1. Leslie S. Ritts, Partner LSRitts@hhlaw.com 1 New Source Review & Title V Permit Update: American Public Power Association 2005 Engineering and Operations Technical Conference April 18, 2005 Leslie Sue Ritts Hogan & Hartson L.L.P. 555 13 th Street, NW Washington, DC 20004 202-637-6573

2. Leslie S. Ritts, Partner LSRitts@hhlaw.com 2 Topics of Discussion 2002/2003 New Source Review (NSR) Reform Rules 2002/2003 New Source Review (NSR) Reform Rules –Implementation –Litigation on NSR Reform Rules –Future NSR Reforms EPA’s NSR Enforcement Initiative EPA’s NSR Enforcement Initiative Title V Update Title V Update –Title V Task Force –Compliance Certification

3. Leslie S. Ritts, Partner LSRitts@hhlaw.com 3 NSR BASICS NSR established by Parts C and D of Title I of the Clean Air Act. NSR established by Parts C and D of Title I of the Clean Air Act. –Permit required for major new sources with major emissions or major modifications of major sources with significant emissions increase  Facilities may qualify for the Routine Maintenance Repair and Replacement (RMRR) exclusion. Dual State and EPA Authorities. Dual State and EPA Authorities.

4. Leslie S. Ritts, Partner LSRitts@hhlaw.com 4 EPA Rules and Guidance EPA promulgated NSR regulations first in 1974, and then revised the regulations in 1978, 1980, 1992, 2002 and 2003. EPA promulgated NSR regulations first in 1974, and then revised the regulations in 1978, 1980, 1992, 2002 and 2003. Current regulations can be found at 40 CFR § 51.165; 40 CFR § 51.166; and 40 CFR § 52.21. Current regulations can be found at 40 CFR § 51.165; 40 CFR § 51.166; and 40 CFR § 52.21. EPA Guidance, Applicability Determinations, and EAB decisions. EPA Guidance, Applicability Determinations, and EAB decisions. –See In Re: Rochester Public Utilities, PSD Appeal No. 03- 03. –See Applicability Determination for DTE’s Monroe Power Plant (May 23, 2000), 65 FR 77623 (Dec 12, 2000) –http://www.epa.gov/region07/programs/artd/air/policy/se arch.htm

5. Leslie S. Ritts, Partner LSRitts@hhlaw.com 5 NSR Implementation

6. Leslie S. Ritts, Partner LSRitts@hhlaw.com 6 2002/2003 NSR Reform Rules December 31, 2002 rule (67 Fed. Reg. 80186) (NSR 2002) December 31, 2002 rule (67 Fed. Reg. 80186) (NSR 2002) –Effective date March 3, 2003 October 27, 2003 rule (68 Fed. Reg. 61248) (NSR 2003) October 27, 2003 rule (68 Fed. Reg. 61248) (NSR 2003) –Planned Effective date December 26, 2003 (stayed)

7. Leslie S. Ritts, Partner LSRitts@hhlaw.com 7 2002 NSR Reform Rule NSR 2002 Reforms NSR 2002 Reforms –Computation of baseline actual emissions for non-utilities –Actual to projected-actual methodology for determining emissions increases –Plantwide applicability limits (PALs) –Clean units –Pollution control projects –Records for demand growth

8. Leslie S. Ritts, Partner LSRitts@hhlaw.com 8 Litigation 2002 NSR Reform Rule Lawsuit filed in the D.C. Circuit Court of Appeals challenging 2002 rules (as well as 1992 and 1980 rules). Lawsuit filed in the D.C. Circuit Court of Appeals challenging 2002 rules (as well as 1992 and 1980 rules). –State of New York et al. v. EPA (Case No. 02-1387) Failed Motion for Stay Failed Motion for Stay Reconsideration of Rule Reconsideration of Rule Argument held on Jan. 25, 2005 Argument held on Jan. 25, 2005 –Decision expected late spring/summer –Possible Outcomes –Effect on Implementation

9. Leslie S. Ritts, Partner LSRitts@hhlaw.com 9 Litigation 2002 NSR Reform Rule Industry petitioners/Industry Intervenors Industry petitioners/Industry Intervenors –Industry (i.e., the Utility Air Regulatory Group, et al.) contends that EPA’s practices over the past two decades, including the new reform rules are illegal. –UARG argues that the capacity to emit should be examined based on maximum hourly emissions rates and not total actual emissions from the facility. –Success of industry petitioners would result in remand of the NSR rules to incorporate the maximum hourly emission rate test. –EPA Defense: They argue that the 1980 and 1992 rules are based on actual emissions. Industry Intervenors attempting to protect baseline, actual-to- future actual methodology, PALs, clean units, and PCPs Industry Intervenors attempting to protect baseline, actual-to- future actual methodology, PALs, clean units, and PCPs

