New Source Review: Issues to Watch

January 19, 2021
Carol F. McCabe, Esq.
MGKF Special Alert

This article providing a comprehensive summary of recent efforts by the Trump administration under the Clean Air Act’s New Source Review (NSR) Program was originally included in the MGKF Federal Forecast 2021. With the Biden administration set to assume office, we are sharing the article again given that NSR is expected to remain an important area of focus for EPA that will be followed closely by the many stakeholders impacted by the program.  

The Clean Air Act New Source Review (NSR) program is notoriously complex and has been subject to a long history of rulemakings, guidance, applicability determinations and court decisions that have affected the manner in which NSR applicability is determined. Intended to force pollution control upgrades when new major sources are built or existing major sources are modified, addressing NSR permitting requirements can be time-consuming and costly, including the Prevention of Significant Deterioration (PSD) program for NAAQS attainment areas (requiring ambient air quality analyses and the application of Best Available Control Technology) and the Non-Attainment New Source Review program for NAAQS nonattainment areas (requiring emissions offsets and the application of Lowest Achievable Emission Rate).

Over the course of the Trump administration, EPA undertook significant efforts to clarify key aspects of the NSR program, with the goal of streamlining and modernizing NSR while providing certainty and lessening permitting burdens for applicants. EPA promoted these efforts as consistent with the Trump administration’s goals of revitalizing manufacturing and growing the economy by removing obstacles and incentivizing investments in critical energy infrastructure. While many of these changes were welcomed by permittees, they were met with criticism from some states and environmental advocacy groups who argued that EPA’s actions weakened the NSR program. In light of these criticisms, the future of EPA’s NSR reform actions is uncertain under the Biden administration. Set forth below is a recap of recent EPA actions affecting NSR permitting and their current status.

Project Aggregation
In a final action published in the Federal Register on November 15, 2018 entitled Prevention of Significant Deterioration (PSD) and Nonattainment New Source Review (NNSR): Aggregation; Reconsideration, EPA concluded its reconsideration and lifted its indefinite stay of an action first taken in January 2009 during the waning days of the Bush administration. See 83 Fed. Reg. 57324-57333. After many years, EPA finalized its Project Aggregation interpretation for determining the scope of a “project” subject to NSR applicability evaluation.

Determining the scope of a project subject to air permitting is necessary for quantifying the emission increase associated with the project, and the amount of the emission increase is key to determining whether or not the project will be subject to NSR program requirements. Specifically, under the two-step applicability analysis established by the federal NSR regulations, if a project is determined to cause a significant emission increase of a regulated NSR pollutant (Step 1), it must then quantify the net emission increase of that pollutant from projects occurring during a five-year contemporaneous period (Step 2) to determine whether the NSR significance threshold is exceeded and thus NSR requirements are triggered. If the emission increase is not significant in Step 1, the net emission increase analysis of Step 2 is not required, and the project does not trigger NSR.

Project Aggregation concepts ensure that emission increases from nominally separate projects occurring at a source are aggregated when compared to NSR thresholds in Step 1 where appropriate, so that NSR program requirements are not circumvented via project splitting. Recognizing that determining the scope of a project is a case-by-case exercise, EPA noted that EPA’s interpretations historically had been applied through project-specific letters and memoranda; EPA’s 2009 action sought to instead establish clear principles of Project Aggregation through a more formalized interpretation of the NSR rules.

In the 2018 Project Aggregation action, EPA reaffirmed its 2009 action, including the following:

  • First, sources and permitting authorities should aggregate projects that are “substantially related.” The factors that should be considered in evaluating whether projects are substantially related include factors indicative of the technical or economic dependence of projects. EPA specifically rejected a broader approach to aggregation that would consider as related any projects that contribute to the source’s overall basic purpose.
  • Second, there is a rebuttable presumption that projects occurring more than three years apart are not substantially related, and therefore should generally not be aggregated. EPA views this general rule as consistent with the notion that the farther apart projects are timed, the less likely they are to be related, since such activities would likely be part of distinct planning and capital funding cycles. Importantly, EPA did not establish a presumption that projects occurring within three years of each other should be aggregated, concluding instead that the projects’ technical and economic relationships should govern the analysis.
  • Third, EPA noted its observation that the source itself is responsible for defining the scope of its project, subject to the limitation that the source cannot seek to circumvent NSR by splitting a single project into multiple projects.
  • Finally, EPA noted that state and local air permitting agencies with approved NSR programs are not required to adopt EPA’s Project Aggregation interpretation.

