Clean Air Act: New Source Review Revisions Could Affect Utility  
Enforcement Cases and Public Access to Emissions Data (21-OCT-03,
GAO-04-58).							 
                                                                 
Recent Environmental Protection Agency (EPA) revisions to the New
Source Review (NSR) program--a key component of the federal	 
government's plan to limit harmful industrial emissions--have	 
been under scrutiny by the Congress, environmental groups, state 
and local air quality agencies, the courts, and several industry 
groups. The revisions more explicitly define when companies can  
modify their facilities without needing to obtain an NSR permit  
or install costly pollution controls, as NSR requires. GAO was	 
asked to determine (1) whether EPA and the Department of Justice 
(DOJ) assessed the potential impact of the revisions on the	 
ongoing enforcement cases against coal-fired utilities and, if	 
so, what the assessments indicated; and (2) what effect, if any, 
the revisions might have on public access to information about	 
facility changes and their resulting emissions. 		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-58						        
    ACCNO:   A08751						        
  TITLE:     Clean Air Act: New Source Review Revisions Could Affect  
Utility Enforcement Cases and Public Access to Emissions Data	 
     DATE:   10/21/2003 
  SUBJECT:   Air pollution control				 
	     Coal						 
	     Electric utilities 				 
	     Equipment maintenance				 
	     Federal regulations				 
	     Industrial pollution				 
	     Information disclosure				 
	     Litigation 					 
	     Pollution monitoring				 
	     New Source Review Program				 

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GAO-04-58

United States General Accounting Office

GAO

                       Report to Congressional Requesters

October 2003

CLEAN AIR ACT

 New Source Review Revisions Could Affect Utility Enforcement Cases and Public
                            Access to Emissions Data

GAO-04-58

Highlights of GAO-04-58, a report to the Ranking Minority Member,
Committee on Environment and Public Works, U.S. Senate, and another
requester

Recent Environmental Protection Agency (EPA) revisions to the New Source
Review (NSR) program-a key component of the federal government's plan to
limit harmful industrial emissions-have been under scrutiny by the
Congress, environmental groups, state and local air quality agencies, the
courts, and several industry groups. The revisions more explicitly define
when companies can modify their facilities without needing to obtain an
NSR permit or install costly pollution controls, as NSR requires. GAO was
asked to determine (1) whether EPA and the Department of Justice (DOJ)
assessed the potential impact of the revisions on the ongoing enforcement
cases against coal-fired utilities and, if so, what the assessments
indicated; and (2) what effect, if any, the revisions might have on public
access to information about facility changes and their resulting
emissions.

To ensure monitoring of NSR compliance, GAO recommends that EPA specify
(1) what constitutes a "reasonable possibility" that a facility change is
subject to NSR, (2) that companies maintain data on reasonable possibility
decisions, and (3) how the public can access companies' on-site
information on these decisions. EPA took no position on the first two
actions; it is reconsidering the reasonable possibility test through
October 2003. EPA agreed with the third recommendation.

www.gao.gov/cgi-bin/getrpt?GAO-04-58.

To view the full report, including the scope and methodology, click on the
link above. For more information, contact John Stephenson at
[email protected].

October 2003

CLEAN AIR ACT

New Source Review Revisions Could Affect Utility Enforcement Cases and Public
Access to Emissions Data

EPA staff assessed the potential impact of the NSR revisions on the
utility enforcement cases and, according to current and former EPA
enforcement officials, determined that some of the revisions could affect
the cases. EPA staff discussed the potential effects of the revisions with
DOJ. In part as a result of the assessments, EPA changed some of the
revisions before issuing them as final and proposed rules in December
2002. Specifically, EPA changed the content and wording of some of the
provisions included in the final rule and determined that the rule would
not affect the cases. However, EPA enforcement officials were very
concerned that the proposed rule- addressing when a company could consider
a facility change "routine maintenance, repair, or replacement" and exempt
from NSR-could have a negative impact on the cases. The concern was that
proposing one specific definition for this exclusion that differed from
the way the agency had applied it in the past could affect the cases'
outcome. Consequently, EPA instead proposed several alternative
definitions-different cost thresholds below which a company could make a
change that is exempt-for public comment. Nevertheless, some of the
enforcement officials and stakeholders believe that industry's knowledge
that EPA could be defining the exclusion in terms more favorable to
industry delayed some settlements while the rule was being developed,
jeopardizing expected emissions reductions.

Subsequently, in August 2003, despite seven ongoing cases, EPA announced a
final rule specifying a 20 percent cost threshold below which a company
could make certain changes and consider them routine replacement and
exempt from NSR. EPA and DOJ maintain that the rule will not affect the
cases because it applies only to future changes. But some EPA enforcement
officials and stakeholders are concerned that even if judges find
companies to be in violation of the old rule, judges could be persuaded,
when setting remedies, to not require the installation of pollution
controls-limiting emissions benefits-because under the 20 percent
threshold, most of the facility changes in dispute would now be exempt.

Certain provisions in the December 2002 final rule could limit assurance
of the public's access to data about-and input on-decisions to modify
facilities in ways that affect emissions. This would make it more
difficult for the public to monitor local emissions, health risks, and NSR
compliance. Under the rule, fewer facility changes may trigger NSR and
thus the need for permits and related requirements to notify the public
about changes and to solicit comments-unless state and local air quality
agencies have their own permit and public outreach rules. However, the
scope of these state and local rules varies widely. Also under the rule,
companies will now determine whether there is a "reasonable possibility" a
facility change will increase emissions enough to trigger NSR-in effect
policing themselves. But EPA has not defined "reasonable possibility,"
required that companies keep data on all of their reasonable possibility
determinations, or specified how the public can access the data companies
do keep on site.

Contents

  Letter

Results in Brief
Background
Because EPA's Assessments Showed That Some NSR Revisions

Could Affect the Enforcement Cases, the Agency Made Changes before Issuing
the Final and Proposed Rules

Portions of the December 2002 Final Rule Could Limit Assurance That the
Public Has Input into Company Decisions to Modify a Facility When
Modifications Affect Emissions

Conclusions
Recommendations for Executive Action
Agency Comments

                                       1

                                      4 7

15

21 26 27 27

Appendix I Objectives, Scope, and Methodology

  Tables

Table 1: Ongoing New Source Review Court Cases Involving Coal-

Fired Power Plants, October 2003 11 Table 2: NSR Revisions Included in the
December 2002 Final Rule 13 Table 3: Judicial Settlements Entered Into
with Coal-Fired Power

Plants since Issuance of the December 2002 Final and

Proposed NSR Rules 20

  Figure

Figure 1: New Source Review Permitting Process

Abbreviations

CAA Clean Air Act
DOJ Department of Justice
EPA Environmental Protection Agency
NAPA National Academy of Public Administration
NEPDG National Energy Policy Development Group
NSR New Source Review
PAL Plantwide Applicability Limitations
PSD Prevention of Significant Deterioration
TVA Tennessee Valley Authority
WEPCO Wisconsin Electric Power Company

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separately.

United States General Accounting Office Washington, DC 20548

October 21, 2003

The Honorable James M. Jeffords
Ranking Minority Member
Committee on Environment and Public Works
United States Senate

The Honorable Joseph I. Lieberman
United States Senate

Since its inception in 1977, the New Source Review (NSR) Program-one
of the Clean Air Act's (CAA) key mechanisms for maintaining air quality to
protect public health-has prevented the emission of millions of tons of
harmful pollutants. It has done so by requiring newly built industrial
facilities, and existing industrial facilities undergoing major
modifications
to equipment or operating procedures, to install modern air pollution
controls.1 The Congress allowed existing facilities to defer installation
of
such controls until a major modification was made with the expectation
that, over time, all facilities would install such equipment, and this
would
lead to lower overall emissions. In recent years, the program has become
increasingly controversial because of what the utility industry believes
to
have been inconsistent interpretation and enforcement of the program by
the Environmental Protection Agency (EPA) against power plants. Some
of the affected companies have agreed to settlements that will cost
hundreds of millions of dollars and require emissions reductions, while
other companies are in various stages of litigation. In addition, two
recent
rounds of changes to this program have been the subject of congressional
debate and litigation and have drawn the scrutiny of environmental
groups, some state attorneys general, and some state and local air quality
authorities. These groups are concerned about, among other things, the
potential effect of the changes on emissions, the ongoing NSR
enforcement cases, or the public's ability to access information about
facility changes and the emissions that result.

