UNITED STATES

ENVIRONMENTAL

PROTECTION

AGENCY RESEARCH TRIANGLE

PARK, NC 27711

MEMORANDUM OFFICE OF AIR QUALITI( PLANNING AND STANDARDS

SUBJECT:

FROM: Guidance

on Developing

Fee Programs

Required

by Clean Air Act Section 185 for the 1-hour Ozone NAAQS//.

•-'• Stephen D. Page, Director Office of Air Quality Planning

and Standard•'•

TO: Regional

Air Division

Directors,

Regions

I-X

Section 185 of the Clean Air Act (CAA) requires

states with ozone nonattainment

areas classified as Severe or Extreme

to develop,

as a revision

to their state implementation

plan (SIP),

a fee collection

rule to be implemented

in the event that an area fails to attain the ozone standards by the required

attainment

date. This memorandum

provides

additional

guidance

on fee collection programs

for the 1-hour ozone National

Ambient

Air Quality Standard

(NAAQS

or standard), which are required

as anti-backsliding

measures

during transition

to the 1997 8-hour

ozone standard.Applicability of Section

185 to Ozone NAAQS

Nonatt•inment

Areas

The section 185 fee program

requirement

applies to any ozone nonattainment

area that is classified as Severe or Extreme

under the NAAQS,

including

any area that was classified

Severe

or Extreme

under the 1-hour ozone NAAQS

as of the effective

date of the area's 8-hour designation. 2 The EPA had previously

waived the section 185 fee programrequirements applicable under the revoked

1-hour ozone NAAQS

in rules issued to address the transition

from the 1-hour standard

to the 1997 8-hour standard)

However,

on December

23, 2006, the United States Court of Appeals

for the District of Columbia

Circuit issued an opinion determining

that EPA improperly

waived the application

of the section 185 fee provision

for Severe and Extreme nonattainment areas that failed to attain the 1-hour ozone standard

by their attainment

date. South Coast Air Quality Management

District v. EPA, 472 F.3d 882 (D.C. Cir. 2006).

See Attachment

A for the text of CAA section 185. The CAA requires that fee program SIPs for nonattainmen areas initially classified

as Severe or Extreme for the l-hour ozone standard be submitted

to EPA by December 31, 2000 (see CAA section 182(d)(3)).

Areas subsequently

reclassified

as Severe or Extreme have a SIP submission date as determined

by EPA. 2 The l-hour ozone NAAQS were established

in 1982 and revoked on June 15, 2004 for most areas. The 8-hour ozone NAAQS were first established

in 1997. EPA is currently reconsidering

the 8-hour ozone NAAQS that

was last revised in 2008. EPA intends to complete the reconsideration

by August 31, 2010. See 69 Fed Reg 23951 (April 30, 2004).

Internet Address (URL) ht•:/iwww.epa,gov Recycled/Recyclable Printed with Vegetable Oit Based Inks on Recycled Paper (Minimum 25% Postconsumer)Summary of Section

185 Requirements

In the event that a nonattainment

are•'classified

as Severe or Extreme

fails to attain the

ozone standard

by the required

date, section 185 of the CAA requires

each major stationary

source of volatile organic compounds

(VOC) and nitrogen

oxides (NOx) 4 located in such area to pay afee to the state for each calendar

year following

the attainment

year for em!ssions

above a "baseline amount."

In 1990, the CAA set the fee as $5,000 per ton of VOC and NOx emitted by the source during the calendar

year in excess of 80 percent of the "baseline

amount."

The fee must be adjusted

for inflation

based on the Consumer

Price Index (CPI) on an annual basis. Attachment B. sets forth the fees, as adjusted

for inflation,

for the years 1990-2009.

The CAA provides

that the computation

of a source's

"baseline

amount"

must be the lower of the amount of actual or allowable

emissions

under the permit applicable

to the source (or if no permit has been issued for the attainment

year, the amount of VOC and NOx emissions allowed under the applicable

implementation

plan) during the attainment

year. The CAA also provides that EPA may issue guidance

on the calculation

of the "baseline

amount"

as the lower of the average

actual emissions

o• average allowable

emissions

over a period of more than one year in cases where a !'source's

emissions

are irregular,

cyclical or otherwise

VarY significantly from year to year." Accordingly,

on March 21, 2008, EPA issued a memorandum

entitled "Guidance on Establishing

Emissions

Baselines

under Section 185 of the CAA for Severe and Extreme Ozone Nonattainment

Areas that Fail to Attain the 1-hour Ozone NAAQS

by their Attainment Date."

The CAA does not specify how states may spend or allocate

the fees collected

under a section 185 fee program.

Therefore,

states have discretion

on how to use the fees. We believe that one beneficial

approach

would be to channel the fees into innovative

programs

to provide incentives for additional

ozone precursor

emissions

reductions

from stationary

or mobile sources,

or for other purposes

aimed at reducing

ambient

ozone concentrations

in the affected

area.
If the state fails to adopt or implement

a required

fee program,

EPA is required

to collect the unpaid fees and may also collect interest on any unpaid fees. All revenue

collected

by EPA under authority

of section 185 is required

to be deposited

in a special fund in the United States Treasury for licensing

and other services

and may be used to fund the Agency's

activities

for collecting such fees. See, CAA sections

185(d) and 502(b)(3)(C).