10. Leslie S. Ritts, Partner LSRitts@hhlaw.com 10 Implementation NSR 2002 (Delegated States) Rule effective on March 3, 2003 Rule effective on March 3, 2003 Delegation states must comply Delegation states must comply –MA terminated delegation agreement. [68 Fed. Reg. 35, 881 (June 17, 2003)] –EPA withdrew delegation from local programs with authority in NV and CA. [68 Fed. Reg. 19, 371 (April 21, 2003)]  NV revising SIP to incorporate NSR 2002. –MN has implemented NSR 2002.

11. Leslie S. Ritts, Partner LSRitts@hhlaw.com 11 Implementation NSR 2002 (SIP states) Implementation NSR 2002 (SIP states) States must submit revised SIPs by January 2, 2006 States must submit revised SIPs by January 2, 2006 –Several states in process of adopting NSR 2002 (Including CO and OH). –Several states have legislation pending that endorses the NSR reform rules promulgated by EPA (AK, TX and IN).

12. Leslie S. Ritts, Partner LSRitts@hhlaw.com 12 2003 NSR Reform NSR 2003 Reforms NSR 2003 Reforms –Incorporates Equipment Replacement Provision (ERP) into RMRR exclusion. ERP exclusion applies if: ERP exclusion applies if: –It involves replacement of an existing component with an identical or functionally equivalent component; –Replacement cost is less than 20% of entire unit’s current replacement value; –Replacement does not change equipment’s basic design parameters (BDP) and; –Replacement does not cause emissions limits to be exceeded.

13. Leslie S. Ritts, Partner LSRitts@hhlaw.com 13 Litigation 2003 ERP Rule Lawsuit filed with D.C. Circuit Court of Appeals Lawsuit filed with D.C. Circuit Court of Appeals –State of New York, et. al. v. EPA, (Case No. 03-1380). On December 24, 2003 the Court held in favor of State/Environmental Group Motions for Emergency Stay. On December 24, 2003 the Court held in favor of State/Environmental Group Motions for Emergency Stay.

14. Leslie S. Ritts, Partner LSRitts@hhlaw.com 14 Litigation 2003 ERP Rule Briefing schedule Briefing schedule –Petitioners’ briefs due 90 days after EPA final action on pending reconsideration (anticipated March 2005).  Final action was to be taken by December 28, 2004 on the reconsideration but is still outstanding. –EPA brief due 90 days after petitioners’ briefs due (anticipated June 2005). –Final briefs due 77 days after EPA brief due (anticipated September 2005). –Oral Argument (anticipated December 2005/January 2006). –Decision (Anticipated July – December 2006).

15. Leslie S. Ritts, Partner LSRitts@hhlaw.com 15 Reconsideration NSR 2003 EPA granted request to reconsider certain aspects of ERP. EPA granted request to reconsider certain aspects of ERP. –Legal basis for ERP –Basis for selecting the cost threshold (20% of unit replacement) Initiated new public comment on July 1, 2004 (final action to be taken within 180 days). Initiated new public comment on July 1, 2004 (final action to be taken within 180 days). EPA continues to believe that 2003 reform is legally justified. EPA continues to believe that 2003 reform is legally justified.

16. Leslie S. Ritts, Partner LSRitts@hhlaw.com 16 Other NSR Issues IGCC as PSD BACT (CO 2 ) IGCC as PSD BACT (CO 2 ) Increments (Recent NO x Increment Rulemaking) Increments (Recent NO x Increment Rulemaking) FLM Issues FLM Issues –Endangered Species Issues Haze Rules Haze Rules NSR Transition in Nonattainment Areas NSR Transition in Nonattainment Areas

17. Leslie S. Ritts, Partner LSRitts@hhlaw.com 17 Future NSR Rules NSR in Ozone and PSD Nonattainment Areas (NAAQS Rule Reconsideration) NSR in Ozone and PSD Nonattainment Areas (NAAQS Rule Reconsideration) Aggregation of Projects Aggregation of Projects Debottlenecking and Emissions Increase Debottlenecking and Emissions Increase ODS Significance Levels ODS Significance Levels Fugitive Emissions (Severed from NSR Reform Litigation) Fugitive Emissions (Severed from NSR Reform Litigation) FLAG Issues FLAG Issues

18. Leslie S. Ritts, Partner LSRitts@hhlaw.com 18 NSR Enforcement Litigation EPA began actively enforcing asserted violations of the NSR regulations with regards to the coal-fired electric utility industry in the late 1990s. EPA began actively enforcing asserted violations of the NSR regulations with regards to the coal-fired electric utility industry in the late 1990s. EPA targets alleged modifications that increased production and/or emissions (GADS) for which no NSR permit was obtained. EPA targets alleged modifications that increased production and/or emissions (GADS) for which no NSR permit was obtained. Factors examined in application of RMRR Factors examined in application of RMRR – the nature and extent of alleged modification, – the purpose, – the frequency, – and the cost.