When created, the NSR program was intended to represent a balance
between the environmental interest in improving air quality and the

1EPA defines a major modification as a physical or operational change that
causes a significant increase in emissions.

economic interest in allowing capital improvement projects at industrial
facilities. Accordingly, one of the program's objectives is to protect
public health in areas that both meet and do not meet federal air quality
standards. Companies that want to make changes to existing facilities that
would result in emissions increases exceeding a certain threshold have to
apply for a federal NSR permit and then typically install some type of
pollution control.2 According to EPA, the cost of installing controls can
reach hundreds of millions of dollars for some facilities. However,
companies can be exempt from the federal NSR requirements if (1) a
facility change is considered "routine maintenance, repair, and
replacement," (2) the company agrees not to significantly increase its
emissions after making a physical or operational change, or (3) the
company balances any emissions increases resulting from a change in a
facility with emissions reductions elsewhere in the same facility. To
implement the NSR program, the CAA requires that EPA provide permitting
and enforcement authority to state and local air pollution agencies, and
most of these agencies currently have this authority. Some states and
localities also have their own NSR programs for governing new construction
or facility changes whose emissions thresholds are lower than the federal
NSR threshold.

Because of the NSR program's complexity and administrative burden, among
other things, EPA began a reform process in 1992 that resulted in proposed
changes to the program in 1996 and 1998, but the agency did not take final
action until 2002. In the meantime, EPA referred to the Department of
Justice (DOJ) a number of alleged violations of existing NSR provisions by
the owners and operators of some of the largest coal-fired power plants in
the country.3 In general, EPA targeted companies that undertook projects
without obtaining a permit or installing pollution controls but that EPA
believed were significant facility changes that resulted in emissions
increases and were therefore subject to NSR. For their part, the companies
believed that their projects were not subject to NSR for various reasons,
including that the projects qualified for the

2The thresholds for these "major" modifications vary by pollutant and the
air quality status of the area in which the facility is located. For
example, in areas that meet air quality standards, a 100-ton per-year
increase is significant for carbon monoxide, while a 40-ton per-year
increase is significant for nitrogen dioxide or sulfur dioxide.

3EPA also referred a number of alleged violations of the NSR provisions
involving industries other than coal-fired power plants, such as the
petroleum refinery industry. Generally, the defendants in those cases did
not challenge EPA's interpretation of the term "routine maintenance," and
many of these cases were settled.

"routine maintenance, repair, and replacement" exclusion (hereafter
referred to as the "routine maintenance exclusion"). In November 1999, DOJ
filed seven NSR enforcement actions in U.S. district courts, and EPA
issued an administrative compliance order to the Tennessee Valley
Authority (TVA). Subsequently, DOJ filed an additional six NSR enforcement
actions against several other companies.4 In many of these federal cases,
states have also taken action to intervene against the power plants. As of
October 2003, 7 of the 14 cases have been settled or decided.

As a result of concerns about regulatory barriers to investments in energy
efficiency and pollution control projects, among other things, EPA decided
to finalize some of the 1996 and 1998 NSR reform proposals. Subsequently,
the agency issued final and proposed rules to revise the program in
December 2002. First, the agency decided to modify certain of the proposed
1996 NSR revisions and issue them as a final rule that provided companies
with options to avoid triggering NSR requirements. For example, companies
could set a limit on a facility's overall emissions and then make changes
within the facility without being subject to NSR, or obtain credit for
controls already in place. Because EPA received a number of petitions from
parties asking the agency to reconsider certain aspects of this rule, EPA
took public comments on certain features of the final rule during July and
August 2003. The agency is analyzing the comments to determine if it
should make any changes in response. Also in December 2002, EPA issued for
public comment a proposed rule to revise the criteria by which it would
determine if a facility change is "routine maintenance, repair, or
replacement" and therefore exempt from NSR. After reviewing the comments
received on the proposed rule, in August 2003, EPA announced plans to
issue a final rule defining when a facility change could be considered a
replacement under the routine maintenance exclusion.

When EPA formally announced in June 2002 that it intended to revise, among
other things, the routine maintenance exclusion, several environmental
groups and some state attorneys general involved in the ongoing
enforcement cases raised concerns that the revisions could negatively
affect the cases. Among other things, these groups were concerned that
industry attorneys might use the planned revisions to the

4Due to an adverse jurisdictional decision, Alabama Power Company was
dismissed as one of the defendants from one of the seven cases that had
been filed in November 1999. DOJ refiled against this company in January
2001.

routine maintenance exclusion to delay the cases by arguing that the
lawsuits should be dismissed because under the rule proposal, the
companies' actions would not violate the NSR requirements.

In light of the concerns about the impact of the revisions, as well as
recent congressional debate on them, you asked us to determine (1) whether
EPA and DOJ assessed the potential impact of the NSR revisions on
enforcement cases against coal-fired utilities before issuing them as
final and proposed rules in December 2002 and, if so, what the assessments
indicated and (2) what effect, if any, the December 2002 final rule might
have on public access to information on facility changes and the resulting
emissions.5 You also asked us to review EPA's assessment of the economic
and environmental impact resulting from the December 2002 final rule, and
we presented our findings to you in a report issued on August 22,

6

2003.

To respond to these objectives, among other things, we met with EPA
officials who were involved in discussions related to the potential impact
of the NSR revisions on the coal-fired power plant enforcement cases,
including officials from three EPA offices-Air Quality Planning and
Standards, Enforcement and Compliance Assurance, and General Counsel-and
DOJ's Environment and Natural Resources Division. We also spoke to former
EPA officials who had been involved in these discussions. To determine how
the December 2002 NSR final rule could affect public access to information
about facility changes and their associated emissions, we reviewed the
relevant federal NSR requirements before the revisions and compared them
with those in the final rule. We also met with officials from EPA's
offices of Air Quality Planning and Standards and Enforcement and
Compliance Assurance, industry groups, environmental groups, and state
associations to discuss their views on the effects of the final rule on
public access to this information.

Results in Brief 	EPA enforcement officials assessed the potential impact
of the draft NSR revisions (before they were issued as final and proposed
rules in

5We focused on the December 2002 final rule revisions because EPA did not
select the final criteria it would use to determine whether a facility
change is considered a "replacement" and exempt from NSR until August 27,
2003, after we had completed most of our work.

6See U.S. General Accounting Office, Clean Air Act: EPA Should Use
Available Data to Monitor the Effects of Its Revisions to the New Source
Review Program, GAO-03-947 (Washington, D.C.: Aug. 22, 2003).

December 2002) on the ongoing enforcement cases against coal-fired
utilities and discussed their views about the impact with DOJ officials.
According to current and former EPA enforcement officials, because they
determined that certain provisions could affect the cases, they changed
the provisions to limit their effects. Nevertheless, the EPA officials and
representatives of some environmental groups believe settlement of some
cases was delayed during development of the two rules because of the
possibility that the routine maintenance exclusion could be defined in
terms favorable to industry, thereby jeopardizing the expected emissions
reductions. According to available documentation and the EPA enforcement
officials, the EPA staff during this time prepared various analyses to
illustrate the draft revisions' potential impact on the cases and
presented the results in briefings to senior EPA managers, including the
EPA Administrator. In formulating the final rule, the agency staff
determined that, after carefully making content and wording changes, the
rule would not affect the integrity of the enforcement cases. However, in
formulating the proposed rule, the staff determined that the revisions EPA
was considering could adversely affect the cases. Specifically, EPA was
considering establishing a specific cost threshold below which facility
changes would be considered "routine maintenance, repair, and replacement"
and thereby exempt from NSR permit and pollution control requirements; in
the enforcement cases, EPA was challenging the way in which companies used
this exclusion in the past. In general, the EPA enforcement officials were
concerned that if the agency proposed a specific definition of the
exclusion that differed from the way EPA had applied the exclusion in the
past, defendants could argue that some of the facility changes under
dispute should now be considered exempt. In part because of these
concerns, EPA proposed several options for calculating cost thresholds to
define this exclusion and solicited public comment on them.

After reviewing the comments submitted, EPA announced a final rule in
August 2003 specifying that a facility change may be considered a
replacement-and exempt from NSR-if the cost of the change is less than 20
percent of the cost of replacing an entire process unit, such as an
electric steam-generating unit in a power plant. EPA assessments indicate
that under this threshold, almost all of the facility changes at issue in
the enforcement cases could now be exempt. Therefore, some of the EPA
enforcement officials and key stakeholders are concerned the August rule
could serve as a disincentive for utilities to settle the remaining seven
cases and could affect judges' decisions on remedies in these cases,
especially regarding the installation of pollution controls, affecting the
expected emission reductions. Conversely, EPA and DOJ argue in the

litigation that the rule governs only prospective conduct and should not
impact the liability of companies who violated the law in the past.