Alternatives to Section

185 Fee Programs

As a result of the 2006 court decision

in South Coast, states with areas classified

as Severe or Extreme

nonattainment

for the I-hour ozone standard

at the time of the initial nonattainment designation

for the 8-hour standard

are subject to the requirements

of section 185. We believe states can meet this obligation

through a SIP revision

containing

either the fee program prescribed

in section 185, or an equivalent

alternative

program,

as further explained

While section 185 expressly

mentions only VOC, section 182(f) extends the application

of this provision
to NOx, by providing

that "plan provisions

required under [subpart D] for major stationary

sources of IVOC] shall also apply to major stationary

sources...of

•.NOx]."below. EPA believes

that an alternative

program

may be acceptable

if it is consxstent

with the principles of section 172(e) of the CAA, which allows EPA through rulemaking

to accept alternative programs

that are "not less stringent"

where EPA.has

revised the NAAQS

to make it less stringent.

This discretion

does not currently

apply to a section 185 fee program

obligation arising from failure to attain the 1997 8-hour ozone NAAQS

by the attainment

date associated with a Severe or Extreme

classification

for that NAAQS

because

that NAAQS

has not been revoked.

Section 172(e) is an anti-backsliding

provision

of the CAA that requires

EPA to develop regulations to ensure that controls

are "not less stringent"

than those that applied prior to relaxing

a standard

where EPA has revised a NAAQS

to make it less stringent.

In the implementation rule for the 1997 ozone NAAQS,

EPA determined

that although

section 172(e) does not directly apply where EPA has strengthened

the NAAQS,

as it did in 1997, it was reasonable

to apply the

same principle

for the transition

from the 1-hour NAAQS

to the 1997 8-hour NAAQS.

As part of applying

the principle

in section 172(e) for purposes

of the transition

from the 1-hour standard to the 1997 8-hour standard,

EPA can either require states to retain programs

that applied for purposes of the 1-hour standard,

or alternatively

can allow states flexibility

to adopt alternative programs, but only if such alternatives

are "not less stringent"

than the mandated

program.

EPA is electing m consider

altemative

programs

to satisfy the section 185 fee program SIP revismn

requirement.

The remainder

of this memorandum

describes

the circumstances under Which we believe we can approve

an alternative

program

that is "no less stringent."

These interpretations will only be finalized

through EPA actions taken under notice-and-comment rulemaking to address the fee program

obligations

associated

with each applicable

nonattainment

area. Ifa starechooses

to adopt an alternative

program

to the section 185 fee program,

the state must demonstrate

that the alternative

program

is no less stringent

than the otherwise

applicable section 185 fee program.

If our preliminary

assessment

indicates

that the alternative

program

is not less stringent,

we would issue a notice in the Federal Register

proposing

to make such a determination at the same time we propose

and take action on any accompanying

SIP revision pursuant to Section 110(k).

EPA believes

that foi an area that we determine

is attaimng

either the 1-hour or 1997 8- hour ozone NAAQS,

based on permanent

and enforceable

emissions

reductions,

the area would

no longer be obligated

to submit a fee program

SIP revision

to satisfy the anti-backsliding requirements associated

with the transition

from the 1-hour standard

to the 1997 8-hour standard. In such cases an area's existing

SIP should be considered

an adequate

alternative

program.

Our reasoning follows from the.fact that an area's existing

S.IP measures,

in conjunction

with other efiforceable federal measures,

are adequate

for the area to achieve attainment,

which is the purpose of the section 185 program.

The section 185 fee program

is an element

of an area's attainment demonstration,

and its object is to bring about attainment

after a failure of an area to attain by its attalument

date. Thus, areas that have attained

the l-hour standard,

the standard

for which the fee program

was originally

required,

as a result of permanent

and enforceable emissions reductions,

would have a SIP that is not less stringent

than the SIP required

under section 185. Also, once an area attains the 1997 8-hour ozone standard,

which replaced

the now revoked 1-hour standard,

the purpose

of retaining

the section 185 fee program

as anantibacksliding measure

would also be fulfilled

as the area would have attained

the 8-hour standard4

for

which the fee program

was retained

as a transition

measure.

We believe that it would unfairly penalize

sources in these areas to require that fees be paid after an area has attained

the 8-hour standard

due to permanent

and enforceable

emission

reductions

because

the fees were imposed due to a failure to meet the applicable

attainment

deadline

for the 1-hour standard,

not any failure to achieve the now applicable

8-hour standard

by its attainment

date. Similarly,

for the reasons'described

above, areas that must still develop

and submit a fee program

may submit

an alternative

that provides

that the fees end at the time that the area attains either the 1-hour or 1997 8-hour standard

due to the existence

of permanent

and enforceable

measures.

There is also an additional,

independent

basis for EPA's approach

to determining

that the anti-backsliding requirements

associated

with section 185 have been satisfied.

