CPR Perspective: 'Grandfathered' Air Pollution Sources and New Source Review

Background

The Issue How should air pollution sources that were grandfathered under the Clean Air Act of 1970 be regulated when they are modified?

One of the important innovations in the modern Clean Air Act of 1970 (CAA or the Act) was the decision to regulate air pollution sources directly. However, recognizing that companies had already invested capital in existing sources, and aware of the cost of retrofitting these sources with modern pollution controls, Congress did not require owners of existing stationary sources to install air pollution control technology until these plants were modified or upgraded in a way that would increase air pollution. Like non-conforming land uses under zoning laws, these “grandfathered” sources were eventually expected to either cease operation from age or, if changes were made to modernize or upgrade them, only continue with the addition of modern pollution controls required of all new sources. The determination whether changes to an existing source require that the source comply with new source requirements is called “new source review” (NSR).

The CAA specifies that any source that undergoes a physical modification that increases the amount of any regulated pollutant is to be considered “modified” for the purposes of the Act, but early on the EPA carved out an administrative de minimis exception if the physical change was properly characterized as routine maintenance, repair, or replacement (RMRR). A determination of whether a physical change required the installation of the pollution control equipment was made on a case-by-case basis.

Despite the expectation that all grandfathered sources would eventually cease operation or be required to upgrade, many older sources continued in use without pollution abatement equipment for a very long time. The longevity of these old plants may be traced to variability of enforcement at the EPA, including its expansive reading of the RMRR exception.. Whatever its cause, many of these “grandfathered” plants were operating far beyond their normal life span, and many continue operating until this day. These sources, primarily coal-fired electric power plants and petroleum refineries, continue to cause a disproportionate share of air pollution in most regions of the country, exacerbating health problems and limiting future economic growth.

In the late 1990s, the Clinton administration began a concerted effort to enforce the new source review provisions against any existing sources that were upgrading illegally. Investigations were started at over 100 plants, and several cases were referred to the Justice Department for prosecution. Many industrial sources cried “foul” at the stepped up enforcement, complaining that EPA’s standards were not consistent. Though the government’s enforcement has no doubt been inconsistent in some respects, investigation revealed that many sources that continued operation after making physical changes, were in fact doing so in violation of the Clean Air Act.

President George W. Bush stated in 2000 that he would bring relief to those industries most affected by the new source review procedures. Based on recommendations of the “energy task force,” headed by Vice President Cheney, President Bush first proposed an amendment to the Clean Air Act to eliminate direct emissions control of stationary sources altogether. This proposal, called the Clear Skies Initiative, would eliminate direct pollution control requirements on any major source of sulfur dioxide and nitrogen oxides, and would replace them with a cap and trade system. Under such a system, the total amount of these pollutants would be limited and sources could decide themselves how to best meet these limitations, either through installing or using control equipment or buying pollution credits from other sources. In addition, the Clear Skies Initiative also proposed a cap and trade program for Mercury, which had been designated a hazardous air pollutant under the Clinton Administration. (See the CPR Perspective on Mercury Pollution).

The Clear Skies Initiative has been criticized in many circles as not doing enough to reverse air pollution. Several studies indicate that it would not reduce air pollution as quickly as would full enforcement of the NSR provisions. Additionally, many states opposed the measure because they believed it would make it harder for them to clean up their air locally. Last, strong Senate opposition was based on concern that its pollution control requirements were too weak and that the legislation omits any provisions to address the control of global warming gases, a proposition refused by the supporters of Clear Skies.

When the passage of the Clear Skies proposal seemed doubtful, the Bush Administration moved to address the issue of “grandfathered” sources through rulemaking. The administration proposed rules which would seek to specify when new sources must upgrade. Though these rules provided brighter lines to govern when a modified source must upgrade pollution control equipment, it appeared that the rule would allow sources to undertake far more extensive modifications without upgrading than had previously been allowed. Specifically, the rules did not mandate that pollution control must occur when a physical modification increases the amount of a pollutant by the sources, in direct contravention to the statutory requirement in the Clean Air Act. Moreover, the proposed regulations posited that an existing source could avoid control requirements by improving efficiency of operation, which meant that these sources could continue in perpetuity without ever upgrading pollution control equipment. This outcome is exactly the opposite of what Congress envisioned when it passed the CAA.