Overall, the final rule could result in less assurance that the public
will have access to data on facility changes and the emissions they
create, as well as input on decisions about undertaking these changes in
the first place and controlling their emissions. Less information would
make it more difficult for the public to monitor local emissions and
health risks, as well as compliance with NSR. The full impact of the rule
will partly depend on the extent to which state and local air quality
agencies have their own regulations requiring public notice, comment, and
reporting on facility changes. In particular, one provision of the final
rule could increase publicly available information but decrease the
public's participation in facility changes that affect emissions. Under
the provision, a company may set an annual limit on emissions-good for 10
years- across an entire facility and then modify equipment or operations
within the facility during this time without being subject to NSR, as long
as it does not exceed its emissions limit. To initially set this limit,
the company must notify the public and provide an opportunity to comment
on the company's intended action. The company must also periodically
report on the facility's overall emissions, individual changes made, and
the emissions generated from each piece of equipment within the facility.
On the other hand, because the company no longer has to obtain a permit
for a major modification, it does not have to notify the public of its
intended action and solicit comment. EPA maintains that most companies,
for various reasons, were not obtaining federal NSR permits for these
modifications anyway, even before the rules, so overall, they will not
have an impact. Several industry representatives also believe that the
public will still be involved in decisions and have access to information
about facility changes and emissions because other federal CAA programs,
or states' and localities' own programs, will require it, but according to
states and other stakeholders we contacted, the scope and stringency of
these other programs vary widely.

Two other provisions in the final rule-outlining how a company is to
measure its historic emissions and estimate increases from a facility
change-when implemented together could also limit assurance that the
public will have access to information about changes and their emissions.
To determine if emissions resulting from a change will be significant
enough to trigger NSR requirements, a company determines its historic
baseline of emissions, estimates the expected emissions after a facility
change, and calculates the difference. Before the final rule, a company
generally had to use the most recent 24 months of emissions as the

baseline and assume its facility would operate at full production when
estimating expected emissions, even if the facility had not been
operating, or did not plan to operate, at this level. Industry complained
that these requirements ignored market fluctuations and a facility's
actual production levels. In the final rule, EPA generally allowed
companies to use any 24-month period over the prior 10 years to establish
a baseline and to assume actual production levels. Some stakeholders
maintain, although EPA disagrees, that these revisions will result in
fewer calculations showing emissions potentially increasing enough to
trigger NSR. Therefore, fewer facility changes will require a federal
permit and its related public participation requirements, although some
may still be subject to these requirements under state and local programs.

Moreover, if the calculation shows that emissions do not trigger NSR, the
company does not have to maintain documentation of its calculations. Under
the new rules, the company may determine that there is still a reasonable
possibility the change will trigger NSR, and if it does, the company
maintains documentation of this decision on site. However, the rule does
not define what constitutes a "reasonable possibility." Therefore,
companies may be inconsistent in how they make this decision and maintain
records of it, and they are in effect policing their own NSR compliance.
As the National Academy of Public Administration (NAPA) recently
concluded, such self-policing makes it difficult for EPA, state and local
agencies, and the public to verify company compliance with NSR.
Furthermore, the rule does not specify how the public can access the
company's on-site documentation of its reasonable possibility
determinations. At the request of a number of stakeholders, EPA agreed to
reconsider the "reasonable possibility" provision, among others, is
assessing the comments it received, and expects to announce whether it
will make any changes to the provision by the end of October. In this
context, we are recommending that EPA (1) issue guidance better defining
what constitutes a "reasonable possibility" that facility changes will
trigger NSR, (2) require companies to maintain documentation of all
"reasonable possibility" determinations, and (3) determine, with state and
local air quality agencies, how to ensure public access to company's
on-site information on facility changes and emissions.

Background 	Under the CAA, EPA establishes health-based air quality
standards that the states must meet and regulates air pollutant emissions
from various

sources, including industrial facilities and mobile sources such as
automobiles. EPA has issued standards for six primary pollutants-carbon
monoxide, lead, nitrogen oxides, ozone,7 particulate matter, and sulfur
dioxide-that have been linked to a variety of health problems. For
example, ozone can inflame lung tissue and increase susceptibility to
bronchitis and pneumonia. In addition, nitrogen oxides and sulfur dioxide
contribute to the formation of fine particles that have been linked to
aggravated asthma, chronic bronchitis, and premature death. About 133
million Americans already live in areas with air pollution levels above
health-based air quality standards, according to EPA.

The NSR program, established in 1977, is intended to ensure as new
industrial facilities are built and existing ones expand that public
health is protected, that the air quality in national parks and wilderness
areas is maintained, and that economic growth will occur in a manner
consistent with the preservation of existing clean air resources. The NSR
program comprises (1) the Prevention of Significant Deterioration (PSD)
program, which generally applies to pollutants in areas that meet federal
air quality standards for those pollutants or for which the attainment
status is unclassified, and (2) the Nonattainment NSR program, which
generally applies to pollutants in areas that are not meeting the
standards for those pollutants, although the term NSR usually refers to
both.

The federal NSR program is primarily administered by state and local air
quality agencies, with oversight by EPA. If a company plans a change to
its facility and determines that it will trigger federal NSR regulations,
the company must then prepare and file a permit application with the
relevant state or local agency. Figure 1 illustrates this permitting
process.

7Ozone forms when nitrogen oxides react with volatile organic compounds in
the presence of heat and sunlight.

Figure 1: New Source Review Permitting Process

aWhile there is no federal NSR requirement specifically requiring public
access to compliance information, there is such a requirement under Title
V of the CAA that applies to NSR data.

The state or local permitting agency determines if the application is
complete; develops a draft permit, if justified; notifies EPA and the
public of the application; and solicits comments on the draft permit. The
permitting agency then responds to comments and issues a final permit, if
merited, which can be administratively or judicially appealed. The
permitting agency must provide EPA with a copy of every permit application
and draft permit; address EPA's comments, if any; and notify EPA of the
final action taken. In addition, the records and reports the state or
local agency collects as it monitors compliance with the permit and NSR
program generally must be available for public review.8

Even when federal NSR requirements do not apply to a facility change, the
project may still be subject to other federal, state, and local air
pollution control requirements. For example, under Title V of the CAA, a
company must obtain a facility operating permit that consolidates all of
the company's federal obligations for controlling air pollution and
complying with the act. These obligations can include meeting the
requirements and standards of states' and localities' federally approved
plans for improving air quality; other federal requirements to control
pollution, such as those controlling hazardous air pollutants not also
covered under NSR; and requirements included in any federal, state, or
local NSR permits issued to the facility. EPA has now given most state and
local agencies approval to implement the Title V operating permit programs
that, among other things, provide for public participation in the Title V
permitting process. These

8While there is no federal NSR requirement specifically requiring public
access to compliance information, Title V of the CAA provides that
emissions and compliance monitoring reports for major sources of emissions
shall be available to the public.

operating permits are issued and then renewed every 5 years and can be
updated at any time.

During the mid-1990s, EPA began evaluating NSR compliance for entire
industry sectors that produced significant amounts of air pollution. The
agency focused its inspections on industry sectors it suspected of
potential NSR violations. In particular, EPA looked at industries with a
decreasing number of facilities but static or increased production,
industries with many years of operation and high emissions but with no
record of NSR permits, and industries with new plants being constructed
with no NSR permits. EPA's data suggested that facilities in some sectors
might have been making major modifications to increase production or
extend the life of the facilities' equipment-and therefore increasing
emissions-without obtaining NSR permits or installing pollution controls.
As a result, EPA targeted its NSR investigations on coal-fired power
plants, petroleum refineries, steel minimills, chemical manufacturers,
wood products companies, and the pulp and paper industry. In 1996, EPA
began its investigation of the coal-fired utility industry. Subsequently,
EPA referred to DOJ a number of alleged violations of the NSR provisions.
Generally, the referrals indicated EPA's conclusion that the owners and
operators of some of the largest coal-fired power plants in the country
had violated the NSR provisions by making physical changes to their
facilities, without obtaining a permit, that increased emissions and that
the agency did not consider to be routine in nature. The companies,
however, believed the changes did not violate the NSR program for a number
of reasons, including that the projects were exempt under the routine
maintenance exclusion. After reviewing these referrals, DOJ in November
1999 filed seven enforcement actions in U.S. district courts. That same
month, EPA issued an administrative compliance order to the Tennessee
Valley Authority alleging multiple NSR violations at its coal-fired power
plants. Since these actions were taken, DOJ has filed an additional six
enforcement actions against coal-fired utilities. As of October 2003, 7 of
the 14 cases have been settled or decided.9 Table 1 provides a summary of
the seven ongoing enforcement cases and the status of each.