Although

section 185 provides

that fees are to continue

until the area is redesignated

for ozone, EPA no longer promulgates redesignations

for the 1-hour standard

because

that standard

has been revoked. Therefore, relief from the 1-hour fee program

requirements

under the terms of the statute is an impossibility, since the conditions

the statute envisioned

for relieving

an area of its fee program obligation no longer can exist. There is, thus, a gap in the statute which must be filled by EPA. We believe that under thesecircumstances

we must exercise

our discretion

under Chevron

USA, Inc. v. Natural Resources

Defense

Council,

467 U.S. 837 (1984), to fill this gap, so as to carry out Congressional

intent in the unique context of anti-backsliding

requirements

for a revoked standard. We believe that it is reasonable

for the fee program

obligation

that applies for purposes of anti-backsliding

to cease upon a determination,

based on notice-and-comment rulemaking, that an area has attained

the 1-hour or 8-hour standard

due to permanent

and enforceable measures.

This determination

centers on core criteria for redesi•ations

under CAA section 107(d)(3).

We believe these criteria provide reasonable

assurance

that the purpose

of the 1-hour anti-backsliding

fee program

obligation

has been fulfilled

in the context of a regulatory regime where the area remains

subject to other applicable

1-hour anti-backsliding

and 8-hour

measures. Under these circumstances,

retention

of the fee program

under the anti-backsliding rule is no longer necessary

for the purpose

of achieving

attainment

of the 8-hour standard.
Additional Potential

Equivalent

Alternative

Program

Concepts Following is a summary

of concepts

for additional

alternative

programs

that a state might consider if all 1-hour nonattainment

areas subject to the section 185 fee program

anti-backsliding requirements within that state are not eligible for the EPA determination

set forth in the section above, and/or if the state chooses

to develop

another alternative

program

that is no less stringent than a section 185 fee program.

While section 185 focuses most directly

on assessing

emissions fees• we believe it is useful to interpret

section 185 within the context of the CAA's ozone implementation provisions

of subpart 2 (which includes

section 185). The subpart 2 provisions

are designed

to provide

an ever-growing

incentive

to reduce ozone-forming

pollutant

emissions
to levels that achieve attainment

of the ozone NAAQS.

In this context,

to satisfy the requirements of section 185 associated

with the 1-hour NAAQS

we believe it is appropriate

for states to focus on fee assessments,

achieving

further emissions

reductions,

or some combination of both in developing

an alternative

program.

For any alternative

program

adopted

by a state, the state's demonstration

that the program

is no less stringent

should consist of comparing

expected fees and/or emissions

reductions

directly attributable

to application

of section 185 to the expected fees and/or emissions

reductions

from the proposed

alternative

program.

For a valid5

demonstration to ensure equivalency,

the state's submission

should not underestimate

the expected fees and/or emissions

reductions

from the section 185 fee program,

nor overestimate the expected

fees and/or emissions

reductions

associated

with the proposed

alternative

program. Recently, a task force composed

of members

of the Clean Air Act Advisory

Committee (CAAAC) was formed to discuss alternate

ideas on complying

with section 185. 5 The concepts described here were discussed

by the task force, and the CAAAC

forwarded

a list of potentia] program features

to EPA for review.

EPA's assessment

of whether

and how certain program features identified

by the CAAAC

can be used in the context of satisfying

the requirements

of section 185 is included

as Attachment

C to this memorandum.

EPA cannot conclude

at this time whether

specific state-developed

programs

relying on these concepts

or containing

any of the features presented

by the CAAAC

would be approvable because such a determination

would be based on the specific parameters

of the program

adopted. Further, any such determination

would need to be made through notice-and-comment rulemaking. States may decide to develop

unique alternative

programs

for each applicable nonattaiument area, and we will independently

evaluate

the approvability

of each alternative program. To assure a valid demonstration

that an alternative

is no less stringent,

we recommend that states work with EPA on a case-by-case

basis.

Additional Fee-Equivalent

Alternative

Progrm•

We anticipate

(subject to notice-and-comment rulemaking

as noted above) that we could approve a program

that clearly raises at least as much revenue

as the otherwise

required

section 185 fee program

if the proceeds

are spent to pay for emissions

reductions

•f ozone-forming pollutants (NOx and/or VOC) in the same geographic

area subject to the section 185 program. Under this approach,

the state would estimate

revenues

that would result under the section 185 fee program

if all section 185 sources paid fees for each applicable

calendar

year, develop

an alternative program

that would raise at least that much revenue,

and establish

a process where the

revenues would be used to pay for emissions

reductions

that will further improve

ozone air quality.

Under this concept,

states could develop

p•ograms

that shift the fee burden from the specific set of major stationary

sources that are otherwise

required

to pay fees according

to section 185, to other non-major

sources of emissions,

including

owners/operators

of mobile

sources. This could allow states to recognize

through

reduced

fees those major sources of emissions that have already installed

the latest technology,

and assess the remainder

of the total required fees on other sources that are not already as well controlled.

