UNITED STATES ENVIRONMENTAL PROTECTIONAGENCY RESEARCHTRIANGLE PARK, NC 27711

OFFICEOF AIR QUALITY PLANNING AND STANDARDS 

### MEMORANDUM

SUBJECT: Guidance on DevelopingFee Programs Required by Clean Air Act Section 185 for the 1-hour OzoneNAAQS



### FROM: Stephen D. Page, Director Office of Air Quality Planning and Standard



### TO: RegionalAir DivisionDirectors, Regions I-X



### Section 185of the Clean Air Act (CAA) reauires states with ozonenonattainmentareas

, A 

### classified as Severe or Extremeto develop, as a revision to their stateimplementationplan (SIP),

a fee collection rule to be implemented in the eventthat an area fails to attain the ozone standards by the required attainment date.' This memorandumprovides additional guidance on fee collection programs for the 1-hourozoneNational Ambient Air Quality &dard (NAAQS or standard),which are required as anti-backsliding measures during transitionto the 19978-hour ozone standard.

Avvlicabilitvof Section 185 to OzoneNAAOS Nonattainment Areas

The section 185fee program requirement appliesto any ozone nonattainment areathat is classified as Severe or Extremeunder theNAAQS, including any area that was classified Severe or Extremeunder the l-hour ozoneNAAQS as of the effective date of the area's 8-hour de~i~nation.~ The EPA had previouslywaived the section 185 feeprogram requirements applicable under the revoked 1-hourozone NAAQS in rules issuedto address thetransition from the 1-hourstandard to the 1997 8-hour ~tandard.~ However, on December 23,2006, the United StatesCourt ofAppeals for the District of Columbia Circuit issued an opinion determining that EPA improperlywaived the applicationofthe section 185feeprovision for Severe and Extreme nonattainment areasthat failed to attainthe 

### 1-hourozone standardby their attainment date. South CoastAir Oualitv 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 SIPSfor nonattainment areas initially classified as Severe or Extreme forthe I-hour ozone standard be submitted to EPA by December 31,2000 (see CAA section 182(d)(3)). Areas subsequently reclassified as Severe or Extremehave a SIP submission date as determined by EPA. The I-hour ozone NAAQS were established in 1982and revoked on June 15,2004for most areas. The &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 reconsiderationby August 31,2010. See 69 Fed Reg 23951 (April 30,2004).

InternetAddress (URL) http://w.epa.gov Recycl.dlReeyclable .Printedwlh Vegetable 011 BasedInks on Rec/cled Papr (Mlnlmum25% Postconsumer)Sumniarv of Section 185 Requirements

In the event that a nonattainnient area classified as Severe or Extreme fails to attain the ozone standard by the required date, section 185oftheCAA requires each major stationary

source of volatile organic compounds (VOC) and nitrogen oxides (NOx)" located in such area to pay a fee to the state for each calendar year following the attainment year for emissions 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 (C1'1) on an annual basis. Attachment 

### I3 sets forth the fees, as adjusted for inflation, for the years 1990-2009.

The CAA provides that the coniputation 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 onthe calculation of the "baseline amount" as the lower of the average actual emissions or 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 froni year to year." Accordingly, on March 21,2008, EPA issued a memorandum entitled "Guidance on Establishing Emissions Baselines under Section 185 ofthe CAA for Severe and Extreme Ozone Nonattainment Areas that Fail to Attain the 1-hour Ozone NAAQS by their Attainment Date."

'She 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 tlie 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 froni 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 prograin, 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 185is 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. 

### &, CAA sections 185(d) and 502(b)(3)(C).

Alternatives to Section 185 17ecProaranis

As a result ofthe 2006 court decision in South Coast, states with areas classified as Severe or Extreme nonattainrnent for the 1-hour ozone standard at tlie time of the initial nonattainment designation for tlie 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

4 While section 185 expressly mentions only VOC, section I82(t) extends the application of this provision to NOx, by providing that "plan provisions required under [subpart Dl for major stationary sources of [VOC] shall also apply to major stationary sources

... of [NOx]."