9The case involving the administrative compliance order, issued to the
Tennessee Valley Authority (TVA), was upheld by EPA's Environmental
Appeals Board. TVA's appeal of the Board's decision was denied by the 11th
Circuit Court of Appeals. Six other cases-filed against Alcoa, PSEG
Fossil, Southern Indiana Gas and Electric, Tampa Electric, Virginia
Electric Power, and Wisconsin Electric Power-were settled.

Table 1: Ongoing New Source Review Court Cases Involving Coal-Fired Power
                       Plants, October 2003 Power Plants

               Case Court                           Status               Sued 
     U.S. v. Illinois Power Co. and     Liability trial held June 2003;  
Dynegy Midwest U.S. District Court,              closing              
    Generation Inc. Southern District    argument September 29, 2003;    
                   of                            remedy trial            
                              Illinois              not set              
U.S. and States of Conn., N.J., and  Liability trial begins June 1,      6 
      N.Y. v. U.S. District Court,                   2005                
Cinergy Corp. Southern District of                                    
                               Indiana                                   
    U.S. and States of Conn., Mass.,    Liability trial begins January     11 
     Md., N.J., U.S. District Court,                 2005                
      N.H., N.Y., R.I., and Vt. v.                                       
American Electric Southern District                                   
                   of                                                    
        Power Service Corp. Ohio                                         
U.S. and States of Conn., N.J., and Liability ruling in favor of U.S.    1 
      N.Y. v. U.S. District Court,               issued August           
    Ohio Edison Co. Southern District   7, 2003; remedy trial April 19,  
                   of                                2004                
                                  Ohio                                   
      U.S. v. Georgia Power Co. and    Administratively closed to await     3 
      Savannah U.S. District Court,                   TVA                
      Electric & Power Co. Northern       decision; court notified of    
               District of                     decision; parties         

                        Georgia have not moved to reopen

U.S. v. Alabama Power Co. U.S. District Court,

Northern District of Alabama

Stayed

                 U.S. v. Duke Energy Corp. U.S. District Court,

                      Summary judgment granted in part and

Middle District of North Carolina

denied in part on August 26, 2003; liability trial date continued; remedy
trial not set

Source: Department of Justice.

Over the years since its inception, various aspects of the NSR program
have been subject to litigation that resulted in court decisions affecting
the program. For example, in 1990, the Seventh U.S. Circuit Court of
Appeals issued a decision in Wisconsin Electric Power Co. v. Reilly.10 EPA
argued in the case that when Wisconsin Electric Power Company (WEPCO) was
estimating whether a physical change would increase emissions enough to
trigger NSR, the company should have assumed it would operate the modified
equipment at the maximum level possible, even though WEPCO had never
operated at that level. The court ruled that this requirement was
inappropriate. EPA then issued a rule for electric steam-generating
utilities only that allowed them to estimate their projected annual
emissions after the change based on their actual emissions history for
purposes of

10Wisconsin Electric Power Co. v. Reilly, 893 F.2d 901 (7th Cir. 1990)
("WEPCO").

preconstruction permitting, but they would have to report their actual
emissions for 5 years after making the change.11

More recently, in January 2001, the President established a task force-the
National Energy Policy Development Group (NEPDG)-chaired by the Vice
President to develop a national energy policy. In its May 2001 National
Energy Policy Report,12 the group recommended to the President that EPA
and the Department of Energy investigate the impact of the NSR program on
investments in new utility and refinery generation capacity, on energy
efficiency, and on environmental protection. The group also recommended
that the Attorney General review the existing NSR enforcement actions to
ensure they were consistent with the CAA and its implementing regulations.
In response to the group's recommendations, DOJ issued a report in January
2002 that concluded EPA had a reasonable basis for bringing those actions
against coal-fired utilities.13

In June 2002, also in response to the group's recommendations, EPA issued
a report to the President and concurrently issued a set of recommendations
for revising the NSR program.14 EPA issued a final rule in December 2002
that contained five provisions based on its June 2002 recommendations,
outlined in table 2 below.15

1157 Fed. Reg. 32314 (July 21, 1992) (codified at 4 C.F.R. Parts 51, 52,
and 60).

12For more information on the NEPDG's report, see U.S. General Accounting
Office, Energy Task Force: Process Used to Develop the National Energy
Policy, GAO-03-894 (Washington, D.C.: Aug. 22, 2003).

13This report focused principally on enforcement actions against
coal-fired power plants because defendants in other industries generally
had not alleged that EPA's actions were inconsistent with the CAA.

14New Source Review: Report to the President, U.S. Environmental
Protection Agency, June 2002.

15Prevention of Significant Deterioration (PSD) and Nonattainment New
Source Review (NSR): Baseline Emissions Determination, Actual-to-Future
Actual Methodology, Plantwide Applicability Limitations, Clean Units,
Pollution Control Projects, 67 Fed. Reg. 80186 (2002) (to be codified at
40 C.F.R. Pts. 51 and 52.)

        Table 2: NSR Revisions Included in the December 2002 Final Rule

                       Provision Final Rule Requirements

Clean unit 	Excludes production equipment with state-of-the-art pollution
controls from NSR requirements for up to 10 years after installation
provided the unit will still meet the physical or operational
characteristics that formed the basis for the clean unit designation.

Revised method for calculating "baseline" Changes the timeframe for
computing a piece of equipment's baseline emissions from the

emissions 	most recent 24-month period-or any other period more
representative of normal operations-to any 24-month period in the past 10
years adjusted for any new emission limits added since the baseline
period. No changes were made to rule for electric utilities.

Pollution control project 	Exempts pollution prevention and control
projects from NSR if they are on EPA's list of "environmentally
beneficial" projects or on a case-specific basis if a non-listed project
is determined to be environmentally beneficial. It also must be shown that
the project will not cause or contribute to a violation of federal air
quality standards or adversely impact air quality standards for a national
park.

Plantwide emissions limit 	Allows facilities to set a single emissions
limit for an entire plant and then make changes within the facility
without triggering NSR, provided they do not exceed the limit.

Revised test for calculating emissions Allows a facility to calculate
expected emissions after a facility change based on its

changes 	projection of its future operation, rather than at full capacity.
This provision extended to all other industries the same methodology for
calculating expected emissions that EPA had granted to the utility sector
in the early 1990s.

Source: EPA.

Subsequently, in response to a number of requests, EPA agreed to
reconsider certain aspects of the final rule, took public comment on those
features during July and August 2003, and is assessing the comments to
determine if the agency needs to make any changes.

Also in December 2002, EPA issued for public comment a proposed rule that
would change the method for determining whether a facility change can be
exempt from federal NSR requirements because it is routine maintenance,
repair, or replacement.16 EPA intended for the final version of the
proposed rule to supplement its case-by-case determination of what
facility changes qualify for the routine maintenance exclusion, using
factors such as the nature, extent, cost, frequency, and purpose of the
change. EPA proposed to determine a facility's total replacement costs and
calculate a certain percentage of those costs that the agency would allow
the company to spend on routine maintenance and repair without

16"Prevention of Significant Deterioration (PSD) and Nonattainment New
Source Review: Routine Maintenance, Repair and Replacement," 67 Fed. Reg.
80290 (2002).

triggering NSR. EPA proposed several alternative cost thresholds for
routine maintenance and repair below which modifications could be
considered exempt and solicited comments on the thresholds. EPA also
included for comment a provision that would generally allow a facility to
consider the replacement of existing equipment with identical or
functionally equivalent new equipment as routine replacement, depending on
the amount of costs involved. The agency announced a final rule in August
2003, specifying the cost threshold industry could use to replace
equipment and exempt it from NSR. This rule will finalize one aspect of
the December 2002 proposed rule and, at this time, the agency is not
taking action to finalize any other aspects of this proposed rule.

The NSR revisions have recently been the subject of recent congressional
debates. In 2002, Congress held hearings during which members of Congress,
EPA and DOJ officials, and a number of stakeholders- including
representatives of industry, states, and environmental groups- presented
their positions on the NSR program revisions. For example, during a July
16, 2002, hearing before the Senate Committee on Environment and Public
Works, some state attorneys general and environmental group officials
testified that the revisions could seriously undercut the ongoing
enforcement cases, jeopardizing the millions of tons in pollution
reductions that those cases could yield. At the same hearing, EPA and
industry officials generally testified that the revisions would allow
companies to modify their facilities so that they are more energy
efficient and, as a result, would emit less pollution. In addition, during
a September 3, 2002, hearing before the Subcommittee on Public Health,
Senate Committee on Health Education, Labor, and Pensions, former EPA
Administrator Carol Browner testified that, among other things, she was
concerned that the revisions would "eliminate the very features of the
current law that provide transparency to the public-monitoring, record
keeping, and reporting."