EPA recognizes

that section 185 is not strategic

in imposing

emissions

fees on all major stationary

sources,

including already well-controlled

sources that have few, if any, options for avoiding

fees by achieving additional reductions.

States can be more strategic

by crafting alternative

programs

that exempt,

or reduce,the

fee obligation

on well-'controlled

sources,

and assign the required

fees to lesswellcontrolled sources, as an incentive

for those sources to further reduce emissions

of ozone-forming pollutants. The alternative

program

should not rely on emissions

reductions

already required

by

For more reformation

on the CAAAC and the proceedings

of the Task Force on section 185 fee programs, visit the following

Web site: htto://www.et•a.•ov/air/caaac/185.htmlthe

applicable

SIP, since the goal is to achieve further reductions

to move the area expeditiously
to attainment.

Additional

Emissions-Equivalent Alternative

Programs

EPA believes

that as an alternative

to the section 185 fee program

a state could adopt a program that achieves

at least as much additional

emissions

reductions

as would be expected

to result from the fee-minimization

incentive

of the section 185 fee program.

EPA believes

this would clearly be demonstrated

if the alternative

program

achieves

emissions

reductions

each year that are equal to or greater than the amount of emissions

against which fees would be assessed each year under the section 185 fee program

(i.e., actual emissions

in excess of 80 percent of the baseline

emissions).

6 For purposes

of estimating

the emissions

reductions

required in such a program,

the state would assume that sources would reduce their emissions

to the fee applicability threshold.

This conservative

approach

would assure that emissions

reductions

from the alternative

program

are at least as great as reductions

that might have occurred

if the statutory fee program

resulted

in all major stationary

sources reducing

their emissions

to no more than 80 percent of the baseline

emissions.

The emissions

reductions

in the alternative

program

could

come t?om the same set of major sources subject to section 185, or from a different

set of sources, in whole or in part, so long as all reductions

come from within the nonattainment

area and are equally beneficial

in reducing

ozone formation.

The alternative

program

should not rely

on emissions

reductions

already required

by the" applicable

SIP, since the goal is to achieve further reductions

to move the area expeditiously

to attainment.

Under this approach,

states would first calculate

the emissions

baseline

for the major stationary sources of VOC and NOx in accordance

with the methodology

required

under CAA section 185(b)(2)

and as further described

in the March 21,2008

guidance

memorandum.

Once

a state calculates

the baseline

amount of each pollutant

for each source affected

by section 185, the amount of emissions

in excess of 80 percent of the baseline

would be the amount of emissions of each pollutant

that sources within the area would need to reduce on a calendar

year basis in each year following

the 1-hour ozone attainment

year until such time as the fee program

no longer applies.

Additional Alternative

Programs

Combininf.

F.mi•sions

Reductions

and Fees

A program

that combines

features

of an emissions-equivalent program

with afeeequivalent program

could also be adopted•

For example,

some portion ofthe emissions reductions necessary

to demonstrate

equivalence

(as explained

above) could be offset by fees collected on each ton of emissions

that is offset. To illustrate,

assume that 1000 tons of emissions reductions

is needed to demonstrate

equivalence.

The state could instead adopt a program that obtains 600 tons of emissions

reductions

and collect fees totaling

$2.0 million (calculated as the remaining

400 tons times $5,000 per ton).

6 A program that achieves less than this amount of emissions

reductions

may also be approvable

depending

on the case-specific circumstances.7

EPA

AssistanceMy officeis

available

to provide any additional

guidance

and to consult with any state that wants to develop

an alternative

equivalent

program

to the section 185 fee program,

For additional consultation

you may contact Denise Gerth, 919-541-5550,ATTACHMENT A Text of CAA Section

185

SEC. 185. ENFORCEMENT

FOR SEVERE

AND EXTREME

OZONE

NONATTAINMENT AREAS FOR FAILURE

TO ATTAIN. (a) General

Rule.-' Each !mplementation

plan revision

required

under section 182 (d) and (e) (relating to the attainment

plan for Severe and Extreme

ozone nonattainment

areas) shall provide that, if the area to which such plan revision

applies has failed to attain the national

primary ambient air quality standard

for ozone by the applicable

attainment

date, each major stationary

source of VOCs located in the area shall, except as otherwise

provided'under

subsection

(c), pay

a fee to the State as a penalty for such failure, computed

in accordance

with subsection

(b), for each calendar

year beginning

after the attainment

date, until the area is redesiguated

as an attainment area for ozone. Each such plan revision

should include procedures

for assessment

and collection of Such fees. (b) Computation

of Fee.- (1) Fe e amount.-

The fee shall equal $5,000, adjusted

in a•cordance

with paragraph

(3), per ton of VOC 9mitred by the source during the calendar

year in excess of 80 percent of the baseline amount, computed

under paragraph

(2). (2) Baseline

amount.-

For purposes

of this section, the baseline

amount shall be computed, in accordance

with such, guidance

as the Administrator

may provide,

as the lower of the amount of actual voc emissions

("actuals")