### below. EPA believes that an alternativeprogram may be acceptable 

### ifit is consistent with the principles ofsection 172(e)ofthe CAA,which allows WA throughrulemaking to accept alternativeprograms that are "not less stringent" where EPA has revised the NAAQS to malte it less stringent. 'Thisdiscretiondoes not currently apply to asection 185

### feeprogram obligation arisingfromfailure to attain the 1997 8-hour ozoneNAAQS by the attainmentdate associated with 

### a Severe or Extreme classification for thatNAAQS because thatNAAQS has not been revoked.

Section 172(e)

### is an anti-backslidingprovision ofthe CAAthat requires EPA to develop regulations to ensure that controls are "not less stringent" than those that appliedprior to relaxing

astandard wl~ere EPA has revised a NAAQS to make it less stringent. In the implementation rulefor the 1997 ozoneNAAQS, EPA determined that although section 172(e)does not directly apply where EPA has strengthened theNAAQS,as it did in 1997,it was reasonable to apply the same principle for the transition from the I-hourNAAQS to the 1997 8-hourNAAQS. As part 

### ofapplying theprinciple in section 172(e) forpurposes ofthe transitionfrom the 1-hourstandard to the 1997 8-hour standard, EPA can either require states to retainprograms that appliedfor purposes ofthe 1

### -hour standard, or alternatively can allow statesflexibility to adopt alternative programs, but only 

### ifsuch alternatives are "not less stringent" than the mandated program.

EPA 

### is electing to consider alternativeprograms to satisfy the section 185

### feeprogram SIP revision requirement. Theremainder ofthis memorandum describes the circumstances under which we believe we can approve an alternativeprogram that 

### is "noless stringent." These interpretations will only befinalized through EPA actions taken under notice-and-comment rulemaking to address ihefeeprogram obligations associated with each applicable nonattainment

area. If

### a state chooses to adopt an alternativeprogram to the section 185

### fee program, the state must demonstrate that the alternativeprogram is no less stringent than the otherwise applicable section 185

### feeprogram. 

### Ifourpreliminary assessment indicates that the alternativeprogram is not less stringent,we would issue anotice in the Federal Registerproposing to make such a determinationat the same time wepropose and take action on any accompanying SIP revision pursuant to section 1 

### lO(k).

EPA believes thatfor an area that we determine 

### is attaining either the 1

### -houror 1997 8- 

### hour ozoneNAAQS, based onpermanent and enforceable emissions reductions,the area would

no longer be obligated to submit 

### afeeprogram SIP revisionto satisfythe anti-backsliding requirementsassociated with the transition from the 1-hour standard to the 1997 8-hourstandard. In such cases an area's existing SIP 

### should be considered an adequate alternativeprogram. Our reasoningfollows from thefact that an area's existing SIP measures,in conjunctionwith other eliforceable federal measures,are adequate for the area to achieve attainment, which 

### is the purpose ofthe section 185

### program. The section 185

### feeprogram 

### isan element ofan area's attainment demonstration,and its object 

### isto bring about attainmentafterafailure ofan area to attain bv its attainment date. Thus. areas that have attained the 1-hour standard. the standard for which thefeeprogram was originally required,

### as aresult of permanent and enforceable emissions reductions,would have a SIP 

### that is not less stringent than the SIP 

### required undei section 185. 

### Also, once an area attains the 1997 8-hour ozok standard, which replaced the now revoltcd 1-hour standard, thepurpose ofretaining the section 185