EPA’s Project Aggregation action was challenged by the Natural Resources Defense Council via petition for judicial review in January 2019, and the challenge was consolidated with a challenge to EPA’s 2009 action, which had been held in abeyance pending completion of EPA’s reconsideration proceedings. According to the Court’s docket, the petitions were voluntarily dismissed in June 2019.

Project Emission Accounting
EPA published its final rule entitled Prevention of Significant Deterioration (PSD) and Nonattainment New Source Review (NNSR): Project Emissions Accounting in the Federal Register on November 24, 2020. 85 Fed. Reg. 74890-74909. The rule further clarifies the two-step process established under the federal NSR regulations for determining whether a project would result in a significant net emission increase, and thus trigger NSR requirements. As described above, Step 1 is a determination of whether the project would cause a significant emission increase of a regulated NSR pollutant. If so, Step 2 would then require a determination of whether a significant net emission increase would occur, by quantifying the net emission increases and decreases over the contemporaneous (five-year) period as compared to the significance level established for the relevant NSR pollutant.

The NSR regulations include specific procedures for quantifying the Step 1 increase depending on whether the project occurs at a new or existing source. However, EPA acknowledged longstanding confusion and uncertainty among permitting authorities and other stakeholders as to whether emission decreases could be taken into account in Step 1 of the process, including in the context of projects that include multiple emission sources.

This question is meaningful because projects that are determined not to be “significant” in Step 1 are not required to proceed to the net emission increase quantification of Step 2, and therefore are not subject to NSR under the federal regulations. EPA’s final rule clarified that decreases may be considered in Step 1 for projects that involve new sources, existing sources and multiple types of sources (both existing and new), and by clarifying that the phrase “sum of the difference” used in the Step 1 regulatory language includes both emissions increases and decreases.

Together with the Project Aggregation rule discussed above, the Project Emission Accounting Rule provides flexibility to applicants to define the scope of a project subject to an NSR trigger evaluation, and to identify and quantify both increases and decreases associated with that project. At proposal, environmental groups and a coalition of state attorneys general criticized the Project Emission Accounting rule. These criticisms included assertions that the rule would weaken the NSR program by allowing sources to “net out” at Step 1 of the two-step regulatory analysis in a manner that is inconsistent with the goals of the NSR program. Critics argued that the Project Emission Accounting rule removes necessary boundaries in Step 1 by allowing a project to include multiple types of emission units (new and existing), and by allowing for consideration of decreases that are not creditable or enforceable, subject only to certain recordkeeping requirements that apply if there is a “reasonable possibility” that a significant emission increase may occur (i.e. where the projected increase in emissions equals or exceeds 50% of the applicable NSR significance level).

While the Project Emission Accounting rule is now effective, the period for filing petitions for judicial review or administrative reconsideration of the rule has not yet passed as of this writing, and the rule is likely to be challenged. EPA’s stance in any such litigation or reconsideration proceeding remains to be seen. In the meantime, the practical effectiveness of the rule is limited to those states and territories where EPA is the permitting authority, or where a state or local permitting authority has been delegated authority to implement the federal NSR program rules on behalf of EPA (for example, many states have received delegated authority to implement the federal PSD program rules).

Importantly, where a state or local permitting authority has developed its own NSR permitting program that has been approved by EPA through a State Implementation Plan (“SIP”), application of the Project Emission Accounting Rule will be subject to the discretion of the state or local authority. This will be most relevant to those states that have developed SIP-approved Non-Attainment NSR programs; in the final rule, EPA determined that state programs would meet the minimum stringency requirements required by the Clean Air Act even if they choose not to revise their regulations consistent with the new Project Emission Accounting Rule. For that reason, many states, including those that objected to the rule at proposal, may reasonably be expected to maintain their current approach to the NSR two-step analysis.

