Following Several Years of Legal Challenges, 2010 Will Likely See Many Federal and State Air Quality Regulation Developments

January 8, 2010
Client Alert Newsletter Forecast 2010

We anticipate meaningful regulatory developments in 2010 in the air quality context at the federal level, as the U.S. Environmental Protection Agency ("EPA") continues to rework certain regulatory programs in response to a number of significant court cases from the last several years. EPA will continue to promulgate new regulations and pursue certain enforcement initiatives consistent with the priorities of the Obama administration. Finally, we expect to see additional air quality regulatory developments in 2010 at the state level.

In 2008, the D.C. Circuit Court of Appeals ("D.C. Circuit") determined that the federal Clean Air Interstate Rule ("CAIR") was inconsistent with the Clean Air Act ("CAA") and remanded the rule to EPA. Because the Court stayed its mandate vacating CAIR, however, beginning in 2009 states were required to either move forward with implementing their own state-specific CAIR programs or allow implementation of the CAIR Federal Implementation Plan ("FIP"). In the meantime, EPA has been focusing on developing a new regulation to replace CAIR and is expected to issue a proposed rule in March 2010. EPA has stated that it is attempting to develop a CAIR replacement rule that works in concert with other federal regulatory programs affecting the power generation sector. Furthermore, EPA appears to be evaluating a wide variety of regulatory approaches for developing a CAIR replacement rule. For these reasons, EPA may not be able to issue a proposed rule by March 2010.

Also in 2008, the D.C. Circuit vacated the federal Clean Air Mercury Rule ("CAMR"), which regulated mercury emissions from electric generating units. EPA is currently working on a new regulation to replace CAMR and is expected to issue a proposed rule in the near term – possibly in 2010. In particular, EPA has explained that, unlike CAMR, the new regulation will be promulgated pursuant to Section 112(d) of the CAA, which requires EPA to establish standards for emissions of hazardous air pollutants ("HAPs") from specific source categories. It is still unclear, however, how (if at all) EPA's CAIR and CAMR replacement rules will overlap, including, in particular, what compliance options will be available under the respective rules.

EPA has also been concentrating on developing a revised version of the National Emission Standards for Hazardous Air Pollutants for Industrial, Commercial and Institutional Boilers and Process Heaters ("Boiler MACT"). The original Boiler MACT, which was vacated by the D.C. Circuit and remanded to EPA in 2007, established hydrogen chloride, particulate matter, mercury, and carbon monoxide emission limits for various new and existing affected units located at major sources of HAPs. EPA is expected to issue a proposed revised Boiler MACT in April 2010. Because EPA failed to promulgate a revised Boiler MACT in accordance with the deadlines established by the D.C. Circuit, states were required to begin implementation of the "MACT Hammer" for the Boiler MACT in 2009. Indeed, many states, including Pennsylvania, have already collected Part 1 and Part 2 MACT applications to establish specific standards for Boiler MACT sources, but many of these same states have also indicated that they will not act on these applications to allow EPA to develop a revised Boiler MACT.

In 2009, the D.C. Circuit remanded the 2006 primary annual National Ambient Air Quality Standards ("NAAQS") for fine particulate matter, or "PM2.5" to EPA for reconsideration, finding that EPA failed to explain adequately why an annual level of 15 µg/m3 is requisite to protect the public health. The Court also remanded to EPA the 2006 secondary NAAQS for PM2.5, determining that EPA unreasonably concluded that the NAAQS are adequate to protect the public welfare from adverse effects on visibility. In response to the Court's findings, in October 2009, EPA announced an accelerated schedule for issuing new NAAQS for PM2.5. Specifically, EPA intends to propose new NAAQS for PM2.5 by July 2010 and implement a final rule by April 2011. In the meantime, states are continuing to promulgate revisions to their New Source Review ("NSR") programs to implement NSR for PM2.5 and its precursors, in accordance with the May 2008 EPA rule establishing the NSR requirements for PM2.5.

Also at the federal level, EPA is expected to determine whether to strengthen the NAAQS for ground-level ozone by August 2010. If EPA issues revised ozone standards, the new standards would replace the existing ozone NAAQS issued in 2008 and associated implementation requirements, including area source designations. EPA would then be required to initiate a new process to designate attainment and nonattainment areas based on the new standards.

EPA was very active in 2007, 2008, and 2009 in promulgating standards under Section 112 of the CAA for various area (non-major) sources of HAPs. Through these rulemakings, EPA is carrying out its "Urban Air Toxics Strategy" under the CAA, which requires EPA to identify a list of at least 30 air toxics that pose the greatest potential health threat in urban areas, and develop standards for source categories representing 90 percent of the emissions of those toxics. EPA is anticipated to continue its rulemaking activity in 2010, promulgating standards governing toxic emissions from industrial boilers, institutional and commercial boilers, sewage sludge incineration, and brick and structural clay source categories. Most recently, EPA announced on February 17, 2010, its revision of the existing standards (at 40 CFR Part 63 Subpart ZZZZ) governing stationary compression ignition reciprocation internal combustion engines to now cover existing engines at area sources.

