstate trades, or intrastate trades that involve reductions from beyond the nonattainment area.

International trades present an especially difficult case. For instance, currently there is no approvable mechanism for demonstrating that reductions made in another country are surplus or enforceable. Nonetheless, emission reductions in other countries could potentially offer substantial air quality benefits in the United States. In approving the ERCs rule, EPA is recognizing the concept of international trading and describing a framework ( i.e. , the submission of a SIP revision demonstrating among other things the validity and enforceability of foreign reductions) for such trading, in the event that a suitable and approvable mechanism is ever developed for resolving concerns including enforceability and surplus. Until such a mechanism is developed and approved by EPA, however, EPA will not approve international trades under the ERCs rule.

The revisions to section 115.950, submitted by TCEQ on December 20, 2000, are approvable. This subsection cross-references the use strategies for ERCs and MERCs in section 101.306, which we are proposing to approve.

The definition of “facility” published at 30 TAC Chapter 116, Control of Air Pollution by Permits for New Construction, Subchapter A, section 116.10(4), submitted by TCEQ on July 22, 1998, is approvable. This definition is approvable as defining what is a “facility” for purposes of permitting under Chapter 116. This satisfies the provisions of 40 CFR—51.160(e) by identifying the types of facilities, building, structures, or installations which will be subject to review.

Section 110(l) of the Clean Air Act states:

Thus, under section 110(l), this SIP revision must not interfere with attainment or reasonable further progress or any other applicable requirement of the Act.

As a general matter, the satisfaction of the environmental benefit principle and the other integrity principles applicable to trading programs will tend to demonstrate that a trading program will do no worse than maintain existing air quality. Accordingly, EPA has determined that discretionary EIPs that are consistent with the EIP Guidance are consistent with section 110(l):

(EIP Guidance, section 1.9.) Thus, if the ERC program is consistent with the EIP Guidance it will satisfy section 110(l). As explained throughout this document, we have determined that the ERC rule is consistent with the EIP Guidance. To further support this determination, we will discuss the rule in connection with specific locations and criteria pollutants.

As a preliminary matter, we note that a user of ECs must retire 10 percent more credits than are needed, which provides a built-in source of reductions under this program that would not occur without it. Further, emission reductions used to generate ECs are permanent, enforceable, and ongoing in nature, so that the environment will always experience the reduction.

We have also considered whether emissions increases resulting from the use of ECs have the potential to interfere with attainment. Because of the ongoing nature of the reductions that can generate an EC, an emissions increase resulting from a traded credit will always be associated with a contemporaneous, and 10 percent greater, emissions decrease. One ozone precursor may also be used to meet the requirements for reductions of another precursor (a facility could use NO X reductions to satisfy a VOC requirement or vice versa), subject to an urban airshed modeling demonstration and TCEQ Executive Director and EPA approval. In very limited cases, the rule allows for such interpollutant trading across the U.S.-Mexico border without specifically requiring urban airshed modeling, but any such trades would be subject to the EPA approval process described below. There remains, however, the question of whether geographic separation between the location of the reduction and increase from any given EC might interfere with attainment. We believe this problem will not occur with the ERC rule, because in the usual case reductions and associated increases will occur in the same nonattainment area. The rule does contain provisions for the use in a nonattainment area of reductions from outside that nonattainment area, but such use is subject to TCEQ Executive Director and EPA approval. EPA intends to address any such requests through a SIP revision, which would require a demonstration of consistency with section 110(l). TCEQ will also conduct an audit of the ERC program every three years. The audit will specifically evaluate the impact of EC generation and use on the State's attainment demonstration. If problems are identified, the TCEQ Executive Director may suspend or discontinue the trading of ECs as a remedy.

We believe that the structure of the ERC rule as discussed above is sufficient to ensure that the rule is consistent with section 110(l), but we have further considered the potential impact as to specific pollutants. Under the Texas program, ECs can only be generated for criteria pollutants (except lead) and precursors of criteria pollutants for which an area is designated nonattainment.

First, as to ozone, attainment demonstrations under the 8-hour standard currently in effect are not yet due. The only 8-hour ozone nonattainment areas in Texas at present are the Beaumont/Port Arthur (BPA), Dallas/Fort Worth (DFW), and HGB 8-hour ozone nonattainment areas. (El Paso was designated as serious under the revoked 1-hour ozone standard, but was designated as attainment for 8-hour ozone, with an obligation to submit a maintenance plan.) Until 8-hour attainment demonstrations are due, EPA believes that preservation of the status quo air quality while new plans are being developed will prevent interference with the States' obligations to develop timely attainment demonstrations and reasonable further progress plans and to attain as expeditiously as practicable. Accordingly, for 8-hour ozone nonattainment areas in Texas, EPA believes that a demonstration that this rule will not worsen existing air quality is sufficient. We conclude that the environmental benefit provided by the ERC program, as discussed above, is sufficient to demonstrate that this rule will not worsen existing air quality.

We note in addition that as to the HGB nonattainment area in particular, a fuller discussion of the section 110(l) analysis appears in EPA's evaluation of the HGB attainment demonstration submitted for the 1-hour ozone standard (RME Docket R06-OAR-2005-TX-0018). That rulemaking contains EPA's proposed determination that the area will attain the 1-hour ozone standard and that the current attainment strategy does not interfere with attainment of the 8-hour standard in the HGB area. In addition, EPA has already approved TCEQ's 1-hour reasonable further progress plan for HGB (70 FR 07407, February 14, 2005).

As to other criteria pollutants, El Paso is classified as nonattainment for carbon monoxide (CO) but has monitored attainment for approximately the past five years and is expected to submit a request for redesignation by the end of 2005. Also, El Paso is classified as nonattainment for particulate matter with a diameter of 10 micrometers and smaller (PM 10 ). We therefore consider whether the generation and use of ECs could interfere with attainment or reasonable further progress under the PM 10 or CO standards. Because no ECs of any type have yet been generated in El Paso, any use of ECs there will require either the generation of ECs through reductions in that area, or the approval of ECs from elsewhere. In the first case, the reductions would have to occur before the associated increases from use of the ECs, and as already noted the reductions would have to exceed the increases by ten percent. In the second case, use of ECs from elsewhere would have to be based on a determination that such use would provide a benefit in the nonattainment area (and subject to EPA review through the SIP revision process, as noted above). In either case, therefore, we conclude that the use of ECs in El Paso will not interfere with attainment and reasonable further progress.

As to all other criteria pollutants, all areas of Texas are currently in attainment. ECs may only be generated and used for nonattainment pollutants in nonattainment areas, and so there will be no EC trades involving areas in attainment for the pollutant in question. We conclude that this rule should not interfere with attainment as to these other criteria pollutants. The reductions of NO X in the BPA, DFW, and HGB nonattainment areas could include reductions in NO 2 , a separate criteria pollutant from ozone. These potential NO 2 reductions will not interfere with attainment of the NO 2 NAAQS.

We have also considered whether potential uses of ECs are contrary to section 110(l) by allowing sources to exceed limits in their CAA Title V permits, which are “applicable requirements” under the Act. For the following reasons, we conclude that the rule does not violate section 110(l) in this respect. First, EPA has addressed the interface of Title V permits and trading programs in the EIP guidance, which provides:

(EIP Guidance, Appendix 16.8). Texas has modified its Title V permit template so as to address the permissible use of ECs to meet Title V permit requirements. As further explained in the TSD for this action, we find that the Texas permit language satisfies the concerns identified in Appendix 16.8.

In reaching this conclusion, we also considered that a Title V permit is not itself a source of substantive limits. Rather, it incorporates applicable requirements under other permits and programs. In Texas, as elsewhere, many of the allowable emission levels in T5 permits are determined through New Source Performance Standards (NSPS), Best Available Control Technology (BACT), Lowest Achievable Emission Rate (LAER), or National Emission Standards for Hazardous Air Pollutants (NESHAPs). The ERC rule does not authorize the use of ECs for compliance with any of these programs. The rule does allow ECs to be used for compliance with Reasonably Available Control Technology (RACT) standards, in accordance with EPA's guidance. Specifically, the guidance provides that “[i]f your EIP allows sources to avoid direct application of RACT technology, your EIP must ensure that the level of emission reductions resulting from implementation of the EIP will be equal to those reductions expected from the direct application of RACT.” EIP Guidance, Appendix 16.7. The Texas program ensures consistency with that element of the EIP guidance through the requirement that a user of ECs must retire 10 percent more credits than are needed. Accordingly, any use of ECs for RACT compliance will have been preceded by a ten percent greater reduction.

For the above reasons, and based also on the analysis in the HGB rulemaking, we conclude that the Texas ERC rule represents an environmental improvement on the status quo, and does not interfere with attainment, reasonable further progress, or any other requirement of the Act. TCEQ will need to evaluate EC generation and use for the BPA and DFW nonattainment areas in the appropriate attainment demonstrations and reasonable further progress plans, and in any future plans developed for El Paso.

EPA reviewed the ERC program revisions with respect to the concerns discussed in the EIP Guidance and the requirements of the Clean Air Act. We conclude that the ERC program is approvable, and propose to approve the revisions to sections 101.301, 101.306, and 101.309 submitted by TCEQ on January 31, 2003, for rule log number 2002-044-101-AI, and the revisions to sections 101.300, 101.302-101.304, and 101.311 submitted by TCEQ on December 6, 2004, for rule log number 2003-064-101-AI.

We have also reviewed the subsection in 30 TAC Chapter 115, which cross-references the ERC program, and have concluded that this subsection is approvable. We are proposing to approve the revisions to section 115.950 submitted by TCEQ on December 20, 2000, for rule log number 1998-089-101-AI. Because this section involves the use of discrete emission credits and emission credits for compliance, the use of discrete emission credits for compliance with Chapter 115 is not approved until the Discrete Emission Credit Banking and Trading program has been approved. The rules for discrete emission credit generation and use are being considered in a separate Federal Register action.

EPA has also reviewed the definition of facility provided in 30 TAC Chapter 116, and has concluded that this subsection is approvable. We are proposing to approve section 116.10(4) submitted by TCEQ on July 22, 1998, for rule log number 98001-116-AI.

When submitting comments, remember to:

1. Identify the rulemaking by File ID number and other identifying information (subject heading, Federal Register date and page number).

2. Follow directions—The agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulations (CFR) part or section number.

3. Explain why you agree or disagree; suggest alternatives and substitute language for your requested changes.

4. Describe any assumptions and provide any technical information and/or data that you used.

5. If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced.

6. Provide specific examples to illustrate your concerns, and suggest alternatives.

7. Explain your views as clearly as possible, avoiding the use of profanity or personal threats.

8. Make sure to submit your comments by the comment period deadline identified.

Do not submit this information to EPA through regulations.gov or e-mail. Clearly mark the part or all of the information that you claim to be CBI. For CBI information in a disk or CD ROM that you mail to EPA, mark the outside of the disk or CD ROM as CBI and then identify electronically within the disk or CD ROM the specific information that is claimed as CBI. In addition to one complete version of the comment that includes information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the official file. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this proposed action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. For this reason, this action is also not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001). This proposed action merely proposes to approve state law as meeting Federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this proposed rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). Because this rule proposes to approve pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4).