### fceprogram as an antibacksliding measure would also befulfilled 

### as the area would have attained the 8-hour standard

### for which thefeeprogram was retained 

### as 

### a transition measure. Webelieve that it would unfairlypenalize sources in these areas to require thatfees bepaid afteran area has attained the 8-hour standard due topermanent and enforceable emission reductions because thefees were imposed due to afailure to meet the applicable attainment deadline for the 1-hour standard, not anyfailure to achieve the now applicable 8-hourstandard by its attainment date. Similarly,for the reasons,described above,areas that must still develop and submit 

### afeeprogram may submit

an alternative thatprovides that thefees end at the time that the area attains either the 1-houror 1997 8-hourstandard due to the existenceof permanent and enforceablemeasures.
'Tllereis also an additional, independentbasis for EPA'sapproach to determining that the anti-backsliding requirements associated with section 185 

### have been satisfied. Altl~ough section 185

### provides thatfees are to continue until the area is redesignated for ozone,EPA no longer promulgates redesignationsfor the I-hour standard because that standard has been revoked. Therefore, relief from the1-hourfeeprogram requirements under the terms ofthe statute is an impossibility,since the conditions the statute envisionedfor relieving an area ofits feeprogram obligationno longer can exist. There 

### is, thus,agap in the statute whichmust befilled by EPA. Webelieve that under these circumstances we must exercise our discretion under ChevronIJSA, Inc. v.Natural Resources Defense Council,467 U.S.837 (1984),tofill 

### this 

### gap, so as to carry out Congressional intent in the unique context ofanti-backsliding requirementsfor a revolted standard. Webelieve that it is reasonablefor thefeeprogram obligation that appliesfor purposes ofanti-backsliding to cease upon 

### a determination,based on notice-and-comment rulemaking,that an area has attained the I 

### -hour or 8-hour standard due topermanent and enforceable measures. This determination centers on core criteria for redesignations under CAA section 107(d)(3).Webelieve thesecriteria provide reasoilable assurance that thepurpose ofthe I 

### -hour anti-bacltslidingfeeprogram obligation has beenfulfilled in the context of a regulatory regime where the area renlains subject to other applicable 1-houranti-backsliding and 8-hour measures. Underthese circumstances,retention ofthefeeprogram under the anti-backsliding rule is no longernecessaryfor thepurpose ofachieving attainment ofthe 8-hourstandard.

Additional Potential Eauivalent Alternative Program Concepts
Following is asummary ofconceptsfor additional alternativeprograms that 

### a state might consider ifall I-hour nonattainrnent areas subject to the section 185

### feeprogram anti-backsliding requirementswithin that state are not eligiblefor the EPA detemination setforth in the section above,and/or

### ifthe state chooses to develop another alternativeprogram that is no less stringent than 

### a section 185

### feeprogram. Whilesection 185

### focuses most directly on assessing emissions fees; we believe it is uscfulto interpret section 185 

### within the context ofthe CAA's ozone implementationprovisions ofsubpart 2 

### (whichincludes section 185). Thesubpart 2

### provisions

are designed toprovide an ever-growing incentive to reduce ozone-formingpollutant emissions to levels that achieve attainn~ent ofthe ozoneNAAQS. In 

### this context, to satisfythe requirementsofsection 185 

### associated with the 1-hourNAAQS we believe it is appropriate for states tofocus onfee assessments,achievingfurther emissions reductions,or some combination ofboth indeveloping an alternativeprogram. For any alternativeprogram adopted by 

### a state, the state's demonstration that theprogram is no less stringent should collsist ofcornparing expected fees and/oremissions reductions directly attributable to applicationofsection 185 

### to the expectedfees and/oremissions reductionsfrom theproposed alternativeprogram. For avalid

### demonstration to ensure equivalency, the state's submission should not underestimate the expected fees and/or emissions reductions from the section 185fee 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.' The concepts described here were discussed by thetask force, and the CAAAC forwarded a list of potential program features to EPA for leview. EPA's assessment of whether and how certain program features identified by the CAAAC can be used in the context of satisfyingthe requirements of section 185is 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 ofthe 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. Statesmay decide to develop unique alternativeprograms for each applicable nonattainment 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 Programs