or voc emissions

allowed

under the.permit

applicable

tO the source (or, if no such permit has been issued for the attainment

year, the amount of VOC emissions allowed

under the applicable

implementation

plan "allowables"))

during the attainment year. Notwithstanding

the preceding

sentence,

the Administrator

may •ssue guidance authorizing the baseline

amount to be determined

in accordance

with the lower of average actuals or average allowables,

determined

over a period of more than one calendar

year. Such guidance may provide

that such average

calculation

.for a specific

source may be used if that source's emissions

are irregular,

cyclical,

or otherwise

vary significantly

from year to year. (3• Annual adjustment.-

The fee amount under paragraph

(1) shall be adjusted

annually, beginning in the year beginning

after the year of enactment,

in accordance

with section 502(b)(3)(B)(v) (relating

to inflation

adjustment). (c) Exception.-

Notwithstanding

any provision

of this section, no source shall be required

to pay any fee under subsection

(a) with respect to emissions

during any year that is treated as an Extension Year under section 181(a)(5), (d) Fee Collection

by the Administrator.-

If the Administrator

has found that the fee provisions of the implementation

plan do not meet the requirements

of this section, or if the Administrator makes a finding that the State is not administering

and enforcing

the fee required

under this section, the Administrator

shall, in addition

to any other action authorized

under this title, collect, in accordance

with procedures

promulgated

by the Administrator,

the unpaid fees required

under subsection (a). If the Administrator

makes such a finding under section 179(a)(4),

the Administrator may collect fees for periods before the determination,

plus interest computed

in accordance with section 6621(a)(2)

of the Internal Revenue

Code of 1986 (relating

to computation of interest on underpayment

of Federal taxes), to the extent the Administrator

finds such fees have not been paid to the State. The provisions

of clauses (ii) through

(iii) of section 502(b)(3)(C) (relating

to penalties

and use of the funds, respectively)

shall apply with respect to fees collected

under this subsection.(e)

Exemptions

for Certain Small Areas.- For areas with a total population

under 200,000

which fail to attain the standard

by the applicable

attainment

date, no sanction

under this section or under any other provision

of this Act shall apply if the area can demonstrate,

consistent

with guidance issued by the Administrator,

that attainment

in the area is prevented

because

of ozone

or ozone precursors

transported

from other areas. The prohibition

applies only in cases in which the area has met all requirements

and implemented

all measures

applicable

to the area under this Act.[42 U.S.C. 751 ld]ATTACHMENT B Inflation Adiustment

for Section

185 Fees

Section 185 cross-references

the methodology

in section 502(b)(3)(B)(v3

of the CAA. This method has been interpreted

for use in determining

permit fees in a 1992 EPA memorandum. (See, Memorandum

of October

15, 1992, from Frank Bunyard,

"Calculating

Fees for Operating

Permits.")

EPA has used this method to calculate

the Part 70 permit fee rate since 1990, and will continue

to update the rate every year in September,

when the August values are available. The adjusted

section 185 fee, then, would be prorated

to that adjusted

permit fee, as shown in Table 1 below, by multiplying

the Part 70 permit fee rate by 200 ($5000/$25).

Since section 185 fees are assessed

on a calendar

year basis, and the inflation

factor is applied in September• the calendar

year fee is determined

as a weighted

average

(8/12 of the fee associated with January

to August,

and 4/12 of the fee associated

with September

to December).

The weighted fees appear in Table 2 below. These will be updated

each year in the fall.

TABLE 1: SECTION

185 FEE RATE BASED

ON PART 70 PERMIT

FEE RATE

Effective Dates.Sept1989-Aug 1990 Sept1990-Au9 1991Sept1991-Au•1992Sept1992-Aug 1993 Sept1993-Au• 1994Se•t1994-Aug 1995 Sept.1995-Aug 1996 Sept1996-Au9 1997 Sept1997-Au 9 1998 Sept1998-Au 9 1999 Sept1999•Aug 2000 Sept2000-Au 9 2001. Sept2001-Aug 2002,

Pact 70 PermitFee Rate*$25.00$26.21

Sect. 185 Fee Rate$5,000.00$5,242.00 $27.59 $5,518.00 $28.43$29.30$30.07$30.93$31.78$32.65$33.21$33.82 $5,686.00$5,860.00$6,014.00$6,186.00$6,356.00$6,530.00$6,642.00$6,764.00 $34.87 $6,974.00 $36.03 $7,206.00 2003 $36.60 Sept2002-AugSept2003,-Au 9Sept2004-AugSept2005,AugSept2006-Au 9Sept2007-Au9Sept2008--Au 9Sept2009=Au 9 2OO4

$37.43 $7,320.00$7,486.00 2005 $38.29 $7,658.00 2006 $39.48 $7,896.00 2007 $41.02$41.96$43.75 200820092010 $43.83 $8,204.00$8,392,00$8,750.00$8,766.00