Adjacency and Common Control
Under the Trump administration, EPA undertook two important actions in clarifying the circumstances under which one or more facilities may be considered to constitute a single stationary source for purposes of NSR and Title V permitting analyses. Where one or more sources are combined, their emissions are likewise combined for comparison to NSR and Title V applicability thresholds. By way of background, single source determinations rely on a three-factor test that considers whether one or more sources: 1) belong to the same industrial grouping; 2) are located on contiguous or adjacent properties; and 3) are under the common control of the same person (or persons under common control). The adjacency and common control factors of this analysis have been subject to years of uncertainty based on numerous and sometimes divergent applicability determinations, many of which have included considerations of functional interrelationships between two otherwise separate facilities. In its recent actions, EPA has now sought to limit the consideration of functional interrelationships in this context.

EPA’s Acting Assistant Administrator Anne Isdal issued a memorandum to EPA’s Regional Administrators on November 26, 2019 entitled Interpreting ‘Adjacent’ for New Source Review and Title V Source Determinations in All Industries Other Than Oil and Gas.[1] The memo notes that while the meaning of “contiguous” has been applied consistent with its dictionary definition to require physical contact, the meaning of “adjacent” has been considered to include facilities that are not physically touching but are otherwise “nearby” to one another.

With no bright-line standard for determining the physical distance that may constitute adjacency, EPA’s determinations have included examinations of whether one or more facilities are otherwise functionally related through numerous “fine-grained” analyses. Through the Isdal memo, EPA rejected the concept of functional interrelatedness as an indicator of adjacency and instead reaffirmed the reasoning of the Sixth Circuit in Summit Petroleum v. EPA, 690 F.3d 733 (6th Cir. 2012), in which “adjacent” was interpreted to refer only to physical proximity and not to the functional relationships between two facilities. In sum, EPA clarified that it would interpret “adjacent” to include properties that are not physically touching – including those that are separated by a right of way or other similar separation – only when they are otherwise in reasonably proximity to one another. EPA will not consider functional interrelationships to establish adjacency.

EPA addressed longstanding confusion and permitting burdens associated with “common control” analyses in its April 30, 2018 Letter from Assistant Administrator William Wehrum to Patrick McDonnell, Secretary of PADEP, relating to the construction of a biogas processing facility by Meadowbrook Energy LLC. The Meadowbrook determination considered whether the Meadowbrook biogas facility should be considered under common control with the Keystone Sanitary Landfill, where Keystone would deliver untreated landfill gas via dedicated pipeline to Meadowbrook, which would then process the gas for conversion to pipeline quality renewable natural gas product for subsequent market sale.

Recognizing the lack of a clear definition of “common control,” the Meadowbrook letter cited prior determinations in which EPA had considered a range of factors for assessing whether two sources are under common control, including but not limited to shared workforces, shared management, shared administrative functions, shared equipment, shared intermediates or byproducts, shared pollution control responsibilities, and support/dependency relationships. In these determinations, EPA often found common control based on the existence of mutually beneficial contractual arrangements whereby economically or operationally interconnected facilities exert influence over one another. Rejecting this historic multi-factor approach as resulting in a lack of clarity and inconsistent outcomes, EPA clarified in the Meadowbrook letter that the assessment of control for NSR and Title V should focus on the power or authority of one entity to dictate decisions of the other that could affect the applicability of, or compliance with, relevant air pollution control regulatory requirements. In narrowing its interpretation of common control, EPA expressly noted in the Meadowbrook letter that mutually beneficial contractual or other arrangements between two separately owned facilities may create economic or operational dependencies but should not be presumed to constitute common control.

EPA’s actions in clarifying the adjacency and common control factors of single source determinations share several important features that may limit their application under the Biden administration or would allow states to apply these concepts differently. First, in each context, EPA has effected these changes informally through guidance memoranda or facility-specific determination. As such they may be a target for reversal or further clarification, although in so doing the Biden administration may need to consider any applicable restrictions of EPA’s new rule: EPA Guidance: Administrative Procedures for Issuance and Public Petitions, 85 Fed. Reg. 66230-66240 (October 19, 2020). Second, in each action EPA has made clear that its new interpretations are not binding on state and local permitting authorities with their own EPA-approved Title V and NSR programs. Finally, in each context, EPA has made clear that its new interpretations of adjacency and common control should be applied prospectively and should not be used as a basis to revisit prior permitting determinations where no changed facts would otherwise warrant. Subsequent EPA determinations in the common control context have borne out this principle. See e.g., Letter from Cristina Fernandez to Brett Sago, Eastman Chemical, dated February 12, 2020.

