UNITED STATES ENVIRONMENTAL PROTECTION AGENCY REGION10 1200 Sixth Avenue Seattle, W a shington 98101

ReplyTo Attn Of : OAQ-IO7 Grant Cooper Frederickson Power LP 1333 W e st Georgia Street Vancouver, British Colum b ia Canada V6E 3K9
Raym ond McKay EPCOR Power Developm ent 10065Jasper Avenue Edm onton, Alberta T5J 3B1 Canada OCT 12 2001

Subject: PSD Applicabilityf o r Frederickson Power L.P. Dear Mr. Cooper and Mr. McKay: This letter is in response to the Preston Gates & Ellis letter of June 22, 2001, written to the State of W a shington Departm e nt of Ecology (Ecology) on behalf of Frederickson Power and EPCOR Power Developm ent (EPCOR), In addition to constructing a 249 m e gawatt (MW ) power generation facility (current project) at a site in Frederickson, W a shington, the com p anies are considering the construction of an additional com b ined cycle com bustion turbine project (proposed project) of less than 350 MW on the sam e property. It is our understanding that the proposed project will be constructed sufficiently close to the current project such that the two projects will be considered one stationary source given their comm on ownership and Standard Industrial Classification (SIC) code.

The United States Environm ental Protection Agency (EP A) has concluded that it is perm issible to perm it the proposed project separately from the current given the facts of this situation as discussed below. In particular, th e fact that both projects would likely be required to install the sam e pollution control technolo gy regardless of perm itting process (m inor NSR vs PSD) significantly dim i nishes any potential environm ental benefit that would otherwise be gained by perm itting the projectstogether through PSD. Moreover, the fact that Ecology' s m i nor NSR and PSDprogram s both require the insta llation of BACT does not provide EPCOR an incentive to intentionally space out the projects so as to circumvent PSD.

-1-Background The current project was originally developed by TenaskaW ashington Partners (Tenaska) to supply electricity to the Bonneville Power Adm i nistration (BPA) as part of BPA' s 1991 Com p etitive Acquisition Program

. The two parties entered into a power-purchase agreem ent in April 1994. Prior to the agreem ent, BPA conducted an extensive environm ental review of the project and subsequently issued an environm ental im pact statem ent in January 1994. The Puget Sound Clean Air Agency (PSCAA), the local perm itting authority, issued Tenaska a synthetic
m i nor New Source Review (NSR) perm it on April 14, 1994. Construction of the current project comm e nced in Septem ber 1994 with the intent of starting up the project by fall 1996. In June 1995, however, after only 40 percent of the project
was com p leted, construction was suspended when BPA withdrew from its agreem ent to purchase power from Tenaska. After protracted litigation and subsequent arbitration, Tenaska transferred the partially com p leted project to BPA in March 1998.

In Decem ber 1999, Frederickson Power entered into an asset purchase and sale agreem ent with BPA which would allow com p letion of th e original project. Before construction was allowed to recomm e nce, however, Frederickson Power was required to obtain a synthetic m i nor NSR perm it from PSCAA, which it did, on April 25, 2000. The m i nor NSR perm it lim its individual criteria pollutant em issions from the current project to less than 100 tons per year. As of May 1,2001, construction of the current project was 60 percent com p lete and engineering 99 percent com p lete. The project is expected to be in comm e rcial operation by July 2002. In light of the recent Northwest energy crisisl, Frederickson Power is considering constructing another com b ined cycle com bustion turbine project near the current project, which is already under construction. The proposed project would operate separately from the current project as illustrated by the f act that the two projects would not share the sam e transm ission line, fuel supply contracts, power sales contracts, ga s m e tering stations, or connections to water and wastewater system s. Frederickson Power is requesting a Preven tion of Significant Deterioration (PSD) applicability determ ination from EPA and Ecology as to whether the proposed project can be perm itted separately f r om the current project f o r purposes of construction authorization. Separating the projects in such a m a nner would allow the existing m i nor NSR perm it to rem a in in place and would require Frederickson Power and/or EPCOR to obtain a separate synthetic m i nor NSR perm it for the proposed project. Com b ining the projects would essentially nullify the existing synthetic m i nor perm it and would require one PSD perm it for both projects together. Generally, PSD perm itting is m o re rigorous than m i nor NSR perm itting. A PSD perm it, unlike a typical m i nor NSR perm it, requires the insta llation of Best Available Control Technology

l January 26,2001, Proclam a tion by the Governor; Gary Locke, of the State of W a shington declaring an energy supply alert, m o st recently extended through October 22,2001.

-2-(BACT) and an am bient im pact analysis dem onstrating not only protection of the National Anm b ient Air Quality Standards, but also acceptable increm ent consum ption and protection of Air Quality Related Values in Class I areas. Notably in W a shington, however, Ecology' s m i nor NSR program requires all sources to install BACT and thereby results in one of the environm ental protections that is required under PSD perm itting.

