With the favorable ethanol market, many ethanol plants have begun or are considering plant expansions. Although a plant may be in compliance with the terms of its current air emissions permits, a request for a new air permit due to a plant expansion may violate the EPA’s New Source Review (“NSR”) or Prevention of Significant Deterioration (“PSD”) regulations. This violation can result in existing air permits being considered void and can result in sanctions.

What are these NSR and PSD regulations? PSD applies in areas that are in attainment for any pollutant for which a NAAQS exists. If an area is in nonattainment for a pollutant, then nonattainment NSR applies. PSD permits are pollutant specific, only one of the emitted pollutants from a source or several of the pollutants may be subject to PSD requirements. There are several different federal regulations that discuss PSD. 40 C.F.R. 51.166 applies to states that are using their own EPA approved PSD program and 40 C.F.R. 52.21 applies to states implementing the federal PSD program. 40 C.F.R. 52.21(r)(4) requires application of NSR requirements to a source that asks for relaxation of permit limits which would be make the source major. “EPA stated that it will require application of SS52.21(r)(4) even where a source legitimately changes a project after finding it cannot comply with the operating restrictions which were taken in good faith.” Memorandum Applicability of NSR Circumvention Guidance to 3M – Maplewood, Minnesota.

PSD requirements apply to new major stationary sources and to major modifications. 40 C.F.R. 52.21(a)(2). A “major stationary source” is any source that belongs in one of the 28 categories listed in the Clean Air Act (CAA) at § 169 and emits or has the potential to emit 100 tons/year of any of the pollutants subject to the CAA, or any other type of source that emits or has the potential to emit pollutants at a rate greater than or equal to 250 tons/year. 40 C.F.R. 52.21(b)(1). A “major modification” is a physical change or change in the method of operation that results in a “significant net emissions increase” in the emissions of any regulated pollutant. 40 C.F.R. 52.21(b)(2)(i). A modification is subject to PSD if it is (1) an existing source and (2) the net emission increase of any pollutant emitted by the source as a result of the modification is equal to or greater than the rates found at 40 C.F.R. 52.21(b)(23)(i), which defines “significant.”

The potential to emit is the most important factor in determining whether a new source or modification is major. Due to the importance of potential to emit, EPA has issued numerous guidance documents devoted to this topic. The phrase is defined as the maximum capacity of a stationary source to emit a pollutant under its physical and operational design. 40 C.F.R. 52.21(b)(4). Any federally enforceable limit on emissions will be treated as part of the design. There are three types of limitations that affect potential to emit: emission limits, operation limits, and production limits. Conditions on any of these limits placed in a permit must be stated independently of each other so that each is federally enforceable.

There are three factors for determining PSD applicability:

1. determine whether the proposed project is sufficiently large (in terms of emissions) to be a “major” stationary source or a “major” modification

2. determine whether the new source will be located in an attainment area

3. determine if the pollutants that are emitted in, or increased by, in “significant” amounts are subject to PSD

Potential to Emit

The potential to emit is the most important factor in determining whether a new source or modification is major. Due to the importance of potential to emit, EPA has issued numerous guidance documents devoted to this topic. The phrase is defined as the maximum capacity of a stationary source to emit a pollutant under its physical and operational design. 40 C.F.R. 52.21(b)(4). Any federally enforceable limit on emissions will be treated as part of the design. There are three types of limitations that affect potential to emit: emission limits, operation limits, and production limits. Conditions on any of these limits placed in a permit must be stated independently of each other so that each is federally enforceable.

Defining “Significant”

“Significant” emission thresholds are defined in two ways. The first is in term of rates in tons/year. There is a list of certain pollutants in the regulations, found at 40 C.F.R. 52.21(b)(23)(i) (see below). Significant emission rates are subject to PSD review in two situations:

1. If a new source that is major for one regulated pollutant that is in attainment (and therefore subject to PSD review), then all the other emitted pollutants that are in attainment, and are emitted at a rate equal to or greater than those specified in the regulations are subject PSD review

2. When an existing source is modified, and the potential to emit due to the modification and the resulting net emissions increase of any regulated, attainment, noncriteria pollutant (any of the pollutants listed at 40 C.F.R. 52.21(b)(23)(i) that are not the six NAAQS pollutants) is equal to or greater than the respective pollutant’s significant emission rate in the regulations, the modification is major and is subject to PSD review.

The second manner in which emission thresholds are defined is when a new source is constructed within ten kilometers of a Class I (national park) area that would increase the 24-hour average concentration of any regulated pollutant.

Minor Sources

There are two types of minor sources. True minors are sources that are physically unable to emit large amounts of air pollutants. Synthetic minors are sources with a potential to emit that exceeds the major thresholds, but the sources have permit that limit emissions.

When a minor source makes a physical change or change in the method of operations that is by itself a major source, that change constitutes a major stationary source that is subject to PSD review. It is important to remember that a source must first be a major source before it will be subject to the PSD requirements. For an expanding minor source to be subject to PSD review, the change must increase the source’s potential to emit by 100 or 250 tons/year, depending on whether the source is included in the list of categories found in the CAA. Once a minor source increases emissions by more than 100 tons/year, then the operational/physical change to the source is considered a major source subject to PSD review. This major change also makes the source a major source for future changes.

Modifications

A modification is subject to PSD requirements if the existing source that is modified is a major source, and the net emission increase of any pollutant emitted by the source as a result of the modification is “significant.” There are some activities that are not considered to be modifications under the CAA, those include routine maintenance, repair and replacement, an increase in operation hours unless restricted by federally enforceable permit; the regulations list more at 40 CFR 52.21(b)(2)(iii).