Other Guidance
In addition to the actions noted above, other NSR-focused guidance has been issued by EPA, as follows:

Plantwide Applicability Limits
On August 4, 2020, EPA finalized its Guidance on Plantwide Applicability Limitation Provisions Under the New Source Review Regulations (the PAL Guidance). The PAL Guidance sought to reduce uncertainty and perceived risk associated with NSR PAL provisions, which were first introduced in EPA’s 2002 NSR reform rule to allow for a facility-wide cap for a regulated NSR pollutant below which projects could be undertaken without NSR review. With only 70 PAL permits issued since 2003, the PAL Guidance sought to address uncertainties identified by stakeholders in the areas of PAL permit reopening, PAL expiration, PAL renewal, PAL termination, PAL monitoring requirements, and baseline actual emissions for replacement units among others. The PAL Guidance reiterates the advantages posed by PAL permits for consideration by permit applicants. While not subject to the same level of criticism as some of EPA’s other NSR actions, it remains to be seen whether the PAL Guidance may spark increased utilizations of PAL permits.

Begin Actual Construction
In March 2020, EPA issued a draft guidance for public comment entitled Interpretation of ‘Begin Actual Construction’ Under the New Source Review Preconstruction Permitting Regulations. The guidance is relevant to the prohibition in the NSR regulations that no new major stationary source or major modification to which the NSR requirements apply shall begin actual construction without first securing a permit stating that the source will meet NSR requirements. The draft guidance notes that EPA’s current interpretation would consider almost every on-site physical construction activity of a permanent nature to constitute the beginning of “actual construction” even where the activity does not involve construction of an emission unit.

After detailing the long history of EPA’s interpretations of “begin actual construction” the draft guidance puts forth a revised interpretation that would allow a permittee to undertake physical on-site activities that may alter the site or are permanent in nature, so long as the activities do not constitute physical construction on an emissions unit, as defined in EPA’s regulations. Allowed activities would include those that are necessary to accommodate an emissions unit, however all such construction is undertaken at the permittee’s risk (i.e. in the event that the permit is ultimately denied or contains required design changes). EPA’s draft guidance was open for public comment until May 11, 2020 and met with mixed feedback.

While industry groups largely supported the draft guidance, some concerns were expressed by environmental groups and states. As of this writing, the guidance has not yet been finalized, and therefore the fate of this guidance under the Biden administration is uncertain.

Projected Actual Emissions
Former EPA Administrator Scott Pruitt released a memorandum to EPA’s regional administrators in December 2017 entitled New Source Review Preconstruction Permitting Requirements: Enforceability and Use of the Actual-to-Projected-Actual Applicability Test in Determining Major Modification Applicability. The memo signaled a significant shift in EPA’s approach toward NSR enforcement, focusing on the NSR applicability triggers for an existing major source undergoing modification. First, the memo clarified that in the Step 1 determination of whether a project would cause a significant emission increase of a regulated NSR pollutant, a source’s quantification of “projected actual emissions” may consider, as part of the projection, its own intention to actively manage future emissions to prevent a significant emissions increase from occurring. Second, in considering whether future emission increases may be subject to exclusion based on demand growth, the memo indicated that the source must exercise its own judgment in excluding emission increases for which the project is not the predominant cause, and that EPA will not second guess such projections. Instead, the memo points to NSR’s post-project monitoring, recordkeeping and reporting requirements as the appropriate means by which EPA may evaluate the source’s pre-project conclusion that NSR was not triggered. Finally, the memo indicates that where projected emissions increases are less than the NSR thresholds, EPA will focus on the source’s post-project actual emissions in determining whether to pursue an enforcement action.

Like EPA’s other NSR actions described above, EPA clarified in this context that SIP-approved state and local NSR regulations continue to have primacy in their jurisdictions. Further, a Biden EPA may be expected to exercise its enforcement discretion differently than described in this memo.

As described herein, EPA has been very active over the past several years in clarifying longstanding issues in the NSR program requirements. Stakeholder groups have expressed diverging views on these actions, and their practical effect on permit applicants and prospective projects may not be fully realized if reversed or abandoned by the EPA under the Biden administration or are not adopted by states.

[1] The determination of adjacency for oil and gas facilities was addressed through a rulemaking specific to that category. See 80 Fed Reg. 35622 (June 3, 2016).