19. Leslie S. Ritts, Partner LSRitts@hhlaw.com 19 Settled Enforcement Cases As of March 2005, settlements have been entered into with nine companies operating coal-fired power plants. As of March 2005, settlements have been entered into with nine companies operating coal-fired power plants. Settlements generally result in the installation of required pollution control devices, civil penalties and environmental mitigation projects. Settlements generally result in the installation of required pollution control devices, civil penalties and environmental mitigation projects.

20. Leslie S. Ritts, Partner LSRitts@hhlaw.com 20 Settled Enforcement Cases * Consent decrees filed but not yet approved. ◊ Consent decree stayed by court pending discovery. Company/UnitsSettlementDatePenaltiesPollution Control Cost Environmental Mitigation TECo/10 Feb. 2000 $3.5 mil. ~$1 bil. ~$10-11 mil. PSE & G /4 Jan. 2002 $1.4 mil. ~$337 mil. ~$6 mil. VEPCo/20 April 2003 $5.3 mil. ~$1.2 bil. ~$13.9 mil. WEPCo ◊ /23 April 2003 $3.1 mil. ~$600 mil. ~$20-25 mil. SIGECo/3 June 2003 $0.6 mil. ~$22 mil. ~$2.5 mil. Santee Cooper*/12 June 2004 $2.0 mil. ~$400 mil. ~$4.5 mil. Mirant/12 Sept. 2004 $0.5 mil. ~$133 mil. ~$1 mil. Illinois Power March 2005 $9 mil. ~500 mil ~$15 mil. Ohio Edison March 2005 $8.5 mil ~$1.1 bill ~$10 mil

21. Leslie S. Ritts, Partner LSRitts@hhlaw.com 21 Pending NSR Enforcement Cases Currently EPA has eight enforcement lawsuits pending against coal-fired electric utilities. Currently EPA has eight enforcement lawsuits pending against coal-fired electric utilities. –Two settled in March. Additionally, EPA issued a NOV to Westar Energy, Inc. in early 2004, a NOV to Indiana Public Service Co. in September 2004, and a NOV against Louisiana Generating on February 15, 2005. Additionally, EPA issued a NOV to Westar Energy, Inc. in early 2004, a NOV to Indiana Public Service Co. in September 2004, and a NOV against Louisiana Generating on February 15, 2005. EPA Continues To Issue Section 114 Information Requests (Region VI and Region IV) EPA Continues To Issue Section 114 Information Requests (Region VI and Region IV)

22. Leslie S. Ritts, Partner LSRitts@hhlaw.com 22 Enforcement Utility Cases Scheduled for Trial Alabama Power Briefing on standards for RMRR test and emissions rate test due October 13, 2004. Trial expected August 2006. AEP Currently in mediation. Trial expected June 2005 Cinergy Trial scheduled 2006. Duke Energy Summary judgment granted for industry in August 2003. Appeal to Fourth Circuit. Argued Feb. 3, 2005. East Kentucky Complaint filed January 2004 and answered June 2004. Liability trial set for December 2005. Georgia Power Administratively terminated (can be reactivated). Illinois Power Liability trial ended June 2003. Decision anticipated 2005. Settled March 2005. Ohio Edison Judgment granted for EPA July 2003. Remedy trial to begin in January 2005 pushed back. Settled March 2005. TVA Administrative order case dismissed by District Court. Supreme Court denied certiorari.

23. Leslie S. Ritts, Partner LSRitts@hhlaw.com 23 Recent Decisions Ohio Edison (Judge Sargus) and Southern Indiana Gas & Electric Co. (Judge McKinney) courts upheld EPA’s interpretation of RMRR. Ohio Edison (Judge Sargus) and Southern Indiana Gas & Electric Co. (Judge McKinney) courts upheld EPA’s interpretation of RMRR. –Routine determined within the unit. –Emissions increases not based on unit’s hourly emissions rates, but based on total annual emissions (GADS). See United States v. Ohio Edison Co., 276 F. Supp. 2d 829, 859 (S.D. Ohio 2003) and United States v. Southern Ind. Gas & Elec. Co., 245 F. Supp. 2d 994, 1009 (S.D. Ind. 2003). See United States v. Ohio Edison Co., 276 F. Supp. 2d 829, 859 (S.D. Ohio 2003) and United States v. Southern Ind. Gas & Elec. Co., 245 F. Supp. 2d 994, 1009 (S.D. Ind. 2003).