This proposed rule also does not have tribal implications because it will not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes, as specified by Executive Order 13175 (65 FR 67249, November 9, 2000). This action also does not have Federalism implications because it does not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999). This action merely proposes to approve a state rule implementing a Federal standard, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This proposed rule also is not subject to Executive Order 13045 “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997), because it is not economically significant.

In reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. In this context, in the absence of a prior existing requirement for the state to use voluntary consensus standards (VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA, when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the Clean Air Act. Thus, the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. This proposed rule does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

Throughout this document wherever “we,” “us,” or “our” is used, we mean the EPA.

The EPA is proposing conditional approval of the Discrete Emission Credit Banking and Trading Program, referred to as the Discrete Emission Reduction Credit (DERC) program, enacted at Texas Administrative Code (TAC) Title 30, Chapter 101 General Air Quality Rules, Subchapter H, Division 4, sections 101.370-101.374, 101.376, 101.378, and 101.379. Also at this time, EPA is proposing approval of 30 TAC Chapter 115, Control of Air Pollution from Volatile Organic Compounds, Subchapter J, Division 4, section 115.950 (“Use of Emissions Credits for Compliance”), which cross-references the DERC program. EPA is also proposing approval of the definition of “facility” published at 30 TAC Chapter 116, Control of Air Pollution by Permits for New Construction or Modification, Subchapter A, section 116.10(4). These revisions were provided in SIP revisions dated July 22, 1998; December 20, 2000; July 15, 2002; January 31, 2003; and December 6, 2004.

Under section 110(k)(4) of the Clean Air Act EPA may conditionally approve a plan based on a commitment from the State to adopt specific enforceable measures within one year from the date of approval. If EPA determines that the revised rule is approvable, EPA will propose approval of the rule. If the State fails to meet its commitment within the one year period, the approval is treated as a disapproval. There are at least two ways that the conditional approval may be converted to a disapproval.

• If the State fails to adopt and submit the specified measures by the end of one year (from the final conditional approval), or fails to submit anything at all, EPA will have to issue a finding of disapproval but will not have to propose the disapproval. That is because in the original proposed and final conditional approval, EPA will have provided notice and an opportunity for comment on the fact that EPA would directly make the finding of disapproval (by letter) if the State failed to submit anything. Therefore, at the end of one year from the conditional approval, the Regional Administrator (RA) will send a letter to the State finding that it had failed to meet its commitment and that the SIP submittal is disapproved. The 18-month clock for sanctions and the two year clock for a Federal Implementation Plan (FIP) start as of the date of the letter. Subsequently, a notice to that effect will be published in the Federal Register , and appropriate language will be inserted in the Code of Federal Regulations (CFR). Similarly, if EPA receives a submittal addressing the commitment but determines that the submittal is incomplete, the RA will send a letter to the State making such a finding. As with the failure to submit, the sanctions and FIP clocks will begin as of the date of the finding letter.

• Where the State does make a complete submittal by the end of the one year period, EPA will have to evaluate that submittal to determine if it may be approved and take final action on the submittal within 12 months after the date EPA determines the submittal is complete. If the submittal does not adequately address the deficiencies that were the subject of the conditional approval, and is therefore not approvable, EPA will have to go through notice-and-comment rulemaking to disapprove the submittal. The 18-month clock for sanctions and the two year clock for a FIP start as of the date of final disapproval.

In either instance, whether EPA finally approves or disapproves the rule, the conditional approval remains in effect until EPA takes its final action. Note that EPA will conditionally approve a certain rule only once. Subsequent submittals of the same rule that attempt to correct the same specifically identified problems will not be eligible for conditional approval.

TCEQ has submitted a commitment letter to Region 6 outlining the steps that will be taken to achieve full approval. This letter, dated September 8, 2005, can be found in the RME docket. The commitments are:

1. Revising the language in section 101.373:

a. To prohibit the future generation of discrete emission reduction credits from permanent shutdowns;

b. To allow discrete emission reduction credits generated from permanent shutdowns before September 30, 2002, to remain available for use for no more than five years from the date of the commitment letter; and

2. TCEQ will perform a credit audit to remove from the emissions bank all discrete emission reduction credits generated from permanent shutdowns after September 30, 2002.

3. Revising the language in sections 101.302(f), 101.372(f)(7), and 101.372(f)(8) to clarify that EPA approval is required for individual transactions involving emission reductions generated in another state or nation, as well as those transactions from one nonattainment area to another or from attainment counties into nonattainment areas.

4. TCEQ will revise Form DEC-1, Notice of Generation and Generator Certification of Discrete Emission Credits; Form MDEC-1, Notice of Generation and Generator Certification of Mobile Discrete Emission Credits; and Form DEC-2, Notice of Intent to Use Discrete Emission Credits, to include a waiver to the Federal statute of limitations defense for generators and users of discrete emission credits.

5. TCEQ will maintain its current policy of preserving all records relating to discrete emission credit generation and use for a minimum of five years after the use strategy has ended.

Additionally, TCEQ has agreed to comply with these commitments during the conditional approval period. Specifically, TCEQ will not approve any trades involving the types of reductions described in item (3) above, will not approve any use of discrete shutdown credits that were generated after September 30, 2002, and will require the waiver described in item (4) above for generators and users of discrete emission credits.

TCEQ will submit these revisions to EPA on or before December 01, 2006. The conditional approval will automatically become a disapproval if the revisions are not completed and submitted to EPA by this date.

The DERC rules establish a type of Economic Incentive Program (EIP), in particular an open market emission trading program as described in EPA's EIP Guidance document, “Improving Air Quality with Economic Incentive Programs” (EPA-452/R-01-001, January 2001). In an open market trading (OMT) program, a source generates short-term emission credits (called discrete emission credits, or DECs, in the Texas program) by reducing its emissions. Discrete emission credit is a generic term that encompasses reductions from stationary sources (discrete emission reduction credits or DERCs), and reductions from mobile sources (mobile discrete emission reduction credits or MDERCs). The source can then use these DECs at a later time, or trade them to another source to use at a later time. The trading program assumes that many sources will participate and continuously generate new DERCs or MDERCs to balance with other sources using previously generated discrete credits. DECs are quantified, banked and traded in terms of mass (tons) and may be generated and used statewide. Reductions of all criteria pollutants, with the exception of lead, may be certified as DECs.

This program provides flexibility for sources in complying with certain State and Federal requirements. Traditionally DECs have been used for alternate RACT compliance for volatile organic compounds (VOCs) and nitrogen oxides (NO X ). The DERC rule also allows DECs to be used to exceed allowable emission levels, as new source review (NSR) offsets, and in lieu of allowances in the Houston/Galveston/Brazoria NO X MECT program.

In this action, when we refer to this program as “the DERC rule” or “the DERC program” we are speaking of the entire Discrete Emission Credit Banking and Trading program, which encompasses both DERCs and MDERCs.

The DERC program was first adopted by the State at 30 TAC Section 101.29 on December 23, 1997. Effective January 18, 2001, Section 101.29 was repealed and Chapter 101, Subchapter H, Divisions 1, 3, and 4 were created. This action created separate divisions for the ERC, Mass Emissions Cap and Trade (MECT) in the Houston/Galveston/Brazoria (HGB) area, and DERC programs. Amendments to the MECT were adopted on October 18, 2001; these amendments also included changes made primarily for clarification to Sections 101.370, 101.372, and 101.373 in the DERC program. The DERC program was amended again effective April 14, 2002, to include the provisions in Texas Senate Bill 1561 for air emissions trading across international boundaries. The submittal, which was effective on January 17, 2003, completely reorganized the DERC and ERC program rules into more standardized formats parallel to each other, with a rule structure which followed a process of recognizing, quantifying, and certifying reductions as credits while explaining the guidelines for trading and using creditable reductions. The most recent submittal of December 06, 2004, amended Sections 101.370, 101.373, 101.373, and 101.376. The DERC program adoption and each of the subsequent revisions were submitted to EPA for approval into the SIP; however, this proposed conditional approval is the first time we have acted on this program.

Generally, SIP rules must be enforceable and must not relax existing requirements. See Clean Air Act sections 110(a), 110(l), and 193.

A guidance document that we used to define evaluation criteria is “Improving Air Quality with Economic Incentive Programs” (EPA-452/R-01-001, January 2001) (EIP Guidance). This guidance applies to discretionary economic incentive programs (EIPs) adopted to attain national ambient air quality standards (NAAQS) for criteria pollutants, but the EIP Guidance is not EPA's final action on discretionary EIPs. Final action as to any such EIP occurs when EPA acts on it after its submission as a SIP revision. Because the EIP Guidance is non-binding and does not represent final agency action, EPA is using the guidance as an initial screen to determine whether potential approvability issues arise. A more detailed review of the DERC program as compared to the EIP Guidance is in the Technical Support Document (TSD) for the TCEQ Discrete Emission Credit Banking and Trading Program. The TSD is available as specified in the section of this document identified as ADDRESSES.

Fundamental principles that apply to all EIPs are integrity (meaning that credits are based on emission reductions that are surplus, enforceable, quantifiable, and permanent), equity, and environmental benefit. These fundamental principles can apply to an EIP in its entirety (the programmatic level) or to individual sources (the source-specific level). EPA evaluated the DERC program against these three fundamental principles, specific concerns applicable to open market trading programs, and applicable Clean Air Act requirements. Our complete analysis of the DERC program is contained in the TSD for this action.

The fundamental principle of integrity consists of the qualities of surplus, enforceable, quantifiable, and permanent.

The element of surplus does not apply to the DERC program in its entirety because OMT programs are not designed to achieve program-wide emission reductions. However, the element of surplus does apply at the source-specific level. Emission reductions are surplus if the reductions are not presently relied upon in any other air quality-related programs such as the SIP, SIP-related requirements such as transportation conformity, other adopted TCEQ measures not in the SIP, Federal rules that focus on reducing precursors of criteria pollutants such as new source performance standards, or a consent decree. Emission reductions measured by sources on a retrospective basis are surplus if the source's actual emissions are below its baseline allowable or historical actual emissions—whichever is lower—and the retrospective inventories reflect actual emission information as appropriate.

Sections 101.372(c)(1)(A) and (c)(2)(A) of the DERC rules require that a reduction be real, quantifiable, and surplus at the time the DERC or MDERC is generated. Surplus is defined in section 101.370(33) as an emission reduction that is not otherwise required of a facility or mobile source by state or Federal law, regulation, agreed order, and not otherwise relied on in the SIP. Thus, the DERC rule requires that at the time of generation, reductions satisfy the source-specific integrity element of surplus. Requirements for emission reduction baselines are specified in sections 101.373(b) and 101.374(b).