We anticipate (subject to notice-and-comment rulemalting 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 of ozone-forming pollutants (NOS and/or VOC) in the same geographic area subject to the section 185program. Under this approach, the state would estimate revenues that would result under the section 185 fee program if all section 185 sourcespaid 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 programs 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 ownersloperators 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 

### &l 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 less wellcontrolled sources as an incentive for those sources to further reduce emissions of ozone-forming pollutants. The alternative program should not rely on emissionsreductions already required by

5 For more information on the CAAAC and the proceedings of the Task Forcc on section 185 fec programs visit the following Web site: htto://www.ena.nov/.di1-/caaac/l85.ht,~ilthe applicable SIP, since the goal is to achieve further reductions to movc the area expeditiously to attainment.

Additional Emissions-Equivale~lt Alternative Programs

EPA believes that as an alternative to the section 185fee program a state could adopt a program that achieves at least as much additional en~issions reductions as would be expected to res& fiom the fee-minimization incentive ofthe section 185 fee program. EI'A belie& 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 (it.,actual emissions in excess of 80 percent of the baseline 

## emission^).^ For purposes of estimating the emissions reductions required in such a program, the state would assumethat 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 ifthe 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 inthe alternative program could

come from 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 

### feeprogram no longer applies.

Additional Alternative Programs Combining Emissions Reductions and Fees
A program that combines features of an emissions-equivalel~t program with a feeequivalent program could also be adopted. For example, someportion of the 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 statecould 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 $5,000per ton).

A program that achieves less than this amount of emissions reductions may also be approvable depending on the casc-specific cil-cumstances.

### EPA Assistance
My officc is available to provide any additional guidance and to consult with any state that wants to develop an alternative equivalent program to the section 185 feeprogram. For additional consultation you may contact Denise Gcrth, 919-541-5550.

### ATTACHMENT A Text 

### of CAA Section 185

SEC. 185. ENFORCEMENT FOR SEVERE AND EXTREME OZONE NONAI'TAINMENT AREAS FOR FAILURE TO ATTAIN.

(a) General Rule.- Each ilnplementation plan revision required under section 182 (d) and (e) (relating to the attainrnetlt 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 inthe area shall, except as otherwise providedunder 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 redesignated 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) Fee amount.- The fce shall equal $5,000, adjusted in accordance with paragraph (3), per ton ofVOC emitted by the source during the calendar year in excess of 80 percent of the baseline amount, colnputed under paragraph (2). (2) Baseline amount.- For purposes ofthis 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 en~issions 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 implelnentation plan "allowables")) during the attainment year. Notwithstanding the preceding sentence, the Administrator may issue 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 lee 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 in~plementation 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) ofthe Internal Revenue Code of 1986 (relating to colnputation 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 ofthe funds, respectively) shall apply with respect to fees collected under this subsection.(e) Exelnptions 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 require~nents and implemented all measures applicable to the area under this Act. 

### [42 U.S.C. 

### 751Id]

### ATTACHMENT 

### I3 Inflation Adiustment for Section 185 

### Fees

Section 

### 185 cross-referencesthe methodology in section 502(b)(3)(H)(v) ofthe CAA. This method has been interpretedfor use in determiningpermit fees in a 1992 EPA memoranduin. (See, Memorandum ofOctober 

### 15, 1992, from Frank Bunyard, "CalculatingFees for Operating Permits.") EPA has used this method to calculate the Part 70permit fee rate since 1990,and will continue to update the rate every year in September, when the August values are available. The adjusted section 185fee, then,would beprorated to that adjusted permit fee,

### as shown in Table 1 

### below,by n~ultiplying the Part 70permit fee rate by 200 ($5000/$25).Since section 185fees 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 (8112ofthe

### fee associated with January to August, and 4112 ofthefee associated with September to December). The weightedfees appear in Table 2 below. These will be updated each year in thefall.