Discussion EP A has issued several guidance docum ents that relate to the issue of whether two projects that are located near each other and undertaken within a relatively short tim e fram e m a y be perm itted as two m i nor sources, or whether it is appropriate to obtain a single PSD perm it f o r the projects 2

. Those guidance docum ents em phasize the im portance of evaluating a source' s intent - specifically, whether the source intends to circumvent PSD perm itting - in undertaking two such projects. As stated in the October 1986 m e m o : In the extreme case where the source has made a deliberate effort to circumvent PSD review (by the systematic construction of carefully sized emiss'ions units which only in the aggregate would trigger review) a permitting agency may, however, make a finding that PSD applies to the total plant. Such a finding would have to be based on clear evidence that the source made a conscious effort to escape review by knowingly misrepresenting the intended source size through the calculated juggling of actual and sche duled construction of emission units.

The June 1989 Federal Register notice along with m e m o s addressing "Potential to Em it" and the June 1993 3M Mem o provide specific criteria for perm itting and enforcem ent authorities to apply when evaluating whether a source intends to circumvent m a jor NSR through the m i nor NSR perm itting process. An outline of the criteria is presented here along with a case-specific
assessm ent.

1. Filing of More than One Minor Source A pplication Associated w i th Emissions Increases at a Single Plant Within a Short Time Period

As stated in the June 1993 3M Mem o :

2 EPA Guidance on this topic includes: October 21,1986, m e m o entitled, "Applicability of PSD to Portions of a Plant Constructed in Phases W ithout Perm its" (October 1986 Mem o ); June 13, 1989, m e m o entitled, "Lim iting Potential to Em it in New Source Perm itting"; June 28, 1989, Federal Register Notice Prom ulgating Revisions to 40 CFR Parts 51 and 52, 54 Fed. Reg. 27274, 27280-27281 (June 1989 Federal Register Notice); Septem ber 18, 1989, m e m o entitled, "Request for Clarification of Policy regardi ng the Net Em ission Increase"; October 1990 Draft NSR W o rkshop Manual, pages A.36 & A.37; June 17,1993, m e m o entitled, "Applicability of New Source Review Circumvention Guidance to 3M - Maplewood, Minnesota." (June 1993 3M Mem o ).

-3-If a source files for more than one minor s'ource permit application simultaneously or within a short time period of each other, this may constitute strong evidence of an intent to circumvent the requirements of preconstruction review. Authorities should scrutinize applications that relate to the same process or units that the source files either before initial operation of the unit or after less than a year of operation. Although Tenaska obtained the original plant perm it from PSCAA in April 1994, Frederickson Power subm itted its m i nor NSR application f o r the current project to PSCAA in October 1999. W e find it appropriate only to consider the tim e fram e in which Frederickson Power becam e actively involved at the plant. W e are assessing Frederickson Power' s intent in October 1999 and not Tenaska' s intent in 1994. Frederickson Power is now considering subm itting another application f o r additional power generation approxim a tely 24 m onths af ter the application for the current project and before the current project finishes construction. Thus, this second perm it is being requested outside, but close to, the short tim e fram e characterized by previous EPA guidance as less than 18 m onths. See June 1993 3M Mem o

. It is our estim ation that the f r equency of m a jor construction perm itting at a typical power plant spans well beyond two years given the historical stability in the m a rket. However, recent dram atic and unanticipated fluctuations in wholesale energy prices in the W e stern United States have understandably m o tivated wholesale energy producers to react quickly to favorable m a rket conditions. In the Pacific Northwest alone, thousands of m e gawatts are being developed in a few
m onths after years of inactivity. Frederickson Power has provided evidence3 stating, "[The proposed project] is being developed prim arily in response to the energy crisis that has em erged in the Pacific Northwest over the past severa l m onths." Because the unanticipated shift in
m a rketplace conditions could certainly justify the com p anies' shortened perm itting cycle and
m i nor NSR perm itting approach, we believe the 24-m onth span between the two applications is a reasonable tim e period supporting separation of the projects. However, we proceed with our review of other criteria to ascertain the com p anies' intent when applying for the current project' s perm it because a 24-m onth span is relatively short.

2. Applications for Funding

As stated in the June 1993 3M Mem o : Applications for commercial loans, or, for public utilities, bond issues, should be scrutinized to see if the source has treated the projects as one modification for financial purposes. 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) without the other projects, this should be considered evidence of circumvention.

3 May 8,2001, Declaration of Harvie Cam pbell before the State of W a shington Energy Facility Siting Evaluation Council in support of petition for declaratory order.