Emission reductions use, generation, and other required actions in the EIP are enforceable on a programmatic basis if they are independently verifiable, define program violations, and identify those liable for violations. For enforceability, both the State and EPA should have the ability to apply penalties and secure appropriate corrective actions where applicable. Citizens should also have access to all the emissions-related information obtained from the source so that citizens can file suits against sources for violations. Required actions must be practicably enforceable in accordance with other EPA guidance on practicable enforceability. At the source-specific level, the source must be liable for violations, the liable party must be identifiable, and the State, the public, and EPA must be able to independently verify a source's compliance. Additionally, in OMT programs owners/operators of sources generating OMT credits must ensure the truth and accuracy of statements regarding actions taken to generate discrete credits and are liable for meeting their emission limits. Owners/operators of sources using OMT credits must ensure the validity of discrete credit generation and use and are liable for meeting their emission limits. The EIP Guidance outlines enforcement elements common to all trading EIPs in Chapter 6.0. In addition to addressing the programmatic and source-specific enforcement provisions discussed above, trading EIPs must incorporate provisions for assessing liability, provisions to assess penalties against participating sources, and provisions for sources with title V permits.

The monitoring and testing protocols established in 30 TAC Chapters 115 and 117 are adequate for independent verifications of emission reductions certified as DERCs or MDERCs and for demonstrating practicable enforceability. The DERC rule identifies those liable at section 101.372(l), and information to be made available to the public/citizens is addressed at section 101.372(i). The DERC rule does provide in section 101.372(l)(2) that a user is in violation of the rule if the user does not possess enough DECs to cover the compliance need for the use period. If the user possesses an insufficient quantity of DECs to cover its compliance need, the user will be out of compliance for the entire use period. Each day the user is out of compliance may be considered a violation.

The application of penalties or obtaining corrective action and citizen filing of lawsuits are not addressed in the DERC rules. Texas enforcement provisions are not typically in the State's individual rules but are separately codified. Texas Water Code Chapter 7 contains the State's statutory provisions for enforcement of the DERC program. In particular, TWC section 7.051 provides for the assessment of administrative penalties by the TCEQ, and section 7.032 provides for injunctive relief by the TCEQ. The TCEQ enforcement rule at 30 TAC section 70.5 incorporates remedies found in the State statutes (Texas Water Code and the Texas Health and Safety Code), and permits referrals to EPA for civil, judicial or administrative action. It is our conclusion that TCEQ has adequate legal authority to enforce its DERC program. Once we approve the DERC program into the SIP, EPA will be able to enforce it under section 113 of the Clean Air Act.

For the above reasons, and as further explained in the TSD, EPA has concluded that the DERC program is consistent with Clean Air Act requirements and EIP Guidance expectations for the integrity element of enforceability.

On a programmatic basis, emissions and emission reductions attributable to an EIP are quantifiable if the source can reliably and replicably measure or determine them. The generation or use of emission reductions by a source or group of sources is quantifiable on a source-specific basis if each source can reliably calculate the amount of emissions and/or emission reductions occurring during the implementation of the program, and replicate the calculations. The EIP Guidance further states that when quantifying results, sources must use the same methodology used to measure baseline emissions, unless there are good technical reasons that this approach is not appropriate. In OMT EIPs, sources must quantify their activity level and their historical, actual, and allowable emission rates per activity levels; OMT credit generators must quantify their emissions before and during implementation of the reduction strategy; and OMT credit users must quantify the amount of credits they will need to cover their total emissions when using discrete credits. Common elements for quantifying results of an EIP are included in Chapter 5.0 of the EIP Guidance. All EIPs should incorporate provisions for predicting results, addressing uncertainty, approving quantification protocols, and emission quantification methods.

For a reduction to be certified as a DEC, the reduction must be real, quantifiable, and surplus at the time the DEC is generated. Quantifiable is defined as an emission reduction that can be measured or estimated with confidence using replicable methodology under section 101.370(25). The emission quantification provisions established in 30 TAC Chapters 115 and 117 are sufficient to reliably and replicably measure the emission reduction. The DERC program definition of quantifiable and the quantification provisions above are sufficient to satisfy the quantifiability requirements at the programmatic and source-specific levels. Additionally, generators/users wanting to use quantification protocols alternate to 30 TAC Chapter 115 and Chapter 117 must follow the quantification requirements at section 101.372(d)(1)(C). EPA approval of such alternate protocols is required. The formulas used to calculate DERC generation, DECs needed, and DECs used incorporate the use of the baseline, actual, and allowable activity levels as applicable. The calculation for DERC generation includes the difference between the baseline emission rate and the emission reduction strategy emission rate. This ensures that the DERC generator quantifies their emissions before and during implementation for the reduction strategy. Section 101.376(d)(1)(D) requires that the application to use DECs include the amount of DECs needed. For the above reasons, and as further explained in the TSD, EPA has concluded that the DERC program is consistent with Clean Air Act requirements and EIP Guidance expectations for the integrity element of quantifiability.

To satisfy the EIP Guidance expectations for permanence, a compliance flexibility EIP must ensure that no emission increases (compared to emissions if there was no EIP) occur over the time defined in the SIP. On a source-specific basis, the permanence expectations are met if the sources participating in the EIP commit to actions or achieve reductions for a future period of time as defined in the EIP.

The DERC certification procedures under section 101.373(d) ensure that the credits generated are permanent, thus ensuring that there were no increases in emissions during the DERC generation period. Similar provisions are provided for MDERC certification in section 101.374(e).

In our initial MECT approval (66 FR 57252, Nov. 14, 2001), EPA deferred action on the use of DERCs and MDERCs for compliance with the MECT until our action on the DERC rule. In addition to the original MECT submission, TCEQ has submitted revisions to section 101.356 twice since EPA's approval of the MECT program. In this document, we are reviewing the use of DERCs and MDERCs in TCEQ's MECT program for the Houston/Galveston/Brazoria (HGB) ozone nonattainment area. We will review and act on the revisions to the MECT program in a separate action (RME Docket R06-OAR-2005-TX-0023). The use of DERCs and MDERCs in the MECT program will not be Federally approved until the approval of both the DERC rule and the revisions to the MECT program.

The DERC and MECT programs are OMT and multi-source cap-and-trade programs, respectively, as described in the EIP Guidance. Section 4.1 of the EIP Guidance explains that certain types of EIPs may not be combined because their characteristics and requirements are incompatible and cites OMT and multi-source cap-and-trading as an example of such incompatible programs. Therefore, the fact that the MECT program provides for the use of DERCs and MDERCs in lieu of allowances at section 101.356(h), with corresponding provisions in the DERC rule at section 101.376(b), is contrary to the general statement in the EIP Guidance about the incompatibility of OMT and multi-source cap-and-trade programs.

The EIP Guidance discourages the use of OMT credits in a multi-source cap-and-trade program based on concerns that the use of OMT credits in the cap program could potentially undermine the integrity of the cap, thus preventing the goals that the cap was established to achieve. EPA is concerned that including OMT credits in a cap-and-trade system could lead to:

• The possibility that more OMT credits will be used in a given year than are generated;

• The possibility that sources will shift production from one source to another, generating credits at the reduced source while no real net benefit in air quality is achieved; and

• The possibility that reductions at unregulated sources will not be real reductions and that they will be used to offset increases at regulated sources.

When a program includes elements that are not consistent with the approaches outlined in our guidance, EPA may still approve the rule if it is consistent with CAA requirements and the rationales underlying the provisions in EPA guidance. In this case, we must determine whether the use of OMT credits (DERCs or MDERCs) in lieu of allowances will, because of the above concerns, undermine the goal of the MECT program, which is attainment of the one-hour ozone standard in the HGB area. EPA should also consider whether there are adequate safeguards to ensure that the additional flexibility provided by the interplay between the DERC and MECT programs will not undermine the HGB reasonable further progress plan and attainment demonstration.

Regarding the HGB reasonable further progress plan, we approved the plan on February 14, 2005 (70 FR 07407). The HGB area met its rate of progress (ROP) target by a wide margin (over 100 tons per day) so the institution of DERCs in the MECT would not be expected to interfere with ROP.

As for the attainment demonstration, the reduction in industrial NO X emissions relied on in it is achieved by the MECT program, which provides a cap on NO X emissions. Beginning in 2002, the amount of allowances (the authorization to emit one ton of NO X during a control period, which is the calendar year) under the cap decreases to the final cap level in 2007. The final 2007 cap level was set, based on photochemical modeling and other evidence, at a level determined necessary for the area to meet the one-hour ozone standard. Even after the change from 90 percent to 80 percent NO X control strategy, the final MECT level is among the most stringent levels of NO X controls on industrial emissions in the United States.

Because of the stringency of the MECT NO X controls, Texas linked the DERC and MECT programs, in an effort to provide additional flexibility to sites subject to the program while encouraging the development and use of cleaner technologies to reduce NO X emissions from sources not covered by the cap-and-trade program. Only DERCs and MDERCs generated in the HGB area are available for use in lieu of allowances.

At the time the MECT rules were developed, the number of DERCs available for use in the HGB area totaled over 37,000 tons (all generated by stationary sources; no MDERCs had been generated). Additionally, sources had the ability to make early reductions and continue banking DERCs until the January 1, 2002, implementation date of the MECT. After implementation of the MECT, sources subject to the cap no longer had the ability to generate DERCs because those reductions would take the form of unused allowances. The potential for capped sites to hold these banked DERCs for use in 2005 and beyond was significant enough to negatively impact the HGB ROP and attainment demonstration. To guard against more DERCs being used in a given year than are being generated, which might affect the goal of attainment, Texas included the following provisions in the MECT rule limiting the use of NO X DERCs in lieu of allowances.

First, beginning in 2005, use of DERCs within the MECT is limited to 10,000 DERCs collectively for all sites within the HGB area. This provision eliminates the potential for sites subject to the MECT to use a large quantity of DERCs in a single year and negatively impact the HGB ROP plan and attainment demonstration. All requests to use DERCs (or MDERCs) in the MECT must be made by October 1 of the control period for which the DERCs (or MDERCs) would be used. In terms of the 10,000 DERC limit, TCEQ will approve requests to use DERCs in the amount of 250 tons or less for a given control period. After October 1, when all requests to use DERCs have been received, TCEQ determines how to respond to any requests to use DERCs in an amount exceeding 250 tons. TCEQ may reduce any such request so that the total amount of all DERCs used collectively does not exceed 10,000. If all the requests to use DERCs in a given control period are less than the 10,000 limit, TCEQ will then address requests for more than 250 tons. For these requests, TCEQ determines the number of remaining DERCs under the 10,000 limit that were not approved in the requests of 250 tons or less. These extra DERCs may be apportioned based on the percentage of DERCs in excess of 250 requested for use by those sites relative to the total amount of extra DERCs available.

Second, depending on when the DERCs were generated, the MECT rule requires the use of DERCs at specified ratios. Beginning in 2005, DERCs generated before January 1, 2005, are required to be used at a ratio of four DERCs to one allowance. The ratio of DERCs to allowances increases to a 10 to 1 ratio for DERCs generated before 2005 and used in the 2007, or subsequent, control periods. For example, if DERC usage equaling the full 10,000 limit is approved for use in the 2007 control period, the overall cap would be increased by 1,000 allowances. Any DERCs generated after January 1, 2005, are available for use within the MECT at a one to one ratio, but are still included in the 10,000 DERC collective limit. We believe these ratios guard against the possibility that the availability of historic reductions would permit the use of more DERCs in a year than are generated, which could interfere with attainment or reasonable further progress.