Many in the energy industry support these proposed rules because it would allow them to modernize their existing pollution sources without having to spend money on increasing pollution control. But while it may benefit the bottom line of the energy industry, there is evidence that the rules would allow air quality far worse than would exist if New Source Review were actively enforced.

In April 2003, the National Academy of Public Administration (NAPA) released A Breath of Fresh Air: Reviving the New Source Review Program. The report criticizes the proposed 2002 reforms to the NSR program, finding that gaping loopholes created or expanded by the proposed rules adversely impact Americans’ health. Further, despite the administration’s assertions to the contrary, the report finds that the revisions will not improve environmental protection. In addition to criticizing the proposed reforms, the NAPA report calls for a fundamental reform of NSR, including ending grandfathering of older sources, creating a performance-based system to require facilities to reduce air pollution, and adopting NSR reforms which integrate other protections of the Clean Air Act and which anticipate future environmental challenges.

The regulations were challenged in federal court in 2002 and 2003 as a violation of the Clean Air Act. Some of the regulations which looked at base line measurements and definitions of physical changes have been upheld; but the most controversial provision -- the one that defines RMRR as any physical change that costs less than 20% of the capital cost of the plant -- has been blocked by a temporary restraining order, and awaits trial on the merits. To this day, the Bush administration continues to support these administrative changes and continues to propose new rules that will weaken NSR.

The problems that exist with the current approach to New Source Review arise largely because existing sources have pushed to exempt alterations well beyond what the CAA envisioned, Relentless lobbying and negotiation have taken their toll, and EPA has allowed many modifications to occur without requiring an upgrade of pollution control equipment. Regulated industries complain that the state of the law is in flux, forcing them to make business decisions in an atmosphere of uncertainty. But most of this uncertainty arises because EPA’s expansive interpretation of what constitute “routine” changes that don’t trigger application of the Act is poorly conceived and stretches the meaning of the statute. The fact of this uncertainty, created by EPA’s weakening of the statute, does not itself warrant further weakening of the standard.

As recommended by the National Academy of Public Administration, grandfathering of all plants built before 1970 should be repealed altogether. Since all of the existing plants have already operated far beyond the life expectancy originally envisioned by Congress when it granted the exemption, the owners of such plants have no reasonable expectation that they can continue in operation without pollution controls indefinitely. CPR supports consistency in enforcement but rejects efforts to weaken NSR under the guise of creating consistency or clarity.

These grandfathered plants continue to contribute to high pollution levels in almost all jurisdictions, making it harder to improve air quality and putting a higher economic burden on new pollution sources and economic growth. This is both unfair and inefficient. If all plants were on an equal playing field, some suggested pollutant trading systems could be more fairly administered, and far more significant reductions would result than those envisioned in the Clear Skies proposal.

This change would be more than fair to regulated industries, since they have already been allowed to operate far beyond their plants’ original life expectancy. If retrofitting is too costly, operators should make the business decision to close them and build new sources to replace them. Any sunk costs in the original construction of the grandfathered sources have been accounted for, recovered, and amortized. There is no need to enhance profitability of these plants at the expense of public health. Moreover, any economic shocks could be eliminated by having a suitable phase-in period, such as five years. The application of New Source Review to modifications of existing pollution sources has caused uncertainty, produced inconsistent enforcement, and created an uneven playing field for electric utilities. The continued operation of the old plants has led to much higher levels of pollution than necessary or tolerable from a public health point of view. The answer to this problem is not to make it easier to avoid New Source Review and let grandfathered pollution sources continue in perpetuity, as the Bush Administration has proposed. Instead, grandfathering should be eliminated and all coal-fired power plants brought up to modern pollution control standards.