From www.epa.qov/oar/oaqps/permits/historicalrates.htmlTABLE 2: ANNUALIZED

SECTION

'185 FEE RATE

Sect. 185 Year1990199119921993 Annualized

Sect. 185 Fee Rate $5,080.67$5,334.00$5,574.00$5,744.00 1994 $5,911.33 1995 $6,071.33 19961'997 $6,242.67$6,414.00 1998 $6,567.33 1999 $6,682.67 2000 $6,834.00 2001 $7,051.33 2002 $7,244.00 2003 $7,375.33 2004 $71543.33 2005 $7,737.33 2006 $7,998.67 2007 $8,266.67 2008 $8,i11.33 2009 $8,755.33ATTACHMENT C Response to CAAAC

Task Force Options

EPA's Clean Air Act Advisory

Committee

(CAAAC)

submitted

a letter to EPA dated May 15, 2009, asking whether

"it is legally permissible

under either section 185 or 172(e) for a state to exercise

the discretion

identified"

in 10 bullet points listed in an attachment

to the letter (see Attachment

D). In general,

we believe the language

in section 185 is relatively

clear regarding the provisions

that must comprise

an approvable

program

and, as indicated

in the discussion below, we do not believe that many of the flexibilities

raised by the CAAAC

would be approvable

provisions

of a state-adopted

section 185 fee program.

However,

EPA believes that an alternative

program

that contains

some of these flexibilities

may be acceptable

if it is Consistent with the principles

of section 172(e) of the CAA, which allows EPA through rulemaking to accept alternative

programs

that are "not less stringent"

where EPA has revised the NAAQS.

Although

the anti-backsliding

provisions

of section 172(e) facially apply only where EPA has revised the NAAQS

to make it less stringent,

in its implementation

rule governing the transition

from the 1-hour ozone standard

to the more stringent

1997 8-hour standard, EPA concluded

that it made sense to rely on the governing

principles

in section 172(e). Applying this principle

for the transition

from the 1-hour standard

to the 1997 8-hour ozone standard, EPA can either require states to retain a specific program

that applied for purposes

of the 1-hour standard,

or alternatively

can allow states flexibility

to adopt alternative

programs,

but only if such alternatives

are "not less stringent"

than the mandated

program

EPA has not yet concluded whether

to apply the principles

of section 172(e) to any future transitions

from the 1997 ozone NAAQS

to any new or revised ozone NAAQS.

Consistent with the preceding

distinction

between

a section 185 fee program

and an alternative program

that is "not less stringent,"

we address each of the 10 points separately below.

.Point A asks whether

a state may "authorize

multi-facility

operators

to aggregate emissions from commonly-owned

and -operated

facilities

within a single nonattainment

area for the purpose

of calculating

the fee." We have defined "major stationary

sources"

in many contexts and have interpreted

that definition

in certain circumstances

to allow for aggregation

of

sources. We anticipate

that we would be able to approve

a section 185 fee program

SIP that relies on a definition

of "major stationary

source" that is consistent

with the CAA as interpreted in our existing

regulations

and policies.

Point B asks whether

a state "may permit major sources to aggregate

their VOC and NOx emissions on a site-wide

basis in calculating

the fee" and includes

a description

of certain limitations that would be assumed

for such aggregation.

Provided

that aggregation

is not used to avoid a "major source" applicability

finding,

and aggregation

is consistent

with the attalamen! demonstration (e.g., if the area has received

a NOx waiver under section 182(f), then NOx reductions cannot be substituted

for VOC reductions),

we believe states have discretion

to allow

a major source to aggregate

VOC and NOx emissions.

Points C and D Concern

whether

states may allow a discount

for certain "pre-attalnment
year or attainment

year" controls.

We do not believe that section 185 allows for any such

C-]consideration. The statutory

language

is clear that the baseline

emissions

are the lower of the actual emissions

or emissions

allowed

under the applicable

permit during the attainment

year or allowed under the SIP during the attainment

year where there is no such permit.

The only exception to this calculation

for baseline

emissions

is where a source's

emission

are "irregular, cyclical or otherwise

vary significantly

from year to year." EPA has previously

issued guidance addressing this exception.

Although

consideration

of these controls

is not consistent

with the express terms of section 185, states may be able to develop

a "no less stringent"

program consistent with the principles

in section 172(e), taking into consideration

such pre-attainment controls See discussion

of point I below.

Point E asks whether

the purchase

of emission,reduction

credits, or allowances,

that are part of an area's attainment

control measures

"may reduce the amount of emissions

upon which the fee is based or constitute

an investment

that should be credited

against the fee." In the context of calculating

both the attainment-year

baseline

emissions

and the post-attainment

year emissions, section 185 requires

such. emissions

be the lower of actual or allowable

emissions. We believe allowable

emissions

can include emission

reduction

credits or emissions

allowances held by a source subject to fees. Whether

holding the emissions

allowances

will affect a source's fee obligation

depends

on the amount that is determined

to be the lower of actual or allowable emissions for that source.

If states wish to provide

some other form of credit for sources that purchase market-based

control measures,

they may be able to do so in the context of a program that is no less stringent

than a section 185 program

consistent

with the principle

in section 172(e). See discussion

of point I below.

Point F asks whether

sources may receive credit for post-attainment

year emissions reductions or air quality investments.