As a further safeguard against the possibility of undermining the attainment demonstration by allowing the use of more DERCs in any given year than are generated, Texas added an additional 2.7 tons per day into the attainment model beyond the emissions that would be allowed based on source allocations. This additional 2.7 tons per day represents the maximum amount of pre-2005 DERCs available for use in the attainment year 2007. To arrive at this number, TCEQ divided the 10,000 DERC limit by 10 (the 2007 reduction ratio) and then by 365 (days per year) to yield a total of 2.7 tons per day that could be reintroduced into the cap. DERCs generated after 2005 by sources outside of the cap could not be quantified as those reductions would be generated through voluntary measures. TCEQ therefore assumed that all DERCs that would be used in the 2007 control period were pre-2005 DERCs. Including these added emissions in the attainment modeling is analogous to cap-and-trade programs that set aside a percentage of the modeled emissions for new source growth or other purposes.

The MECT program also provides that MDERCs can be used in lieu of allowances at a ratio of one MDERC to one allowance. MDERCs are not included in the 10,000 DERCs limit in any given year. TCEQ incorporated MDERCs into the MECT to provide incentives for mobile reductions. Although there is no set limit for MDERC usage under the MECT, from our experience with open market trading programs, we can reasonably predict that a relatively small quantity of MDERCs will be generated. Consistent with our prediction, we note that only 60 tons of NO X MDERCs have been banked as of August 1, 2005.

TCEQ has also committed to making certain revisions to the DERC program to ensure that DECs used are real and surplus, consistent with the assumptions in the attainment demonstration. These revisions will include:

• Prohibiting the generation of DERCs from permanent shutdowns;

• Ensuring that reductions can only come from process changes or the installation of control equipment that result in less emissions per unit of production, thus preventing reductions from production shifting as a method of DEC generation;

• Clarifying provisions that allow for public comment and EPA approval of quantification protocols to ensure that the reductions used for DEC generation are quantifiable.

Additionally, section 101.363 requires TCEQ to audit the MECT program every three years. If the use of DERCs or MDERCs is shown to negatively impact attainment, TCEQ will remove this flexibility from the program.

With the restrictions outlined above, we believe that using DERCs and MDERCs in lieu of allowances provides additional flexibility in compliance with the MECT program without undermining the goal of attaining the one-hour ozone standard in the HGB area. EPA also believes that the restrictions placed on the use of DECs in the MECT will prevent such use from damaging the integrity of the MECT program and the HGB attainment demonstration. Because the basis for the use of DECs in the MECT is, in part, the modeling and attainment demonstration for the HGB area, EPA cannot grant a final approval of this provision of the MECT program until EPA issues a final approval of the attainment modeling provided as a mid-course review SIP revision. The attainment demonstration and MECT revisions are being concurrently proposed for approval (RME Dockets R06-OAR-2005-TX-0018 and R06-OAR-2005-TX-0023).

The equity principle is composed of two elements—general equity and environmental justice.

General equity means that an EIP ensures that all segments of the population are protected from public health problems and no segment of the population receives a disproportionate share of a program's disbenefits. OMT EIPs should specifically protect communities from disproportionate impacts from emission shifts and foregone emission reductions.

Consideration of health impacts from DEC use are included throughout the DERC rule. A facility wishing to use reductions of one pollutant to meet the reduction requirement of another pollutant must use urban airshed modeling to obtain TCEQ and EPA approval. If the facility generating the reductions is located outside the United States, the substitution must result in a greater health benefit and be of equal or greater benefit to the overall air quality of the area. Once the TCEQ meets the commitments outlined earlier, EPA review and approval will be required any time a reduction generated outside the United States is requested for use. EPA intends to address any such requests through a SIP revision, which will provide an opportunity for public participation. The public information requirements in section 101.372(h) and the information that must be submitted to the TCEQ for inclusion in the credit registry on the use and banking of DECs in sections 101.376 and 101.379 demonstrates the importance of public participation in the DERC program.

The environmental justice element applies if the EIP covers VOCs and could disproportionately impact communities populated by racial minorities, people with low incomes, and/or Tribes. EIPs that include hazardous air pollutants (HAPs) must also satisfy the expectations of Appendix 16.2 of the EPA EIP Guidance, which addresses prevention and/or mitigation of impacts from potential or actual trades involving HAPs, sufficient information made available for meaningful review and participation, public participation, and periodic program evaluations. OMT EIPs should also protect communities of concern from disproportionately high and adverse impacts from emission shifts and foregone emission reductions.

Because the DERC program allows for the generation and use of DECs from VOCs and/or HAPs, the rule must be evaluated against environmental justice expectations. The DERC rule satisfies all elements of the HAP Framework. For compliance with the prevention and/or mitigation of potential impacts, the TCEQ has placed limits on NO X and VOC DEC usage in ozone nonattainment areas and similar DEC usage limits in attainment or unclassified areas to exceed permit allowables. Additionally, the trading of DECs may be discontinued if the program audit identifies problems in a localized area of concern. The TCEQ addresses the expectations for sufficient information made available for meaningful review and participation by requiring under section 101.372(i) that all information submitted with notices, reports, and trades regarding the nature, quantity of emissions, and sales price for DECs is public information. This information is available upon request or on the TCEQ website. Public participation is an integral feature of the DERC rule in the design, implementation, and evaluation of the program. During the development of the SIP revisions under consideration in this action, the TCEQ held four public meetings in Austin, Channelview, and Houston, TX. The TCEQ also has an extensive stakeholder list of approximately 150 contacts who receive copies of all TCEQ rulemaking actions for comment and participation in development. The public also has the opportunity to comment on quantification protocols used under section 101.372(d) and has the ability to review the program evaluations under section 101.379.

As an added measure that demonstrates general equity and environmental justice, TCEQ has developed the Toxicological Risk Assessment (TARA) Effects Evaluation Procedure. Under this process, which is authorized under section 382.0518(b)(2) of the Texas Health and Safety Code, TCEQ may not grant a permit to a facility and a facility may not begin operating unless it is demonstrated that emissions will not have an adverse impact on public health and welfare. This demonstration is accomplished by (1) establishing off-property ground-level-air concentrations of constituents resulting from the proposed emissions, and (2) evaluating these concentrations for the potential to cause adverse health or welfare effects. The TARA Effects Evaluation is used to evaluate the use of DECs in an air permit. The TCEQ guidance document “How to Determine the Scope of Modeling and Effects Review for Air Permits” (RG-324, Oct. 2001) has a detailed discussion of the TARA Effects Evaluation procedures.

All EIPs must be environmentally beneficial and can demonstrate this principle through more rapid emission reductions or faster attainment than would have occurred without the EIP. The DERC EIP meets the expectations for the environmental benefit principle. The ability to generate DECs provides an incentive for early compliance and more rapid emission reductions. Additionally, users of DECs must retire an additional 10 percent of DECs as an environmental benefit under section 101.376(d)(2)(D).

Appendix 16.14 of the EIP Guidance outlines EPA's expectations for the use of emission credits in the NSR program. In addition to meeting the requirements of the NSR program, a source wishing to use OMT credits to meet NSR offset requirements must:

• Meet all other OMT requirements.

• Meet the geographic limitation and other criteria contained in section 173 of the CAA.

• Obtain sufficient OMT credits for at least one year of operation before receiving its permit.

• Commit in its NSR permit to obtain sufficient additional OMT credits to cover each subsequent year of operation by December 31 of the previous year. This means that the OMT credits used for NSR offsets must be obtained in advance of the year for which they will be used.

• Ensure that emissions reductions used as OMT credits are not otherwise required by the CAA.

The DERC program meets the requirements of an OMT program, as shown in the TSD for this action. Table IV-3 of the TSD specifically addresses how sources demonstrate that DECs are surplus and not otherwise required by the CAA. Section 101.376 of the DERC program provides that DECs can be used as NSR offsets if the following requirements are met:

• The user must obtain the executive director's advance approval covering use of specific DECs for at least one year of operation of the new or modified facility;

• The amount of DECs needed for NSR offsets equals the quantity of tons needed to achieve the maximum allowable emission level set in the user's NSR permit. The user must also purchase and retire enough DECs to meet the offset ratio requirement in the user's ozone nonattainment area. The user must purchase and retire either the environmental contribution of 10 percent or the offset ratio, whichever is higher; and

• The NSR permit must meet the following requirements:

• The permit must contain an enforceable requirement that the facility obtain at least one additional year of offsets before continuing operation in each subsequent year;

• Before issuance of the permit the user must identify the DECs; and

• Before start of operation the user must submit a completed DEC-2 Form, Notice of Intent to Use Discrete Emission Credits, along with the original certificate.

The structure of the DERC program also addresses the requirements in section 173 of the CAA concerning NSR offsets. In particular, section 173(a)(1)(A) requires that “by the time the source is to commence operation” the total allowable emissions in the area must be less than total emissions as of the time of the application to construct, so as to represent reasonable further process under section 171. Further, section 173(c) requires that by the time the source commences operation its new emissions must be offset by “actual” reductions in the area. Thus, as to offsets, section 173 requires that emission reductions occur in sufficient quantity to ensure that new or modified sources do not add to the total emissions in the airshed.

Because OMT programs such as the DERC program provide for banking and trading of reductions that occur over a discrete span of time, it is possible that when they are used as NSR offsets such reductions may have occurred several years before the commencement of the new emissions that they are being used to offset. It is important that such time lags between generation of the DECs and their use as offsets not interfere with the purposes of the NSR program. These purposes include ensuring that new sources in nonattainment areas do not significantly add to the overall level of emissions in the area.

The ultimate test as to whether offsetting emissions reductions are sufficient under section 173(a)(1)(A) is whether they represent “reasonable further progress as defined in section 171.” The definition of “reasonable further progress” in section 171(1) plainly refers to the air quality goal of attainment of the NAAQS. Accordingly, real reductions should be the focus. We consider banked DERCs and MDERCs to be real reductions. Therefore, we only need to determine whether the potential time lag between generation and use of DERCs and MDERCs as offsets may interfere with attainment or otherwise impede the achievement of the goals of the NSR program.

We do not expect that many sources will choose to use DECs for NSR offsets. Emission credits representing ongoing, perpetual reductions—such as the credits generated under the 30 TAC Chapter 101, Subchapter H, Division 1 Emission Credit Banking and Trading program—are the traditional choice for NSR offsets. By contrast, EPA believes that few DECs will be used as offsets, because few facilities will want to face potentially having to shut down if no credits are available in later years. We note that since the DERC program began operation in 1997 no source has applied to use DECs as NSR offsets. Nonetheless, we are evaluating the potential impact of usage of this feature of the DERC program. We conclude that the program is consistent with section 173 and NSR goals, for the following reasons.

First, and most important, we expect that, under the DERC program, new discrete emission reductions, and other reductions that are equivalent to discrete reductions, will be generated on an ongoing basis. The generation of new reductions is important to counterbalance the potential effect of the use as offsets of reductions that took place entirely in the past. If new reductions are generated regularly, then the system as a whole will satisfy the section 173 offset requirements even if some of the DERCs and MDERCs in the system are from previous years.