TABLE I: SECTION 185 FEE RATE BASED ON PART 70 PERMIT FEE RATE

* 

### From www.e~a.aov/oar/oaa~s/~ermitslhistoricalrates.htmlTABLE 2: ANNUALIZED SECTION 185 FEE RATE

2005 2006 2007 2008 2009 $7,737.33 $7,998.67 $8,266.67 $8,51133 $8,755.33 -

### ATTACHMENT C Response to CAAAC Task Force Options

EPA's Clean Air Act Advisory Committee (CAAAC) submitted a letter to EI'A 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 10bullet 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 approvableprogram 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-bacltsliding 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 I-hour ozone standard to the more stringent 1997 8-hour standard, EPA concluded that it made sense to rely on the governingprinciples in section 172(e). Applying this principle for the transition 

### from the I-hour standard to the 1997 8-hour ozone standard, EPA can either require states to retain a specificprogram 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. EI'A 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 scction 185 fee program and an alternative program that is "not less stringent," we address each of the 10points separately below.

Point A asks whether a state may "authorize multi-facility operators to aggregate emissions fiom 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 contcxts 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 aslts 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 attainment demonstration (e.g., if thc area bas 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-attainment year or attainment year" controls. We do not believe that section 185 allows for any suchconsideration. The statutory language is clear that the baseline emissions are the lower ofthe actual elnissions 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 eniissions is where a source's emission are "irregular, cyclical or otherwise vary signifkantly 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 asla whether the purchase of emission reduction credits, or allowances, that are part of a11 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 marltet-based control measures, they may be able to do so in the context of a program that is no less stringent than a section 185program 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, if a source has 1000 tons of emissions in the attainment 

### "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 1000tons to 900 tons, then the source will pay fees 011 only 100 tons of emissions. With regard to crediting emission-reducing or air-quality investments, we note that section 185 does not specify how collected fees must be spent. In general, we believe that a state may choose to use collected fees to support air quality improvenient 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 apart of a major source that existed in the attainment year, the emissions from the

new sourcemust be considered as eniissions from that major source. For new major sourcesthat

are not part of existing major sources, we believe section 185does 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" duringthe attainment year. Therefore, states should examine how the applicable SIP addressed emissions fiom 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 attainn~ent-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 (is.,emissions levels after application of LAER must be offset at a ratio of at least 1 to 1). Therefore the attainmentyear 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 13, which references state discretion regarding the use of collected fees, we point to our response above for Point F.

Point I asks whether section 172(e)authorizes a state to develop 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 transitioning fiom the I-hour ozone standard to the more stringent 1997 8-hour standard. However, in developing our anti-backsliding rules in the Phase 1 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 Oualitv Manaaement District v. EPA, 472 F.3d 882 (D.C. Cir. 2006), the Court rejected our waiver of the section 185 fee program for the 1-hour standard, holding that such program was a "control applicable" to 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 requirements



### .. . to provide for controls which are not less stringent than the controls applicable to areas designated nonattaimnent before such relaxation." EPA believes that this language clearly allows EPA by iqulationto accept alternative control programs that "are not less stringent" than those that were mandated by the Act for the standard that has been replaced (is.,the 1-hour standard).

Point 

### J requests that EPA "clearly indicate the conditions under which the collection of fees may be terminated." Furthennore, it indicates that some members of the task force "would like the authority to terminate the section 185fee program upon the first year in which an area achieves the relevant standard." EPA believes that for an area EPA determines through noticeand-comment rulernaking is attaining either the I-hour or 1997 8-hour ozone NAAQS based on permanent and enforceable en~issions 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 equivalent program). The bases for EPA to make such a determination through notice-and-com~nent rulemaking are provided in the nmnorandum associated with this Attachment.