-4-Frederickson Power has not applied for a comm e rcial loan to fund the current project. According to a certified statem ent 4 of Mr. Brian Vaasjo, Executive Vice President of EPCOR, "The [current] project has, to date, been selffinanced." Docum e ntation unrelated to Frederickson Power' s f i nancing illustrates the f i nancial independence of the two projects. Mr. Harvie Cam pbell, Vice President of W e stcoast Power Inc. (parent com p any to Frederickson Power), provided a sworn declaration (Declarati on) to the State of W a shington Energy Facility Site Evaluation Council (EFSEC) in May 2001, related to the purchase, perm itting and construction of the current project along with the initiation of the proposed project. In his Declaration, Mr. Cam pbell provides evidence of the com p anies' original intent to solely develop the current project, and he speaks to the econom ic viability and independent nature of the projects. Mr. Cam pbell states: Frederickson Power did not plan to develop a second unit when it purchased and repermitted the existing Frederickson Project. We acquired the Frederickson Project on a stand-alone basis. Its' economic and technical feasibility were evaluated and found desirable on the assumption that it would be the only unit on the parcel. The existing Frederickson Project and any second unit will be designed and planned as separate facilities. Planning, design and approval of construction of the Frederickson II Project will not affect the construction and initiation of operation of the Frederickson Project. The existing Frederickson Project and the proposed Frederickson II Project would have separate gas metering stations. Although the natural gas lateral from Northwest Pipeline has the capacity for the Frederickson II Project, the fuel metering station does not. Therefore, a second metering stations would have to be designed and installed. Thus, the evidence before the agencies supports the conclusion that there was no intent to construct the proposed project when Frederickson Power purchased the current project. No one has presented inform ation contrary to our conclusion. In addition, in com i ng forward to the agencies and explicitly requesting clarif ication relating to proper perm itting of the existing and proposed project, the com p anies em phasized their concern that nothing interfere with the uninterrupted com p letion of the current proj ect. The current project is unquestionably
econom ically independent and can operate even if the proposed project is never constructed.

3. Reports on Consumer Demand and Projected Production Levels

As stated in the June 1993 3M Mem o ,

4 Undated certification statem ent of Brian Vaasjo concerning existing loan docum ents for Frederickson Power L.P.

-5-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. Frederickson Power has entered into power purchase agreem ents 5 with three public utilities for the sale of 125 MW -hours; well below the 249 MW generating capacity of the current project. According to Mr. Cam pbell' s D eclaration, neither project' s production level will be influenced by the other given the likelihood of separate contracts with generally different custom ers. Mr. Cam pbell states: Separate power sales contracts would be negotiated and entered into for the Frederickson II Project. Although there may be s'ome overlap in the power customers of the Frederickson II Project and the Frederickson Project, the two facilities will probably serve different customers for the most part. Thus, there is no evidence that the proposed project is required to fulfill Frederickson Power' s power generation obligations with respect to the current project.

4. Statements of Authoriz ed Representatives of the Source Regarding Plans for Operation

As stated in the June 19933M Mem o : 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.
In his Declaration, Mr. Cam pbell speculates as to the plans for the proposed project. Mr, Cam pbell states: Westcoast and EPCOR are both interested in participating in the Frederickson II Project if it goes forward. It is also possible that a third partner could be brought into the partnership. No decisions have been made about ownership of the Frederickson II Project. However, the Frederickson Project and the proposed

5 March 26, 2001, Wholesale Power Purchase and Sale Agreem ent by and between Frederickson Power L.P. and P.U.D. No. I of Gray Harbor County, W A ; March 27,2001, Wholesale Power Purchase and Sale Agreem ent by and between Frederickson Power L.P. and P,U.D. No.1 of Benton County, W A ; March 27,2001, Wholesale Power Purchase and Sale Agreem ent by and between Frederickson Power L.P. and P.U.D. No.1 of Franklin County, W A

-6-Frederickson II Project would probably be owned and operated by different legal entities. The proposed project is still in its earliest phases of developm ent as it has not yet even been determ ined who will own and operate the proposed project. Based upon the inform ation available, we have no evidence of an intent by Frederickson Power to circumvent the PSD perm itting process.

Conclusion

As stated in the June 1989 Federal Register notice, a source' s intent is central to an evaluation of whether two projects m a y be perm itted under two m i nor source perm its or whether they m u st be perm itted undera single PSD perm it. See 54 Fed. Reg. at 27228. It is our finding that no clear evidence exists dem onstrating an intent by Frederickson Power and/or EPCOR to circumvent PSD perm itting. Based upon our reviewof the facts andperm itting history of the projects, the com p anies m a de no deliberate effort to circumvent PSD review. Given our findings noted above, the tim ing of the projects, and the certainty that both projects would be required to install the sam e pollution control technology regardless of perm itting process, EP A advises that the projects m a y be perm itted separately. Our conclusion is founded upon the record presented to EPA. Sincerely,

Doug Cole, Acting Manager Federal & Delegated Air Program s Unit

cc: Bernard Brady, P.E., Ecology Kirk A. Lilley, Preston Gates & Ellis, LLP Steven M. Van Slyke, P.E., Puget Sound Clean Air Agency

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