In each of the nonattainment areas in Texas where DERCs and MDERCs might be used as offsets, there is a reasonable basis to conclude that DERCs and MDERCs will be generated on a recurring basis at least until the area reaches attainment. Because of the expected low utilization of DERCs and MDERCs as offsets, it is not necessary to show that DERCs and MDERCs will be generated in quantities equal to existing banked quantities—a much smaller amount of recurring generation will be sufficient. We will address each of the nonattainment areas in Texas separately.

The HGB area is a moderate nonattainment area for ozone under the 8-hour standard. Its attainment deadline is 2010. In the HGB area, the existence of a robust trading market, with credits that are for relevant purposes fungible across several programs, leads EPA to conclude that additional reductions may reasonably be expected in the future. The NO X Mass Emissions Cap and Trade (MECT) program and the large and diverse universe of sources will ensure that a robust trading market will exist until the area reaches attainment. Analysis of the HGB 2002 emissions inventory shows that for VOC emissions, approximately 41 percent of the inventory (239 tpd) is attributable to area sources, 23 percent (136 tpd) is attributable to point sources, 20 percent (115 tpd) is attributable to onroad mobile sources, and 16 percent of the inventory (93 tpd) is attributable to nonroad mobile sources. For NO X emissions, approximately 35 percent of the inventory (398 tpd) is attributable to nonroad mobile sources, 30 percent (338 tpd) is attributable to point sources, 28 percent of the inventory (323 tpd) is attributable to onroad sources, and 8 percent (87 tpd) is attributable to area sources. (Please note that the emissions inventory data above is presented only for illustrative purposes. EPA is not proposing action on the 2002 emissions inventory in this document.) Typical point sources in the HGB area include refineries, chemical facilities, and electric generating facilities.

The MECT program applies to all sites in the HGB area with an uncontrolled design capacity to emit 10 or more tons of NO X per year. The MECT is a declining cap: the first phase of NO X reductions required under the cap was in 2002, and has been followed by step-downs that will continue through 2007. All sites subject to the MECT had the option of complying early and generating DERCs up to the 2002 start date. Since 2002, any reductions these sites make have been considered unused allowances under the MECT program, instead of being banked as DERCs. Sites participating in the MECT also have the option to use banked DERCs in lieu of MECT allowances. Additionally, sources not subject to the MECT ( e.g. , mobile sources and area sources) can still generate DERCs in accordance with the generation strategies in the DERC rule. Therefore, we conclude, as to NO X , that the emissions increases at sources that have used DERCs generated in the past for offsets will be offset by reductions in the future that will occur as unused allowances.

With regard to VOCs, TCEQ has also adopted two rules for controlling emissions of highly reactive volatile organic compounds (HRVOCs) in the HGB area. The short-term limit on HRVOC emissions established in 30 TAC Chapter 115 will be effective in 2006, and the HRVOC annual emissions cap and trade program will be effective in 2007. Sources subject to these rules can comply early and generate DERCs from early reductions up until the implementation dates. Therefore, we believe that sources will have incentives to generate VOC DERCs in the future, which will tend to offset the use of past DERCs for NSR purposes.

Past patterns of DERC generation, combined with rules coming into effect in the future, suggest that it is likely that new reductions will continue to occur, although not in every year. From 2000 through 2005, some amount of DERCs were generated in every year except 2005 (which of course is not over yet). A relatively small amount was generated in 2004, but nonetheless the fact that substantial amounts of reductions were generated in each of the years 2000 through 2003 is a positive sign as to the ability of stationary sources in the DFW area to generate reductions. There are approximately 9,000 tons of NO X and 10 tons of VOC DERCs banked in DFW; no MDERCs have been generated in DFW. Analysis of the DFW 2002 emissions inventory shows that for VOC emissions, approximately 53 percent of the inventory (216 tpd) is attributable to area sources, 26 percent (104 tpd) is attributable to onroad mobile sources, 13 percent (55 tpd) is attributable to nonroad mobile sources, and 8 percent of the inventory (30 tpd) is attributable to point sources. For NO X emissions, approximately 45 percent of the inventory (207 tpd) is attributable to onroad mobile sources, 27 percent (121 tpd) is attributable to nonroad mobile sources, 19 percent of the inventory (83 tpd) is attributable to point sources, and 9 percent (40 tpd) is attributable to area sources. (Please note that the emissions inventory data above is presented only for illustrative purposes. EPA is not proposing action on the 2002 emissions inventory in this document.) Typical point sources in the DFW area are electric generating facilities and cement kilns. Electric generating facilities have generated approximately 85 percent of the NO X DERCs in DFW to date.

To the extent there is a concern that these previous reductions were driven by early compliance with rules that are now in effect, and therefore that there is no incentive for future reductions, other rules coming into effect in the future should mitigate that concern. The DFW 5 percent increment of progress plan submitted to fulfill obligations under the 1-hour ozone standard extends the nonattainment area to the new counties of Ellis, Parker, Rockwall, Johnson, and Kaufman. Sources in the newly designated nonattainment counties now have a RACT compliance date of 2007. These sources could comply early with RACT requirements and generate DERCs up to the 2007 compliance date. The 8-hour ozone attainment deadline for DFW is 2010. The 8-hour ozone attainment demonstration SIP has not yet been submitted, but it will presumably have control measures taking effect between now and 2010, which will drive reductions, and therefore potential early reductions, during that time.

In addition to the above reasons, to the extent discrete credits become widely used in the DFW area (as NSR offsets or otherwise), the ordinary function of the trading market could drive the creation of new DERCs and MDERCs. That is, demand for discrete reductions will provide a financial incentive for sources to generate such reductions.

Past patterns of DERC generation in the BPA area, combined with rules coming into effect in the future, suggest that it is likely that new reductions will continue to occur, although not in every year. From 1999 through 2005, some amount of DERCs were generated in every year except 2000 and 2005 (which of course is not over yet). The fact that substantial amounts of reductions were generated in most of these years is a positive sign as to the ability of stationary sources in the BPA area to generate reductions usable as DERCs. There are approximately 1,500 tons of NO X DERCs banked in BPA; no MDERCs have been generated in BPA. Analysis of the BPA 2002 emissions inventory shows that for VOC emissions, approximately 44 percent of the inventory (57 tpd) is attributable to area sources, 34 percent (44 tpd) is attributable to point sources, 12 percent (16 tpd) is attributable to nonroad mobile sources, and 10 percent of the inventory (13 tpd) is attributable to onroad sources. For NO X emissions, approximately 41 percent of the inventory (120 tpd) is attributable to nonroad mobile sources, 38 percent (109 tpd) is attributable to point sources, 16 percent of the inventory (46 tpd) is attributable to onroad mobile sources, and 5 percent (16 tpd) is attributable to area sources. (Please note that the emissions inventory data above is presented only for illustrative purposes. EPA is not proposing action on the 2002 emissions inventory in this document.) Typical point sources in the BPA area are refineries, chemical facilities, and electric generating facilities. Chemical manufacturers and refineries have generated all the DERCs in BPA to date.

To the extent there is a concern that these previous reductions were driven by early compliance with rules that are now in effect, and therefore that there is no incentive for future reductions, other rules coming into effect in the future should mitigate that concern. In particular, TCEQ has proposed to lower the RACT exemption for shipbuilding/repair and batch processes from 100 to 50 tons, which will cause some sources to be newly subject to RACT. These sources could comply early with RACT requirements and generate DERCs up to the 2006 compliance date.

Beaumont expects to reach attainment by the end of 2006, therefore, the time frame for using DERCs/MDERCs as NSR offsets in this area (and hence the scope of our concern about this usage) may prove to be fairly limited. If discrete credits do become widely used in the BPA area (as NSR offsets or otherwise), the ordinary function of the trading market could drive the creation of new DERCs and MDERCs. That is, demand for discrete reductions will provide a financial incentive for sources to generate such reductions.

El Paso is currently classified as a moderate nonattainment area for carbon monoxide (CO) and particulate matter with a diameter of less than 10 micrometers and smaller (PM 10 ). El Paso has monitored attainment of the CO standard for approximately the past five years and is expected to submit a request for redesignation by the end of 2005. EPA approved El Paso's 179(b) plan for PM 10 on January 18, 1994 (59 FR 2532), which demonstrated that the area would achieve the PM 10 standard except for emissions contribution from geologic dust from Mexico. TCEQ also intends to pursue redesignation under the PM 10 standard in the future. Since the DERC program began in 1997, no CO or PM 10 DECs have been generated.

With the future redesignation requests the timeframe for using DERCs/MDERCs as NSR offsets in the El Paso area (and hence the scope of our concern about this usage) may prove to be fairly limited. If discrete credits do become widely used in the El Paso area (as NSR offsets or otherwise), the ordinary function of the trading market could drive the creation of new DERCs and MDERCs. That is, demand for discrete reductions will provide a financial incentive for sources to generate such reductions. Also, because there are no DERCs or MDERCs generated in El Paso, the concern that older banked reductions could reenter the market is not applicable.

The geographic restrictions outlined in section 101.372(f) provide further safeguards against inappropriate use of DECs as offsets, by ensuring that reductions used for offsets come from the same source or from other sources in the same nonattainment area. On completion of the conditions outlined earlier in this document, TCEQ Executive Director and EPA approval will be required for sources wishing to use reductions generated in another state or nation, from another nonattainment area, or from attainment counties into nonattainment areas. The DERC program relies on many sources continuing to generate new DERCs and MDERCs to balance with other sources using previously generated discrete credits. Proper functionality of the DERC program will ensure that reductions used as offsets will not negatively impact an area's attainment strategy.

EPA believes that although generating a DEC does not change the allowable emissions in a facility's permit, it is nonetheless appropriate to treat the temporary reduction in facility emissions that a DEC represents as a limited reduction in the allowable emissions of the generating facility. The rationale for this conclusion is that a DEC is banked after it is generated, but the facility must be able to quantify its reductions and demonstrate that emissions before and after a reduction strategy produced a certain amount of reductions. Thus, by nature of how the DEC is generated, there is in effect a temporary limit on the facility's emissions.

EPA's EIP Guidance directs that to avoid problems associated with inter-temporal trading, the program should analyze, minimize, track, and if necessary correct potential problems. The DERC program, at section 101.379, requires an audit of the program every three years. The TCEQ Executive Director may suspend or discontinue the use of DECs if a problem relating to DEC use is identified during the triennial audit.

For the above reasons, EPA believes that the DERC program provides offsets that (except for their discrete nature) are in principle equivalent to offsets provided by traditional means, and that the program is consistent with section 173. With the restrictions outlined above, and the environmental benefit provision for DEC use, EPA believes that TCEQ has addressed our expectations for using DECs as NSR offsets.

The DERC rule provides at section 101.372(f) that emission reductions from another county, state, or nation may be used, subject to certain conditions. The current wording of the rule is unclear on when prior approval from EPA will be required. Upon completion of the condition outlined above, prior approval from EPA will be required when discrete emission credits or reductions from another county, state, or nation are requested for use. EPA has addressed the possibility of such cross-jurisdictional trades in Appendix 16.16 of the EIP Guidance. Satisfaction of the provisions of Appendix 16.16 is necessary to ensure that cross-jurisdictional trades are consistent with the fundamental integrity, equity, and environmental benefit principles described in the EIP Guidance. This condition requiring EPA review of such trades will be the mechanism by which EPA ensures that inappropriate trades do not take place. In particular, EPA intends to require a further SIP revision (either a detailed trading program, such as an interstate MOU, or a trade-specific submission) before approving any international trades, interstate trades, or intrastate trades that involve reductions from beyond the nonattainment area.