On the New Source Review/Prevention of Significant Deterioration ("NSR/PSD") front, EPA may continue in 2010 to scale back some of the flexibility established by the Bush administration. In particular, EPA has granted reconsideration and/or stayed the following actions: (1) EPA's final rule of December 19, 2007, known as the "reasonable possibility" rule, which specified the circumstances under which a major source undergoing a modification that does not trigger NSR/PSD must undertake post-change recordkeeping and reporting regarding emission increases; (2) certain aspects of EPA's May 2008 rule addressing NSR/PSD provisions for PM2.5, including specifically the "grandfathering" provision under which sources which had submitted complete permit applications prior to the rule’s July 15, 2008 effective date may continue to rely on the use of PM-10 as a surrogate for PM2.5 for purposes of the pending application; (3) EPA's December, 2008 rule clarifying that fugitive emissions must be included in determining whether a physical or operational change amounts to a major modification only for those sources specifically identified under Section 302(j) of the CAA; and (4) EPA's January, 2009 "aggregation rule" which clarified the circumstances under which multiple projects at a major source may be evaluated separately for purposes of NSR/PSD applicability evaluations. EPA may act on some or all of these rules this year. As of February 4, 2010, EPA has proposed to repeal the PM2.5 grandfathering provision, and to stay the fugitive emissions rule for an additional 18 months. In addition, the White House is reportedly considering a reconsideration of the "aggregation rule" which is currently stayed until May, 2010.

Consistent with its apparently more stringent interpretations of NSR issues, EPA's air enforcement priorities in 2010 will continue to include NSR/PSD compliance, with a focus on coal-fired power plants, sulfuric and nitric acid manufacturing facilities, cement manufacturing facilities, and glass manufacturing facilities. In 2009, EPA assessed a total of $5.3 million in penalties against these industries, and required pollution control measures valued at $318 million. Air toxics will also continue to be an enforcement focus, including for facilities subject to Maximum Achievable Control Technology ("MACT") standards governing leak detection and repair, operation of industrial flares, and surface coatings. In 2009, EPA assessed a total of $0.34 million in penalties against these industries, and required pollution control measures valued at $0.19 million. EPA's proposed air enforcement priorities for fiscal years 2011 through 2013 are also currently under consideration. EPA's focus on air toxics will continue, including federal leak detection and repair ("LDAR") requirements and industrial flares, and will also include a geographic initiative to focus on compliance of large emitters of hazardous air pollutants in disproportionately affected areas. NSR/PSD enforcement would also continue, with an added focus on the lime manufacturing sector. In addition to its sector-based enforcement priorities, EPA has identified a need to address environmental justice concerns by focusing on compliance and enforcement across all sectors in underserved and disadvantaged communities.

At the state level, on February 6, 2010, the Pennsylvania Department of Environmental Protection ("PADEP") issued proposed regulations that would revise Pennsylvania’s Chapter 127 permitting requirements to incorporate nonattainment NSR requirements for PM2.5. The revisions would address federal NSR requirements for fine particulates, including the identification of major source NSR emission thresholds for PM2.5, significance thresholds for modifications, and the identification of sulfur dioxide ("SO2") and nitrogen oxides ("NOx") as precursors to fine particle pollution. DEP's proposal differs from the federal rules in one significant respect, in that it would extend Pennsylvania's unique "de minimis aggregation" provisions to NSR determinations for fine particulates. Specifically, these provisions of PADEP's existing regulations may result in an NSR "trigger" at major sources, even where the proposed change would result in an emission increase below the significant threshold for the pollutant. In these circumstances, sources are required to aggregate emission increases of the relevant pollutant over a ten-year period, including increases associated with the proposed modification. To the extent that this aggregation of emissions exceeds the significance threshold for major modifications, then the source operator must secure emission reduction credits to offset the aggregate emission increases. Since the significant net emission increase level for major modifications of PM2.5 is only ten tons per year, aggregation of de minimis increases over a ten-year period would cause many facilities to trigger NSR for PM2.5. Given an anticipated shortage of PM2.5 credits, and the less stringent federal requirements, this aspect of the proposed rulemaking may create a disadvantage for Pennsylvania facilities considering modifications. The comment period for the proposed rule closes on April 12, 2010.

Additionally, PADEP is expected to propose rules under the Pennsylvania Air Pollution Control Act that would limit NOx emissions from electric generating units and emergency generators used during non-emergency periods that operate less than 1,200 hours per ozone season and generate electricity during periods of peak electric demand, including high electric demand days ("HEDD"). PADEP believes regulation is necessary because these units produce aggregate emissions of NOx on peak electric demand days that reduce or eliminate the environmental benefit of NOx emission reductions achieved on peak demand days by the larger electric generating units currently regulated under CAIR.

In New Jersey, the Department of Environmental Protection ("NJDEP") Air Quality Permitting program continues to work with industrial stakeholders on various permitting concerns, including the clarification of issues surrounding temporary equipment at Title V facilities, health risk assessments for diesel particulate emissions from internal combustion engines, State-of-the-Art manual updates, and Title V renewals. NJDEP is also anticipated to finalize its presumptive MACT standard for industrial, commercial and institutional boilers, and process applications by affected facilities.