The regulations require major modifications to meet two qualifications. First, the regulated pollutant must have a significant emission increase (equal or greater than the emission rates found in the regulations). Second, there must be a significant net emissions increase. 40 C.F.R. 52.21(a)(2)(iv)(a). If there is no significant emission increase, then the project is not a major modification. A significant net emission increase is only applicable to major stationary sources. 40 C.F.R. 52.21(b)(3)(i).

If a net emission is shown to result, then PSD review is required for each pollutant that had a significant emission increase. Minor sources are ineligible for netting emission changes because they are not considered a new major source until there has been an increase in emissions to bump them into the major source category. Also, a modification that does not result in “significant” emission increases does not consider contemporaneous emissions.

Sham Permitting

These regulations can pose a problem if an ethanol plant is built in stages. As an example, a plant designed to emit just less than 100 tons of air pollutants (and much lesser amounts of “hazardous” air pollutants) per year should be able to avoid having to obtain a Title V air permit. If that same plant is later modified and increases its air pollution emissions by up to 100 tons per year, it becomes a major source and will have to obtain a Title V air permit. Although the plant may have avoided triggering PSD review because the increase was less than 100 tons per year, splitting a project into stages to avoid PSD review is considered circumvention of the regulation, and the plant could be subject to an enforcement action and revocation of its permit.

The regulatory authority may ask a number of questions to determine if a plant is circumventing PSD review, including whether the expansions were proposed over a relatively short period of time and whether they are really a single project. Circumvention of PSD review is sometimes called “sham permitting.” Permits obtained through circumvention are void if the regulator can show an original intent to operate the plant at major source levels.

The EPA has set out a four-part “factors” test in the EPA’s June 13, 1989 “Guidance on Limiting Potential to Emit in New Source Permitting.” http://www.epa.gov/docs/region07/programs/artd/air/nsr/nsrmemos/lmitpotl.pdf

The first factor is:

1. Filing a PSD or nonattainment NSR permit application. If a major source or major modification permit application is filed simultaneously with or approximately the same time as the minor source construction permit, this is strong evidence of an intent to circumvent the requirements of preconstruction review. Even a major source application filed after the minor source application, but either before operation has commenced or after less than a year of operation should be looked at closely.

Under this guidance document the regulating agency is asked to “look closely” at the former and subsequent applications when they are filed at approximately the same time. In other words, proximity in filing is only an initial trigger requiring that the regulating agency study the situation. From a legal standpoint, it is very important to also note that what the regulating agency is looking for is “intent.” This is not an objective test, although objective facts can be used to determine subjective intent. In other words, this factor does not mean that all applications made within one year of each other are to be collapsed into one application with no further inquiry. The legal question that must be answered by the regulating agency is whether the permitee actually intended to circumvent the PSD review process. This means that the test is subjective. In other words, what was going through the permitee’s head at the time they filed the earlier and subsequent permit application.

The second factor is:

2. Applications for funding. Applications for commercial loans or, for public utilities, bond issues, should be scrutinized to see if the source has guaranteed a certain level of operation which is higher than that in its construction permit. If the project would not be funded or if it would not be economically viable if operated on an extended basis (at least a year) at the permitted level of production, this should be considered as evidence of circumvention.

Most ethanol projects with which I am familiar will not have a problem meeting this test. Financial projections are self-sustaining for the original construction of each ethanol plant.

The third factor is:

3. Reports on consumer demand and projected production levels. Stockholder reports, reports to the Securities and Exchange Commission, utility board reports, or business permit applications should be reviewed for projected operation or production levels. If reported levels are necessary to meet projected consumer demand but are higher than permitted levels, this is additional evidence of circumvention.

One important point needs to be mentioned with respect to this factor. While expanding markets and demand is relevant to this factor, ethanol is not a market that can only be met by a few producers. Unlike most commercial goods which are subject to alteration and specifications, ethanol is a commodity. Therefore, an increase in demand for a commodity cannot be translated into a plan on the part of every producer to increase production to meet that demand. In at least one example discussed in EPA guidance, the product in question was specific and had a market that could only be met by a few producers. The producer in question was fooling no one by artificially setting production goals in the permit application at a level that would not serve the existing market for that manufactured product. This particular factor is therefore less useful when viewed in the context of a commodity such as ethanol.

The fourth factor is:

4. Statements of authorized representatives of the source regarding plans for operation. Statements by representatives of the source to EPA or to state or local permitting agencies about the source’s plans for operation can be evidence to show intent to circumvent preconstruction review requirements.

Summary:

It is clear from this guidance document that the EPA must engage in a fact-finding process to determine if the permit holder intended from the outset (or at some later date) to circumvent PSD review. For new plants still in the planning stage, avoid mentioning purely conjectural plant expansions in offering documents, web sites and other documents. Otherwise, an agency may be able to argue that there was an intention from the outset to build a larger plant and that any permits granted for the first “stage” of construction circumvented PSD review. If a future plant expansion is central to the company’s plans, then the permit engineer should consider complying with PSD requirements in the first permit application in order to avoid later penalties and sanctions. Considering a significant expansion? Examine the original offering documents. Was a future plant expansion mentioned? If so, carefully consider the new permit applications. Regardless, management should understand that PSD regulations pose additional regulatory risks associated with plant expansions.

James L. Pray copyright 2006