International trades present an especially difficult case. For instance, currently there is no approvable mechanism for demonstrating that reductions made in another country are surplus or enforceable. Nonetheless, emission reductions in other countries could potentially offer substantial air quality benefits in the United States. In approving the DERC rule, EPA is recognizing the concept of international trading and describing a framework ( i.e. , the submission of a SIP revision demonstrating among other things the validity and enforceability of foreign reductions) for such trading, in the event that a suitable mechanism is developed for resolving concerns regarding enforceability and surplus. Until such a time, however, EPA does not expect to be able to approve specific international trades under the DERC rule.

The EIP Guidance states that the generation of discrete emission reduction credits from shutdowns and activity curtailments is not an appropriate feature of OMT programs because:

• OMT EIPs are intended to encourage innovative and creative emission reductions, and shutdowns generally do not fall into this category.

• Other types of trading programs may allow shutdowns to generate emission reductions.

Shutdowns are also problematic for OMT programs because of the possibility that a facility may shut down in one area, generate and sell credits, but then relocate operations to other areas or states. Additionally, when activity level increases cause emission increases, mitigating reductions are typically not required. Thus, allowing the generation of tradable credits as a result of activity level decreases (including shutdowns) may tend to promote emissions increases. Such patterns of activity related to shutdowns have the potential to interfere with attainment.

Section 1.6 of the EIP Guidance states that:

Consistent with the intent of this statement, EPA recognizes that TCEQ began developing the DERC program before the January 2001 publication of the EIP Guidance. More specifically, the Texas DERC program has been operational since 1997. Accordingly, we have considered the policies behind the EIP Guidance's statement that OMT credits from shutdowns are not appropriate. We have also considered the EPA Office of Inspector General report titled, “Open Market Trading Program for Air Emissions Needs Strengthening” (No. 2002-P-00019, September 30, 2002), as well as EPA air program responses to that report.

After considering the legal and policy issues, we have concluded that it is appropriate to conditionally approve the DERC rule based on the following commitments from TCEQ:

• Revising the language in section 101.373 to prohibit the future generation of DERCs from permanent shutdowns (“shutdown DERCs”) and to allow shutdown DERCs generated before September 30, 2002, to remain available for use for up to five years from the date of the commitment letter; and

• To perform a credit audit to remove from the emissions bank all shutdown DERCs generated after September 30, 2002.

EPA believes that these conditions address the majority of our policy concerns relating to the use of shutdown DERCs in OMT programs. These conditions address the issue of incentives because sources can no longer generate DERCs from shutdowns. We also believe that the issue of whether the use of the existing shutdown DERCs would interfere with attainment in the HGB nonattainment area has been addressed because TCEQ modeled a conservative estimate of the use of DERCs, including shutdown DERCs, and found no interference with attainment. (See Section IV of the TSD—Technical Summary, Does the DERC EIP SIP Submittal Violate the Integrity of Other Programs.) Additionally, reductions from shutdowns of facilities not included in the SIP cannot generate DERCs. Future attainment demonstrations for other areas will have to consider and account for any potential impact from use of DERCs as well.

EPA further believes that September 30, 2002, is an acceptable cut-off date for the use of shutdown DERCs because it reflects the publication date of the OIG report and the various EPA air program responses, which served as notice that in EPA's view shutdowns should not generate OMT credits. Additionally, it reflects the necessary response time for TCEQ to adopt and submit SIP revisions, and for EPA to process these submittals.

The five year phase-out period for the use of shutdown DERCs generated and banked before September 30, 2002, is also consistent with EPA's goals regarding the effects of credit expiration on the market. As explained in the EIP Guidance, EPA supports unlimited credit lifetimes in trading programs because it tends to reduce emissions spiking around the time of credit expiration, and because credits with an unlimited lifetime promote an efficient trading market. Here, EPA believes that the five year phase-out (as opposed to a shorter-term phase-out) will reduce the potential for emissions spiking and will help promote an efficient trading market, because companies can manage DERC usage across an extended time period. Additionally, in the HGB area, the flow controls established by TCEQ will help ensure that emissions spiking does not occur. (See the following section for a discussion of other issues related to credits with an unlimited lifetime.)

A DEC is available for use after the Notice of Generation and Generator Certification of Discrete Emission Credits Form, has been received, deemed creditable by the TCEQ Executive Director, and deposited in the commission credit registry in accordance with section 101.378(a), and may be used anytime thereafter. DECs do not expire; all credits are deposited in the credit registry and reported as available credits until they are used or withdrawn.

Section 16.15 of the EIP Guidance recognizes that allowing an unlimited lifetime for OMT credits provides certainty and flexibility to the sources participating in the program and reduces the risk of emission spiking that could occur before the expiration date of the credit. It also recognizes that an unlimited lifetime of OMT credits could present an enforcement problem because of the Federal statute of limitations at 28 U.S.C. Section 2462, which typically requires Federal enforcement actions under environmental statutes to commence within 5 years of a violation. (This concern does not apply in the same way to State programs because there is no comparable statute of limitations under Texas law.) In addition, enforcement actions taking place many years after the generation or use of DECs could be hindered by evidentiary problems such as the lack of available records. Therefore, because of the unlimited lifetime of DECs under the Texas program, EPA has placed a condition on approval of the rule. To address the Federal enforceability concerns, TCEQ has committed to:

• Revise Form DEC-1, Notice of Generation and Generator Certification of Discrete Emission Credits; Form MDEC-1, Notice of Generation and Generator Certification of Mobile Discrete Emission Credits; and Form DEC-2, Notice of Intent to Use Discrete Emission Credits, to include a waiver to the Federal statute of limitations defense for generators and users of DECs. The assertion of any such defense will render the initial trade void from the very beginning, and the subsequent use of such emission reductions will be a violation.

• TCEQ will maintain its current policy of preserving all records relating to DEC generation and use for a minimum of 5 years after the use strategy has ended.

Again, TCEQ has agreed to comply with these conditions during the conditional approval period.

The rule language published at 30 TAC Chapter 115, Control of Air Pollution from Volatile Organic Compounds, Subchapter J, Division 4, section 115.950, submitted by TCEQ on December 20, 2000, is approvable. This subsection cross-references the use strategies for DERCs and MDERCs in section 101.376, which we are proposing to approve. These use strategies provide that DERCs and MDERCs can be used to meet VOC requirements in Chapter 115.

The definition of “facility” published at 30 TAC Chapter 116, Control of Air Pollution by Permits for New Construction, Subchapter A, section 116.10(4), submitted by TCEQ on July 22, 1998, is approvable. This definition is approvable as defining what is a “facility” for purposes of permitting under Chapter 116. This satisfies the provisions of 40 CFR § 51.160(e) by identifying the types of facilities, building, structures, or installations which will be subject to review.

Section 110(l) of the Clean Air Act states:

Thus, under section 110(l), this SIP revision must not interfere with attainment or reasonable further progress or any other applicable requirement of the Act.

As a general matter, the satisfaction of the environmental benefit principle and the other integrity principles applicable to trading programs will tend to demonstrate that a trading program will do no worse than maintain existing air quality. Accordingly, EPA has determined that discretionary EIPs that are consistent with the EIP Guidance are consistent with section 110(l):

(EIP Guidance, section 1.9.) Thus, if the DERC program is consistent with the EIP Guidance it will satisfy section 110(l). Although the DERC program is an OMT program as described in the EIP Guidance, it deviates in several respects from that guidance. Namely, the DERC program allows the use of DECs in the HGB MECT, the generation and use of DERCs from permanent shutdowns, the use of discrete reductions from beyond the nonattainment area, and the use of DECs as NSR offsets. Therefore, we must determine if these areas of difference from the guidance could reasonably be expected to interfere with attainment, reasonable further progress, or any other applicable CAA requirement. As a preliminary matter we note that a user of DECs must retire 10 percent more credits than are needed, which provides a built-in source of reductions and therefore tends to promote attainment. That meliorative tendency noted, we will address in the section 110(l) context each of the areas of significant departure from the EIP guidance.

First, as described earlier in this action, the use of DERCs in lieu of MECT allowances has been modeled for impact on the HGB attainment demonstration and reasonable further progress plan. See RME docket R06-OAR-2005-TX-0018 for the attainment demonstration. EPA believes that with the flow control restrictions on the use of DERCs in the MECT, and considering the modeling presented in the attainment demonstration, this deviation does not render the rule inconsistent with section 110(l).

Second, the generation and use of DERCs from permanent shutdowns is also a deviation from the EIP Guidance. (See section I.C.8 of this action.) One condition we have placed on our approval of the DERC program is that TCEQ prohibit future generation of DERCs from permanent shutdowns. Additionally, the DERCs currently banked from permanent shutdowns will only be available for use for a limited time. Because banked DERCs are modeled as actual emissions that could reenter the airshed, all nonattainment areas must evaluate use of shutdown DERCs in the modeling. The attainment demonstration for HGB is being proposed concurrently with this action. TCEQ will need to evaluate impact of DERC use in BPA and DFW as attainment demonstrations are submitted. Only a minimal number of shutdown DERCs have been banked in attainment areas. With the five-year phase out period allowed under the conditional approval and the limitations on DERC use at section 101.376, the use of these DERCs should be sufficiently restricted as to satisfy section 110(l).

Third, the use of discrete reductions from beyond the nonattainment area is also a condition for rule approval. EPA approval is required anytime a source requests to use discrete reductions from beyond the nonattainment area, or from another state or nation. EPA intends to address any such requests through a SIP revision, which will demonstrate consistency with section 110(l).

Fourth, the use of DERCs and MDERCs as NSR offsets is permitted by the EIP Guidance, but only to the extent that other sections of the CAA are satisfied. Our discussion earlier shows that the use of DECs is consistent with sections 171 and 173. Therefore, this use is also consistent with section 110(l). Further, any such use of DECs would be in connection with an NSR permit, which itself includes a review to ensure noninterference with attainment.

Having reviewed the DERC rule in connection with the EIP Guidance and section 110(l) of the act, we conclude that for purposes of determining consistency with section 110(l) the rule is consistent with the guidance. To further support this determination, we will discuss the rule in connection with specific locations and criteria pollutants. Discrete emission credits can be generated from reductions of any criteria pollutant or precursor of a criteria pollutant, with the exception of lead. Therefore, we have evaluated the DERC rule for its impact on attainment and reasonable further progress for CO, ozone, NO 2 , NO X , PM, SO 2 , and VOC.