  Because EPA's Assessments Showed That Some NSR Revisions Could Affect the
  Enforcement Cases, the Agency Made Changes before Issuing the Final and
  Proposed Rules

EPA enforcement officials assessed the potential impact of the NSR
revisions (before issuing them as final and proposed rules in December
2002) on the enforcement cases against coal-fired utilities and determined
that some of the revisions could have an impact. These EPA officials
discussed their views on the potential impact with DOJ. In part as a
result of the assessments, for the revisions that were included in the
final rule, EPA adjusted the content and wording of the language before
issuing the rule so that they were not expected to affect the cases. For
the proposed rule, the EPA enforcement staff had concerns that if EPA
specifically defined what facility changes would qualify for the routine
maintenance exclusion, the cases could be affected since they involved
disagreements about how EPA had been applying the routine maintenance
exclusion in the past. Consequently, EPA decided not to specifically
define what activities qualify as routine maintenance but to propose
several options for calculating cost thresholds below which modifications
could be considered exempt and solicited public comment on the options.
Nevertheless, during the 1 1/2 years that the final language of the
revisions was being debated, some EPA enforcement officials and key
stakeholders believe that some companies were discouraged from settling
their cases because of the possibility that EPA could revise the
definition of the exclusion in a way that would be favorable to
industry-although some companies did settle after the proposed rule was
issued. Furthermore, some EPA enforcement officials and key stakeholders
believe that the announcement of the August 2003 final rule, in which EPA
set a specific cost threshold for routine replacement activities, could
also delay settlement of some of the cases and could affect judges'
decisions in the cases about what remedies to apply to companies that are
found to be in violation of the old NSR rule.

    After Careful Content and Wording Changes, EPA Determined That the Final
    Rule Would Not Significantly Affect the Cases

EPA enforcement officials assessed the potential impact of the draft NSR
revisions that were issued as a final rule in December 2002 on the
enforcement cases and discussed their views about the impact with DOJ.
According to current and former EPA enforcement officials, after EPA
internally debated and agreed upon the language of the revisions, they
were not expected to adversely affect the ongoing enforcement cases
against coal-fired utilities. According to these EPA officials, in 2001
and 2002, several briefings and less formal discussions occurred during
which the enforcement staff raised concerns about the revisions' potential
adverse impact on the cases. Officials involved in at least one, and in
some cases several, of these meetings included the EPA Administrator, the
Deputy Administrator, the Assistant Administrator for Air and Radiation,
the former Principal Deputy Assistant Administrator for Enforcement and

Compliance Assurance, and the Director of the Air Enforcement Division.
DOJ's Deputy Assistant Attorney General for Environment and Natural
Resources and other DOJ enforcement staff also discussed the potential
impact of the proposed revisions on the cases with EPA's Assistant
Administrator for Air and Radiation and staff in EPA's offices of the
General Counsel and Enforcement and Compliance Assurance. According to EPA
enforcement officials, they prepared analyses-some of which were
documented in briefing papers, charts, and graphs-that were discussed
internally. EPA enforcement officials said that because their main
objective in raising concerns about the revisions was to maintain the
cases, they urged senior agency officials to tailor the language of the
revisions to address their concerns before issuing the final rule. The
enforcement staff felt this would help ensure that the language finally
adopted would minimize any impact on the cases.

More specifically, according to the Director of EPA's Air Enforcement
Division, the staff prepared analyses indicating that three of the
revisions in the rule would have no impact on the enforcement cases. These
three revisions involve the exemptions for clean units, pollution control
projects, and the option of setting a plantwide limit on emissions. In
addition, because of the 1990 WEPCO decision, utilities already had the
authority, before EPA issued the final rule, to use the revised method for
estimating emission changes resulting from a facility change. Therefore,
since this provision in the rule was not a significant change for the
utility industry, the EPA staff did not expect this provision to affect
the cases. However, the EPA enforcement officials were concerned about the
provision establishing a revised method for calculating past, or baseline,
emissions. Specifically, EPA considered changing the time period used to
calculate baseline emissions for utilities. According to the Director of
EPA's Air Enforcement Division, the enforcement staff prepared an analysis
comparing the effects of using different time periods on the viability of
each case. In part as a result of this analysis, the baseline calculation
for utilities was not changed in the final rule.

    Because EPA's Assessments of the Draft Proposed Rule Raised Concerns That It
    Could Affect the Cases, EPA Changed Its Strategy and Revised the Rule before
    It Was Issued

During the same briefings held in 2001 and 2002, the EPA enforcement staff
expressed concern that more explicitly defining what facility changes
qualify for the routine maintenance exclusion, as anticipated in the
December 2002 proposed rule, had the most potential to negatively affect
the cases. They were concerned because the enforcement cases generally
involve disagreements between EPA and the utilities on whether past
facility changes made without an NSR permit qualified for the routine
maintenance exclusion. In general, EPA enforcement officials were
concerned that if the agency specifically proposed a definition of routine
maintenance that was different from the way the agency had applied the
exclusion in the past, defendants could delay the cases by arguing that
some of the facility changes under dispute in the lawsuits might be able
to qualify for an exemption from NSR. For example, the EPA officials were
considering setting a cost threshold for an allowance for annual
maintenance, repair, and replacement below which a company would not have
to obtain an NSR permit. EPA enforcement officials believed that if a
threshold were proposed that was higher than the costs incurred for the
facility changes at issue in the cases, the cases could be adversely
impacted. Specifically, the officials were concerned that judges might not
order companies to install pollution controls even if they were found to
be in violation of the prior NSR rule, since the facility changes in
question would now be legal under the proposed rule (if adopted as
proposed). The EPA enforcement staff compared the potential impact of
various cost thresholds on the viability of each case. Based in part on
these comparisons, EPA decided not to specifically set cost thresholds for
individual industries in its December 2002 proposed rule, but rather to
solicit comments on what thresholds to use.

The EPA enforcement staff had similar concerns about the other revision
under consideration for the December 2002 proposed rule. It would allow
companies to consider the replacement of existing equipment with
identically or functionally equivalent new equipment as "routine
maintenance, repair, and replacement" and be exempt from federal NSR
regulations. The cost of the equipment had to be below a certain
percentage of the cost to replace a process unit. A process unit for power
plants is defined as an electric utility steam-generating unit (power
plants can have more than one of these). The replacement equipment also
had to meet certain criteria, such as maintaining the basic design
parameters of the original unit. EPA enforcement officials were concerned
that, depending on where the threshold was set, this revision could also
affect the cases. As with the first provision, the EPA enforcement staff
compared the potential impact of various replacement cost thresholds (up
to 50 percent) on the viability of each case in dispute at the time and
concluded

that 95 percent to 98 percent of the facility changes at issue in the
utility enforcement cases would be considered routine maintenance-and thus
exempt from NSR-if the new rule were applied and the threshold were set at
more than about 1 percent or 2 percent of the process unit's costs. Again,
EPA decided not to specify a threshold in the December 2002 proposal but
instead to solicit comments on the overall approach. EPA reviewed the
comments submitted on both proposed revisions and, even though seven of
the enforcement cases had not yet been settled or decided by the courts,
announced a final rule in August 2003 specifying a 20 percent threshold
for the replacement of existing equipment, provided the replacement does
not change the basic design parameters of the process unit and the process
continues to meet enforceable emission and operational limitations. To
illustrate the impact of this cost threshold, it costs approximately $800
million on average to replace a 1,000-megawatt electric utility
steam-generating unit, excluding the costs of pollution controls,
according to EPA enforcement officials. Under the new rule, an unlimited
number of projects costing on average between $8 million and $160 million
each (assuming cost thresholds of between 1 percent and 20 percent) could
be excluded from NSR requirements. According to the Director of EPA's Air
Enforcement Division, this could allow companies to make facility changes
without an NSR permit that are much more substantial than any of those in
dispute in the cases.