### ATTACHMENT 

### D CAAAC Letter

llnited States Environmental Protection Agency Clean Air Act Advisory Committcc
May 15,2009

The Honorable Elizabeth Craig Acting Assistant Administrator Office ofAir and Radiation US.EPA Ariel Rios North 1200 Pennsylvania Avenue, N.W Mail Code 6lOlA Washington, DC 20460

Rc: Clean Air Act Sections 185 and l72(e1
Dear Assistant Administrator Craig:
At the May 14,2009 meeting oftlie US EPA Clean Air Act Advisory Committee, on a unanimous vote, the Committee resolved to urge the Agency to provide prompt guidanceto tlie States regarding the following question arising under the Clean Air Act:

Is ir legalIypermissible under either seclion 185 or I72jej for a Slate lo exercise the di.scre/ion idenlified in OplionsA-J?

The Clean Air Act Section I85 Task Force, a work group establisl~ed under the Clean Air Act Advisory Committee, identified ten areas (A-J) ofpotential state discretion. These options are listed in the attaclnnent to this letter. The Coln~nittee took no position on the reasonableness or legal pe~missibility of any option.

As several States are in the process ofdeveloping their sectiot~ 185 nonattaintnent fee programs, time is of the essence in providing appropriate legal and policy guidance.

Thank you sincerely,

Co-Chairs of tlie Section 185 Task Force:

Eddie Terrill Director Department oSEnvironmenta1Quality Air Quality Division 707North Robinson Oklahoma City, OK 73 101-1677 Robert A. Wyman Latham & Watkins LLP 355 South Grand Avenue I,os Angeles, CA 90071

### Aggregation of Emissions Among Commonly-Owned Facilities

At its option, a Statemay 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.
Aggregation of VOC and NOx Emissions

At its option, a Statemay 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).

Co~isideration 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 attaintnent year emission control investments by major sources. Witlmut 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 %ACT

or LAER, should not be required to include emissions from such equipment in calculating the fee.

Col~sideration 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 rcpresent well-controlled (e.g.,in the range of or superior to 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.

Consideration of Market-Based Programs

At its option under appropriate circumstances, a Statemay determine that purchases of emission reduction credits, or allowances, as part of a State's market-based attainment control measure may reduce the amount of emissions upon which the fee is based or constitute an investment that should be credited against the fee.

### 17. CreditSourccsfor Post-Attainment YearEmissions-Reducing orAir Quality Investments

At its option,a State should recognize and appropriately credit qualifyingpostattainmentyear emissions-reducing or 

### air quality-beneficial investments by major

sources. 'Il~cse investmentsshould be credited to such sources in 

### a manner that reduces or eliminatesfees that otherwise would be due under theplogram. States should identifythe qualifications for such investmentsbased on their unique attainment needs.

G. 

### Post-Attainment Year New Sources

'Illerewas agreement that new sources constructed afterthe attainnlentyear would not have abaseline;would already have installed BACT or LAER, 

### would already haveprovided offsets, and thereforeshould not be subject to thefeefor such equipment.

I 

### Use ofProgram Revenues
States retain full discretionregarding the usc ofcollected revenues. I'articipants 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).

1. 

### Equivalent Programs

Undersection 172(e), a State should have the option ofcollecting equivalent or greaterfees, or ofrequiring equivalent or greater emission reductions, by shifting theprogram target inpart or in whole to under-regulated sources (e.g.,legacy vehicles and engines,under-regulatedarea sources)or by applying theprogram in

amanner that addresses other attainment gaps. Likewise, the taskforce envisioned that any recommended strategy not directly approvablc under section 185

### should be 

### considered as an equivalent alternativeprogram under 172(e).In such circumstances,the state may need to shiftthe fee burden among sources to demonstrate equivalency.

J. 

### Program Sunset

EPA needs to clearly indicatc the conditions under which the collection of fecs may be terminated. Some members ofthe tasltforccwould like the authority to terminate the section 185

### feeprogram upon thefirst year in whichan area achieves the relevant standard.