The Act is clear that post-attainment

year emission reductions will be credited

to the extent that they reduce emission

levels from the baseline

year. For example,

ifa source has 1000 tons of emissions

in the attaimnent

"baseline"

year, the CAA requires that source to.pay fees on any emissions

in excess of 800 tons (80 percent of baseline)

in each post:attainment

year. If the source is able to reduce post-attainment

year emissions

from 1000 tons to 900 tons, then the source will pay fees on only 100 tons of emissions.

With regard to crediting

emission-reducing

or mr-quality

investments,

we note that section 185 does not specify how collected

fees must be spem. In general,

we believe that a state may choose to use collected fees to support air quality improvement

projects

at sources

However,

we caution that any such provisions

should not be developed

in a way such that the provisions

would appear to defeat the purpose

of section 185, which is to encourage

emission

reductions

that will bring the

area into attainment

with the ozone NAAQS

in the near-term

Point G asks whether

post-attainment

year new sources must be subject to the fees. We believe it is clear that the fee imposed

is on major sources.

Thus, to the extent a "new source" is considered a part of a major source that existed in the attainment

year, the emissions

from the

new source must be considered

as emissions

from that major source.

For new major sources that

are not part of existing

major sources,

we believe section 185 does not provide a clear interpretation of the source's

fee obligation.

Therefore,

we believe states have discretion

in determining how fees apply to these sources.

States should consider

that section 185 requires "each major stationary

source" to pay a fee; however,

the baseline

amount for sources that did
not have a permit in the attainment

year is calculated

according

to what the SIP "allowed"

during

C-2the

attainment

year. Therefore,

states should examine.how

the applicable

SIP addressed emissions from potential

new major sources in the attainment

year. For example,

a state could determine that the SIP's new source review (NSR) requirements

would provide

that a new source employ emissions

control that meets the requirements

of "lowest achievable

emissions

rate" (LAER). Therefore,

the attainment-year

baseline

for a new source is the level allowable

after application of LAER. Alternatively,

a state could determine

the SIP's NSR requirements

would provide that a new source's

net emissions

impact be no greater than zero (i.e., emissions

levels after application

of LAER must be offset at a ratio of at least 1 to 1). Therefore

theattainmentyear baseline

for a new source is zero, subjecting

the entire amount of a source's

post-attainment year emissions

to. the per-ton emissions

fee. Also, states may be able to develop

"not less stringent" programs

consistent

with the principles

in section 172(e), that exempt new major

sources from fees, provided

the alternative

programs

meet the 172(e) standard

of equivalence. See discussion

of point I below.

With regard to Point H, which references

state discretion

regarding

the use of collected fees, we point to ourresponse

above for Point F.

Point I asks whether

section 172(e) authorizes

a state todevelop

an alternative

program

to that mandated

under section 185. As an initial matter, we note that section 172(e) does not directly apply here, where we are transitianing

from the 1-hour ozone standard

to the more stringent 1997 8-hour standard.

However,

in developing

our anti-backsliding

rules in the Phase Rule for Implementing

the 8-hour Standard

(69 FR 23951, April 30, 2004), we indicated

that although section 172(e) did not.directly

apply, we were relying on the principles

in section 172(e), as well as other indications

of Congressional

intent, in developing

our anti-backsliding rules. In South Coast Air Quality Management

District v. EPA, 472 F.3d 882 (D.C. Cir. 2006), the Court rejected

our waiver of the section 1.85 fee program

for the 1-hour standard,

holding that such program

was a "control

applicable"

t6 the area as that phrase is used in section 172(e) and thus must be retained

under EPA's decision

to apply section 172(e) to the transition

from the 1- hour standard

to the more stringent

8-hour standard.

Not before the Court was the issue of the remaining language

in section 172(e) that provides

that EPA "shall promulgate

reqmrements to provide for controls

which are not less stringent

than the controls applicable

to areas designatednonattainment before such relaxation."

EPA believes

that this language

clearly alloWs EPA by regulation

to accept alternative

control programs

that "are not less stringent"

than those that were.mandated

by the Act for the standard

that has been replaced

(i.e., the 1-hour standard).

Point J requests

that EPA "clearly

indicate the Conditions

under which the collection

of fees may be terminated."

Furthermore,

it indicates

that some members

of the task force "would like the authority

to terminate

the section 185 fee program

upon the first year in which an area achieves the relevant

standard."

EPA believes

that for an area EPA determines

throughnoticeand-comment rulemaking

is attaining

either the 1-hour or 1997 8-hour ozone NAAQS

based on permanent and enforceable

emissions

reductions,

the area would no longer be obligated

to submit a fee program

SIP revision,

nor be obligated

to continue

implementing

a section 185 fee program (or approved

alternative

equ!valent

program).

The bases for EPA to make such a determination through

notice-and-comment rulemaking

are provided

in the memorandum associated with this Attachment.