    EPA Enforcement Staff and Key Stakeholders Believe the Possibility of
    Revising the Routine Maintenance Exclusion Delayed Settlement of Some Cases,
    and the August 2003 Rule May Have Additional Negative Effects

According to former and current EPA senior enforcement officials, despite
the agency's efforts to minimize the impact of the final and proposed
rules on the enforcement cases, they believe the possibility that EPA
could revise the routine maintenance exclusion in ways that could improve
the companies' legal positions in the cases had a detrimental effect on
the willingness of some companies to settle. The officials stated that EPA
normally settles 90 percent to 95 percent of its enforcement cases before
they go to trial, but that companies were slower to settle after EPA
publicly acknowledged it was considering the revisions. For example,
according to a former EPA enforcement official who had been involved in
the cases, the attorneys representing some of the companies in the cases
asked EPA why they should comply with an interpretation of the law that
the administration was trying to change. These concerns were reinforced
further when an industry attorney in a state NSR enforcement case
suggested that the court delay the case because EPA was still
reconsidering its interpretation of the CAA through the NSR revisions.
Similarly, the current Director of EPA's Air Enforcement Division believes
the most significant impact on the enforcement cases was that companies
delayed settling during the year and a half the agency spent discussing

NSR program reforms before issuing the final and proposed rules. According
to current and former enforcement officials, companies spent this time
lobbying EPA to include language in the revisions that would help them win
their cases. Similarly, the National Academy of Public Administration
(NAPA) concluded in an April 2003 report on the NSR program, "The
possibility that EPA would soon reform the NSR modification provisions
favorably to industry may have led to [some] companies' reluctance to
settle their cases."17

According to the Director of EPA's Office of Air Enforcement, in the
months immediately following the issuance of the December 2002 final and
proposed rules, settlement activity did increase. During this time, EPA
and DOJ entered into settlement agreements with four companies that
resulted in the annual reduction of approximately 421,000 tons of sulfur
dioxide and nitrogen oxide combined.18 See table 3 for a list of these
companies.

17A Breath of Fresh Air: Reviving the New Source Review Program, a report
by a panel of the National Academy of Public Administration for the U.S.
Congress and the Environmental Protection Agency, April 2003.

18DOJ and EPA have also entered into settlement agreements with two other
companies. Specifically, in October 2000, the courts approved a settlement
with Tampa Electric Company that resulted in an annual reduction of
approximately 190,000 tons of sulfur dioxide and nitrogen oxide combined.
In July 2002, a consent decree was entered into in a case involving PSEG
Fossil LLC that resulted in an annual reduction of approximately 35,940
tons of sulfur dioxide and 18,270 tons of nitrogen dioxide.

Table 3: Judicial Settlements Entered Into with Coal-Fired Power Plants
since Issuance of the December 2002 Final and Proposed NSR Rules

 Estimated Environmental Benefit of the SettlementsCase Status of Negotiations

                           U.S. v. Virginia Electric

                          Consent decree submitted for

Annual reduction of 237,000 tons of sulfur dioxide and nitrogen oxide
combined

Power

public comment on April 21, 2003

          U.S. v. Wisconsin Consent decree submitted Annual reduction of      
                            for                      72,300                   
             Electric Power public comment on April  tons of sulfur dioxide   
                            29,                      and                      
                                                2003  32,600 tons of nitrogen 
                                                                        oxide 
              U.S. v. Alcoa Consent decree approved  Annual reduction of      
                            by                       52,900                   
                             the court on July 28,   tons of sulfur dioxide   
                                      2003           and                      
                                                      15,480 tons of nitrogen 
                                                                        oxide 
           U.S. v. Southern Settlement approved by   Annual reduction of      
                            the                      10,600                   
            Indiana Gas and court on August 13, 2003 tons of sulfur dioxide   
                                                     and                      
               Electric Co.                          nitrogen oxide combined  

Source: DOJ and EPA.

EPA's Director of Air Enforcement believes these settlements suggest that
the December 2002 final and proposed rules, as issued, did not
significantly affect companies' willingness to settle the cases. In this
official's opinion, the cases were not substantially affected prior to the
announcement of the August 2003 final rule because the enforcement staff
was successful in negotiating and revising the language and content of the
rules. However, this official stressed that to the extent EPA decided to
go forward with more explicit exclusions for routine maintenance, repair,
and replacement, as it has now done, companies could be less willing to
settle their cases. According to the former Director of EPA's Office of
Regulatory Enforcement, if EPA got agreements with companies in the
remaining seven pending enforcement cases against coal-fired utilities
that are equivalent to the settlements it has achieved in the past, sulfur
dioxide emissions could be cut by as much as 2.9 million tons annually and
substantial reductions in nitrogen oxide emissions could also be achieved.

Some EPA enforcement officials and officials from environmental groups and
states have raised concerns that the announced August 2003 rule, and any
subsequent rules more explicitly defining what facility changes qualify
for the routine maintenance exclusion, could negatively impact the
enforcement cases even further. In a September 2003 legal filing in one of
the enforcement cases, DOJ stated EPA's position that the announced August
2003 rule is prospective in nature and does not affect the ongoing
enforcement cases, which are based on past conduct. Officials from the New
York and New Jersey Attorney General offices have said that the

charges against the companies in these cases were brought under the
previous NSR program, before any of the recent revisions, and the
officials are confident that the judges will make decisions based on
whether the companies violated the rules that were in effect at that time.
While these officials did not expect the cases to be delayed on the basis
of any motions that industry may file in light of the August 2003 rule,
they noted that if such motions were filed, the officials would have to
spend additional time and resources to defeat them. In addition to these
effects, some stakeholders are also concerned that the rule could affect
the remedies imposed on companies (including fines companies must pay or
actions they must take) if the courts find the companies to be in
violation of the old NSR rule. Officials from environmental groups and
state attorney general offices expressed concerns that industry attorneys
would attempt to argue that since the modifications for which they were
found liable under the old rule were now permissible under the new rule,
they should not be penalized. If judges were to agree, this could mean
that fines may be reduced or companies may not be required to install
pollution controls and reduce emissions to the extent that they might have
been before the new rule.

Indeed, on September 29, 2003, industry attorneys in the Illinois Power
case asserted in their closing arguments that the new exclusion for
routine maintenance in the August 2003 rule decisively undercut the
critical premise of the government's case because in the new rule, EPA
changed the interpretation of the Clean Air Act upon which it had based
the enforcement cases. The judge had not issued a ruling in the Illinois
Power case at the time GAO completed this report.

Several provisions in the December 2002 NSR final rule could limit
assurance that the public has input on changes companies make to their
facilities, especially those that increase emissions, hampering the
public's ability to monitor health risks and company compliance with NSR.
The provisions could also limit assurance that the public has access to
documents showing how companies estimated whether the changes would
increase emissions enough to trigger NSR. For example, a company can now
determine on its own if there is a "reasonable possibility" that a change
could trigger NSR, but the rule is unclear about how companies will make
this determination and how the public can access information about it. The
extent of the rule's impact depends on the extent to which other federal,
state, and local regulations still require that companies obtain a permit
and notify the public of modifications, but the scope of these other
requirements varies widely.

  Portions of the December 2002 Final Rule Could Limit Assurance That the Public
  Has Input into Company Decisions to Modify a Facility When Modifications
  Affect Emissions

    Under a PAL, the Public Can Help Set a Facility's Emissions Limit but May
    Not Have Input into Company Decisions to Modify the Facility When
    Modifications Affect Emissions

The Plantwide Applicability Limit (PAL) provisions in the December 2002
final rule could impact the amount of data available on, and public input
into, facility changes and emissions. On the one hand, a PAL provides new
opportunities for the public to have access to facility emissions
information because a company must undergo a public notice and comment
process before setting a PAL. The company must also monitor and report
more detailed and frequent emissions information during the life of the
PAL. For example, if a company decides to pursue a PAL, it must apply to
the state or local air quality agency, which in turn must notify the
public of the draft PAL and give the public at least 30 days to provide
comments. The application must list each piece of equipment in the plant
that emits the pollutant to be regulated under the PAL, such as a boiler
or paint sprayer, and the "baseline" emissions it generates. Also, during
the life of the PAL, a company must report semiannually to the state or
local agency the monthly emissions of some or all of the NSR "criteria
pollutants" from each piece of equipment. In contrast, for a facility
without a PAL, in many instances the company would have limited emissions
data for the facility. Thus, both the public notice and comment process
for obtaining a PAL and the semiannual reporting requirements while
subject to the PAL provide the public more specific and more frequent
emissions information than would be provided for a facility that does not
have a PAL.