24. Leslie S. Ritts, Partner LSRitts@hhlaw.com 24 Recent Decisions Duke Energy (Judge Bullock) Duke Energy (Judge Bullock) –Routine determined within the industry. –EPA has burden to show that the facility change does not fall within the RMRR exclusion. –Emissions increases based on unit’s hourly emissions rates not on total annual emissions (GADS). –Court held, in opposition to the majority of cases, that a violation of NSR requirements is an on-going violation rather than a one-time violation. Decision on appeal argued February 3, 2005 (U.S. v. Duke Energy, Case No. 04-1763, 4 th Circ.) Decision expected spring/summer 2005. Decision on appeal argued February 3, 2005 (U.S. v. Duke Energy, Case No. 04-1763, 4 th Circ.) Decision expected spring/summer 2005.

25. Leslie S. Ritts, Partner LSRitts@hhlaw.com 25 Citizen’s Suit Enforcement Cases September 21, 2004, Sierra Club issued a complaint to the owners of the Stuart Plant in Ohio for NSR violations. September 21, 2004, Sierra Club issued a complaint to the owners of the Stuart Plant in Ohio for NSR violations. –Allegations include many routine replacements not traditionally included in Complaint. –Alleges both major modifications under PSD, SIP, NSPS (D and Da) and opacity violations.

26. Leslie S. Ritts, Partner LSRitts@hhlaw.com 26 Citizen ’ s Suit NSR Enforcement Cases Company Citizen ’ s Group Status Niagara Mohawk Power Corp. State of New York Liability trial set for March 2006. TVA (Cobalt Plant – Alabama) Nat ’ l Parks Conservation Assn. Summary judgment granted for TVA September 2004. TVA (Bull Run Plant – TN) Nat ’ l Parks Conservation Assn. Trial set for September 2005. Tucson Electric Power Co. (TEPCo) Grand Canyon Trust Ninth Circuit vacated and remanded decision favoring TEPCo. Rehearing on decision being sought. Stuart Plant: Dayton Power & Light, Cincinnati General & Elec. Co., and Columbus Southern Power Co. Sierra Club Complaint filed September 2004.

27. Leslie S. Ritts, Partner LSRitts@hhlaw.com 27 Recent Decisions Tucson Electric Power Company Tucson Electric Power Company –Remanded favorable decision to defendant. Tennessee Valley Authority (TVA - Cobalt Plant) Tennessee Valley Authority (TVA - Cobalt Plant) –Granted summary judgment in favor of TVA finding that no evidence indicated TVA was in violation of the CAA.

28. Leslie S. Ritts, Partner LSRitts@hhlaw.com 28 Effect of NSR 2003 EPA states that the 2003 ERP regulation is not retroactive and should have no impact on ongoing litigation or settlement negotiations. EPA IG disagrees. EPA states that the 2003 ERP regulation is not retroactive and should have no impact on ongoing litigation or settlement negotiations. EPA IG disagrees. Industry believes that EPA’s underlying legal arguments in the enforcement and settlement actions have been weakened. Industry believes that EPA’s underlying legal arguments in the enforcement and settlement actions have been weakened.

29. Leslie S. Ritts, Partner LSRitts@hhlaw.com 29 Future NSR Enforcement EPA has stated that it will still enforce NSR under the “old” reinterpreted NSR regulations. EPA has stated that it will still enforce NSR under the “old” reinterpreted NSR regulations. Some, including EPA IG, note NSR enforcement since October 2003 has involved only those facilities that violate the new rule (recent NOVs issued under reinterpreted standards). Some, including EPA IG, note NSR enforcement since October 2003 has involved only those facilities that violate the new rule (recent NOVs issued under reinterpreted standards). EPA document leaked to the press in July 2004 lists with between 14 and 22 utility companies that the EPA has referred to the DOJ for enforcement or for which NOVs are pending.* EPA document leaked to the press in July 2004 lists with between 14 and 22 utility companies that the EPA has referred to the DOJ for enforcement or for which NOVs are pending.* * The accuracy of this document cannot be authenticated.