C-3ATTACHMENT D CAAAC Letter

United States Environmental

Protection

Agency Clean AirAct

Advisory

Committee May 15, 2009

The Honorable

Elizabeth

Craig Acting Assistant

Administrator Office of Air and Radiation U.S. EPAAriel Rios North 1200 Pennsylvania

Avenue,

N.W. Mail Code 6101AWashington, DC 20460

Re: Clean Air Act Sections

185 and 172(e)

Dear Assistant

Administrator

Craig:

At the May 14, 2009 meeting of the US EPA Clean Air Act Advisory

Committee,

on a unanimous vote, the Committee

resolved to urge the Agency to provide prompt guidance

to the States regarding the following

question arising under the Clean Air Act:

ls it legally permissible

under either section 185 or 172(e) for a State to exercise the discretion

identified

in Options A-J?

The Clean Air Act Section 185 Task Force, a work group established

under the Clean Air Act Advisory Committee,

identified

ten areas (A-J) of potential

state discretion.

These options are listed in the attachment

to this letter. The Committee

took no position on the reasonableness

or legal permissibility of any option.

As several States are in the process of developing

their section 185 nonattainment

fee programs, time is of the essence in providing

appropriate

legal and policy guidance.

Thank you sincerely,

Co-Chairs of the Section 185 Task Force:

Eddie TerrillDirectorDepartment of Environmental

Quality Air Quality Division 707 North Robinson Oklahoma City, OK 73101 1677 Robert A. Wyman Latham & Watkins LLP 355 South Grand Avenue Los Angeles,

CA 90071A. Aggregation

of Emissions

Among Commonly-Owned

Facilities

At its option, a State may authorize

multi-facility

operators

to aggregate

emissions from commonly-owned

and -operated

facilities

within a single nonattainment

area for the purpose

of calculating

the fee.

B. Aggregation

of VOC and NOx Emissions

At its option, a State may permit major sources to aggregate

their VOC and NOx emissions on a site-wide

basis in calculating

the fee to the extent such aggregation is consistent

with attainment

modeling

previously

submitted

by the State for the applicable air quality control region. Such aggregation

is not to be used for the purpose of avoiding

a "major source" applicability

finding (e.g., by spreading emissions over multiple

sources so as to render the average facility emissions

less than the major source threshold).

Consideration of Pre-Attainment

Year or Attainment

Year Installation

of BACT

or LAER

At its option, a State may consider

to an appropriate

extent pre-attainment

or attainment year emission

control investments

by major sources.

Without intending to define the precise boundaries

of a State's discretion

to recognize

the degree of control already achieved

by a source, the participants

determined

that

sources that had recently

(e.g., within five (5) years of the year for which the fee would be imposed)

undergone

new source review and, as a result, installed

BACT

or LAER, should not be required

to include emissions

from such equipment

•n calculating the fee.

Consideration of Pre-Attainment

Year or Attainment

Year Installation

of Retrofit Controls.

In addition,

at its option under appropriate

circumstances,

a State may designate emission performance

standards

that it has determined

represent

well-controlled (e.g., in the range o•or superior

m BACT or LAER) units for a given period Of time and authorize

a facility to demonstrate

what portion of its emissions

should be excluded

from the fee calculation

on that basis.

E. Consideration

of Market-Based

Programs

At its option under appropriate

circumstances,

a State may determine

that purchases of emassion

reduction

credits, or allowances,

as part of a State's market-based attainment

controlmeasure

may reduce the amount of emissions upon which the fee is based or constitute

an investment

that should be credited against the fee.F. Credit Sources

for Post-Attainment

Year Emissions-Reducing or Air Quality Investments

At its. option, a State should recognize

and appropriately

credit qualifying

postattainmem year emissions-reducing

or air quality-beneficial

investments

by major

sources. These investments

should be credited

to such sources in a manner that reduces or eliminates

fees that otherwise

would be due under the program.

States should identify the qualifications

for such investments

based on their unique attainment needs.

Post-Attainment Year New Sources

There was agreement

that new sources constructed

after the attainment

year would not have a baseline;

would already have installed

BACT or LAER, would already have provided

offsets• and •herefure

should not be subject to the fee for such equipmem

Use of Program

Revenues

States retain full discretion

regarding

the use of collected

revenues.

Participants encouraged States to tailor strategies

to their unique attainment

challenges

and to consider ways to address under-regulated

sources (e.g., legacy vehicles

and engines and certain area sources). Equivalent Programs

Under section 172(e), a State should have the option of collecting

equivalem

or greater fees, or of requiring

equivalent

or greater emission

reductions,

by shifting the program

target in part or in whole to under-regulated

sources (e.g., legacy vehicles and engines,

under-regulated

area sources)

or by applying

the program

in

a manner that addresses

other attainment

gaps. Likewise,

the task force enwisioned that any recommended

strategy not directly approvable

under Section 185 should be considered

as an equivalent

alternative

program

under 172(e). In such circumstances,

the state may need to shift the fee burden among sources to demonstrate equivalency. Program Sunset

EPA needs to clearly indicate

the conditions

under which the collection

of fees may be terminated.

Some members

of the taskforce

would like the authority

to terminate the section 185 fee program

upon the first year in which an area achieves the relevant

standard.