On the other hand, according to some state and local air quality agencies
and environmental groups, because a company can pursue a facility change
without an NSR permit under a PAL, as long as total facility emissions do
not increase, the public may have fewer opportunities to provide input on
a company's decision to modify a facility, assess the emissions created
(including hazardous air pollutants that may not be identified for
monitoring under the PAL), and consider ways to control them. For example,
if a company without a PAL decided to install a piece of equipment, such
as a boiler, that would increase the facility's emissions to a level that
would trigger federal NSR, the company would have to submit an application
to the state or local agency describing the change and the anticipated
emissions.19 The agency would have to notify the public and give it 30
days to comment on the draft federal NSR permit, and the company would
have to install the best available pollution controls on the equipment
when making the facility change. However, under a PAL,

19Prior to the final rule, a company also had the option to "net out" of,
or avoid, NSR by agreeing to reduce emissions elsewhere in a facility or
accepting an enforceable emissions limit that was below the threshold for
triggering NSR.

the company could make the change without obtaining a federal NSR permit,
soliciting public participation, or installing pollution controls, even
though the change significantly increases emissions, as long as the
company offsets the increase somewhere else within the facility and does
not exceed the PAL.

Some industry groups have responded that other federal, state, or local
regulations will still require reporting and record keeping on facility
changes and installation of emission control technology, so public access
and input will not change. For example, if state and local air quality
agencies require that companies obtain permits for facility changes not
subject to federal NSR requirements, the public may still be notified
about company plans to make a change and could comment on them. However,
several states, as well as the State and Territorial Air Pollution Program
Administrators and the Association of Local Air Pollution Control
Officials, note that state and local emission control regulations
governing such facility changes vary widely. For example, some local air
quality agencies in California require a public comment process for many
facility changes not subject to the federal NSR program, while Ohio
requires that the public be notified of only large or potentially
controversial changes.

EPA program managers maintain that many past changes were not subject to
federal NSR permits for a number of reasons, so public access will not
change. For example, prior to the final rule, the managers stated that a
company could make an unlimited number of changes to a facility, as long
as any one change did not trigger NSR. In addition, if the emissions
effects of some changes were too small to trigger NSR, a company could
offset emissions increases with other emissions reductions, "netting out"
of federal NSR requirements. The program managers also believe that a
predominant number of states and localities would still require public
notice and comment on these changes.

    Two Provisions Revising How Companies Measure Their Emissions Baseline and
    Estimate Future Emissions Could Limit Assurance That the Public Has Access
    to Data on Facility Changes

The two provisions of the December 2002 final rule revising the method for
calculating past emissions and estimating emissions resulting from a
facility change could affect the amount and availability of information
available to the public. Companies use these provisions to determine if
their changes will trigger federal NSR requirements. To make this
determination, a company must estimate the emissions expected after the
change and compare this with the actual historic emissions prior to the
change, known as the baseline emissions level. Before the rule, a company
determined the baseline for a piece of equipment or operating procedure
using the average annual emissions generated during the 24-month period

prior to the change-or the company could seek to use a different period,
more representative of normal operations. Under the new rule, a company
will be able to choose any 24-month period in the past 10 years as the
baseline. However, the company must adjust the baseline to account for any
other pollution control requirements implemented during this time, such as
limits on acid rain pollutants, and eliminate any time periods from
consideration where facilities exceeded required emissions limits.

Also under the new rule, once a company calculates its baseline, it
compares the baseline to the expected emissions after the equipment or
operations are modified to determine if emissions will increase enough to
trigger NSR. Prior to the final rule, when estimating expected emissions,
companies other than utilities had to assume that they would operate a
piece of equipment at the maximum level possible representing the maximum
possible emissions, even if they had not operated at that level in the
past and did not plan to do so in the future. 20 Companies have said that
this approach was unfair because, among other things, it ignored market
fluctuations. EPA revised the method of calculating the expected emissions
in the final rule. Now, a company can project the expected activity level
after the facility change and estimate the resulting emissions
accordingly. Thus, under the rule, some estimates of expected emissions
most likely will be smaller than in the past.

Various stakeholders involved in the NSR revisions disagree on the impact
of these two changes. For example, some expect that companies will choose
the time period that gives them the highest baseline, or allowable
emissions, thereby giving the companies the greatest flexibility to make
changes in response to economic variations without triggering NSR. On the
other hand, EPA program managers and a representative of a major industry
explain that this is not necessarily true because companies now have to
adjust their baselines downward to account for other pollution control
requirements.

In those cases where companies set higher emissions baselines and estimate
smaller emissions increases, the difference between these two numbers will
be smaller than in the past and will not trigger the federal NSR program
and its requisite permitting, public notice, and public

20Again, prior to the final rule, a company could avoid NSR review by
reducing emissions elsewhere in a facility and accepting an enforceable
emissions limit that was below the threshold for triggering NSR.

comment requirements. These changes may still trigger state or local
requirements to obtain a permit and its associated public participation
rules, depending on the state or locality, but, as we have stated, the
scope of these requirements varies widely. In addition, several industry
representatives claim that the Title V provisions governing record keeping
and reporting requirements will ensure the public continues to have
emissions data to monitor compliance. But other stakeholders point out
that the data are scattered across various programs, making it difficult
for the public to determine if facilities made any changes and what
impact, if any, this had on emissions. The public eventually may learn of
a facility change because under the rule, a company must annually report
if the actual emissions generated after certain changes exceeded the
company's estimate. In any event, this reporting is done after the change
is in place, and the public can have any input.

Also under the NSR program, when a company calculates the expected
emissions after a change, if the company determines emissions will clearly
exceed the federal NSR threshold, the company must obtain a permit to
proceed. If the calculation does not clearly indicate that a proposed
facility change triggers NSR, the company does not have to keep any
records of this determination. Under the rule, a company can now determine
if there is a "reasonable possibility" the change will trigger NSR
requirements. If it does, the company must maintain on-site documentation
of this decision, as well as emissions records for the modified equipment
or process. EPA program managers maintain that as a result, more data may
be available now than in the past.

However, EPA did not define what constitutes a "reasonable possibility"
that emissions will trigger federal NSR requirements in the final rule, so
companies might not apply this provision consistently and are, in effect,
policing themselves. As several state and local representatives pointed
out, this makes it difficult for EPA, state and local air quality
agencies, and the public to monitor compliance with NSR, potentially
leading to increased emissions and enforcement actions. Similarly, NAPA
reported that such self-policing could lead to implementation problems and
inadequate reporting of information and recommended that EPA carefully
oversee the calculation of emissions increases resulting from facility
changes and that sources not be allowed to "self-police." EPA program
managers take issue with the conclusion that self-policing is inherently
wrong and point out that many environmental programs provide such
self-policing mechanisms.

Conclusions

Furthermore, the rule states that if a company determines there is a
reasonable possibility a facility change could trigger NSR, it must make
the record of the determination as well as the emissions records related
to the change available to state or local agency officials or the public
upon request. But the rule is unclear how the public will know about the
changes or access the company's on-site records. According to industry
representatives, some companies will keep records of all reasonable
possibility determinations to limit their legal risks, and some will
proactively reach out to local communities before undertaking facility
changes because they want to maintain good relations in these communities.
Nevertheless, this lack of clarity could potentially hinder enforcement
and monitoring activities. It could also pose administrative problems for
companies, should the public begin requesting information directly from
them-especially if the information contains sensitive business data that
the company is entitled to protect. EPA is currently considering comments
it received on the reasonable possibility provision as part of its
decision to reconsider portions of the final rule. The agency plans to
determine whether it will make any changes by the end of October.

While EPA enforcement officials assessed the potential impact of the
December 2002 final and proposed rules on the enforcement cases against
coal-fired utilities and made changes before announcing the rules, these
officials and key stakeholders believe that settlement of some cases was
delayed because of the prospect that the definition of routine maintenance
could be revised in a way that would improve industry's legal position.
Furthermore, the announced August 2003 rule exempting the replacement of
certain equipment from NSR requirements-the fundamental basis for most of
the coal-fired utility cases-also likely will discourage utilities from
settling at least some of the remaining cases. The rule may also affect
judges' decisions regarding whether the companies have to install
pollution controls, jeopardizing the expected emissions reductions.

Overall, as a result of the final rule, the public may have less assurance
that they will have notice of, and information about, company plans to
modify facilities in ways that affect emissions, as well as less
opportunity to provide input on these changes and verify they will not
increase emissions. In some but not all cases, state or local regulations
may require companies to continue to provide the public with this
information and opportunities for input, or companies may do so
voluntarily. However, the public will not have consistent access and input
unless EPA better (1) defines the criteria companies use to determine if
there is a reasonable

possibility a facility change will trigger NSR requirements and (2)
explains how the agency will ensure the public can access company
documentation on such decisions and the resulting emissions. Otherwise, it
will be more difficult not only for the public but also for EPA and state
and local air quality agencies to ensure companies are complying with the
federal NSR program and not increasing emissions in ways that affect
localities' air quality and public health.