30. Leslie S. Ritts, Partner LSRitts@hhlaw.com 30 Title V Update NODs Issued To A Dozen State Programs in 1999-2000, But All Programs Now Approved Despite Some Citizens’ Petitions Alleging Additional Program Insufficiencies NODs Issued To A Dozen State Programs in 1999-2000, But All Programs Now Approved Despite Some Citizens’ Petitions Alleging Additional Program Insufficiencies 90% of All Title V Permits Issued 90% of All Title V Permits Issued –10% remaining are generally large integrated refineries and chemical plants 20% of All Permits in Renewal Phase 20% of All Permits in Renewal Phase Multiple Permits On Appeal In Individual States Multiple Permits On Appeal In Individual States Approx. 5 Dozen Permits Petitioned On By Environmental Groups and Before EPA Administrator Approx. 5 Dozen Permits Petitioned On By Environmental Groups and Before EPA Administrator

31. Leslie S. Ritts, Partner LSRitts@hhlaw.com 31 Issues on Renewal Compliance Assurance Monitoring (“CAM”) Plans Compliance Assurance Monitoring (“CAM”) Plans PSD/NSR/Minor NSR PSD/NSR/Minor NSR Incorporation of MACT Standards (now less of an issue for most utilities) Incorporation of MACT Standards (now less of an issue for most utilities) Monitoring, Notwithstanding EPA 2004 “Umbrella Monitoring” Rule Monitoring, Notwithstanding EPA 2004 “Umbrella Monitoring” Rule

32. Leslie S. Ritts, Partner LSRitts@hhlaw.com 32 EPA Title V Task Force Purpose – To make recommendations to Federal Clean Air Act Advisory Committee by August 2005 Purpose – To make recommendations to Federal Clean Air Act Advisory Committee by August 2005 Membership Membership Public Hearings Public Hearings Docket Closed March 31, 2005 Docket Closed March 31, 2005

33. Leslie S. Ritts, Partner LSRitts@hhlaw.com 33 Issues Raised During Title V Task Force Hearings Inadequate Monitoring Inadequate Monitoring Change Management (keeping permit current) Change Management (keeping permit current) Title I and Title V (NSR/Old SIPs) Title I and Title V (NSR/Old SIPs) Incorporation by Reference Incorporation by Reference Public Processes Public Processes Statement of Basis Statement of Basis Compliance Schedules Compliance Schedules SSMs SSMs Compliance Certifications Compliance Certifications

34. Leslie S. Ritts, Partner LSRitts@hhlaw.com 34 IG Report On Title V March 2005 “Substantial Changes Needed in Implementation and Oversight of Title V Permits If Program Goals Are To Be Fully Realized” (Report No. 20050P-00010) March 9, 2005. “Substantial Changes Needed in Implementation and Oversight of Title V Permits If Program Goals Are To Be Fully Realized” (Report No. 20050P-00010) March 9, 2005. T-V Program partially successful in encouraging accountability, enforceability, (emission reductions?) T-V Program partially successful in encouraging accountability, enforceability, (emission reductions?)

35. Leslie S. Ritts, Partner LSRitts@hhlaw.com 35 IG Criticisms Permits Clarity (incorporation by reference is a problem, permit organization poor, missing citations) Permits Clarity (incorporation by reference is a problem, permit organization poor, missing citations) Statements of Basis Missing for Most Applicable Requirements Statements of Basis Missing for Most Applicable Requirements Monitoring Inadequate Monitoring Inadequate Annual Compliance Certifications Vary Annual Compliance Certifications Vary Practical Enforceability Concerns Practical Enforceability Concerns

36. Leslie S. Ritts, Partner LSRitts@hhlaw.com 36 Title V Outcomes 1992 Litigation 1992 Litigation 1996 Permit Revision Proposed Rule 1996 Permit Revision Proposed Rule Umbrella Monitoring Rule, and New § 70.6 rulemakings Umbrella Monitoring Rule, and New § 70.6 rulemakings Compliance Certification Guidance?? Compliance Certification Guidance?? Credible Evidence and Compliance Certifications Credible Evidence and Compliance Certifications

37. Leslie S. Ritts, Partner LSRitts@hhlaw.com 37 Conclusions NSR – What Happens When The Courts Weigh In NSR – What Happens When The Courts Weigh In NSR – State Discretion To Pare Back NSR Reforms NSR – State Discretion To Pare Back NSR Reforms –EPA “Substantive Equivalence” Test –Indiana, the test case? Title V – Settled, But Unsettled Title V – Settled, But Unsettled –Compliance Certifications –Monitoring