As to ozone, attainment demonstrations under the 8-hour standard currently in effect are not yet due. Pending that date, EPA believes that preservation of the status quo air quality while new plans are being developed will prevent interference with the States' obligations to develop timely attainment demonstrations and reasonable further progress plans and to attain as expeditiously as practicable. Accordingly, for 8-hour ozone nonattainment areas in Texas, EPA believes that a demonstration that this rule will not worsen existing air quality is sufficient. As to the HGB nonattainment area, a fuller discussion of this analysis appears in EPA's evaluation of the HGB attainment demonstration submitted for the 1-hour ozone standard (RME Docket R06-OAR-2005-TX-0018). That rulemaking contains EPA's proposed determination that the area will attain the 1-hour ozone standard and that the current attainment strategy does not interfere with attainment of the 8-hour standard in the HGB area. In addition, EPA has already approved TCEQ's 1-hour reasonable further progress plan for HGB (70 FR 07407, February 14, 2005).

Under the DERC rule, one ozone precursor may be used to meet the reductions of another precursor ( i.e. , a facility could use NO X reductions to satisfy a VOC requirement or vice versa), subject to an urban airshed modeling demonstration and TCEQ Executive Director and EPA approval. In very limited cases, the rule allows for such interpollutant trading across the U.S.-Mexico border without specifically requiring urban airshed modeling, but any such trades would be subject to EPA approval, as further described below. DEC usage is also subject to geographic restrictions. Generally, DECs generated in an attainment area can be used in that area or any other attainment area. DECs generated in a nonattainment area can only be used in that nonattainment area or in any attainment area. TCEQ Executive Director and EPA approval will be required any time a DEC generated outside a nonattainment area is requested for use within that nonattainment area. EPA intends to address any such request through a SIP revision, which would require a demonstration of consistency with section 110(l). TCEQ will also conduct an audit of the DERC program every three years. The audit will specifically evaluate the impact of DEC generation and use on the State's attainment demonstration. If problems are identified, the TCEQ Executive Director may suspend or discontinue the trading of DECs as a remedy.

As to criteria pollutants other than ozone, the only nonattainment area in Texas is El Paso, which is currently designated nonattainment for carbon monoxide (CO) and particulate matter with a diameter of 10 micrometers and smaller (PM 10 ). El Paso has monitored attainment of the CO standard for approximately the past five years and is expected to submit a request for redesignation by the end of 2005.

No DECs of any sort have yet been banked in El Paso. Therefore, before any DECs could be used there, reductions in an amount ten percent greater than the eventual use would have to occur. In light of El Paso's five-year record of monitored attainment with the CO standard, we conclude that such potential DEC usage would not interfere with attainment or reasonable further progress. As to PM 10 , potential DEC usage will not interfere with attainment of the PM 10 standard. EPA approved a SIP revision for El Paso on January 18, 1994, finding under section 179(b) of the CAA that the plan provided for attainment but for emissions from Mexico consisting primarily of geologic dust (59 FR 2532). As demonstrated by the 179(b) plan and by the fact that no one has banked PM 10 emissions, there are very few sources in the El Paso area that could serve as generators of PM 10 DECs, and therefore there is no reasonable prospect that the use of PM 10 DECs will interfere with attainment of that standard.

We have also considered whether the potential use of DECs to exceed allowable emission levels under 30 TAC § 101.376(b)(1) is contrary to section 110(l) in that it could allow sources to exceed limits in their CAA Title V permits, which are “applicable requirements” under the Act. We conclude that this aspect of the rule does not violate section 110(l), for the following reasons. First, EPA has addressed the interface of Title V permits and trading programs in the EIP guidance, which provides:

(EIP Guidance, Appendix 16.8.) Texas has modified its Title V permit template so as to address the permissible use of DECs to meet Title V permit requirements. As further explained in the TSD for this action, we find that the Texas permit language satisfies the concerns identified in Appendix 16.8.

In reaching this conclusion, we also considered that a Title V permit is not itself a source of substantive limits. Rather, it incorporates applicable requirements under other permits and programs. In Texas, as elsewhere, many of the allowable emission levels in Title V permits are determined through New Source Performance Standards (NSPS), Best Available Control Technology (BACT), Lowest Achievable Emission Rate (LAER), or National Emission Standards for Hazardous Air Pollutants (NESHAPs). Under the Texas rules, DECs may not be used for compliance with any of these programs. The rule does allow DECs to be used for compliance with Reasonably Available Control Technology (RACT) standards, in accordance with EPA's guidance. Specifically, the guidance provides that “[i]f your EIP allows sources to avoid direct application of RACT technology, your EIP must ensure that the level of emission reductions resulting from implementation of the EIP will be equal to those reductions expected from the direct application of RACT” (EIP Guidance, Appendix 16.7). The Texas program ensures consistency with that element of the EIP Guidance through the requirement that a user of DECs must retire 10 percent more credits than are needed. Accordingly, any use of DECs for RACT compliance will have been preceded by a ten percent greater reduction.

The above discussion concerns criteria pollutants for which an area is classified as nonattainment. As for pollutants for which an area is in attainment, EPA believes that the DERC rule is consistent with section 110(l). Discrete credit use in attainment areas could potentially result in temporary local increases in such attainment pollutants, but only in the sense of authorizing limited exceedances of state-only permit requirements. That is, in attainment areas in Texas, the Federally enforceable permit limits are all based on programs, such as BACT and NSPS, for which DEC use is not authorized under the Texas rule. DEC use for attainment pollutants can therefore only affect non-SIP requirements. Irrespective of the DERC rule, such non-SIP requirements are subject to change without undergoing a 110(l) analysis. Accordingly, the DERC SIP revision is not itself causing any increases in attainment pollutants that might be contrary to section 110(l).

For the above reasons, and based also on the analysis in the HGB rulemaking, we conclude that the Texas DERC rule represents an environmental improvement on the status quo, and does not interfere with attainment, reasonable further progress, or any other requirement of the Act. TCEQ will need to evaluate DEC generation and use for the BPA and DFW nonattainment areas in the appropriate attainment demonstrations and reasonable further progress plans.

EPA reviewed the DERC program revisions with respect to the expectations of the EIP Guidance document and the requirements of the Clean Air Act. EPA has concluded after review and analysis that the DERC program is conditionally approvable. EPA is proposing to approve the revisions to sections 101.371, 101.372, 101.378, and 101.379 submitted by TCEQ on January 31, 2003, for rule log number 2002-044-101-AI; and the revisions to sections 101.370, 101.373, 101.374, and 101.376 submitted by TCEQ on December 6, 2004, for rule log number 2003-064-101-AI.

EPA has also reviewed the subsection in 30 TAC Chapter 115 which provide cross-references to the DERC program, and has concluded that this subsection is approvable. We are proposing to approve section 115.950 submitted by TCEQ on December 20, 2000, for rule log number 1998-089-101-AI. Because this subsection involves the use of discrete emission credits and emission credits for compliance, the use of emission credits for compliance with Chapter 115 is not approved until the Emission Credit Banking and Trading program has been approved. The rules for emission credit generation and use are being considered in a separate Federal Register notice.

EPA has also reviewed the definition of facility provided in 30 TAC Chapter 116, and has concluded that this subsection is approvable. We are proposing to approve section 116.10(4) submitted by TCEQ on July 22, 1998, for rule log number 98001-116-AI.

When submitting comments, remember to:

1. Identify the rulemaking by File ID number and other identifying information (subject heading, Federal Register date and page number).

2. Follow directions—The agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulations (CFR) part or section number.

3. Explain why you agree or disagree; suggest alternatives and substitute language for your requested changes.

4. Describe any assumptions and provide any technical information and/or data that you used.

5. If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced.

6. Provide specific examples to illustrate your concerns, and suggest alternatives.

7. Explain your views as clearly as possible, avoiding the use of profanity or personal threats.

8. Make sure to submit your comments by the comment period deadline identified.

Do not submit this information to EPA through regulations.gov or e-mail. Clearly mark the part or all of the information that you claim to be CBI. For CBI information in a disk or CD ROM that you mail to EPA, mark the outside of the disk or CD ROM as CBI and then identify electronically within the disk or CD ROM the specific information that is claimed as CBI). In addition to one complete version of the comment that includes information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the official file. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this proposed action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. For this reason, this action is also not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001). This proposed action merely proposes to approve state law as meeting Federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this proposed rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). Because this rule proposes to approve pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Public Law 104-4).

This proposed rule also does not have tribal implications because it will not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes, as specified by Executive Order 13175 (65 FR 67249, November 9, 2000). This action also does not have Federalism implications because it does not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999). This action merely proposes to approve a state rule implementing a Federal standard, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This proposed rule also is not subject to Executive Order 13045 “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997), because it is not economically significant.

In reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. In this context, in the absence of a prior existing requirement for the State to use voluntary consensus standards (VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA, when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the Clean Air Act. Thus, the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. This proposed rule does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

If you wish to comment on this proposed rule, you may submit your comments by any of the methods listed in the ADDRESSES section.

Our practice is to make comments, including names and home addresses of respondents, available for public review during regular business hours. Individual respondents may request that we withhold their home address from the rulemaking record. We will honor the request to the extent allowable by law.

In some circumstances we may withhold from the rulemaking record a respondent's identity, as allowable by law. If you wish us to withhold your name and/or address, you must state this prominently at the beginning of your comment. However, we will not consider anonymous comments. We will make all submissions from organizations or businesses, and from individuals identifying themselves as representatives or officials or organizations or businesses, available for public inspection in their entirety.

Originally enacted in 1980, the Equal Access to Justice Act (the Act or EAJA) provides that “[a]n agency that conducts an adversary adjudication shall award, to a prevailing party other than the United States, fees and other expenses incurred by that party in connection with that proceeding, unless the adjudicative officer of the agency finds that the position of the agency was substantially justified or that special circumstances make an award unjust.” 5 U.S.C. 504(a)(1) (2000). The Act has been amended several times since 1980, most recently in 1996, when the maximum amount of fees that may normally be awarded to an attorney or agent was increased from $75 per hour to $125 per hour. 5 U.S.C. 504(b)(1)(A)(ii).

OHA issued final regulations implementing the Act in 1983. 43 CFR 4.601-4.629, 48 FR 17595 (April 25, 1983). Those regulations were based on model rules published in 1981 by the Administrative Conference of the United States (ACUS). 46 FR 32900 (June 25, 1981). ACUS published revised model rules in 1986 that reflected the amendments Congress made when it re-authorized the Act in 1985. 1 CFR part 315 (1995), 51 FR 16659 (May 6, 1986); see Administrative Conference of the U.S., Federal Administrative Procedure Sourcebook at 419 (2d ed. 1992). ACUS did not publish model rules reflecting amendments to the Act made since 1985 before ACUS was terminated in 1996.

In preparing these revised regulations implementing the Act, OHA has used the 1986 ACUS model rules as a point of departure, modifying them to put them in plain language, to reflect more recent amendments to the Act, and to make certain changes we believe are warranted for reasons explained in the following section-by-section analysis. We do not discuss changes that are simply editorial. Readers may find it helpful to have a copy of the 1986 model rules available as they review this proposed rule.

This regulation is based on the “purpose” section of the 1986 model rules, 1 CFR 315.101. We propose using the phrase “the Department or other agency” rather than “this agency” because OHA conducts proceedings for some agencies outside the Department, e.g. , the Indian Health Service. See the proposed definition of “other agency” in section 4.602.