Recommendations for To better ensure the ability of federal, state, local,
and public entities to monitor facility emissions and NSR compliance, we
recommend that the Executive Action EPA Administrator

o  	better define what constitutes a "reasonable possibility" that
emissions after a facility change will trigger NSR requirements,

o  	require that companies maintain documentation on all "reasonable
possibility" determinations, and

o  determine, with state and local air quality agencies, how to ensure
public

  Agency Comments

access to company's on-site information on facility changes and emissions.

We provided DOJ and EPA with an opportunity to review and comment on a
draft of this report. We subsequently received comments from both
agencies. DOJ advised that it could not address the accuracy of, or
otherwise comment on, the statements of EPA officials contained in the
report. The agency did not address or comment on those portions of the
report concerning public access to emissions data that GAO discussed
exclusively with EPA. DOJ also advised that its position on the final and
proposed regulations discussed in the report are contained in its legal
filings in the power plant cases, and GAO was provided with a copy of
those filings. Since EPA's December 2002 announcement of the final and
proposed NSR rule changes, DOJ stated that it has continued to prosecute
these cases vigorously and has also achieved settlements with four
companies. DOJ also reiterated that its position as to the potential
impact of the NSR rule announced in August 2003 has always been consistent
and is reflected in its court filings-"that the rule only governs
prospective conduct and should not impact the liability of companies who
violated the law in the past."

EPA generally agreed with the report's characterization of the NSR
revisions' potential impact on the ongoing enforcement cases. In terms of

the revisions' impact on public access to information about facility
modifications and emissions, however, the agency maintains the revisions,
at a minimum, will not change, and most likely will increase, the amount
of information available. According to EPA, before the revisions,
companies were not obtaining federal NSR permits with their requisite
public participation requirements for the types of changes that would be
affected by the revisions, for several reasons. For example, companies
could avoid federal NSR requirements for such changes by offsetting
emissions increases with emissions reductions elsewhere in the facility (a
process known as netting). EPA also maintains that even if these changes
were not subject to federal NSR permitting requirements, they were subject
to state and local permitting and public participation requirements in
many cases, and that the NSR revisions would not change these underlying
state and local programs. In addition, EPA said that facilities choosing
to use a plantwide emissions limit have new and additional reporting
requirements that could increase the information available, as we also
point out in the report. Furthermore, the agency maintains that in the
past, companies calculated the expected emissions from a modification and
determined whether the emissions would increase enough to trigger federal
NSR requirements. If the NSR requirements were not triggered, the
companies did not have to keep records of the calculations. Now, companies
can take the extra step of determining that even if the calculations do
not show a significant enough increase, there is a "reasonable
possibility" of an increase and companies must keep records on site
supporting this determination.

For our work, however, we compared the federal NSR requirements before and
after the revisions and determined that the changes to these requirements
could limit assurance that the public has access to information on
facility changes and emissions. We did not have information on, and did
not try to account for, the extent to which companies were actually
triggering NSR requirements before and after the rule, or the effect this
had on available information. Based on discussions with a number of state
agencies and the national association representing them, among other
stakeholders, as to whether state and local programs will continue to
require permits and public notice for changes not subject to the federal
program, we determined that the extent varied considerably across states
and localities. For example, two states said they did not allow netting.
Furthermore, a number of states indicated that even if such changes had
been subject to their programs in the past, they might not be in the
future because states and localities are facing pressures to modify their
programs to match the federal NSR revisions and to not have more stringent
requirements.

As to GAO's recommendations, EPA did not take a formal position on either
the recommendation calling for additional guidance on reasonable
possibility determinations or for the maintenance of all records on these
determinations. The agency is still evaluating public comments it received
on these issues as part of its agreement to reconsider portions of the NSR
revisions and does not expect to make a final decision on the
reconsideration process until the end of October 2003. EPA did agree with
our recommendation on ways to better ensure public access to information
on facility changes and emissions that companies maintain on site. DOJ and
EPA also recommended a number of technical changes to the report, which we
incorporated, as appropriate.

As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 10 days from
the report date. At that time, we will send copies to the EPA
Administrator, the Attorney General, interested congressional committees,
and other interested parties. We will also make copies available to others
upon request. In addition, the report will be available at no charge on
GAO's Web site at http://www.gao.gov.

If you or your staffs have any questions, please call me at (202)
512-3841. Karen Keegan, Eileen Larence, Jeff Larson, and Lisa Turner made
key contributions to this report. Nancy Crothers, Mike Hix, and Laura
Yannayon also made important contributions.

John B. Stephenson Director, Natural Resources

and Environment

Appendix I: Objectives, Scope, and Methodology

Our objectives were to determine (1) whether EPA and DOJ assessed the
potential impact that issuing the final and proposed rules in December
2002 would have on enforcement cases pending against coal-fired utilities
and what the assessments indicated, and (2) what effect, if any, the final
rule might have on public access to information on facility changes and
the resulting emissions.

To respond to the first objective, we interviewed both current and former
EPA officials and current DOJ officials that were involved in discussions
about the impact of the revisions on the relevant enforcement cases. These
officials included the former Principal Deputy Assistant Administrator for
EPA's Office of Enforcement and Compliance Assurance, the former Director
of EPA's Office of Regulatory Enforcement, the current Director of EPA's
Air Enforcement Division, and the DOJ Deputy Assistant Attorney General
for Environment and Natural Resources. We also submitted written document
requests to both agencies, asking that they provide GAO with all documents
referring to, relating to, or describing the assessments of the potential
impact of the NSR revisions on the pending enforcement cases and
discussions between officials from EPA and attorneys from DOJ concerning
these assessments.

In the case of DOJ, the agency's enforcement staff acknowledged that in
July 2002, they had prepared an internal evaluation, as backup material
for testimony, that summarized EPA's public announcement the previous
month concerning proposed NSR rule changes the agency was considering, the
content of some of the potential revisions, and the relevance of those
changes to filed enforcement cases. The DOJ enforcement officials were
concerned about providing us a copy of this document primarily because it
could impact the ongoing litigation of the cases. In the case of EPA, the
officials acknowledged that they, too, had prepared assessments, and they
discussed the general content of some of them with us. They also provided
us access to (but not copies of) the assessments supporting the December
2002 final rule. The officials had concerns similar to those of DOJ about
(1) describing all of the details about the changes made to the rule as a
result of the assessments, and (2) providing us access to the assessments
concerning the December 2002 proposed rule and the August 2003 rule. We
did not further pursue access to this information because we had
sufficient data to respond to our objectives, and it is GAO's policy,
except in limited circumstances, not to conduct work that would involve
analyzing, evaluating, or commenting on specific issues that are pending
before the courts.

Appendix I: Objectives, Scope, and Methodology

To respond to the second objective, we analyzed the December 2002 final
rule to determine what provisions could impact public access to
information about facility changes and their associated emissions. We
interviewed the Director of EPA's Information Transfer and Program
Integration Division in the Office of Air Quality Planning and Standards,
the Director of EPA's Air Enforcement Division, and attorneys in EPA's
Office of General Counsel regarding the interpretation of relevant
provisions of the rule and the potential effects of these provisions on
public access. We also obtained the views of key stakeholders that could
be affected by changes in public access to such information. To ensure we
captured a wide cross section of interests, we focused on

o  groups identified by EPA officials as key stakeholders,

o  members of EPA's CAA Advisory Council,1

o  	national level groups that have testified before Congress on NSR and
CAA issues over the last several years,

o  	national level groups that submitted comments to EPA in response to
the agency's request for public comment on its June 2001 NSR 90-Day Review
Background Paper (many of these were identified in EPA's June 2002 NSR
Report to the President), and

o  	trade associations representing those industries EPA identified as
being most affected by NSR.

Stakeholders included officials from the American Forest and Paper
Association, Clean Air Trust, Georgia Pacific Company, National
Petrochemical and Refiners Association, Natural Resources Defense Council,
New York State Attorney General's Office, Rockefeller Family Fund's
Environmental Integrity Project, and the professional association
representing State and Territorial Air Pollution Program Administrators
and the Association of Local Air Pollution Control Officials.

1The council is a senior-level policy committee established in 1990 to
advise EPA on issues related to implementing the CAA Amendments of 1990.
Membership is approximately 60 senior managers and experts representing
state and local government, environmental and public interest groups,
academic institutions, unions, trade associations, utilities, and
industry.

Appendix I: Objectives, Scope, and Methodology

We conducted our work between August 2002 and October 2003 in accordance
with generally accepted government auditing standards.

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