The regulations in this subpart apply only to administrative proceedings under 5 U.S.C. 504, not to judicial proceedings under EAJA, 28 U.S.C. 2412 (2000), or to the attorney fee provisions of any other statute.

We propose revising most of the definitions in our previous regulations and have added some definitions.

We propose adding “deciding” before “official(s) who presided” in the definition of “adjudicative officer” because it is in the Act, 5 U.S.C. 504(b)(1)(D). ACUS suggested that the adjudicative officer should normally be the person who made the decision on the merits, but stated its belief that “agencies can properly assign EAJA petitions to new board members or panels where illness, retirement, or other specific circumstances would prevent assignment to the original member.” 51 FR 16663-64 (May 6, 1986). See United States v. Willsie , 155 IBLA 296, 297-98 (2001). We are proposing language to cover such circumstances.

Within OHA, the adjudicative officer will often be an administrative law judge, but in some cases, it may be a panel of two or more appeals board judges. The term “adjudicative officer” is therefore used to include both a single deciding official and a panel of deciding officials issuing a joint decision.

Paragraphs (1) and (2) of the proposed definition of “Adversary adjudication” are based on the second sentence of the “proceedings covered” section of the model rules, 1 CFR 315.103(a). Paragraphs (3) and (4) are based on 1986 and 1993 amendments to the Act, Pub. L. 99-509 and Pub. L. 103-141.

The proposed definition of “affiliate” is based on the second sentence of paragraph (f) of the “eligibility” section of the model rules, 1 CFR 315.104(f).

The proposed definition of “demand” is based on a 1996 amendment to the Act, Pub. L. 104-121; see 5 U.S.C. 504(b)(1)(F).

The proposed definition of “final disposition” is based on paragraph (b) of the “when an application may be filed” section of the model rules, 1 CFR 315.204. Under the definition, a settlement or voluntary dismissal of the proceeding may serve as the final disposition, in which case any application for fees and expenses would be due within 30 days from that event, under section 4.613(a). But a settlement or voluntary dismissal may not be a sufficient basis for an award.

For example, if the settlement or voluntary dismissal occurs at the hearings level because the Department or other agency has voluntarily changed its position in response to the filing of the proceeding and before there has been any ruling on the merits, the applicant will be unable to show it is a prevailing party entitled to fees. Buckhannon Board & Care Home, Inc. v. West Virginia Dept. of Health and Human Resources , 532 U.S. 598 (2001); Brickwood Contractors, Inc. v. United States , 288 F.3d 1371 (Fed. Cir. 2002); Perez-Arellano v. Smith , 279 F.3d 791 (9th Cir. 2002). On the other hand, if the settlement or voluntary dismissal occurs at the appeals board level because the Department or other agency has changed its position in response to an adverse ruling on the merits at the hearings level, the applicant will likely be able to show that it is a prevailing party potentially entitled to fees.

We propose adding a definition of “other agency,” as discussed above in connection with section 4.601.

The proposed definition of “party” is drawn from 1 CFR 315.104(a) of the model rules and a 1996 amendment of the Act, Pub. L. 104-121.

The proposed definition of “position of the Department or other agency” is based on the Act, 5 U.S.C. 504(b)(1)(E), but the exception provided in the Act has been transferred to section 4.605(b), as suggested in the “standards for awards” section of the model rules, 1 CFR 315.105(b).

Paragraphs (a), (b)(1), and (b)(2) are based on the “proceedings covered” section of the model rules, 1 CFR 315.103(a), except that the second sentence of section 315.103(a) has been moved to the definition of “adversary adjudication” in section 4.602, as stated above. Under that definition, an “adjudication under 5 U.S.C. 554” includes those proceedings required by a statute to be conducted under section 554, e.g. , section 9 of the Taylor Grazing Act, 43 U.S.C. 315h (2000), see Bureau of Land Management v. Ericsson , 98 IBLA 258 (1987), and the Indian Self-Determination and Education Assistance Act, as amended, 25 U.S.C. 450f(b)(3) (2000).

Paragraph (a) also covers appeals of decisions of contracting officers made pursuant to section 6 of the Contract Disputes Act of 1978, 41 U.S.C. 605, before the Interior Board of Contract Appeals under section 8 of that Act, 41 U.S.C. 607.

Paragraph (b)(1) would clarify that the Act does not cover other hearings or appeals that are not governed by 5 U.S.C. 554, even if the Department has elected to conduct such hearings or appeals using procedures comparable to those under section 554. Examples include cases referred by an appeals board for a fact-finding hearing under 43 CFR 4.337(a) or 4.415, and personnel grievance hearings for Departmental employees under 370 Departmental Manual 771, Subchapter 3.

In Collord v. U.S. Department of the Interior , 154 F.3rd 933 (9th Cir. 1998), the U.S. Court of Appeals for the Ninth Circuit held that, because a mining claim is a property interest that may not be extinguished without due process, section 554 governs mining claim contests, and therefore those proceedings are adversary adjudications under the Act. The Interior Board of Land Appeals (IBLA) has followed the Collord decision with respect to mining claim contests, United States v. Willsie , 155 IBLA 296, 297 (2001), and has extended its applicability to Alaska Native Allotment Act claim contests, Heirs of David F. Berry , 156 IBLA 341, 343-44 (2002).

However, the Ninth Circuit's reliance in Collord on Wong Yang Sung v. McGrath , 339 U.S. 33, 50-51 (1950), is open to question. See A Guide to Federal Agency Adjudication ¶¶ 3.02, 11.03 (Michael Asimow, ed., American Bar Association, 2003); 1 Richard J. Pierce, Jr., Administrative Law Treatise , § 8.2 (4th ed. 2002).

Under existing court precedent, therefore, mining claim contests and Native allotment contests in the Ninth Circuit are deemed to fall within the proceedings covered by section 4.603(a), while mining claim contests in other judicial circuits may not be. See Kaycee Bentonite Corp. , 79 IBLA 182 (1984) (pre- Collord analysis of the applicability of the Act to mining claim contest proceedings).

Paragraph (c) is based on 1 CFR 315.103(c) of the model rules.

We propose to omit section 4.604 of our previous regulations, or any revision of that section based on the “when the Act applies” section of the model rules, 1 CFR 315.102, because it is no longer needed. Section 4.605 of our previous regulations would become section 4.604.

Paragraph (a) is based on the “eligibility of applicants” section of the model rules, 1 CFR 315.104(a), except that we have moved the definition of “party” to section 4.602, as stated above.

Paragraph (b) is based on 1 CFR 315.104(b). We propose adding paragraph (6) based on a 1996 amendment to 5 U.S.C. 504(b)(1)(B), Pub. L. 104-121.

Paragraphs (c) through (g) are based on 1 CFR 315.104(c) through (g), except that the second sentence of paragraph 315.104(f) was moved to section 4.602 as the definition of “affiliate.”

Paragraph (a) is based on the “standards for awards” section of the model rules, 1 CFR 315.105(a), except that the second sentence of the model rule, which is based on 5 U.S.C. 504(b)(1)(E), has been moved to the definition of “position of the Department or other agency” in section 4.602, as stated above.

Consistent with the model rules, section 4.605(a) provides that an award may be granted to a party who has prevailed in “the proceeding” or in “a significant and discrete substantive portion of a proceeding.” The latter phrase could include, in an appropriate case, an interlocutory appeal on a significant, separable issue, or an appeal that results in a remand to an ALJ for further proceedings. It would not include a ruling on a purely procedural issue during the course of a proceeding. See 46 FR 32900, 32907-08 (June 25, 1981); Van Hoomissen v. Xerox Corp. , 503 F.2d 1131, 1133 (9th Cir. 1974); Bohn v. Heckler , 613 F. Supp. 232, 234-35 (N.D. Ill. 1965).

Paragraph (b) is based on 1 CFR 315.105(b) and 5 U.S.C. 504(b)(1)(E).

Paragraph (c) is based on 5 U.S.C. 504(a)(4), as added by a 1996 amendment, Pub. L. 104-121.

Paragraph (a) is based on the “allowable fees and expenses” section of the model rules, 1 CFR 315.106(a)-(b), except that the maximum hourly fee has been increased from $75 per hour to $125 per hour, in accordance with a 1996 amendment, Pub. L. 104-121. Instead of supplying a fixed dollar amount for the rate of an expert witness, we propose substituting a standard of not more than the highest rate at which the Department or other agency pays expert witnesses with similar expertise.

Paragraphs (b) and (c) are based on the corresponding paragraphs of the model rule, 1 CFR 315.106(c) and (d).

We have omitted from section 4.606 any reference to fees for agents, who are included in the Act at section 504(a)(2), (b)(1)(A) and in section 315.105 of the model rules. As used in the Act, the term “agent” does not mean any person who acts on behalf of a party; rather, it means a specialized non-attorney practitioner who is authorized to represent clients with special permission of the tribunal. Fanning, Phillips and Molnar v. West , 160 F.3d 717 (Fed. Cir. 1998); Cook v. Brown , 68 F.3d 447 (Fed. Cir. 1995).

The Department does not authorize specialized non-attorney practitioners to represent clients before it, see 43 CFR 1.3 (2004). Under section 1.3(b)(3), an individual who is not an attorney can represent himself, a member of his family, a partnership of which he is a member, a corporation of which he is an officer or full-time employee, etc.; but that does not make the individual an “agent” within the meaning of the Act. Consequently, a party could not seek fees for an agent in a proceeding before OHA, and there is no need for these regulations to include a reference to agents.

This section is based on the “contents of application” section of the model rules, 1 CFR 315.201. We propose adding paragraph (b)(4) to cross-reference the new language in section 4.605(c).

This section is based on the “net worth exhibit” section of the model rules, 1 CFR 315.202, except we propose adding a reference to a small entity in the first sentence of paragraph (a). We have also broken the paragraphs of the model rule into shorter paragraphs and have added a cross reference in the last sentence to the Department's Freedom of Information Act regulations.

This section is based on the “documentation of fees and expenses” section of the model rules, 1 CFR 315.203.

This section is based on the “when an application may be filed” section of the model rules, 1 CFR 315.204, except that paragraph (b) of the model rules has been moved to the definitions in section 4.602.

This section is based on the “filing and service of documents” section of the model rules, 1 CFR 315.301.

This section is based on the “answer to application” section of the model rules, 1 CFR 315.302.

This section is based on the “reply” section of the model rules, 1 CFR 315.303.

This section is based on the “comments by other parties” section of the model rules, 1 CFR 315.304.

This section is based on the “further proceedings” section of the model rules, 1 CFR 315.306.

This section is based on the “decision” section of the model rules, 1 CFR 315.307. We have omitted the final sentence about allocating awards among agencies because it is not expected to come up in cases that OHA handles.

In this section we have retained the concept of the “agency review” section of the model rules, 1 CFR 315.308, that review of adjudicative officer decisions on applications take place in accordance with the Department's regular review proceedings. For example:

• An appeal from a decision of an administrative law judge on an application for an award in a proceeding under the Taylor Grazing Act would be appealed to IBLA under 43 CFR 4.478(e), 4.410 et seq. IBLA would render a final decision for the Department.