UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

RESEARCH TRIANGLE PARK, NC 2771 1 

MAR 2 1 2008 

OFFICE OF 

AIR QUALITY PLANNING 

AND STANDARDS 

MEMORANDUM 

SUBJECT: Guidance on Establishing Emissions Baselines under Section 185 of the 

Clean Air Act (CAA) for Severe and Extreme Ozone Nonattainment 

Areas that Fail to Attain the 1-hour Ozone NAAQS 

FROM: William T. Harnett, Director 

Air Quality Policy Division (C539-01) 

TO: Regional Air Division Directors, Regions I-X 

The purpose of this memorandum is to provide guidance on establishing the 

"baseline amount" for the imposition of penalty fees under section 185 of the Clean Air 

Act (CAA) for severe and extreme areas that fail to attain the 1-hour ozone national 

ambient air quality standards (NAAQS) by their attainment date.' Under section 185, 

major stationary sources of volatile organic compounds (VOC) and nitrogen oxides 

(NOx) in severe and extreme ozone nonattainment areas are subject to penalty fees in 

these circumstances for emissions in excess of 80 percent of the baseline amount. 

Under the CAA, the affected States generally should impose the fees on such sources 

based on their "baseline amount," which generally is based on applicable source 

emissions information in the attainment year inventory. However, where source 

emissions are irregular, cyclical or otherwise vary significantly, the CAA provides that 

the U. S. Environmental Protection Agency (EPA) may issue guidance providing an 

alternative method to calculate the baseline amount. This memorandum contains such 

guidance for an alternative method for calculating the emissions baseline. 

Background 

Section 185 of the CAA requires States to impose fees on major stationary 

sources of VOC and NOx in severe and extreme ozone nonattainment areas that fail to 

I For background on the 1-hour standard, its revocation and relationship to the section 185 fee provisions, 

see the following documents: 40 CFR 50.9(b); 69 FR 23951 at 23968 (April 30,2004); 70 FR 44470 

(August 3,2005); and South Coast Air Quality Management Dist. v. EPA, 472 F.3d 882 (D.C. Cir. 2006). 2 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 Dl for major stationary sources of 

[VOC] shall also apply to major stationary sources . . . of [NOx) ." 

Internet Address (URL) http://www.epa.gov 

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attain the ozone national ambient air quality standard (NAAQS or standard) by their 

attainment date. 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" for each year beginning after the attainment date until the area is redesignated to 

attainment for ozone [see section 185(b)(l)]. The fee must be adjusted for inflation based 

on the Consumer Price Index (CPI) on an annual basis. For 2007, the penalty fee would 

be $8,040 based on the CPI.~ 

The CAA further states 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 actuals or average 

allowables 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." 

Alternative Method for Calculating "Baseline Amount" 

Under the presumptive calculation method provided in the CAA, a State would 

calculate the "baseline amount" for each source that may be affected by the section 185 

penalty fees by determining the actual emissions for a source (e.g., by reviewing the State 

emissions inventory for the applicable attainment year) or by reviewing the permits for 

such source to determine the source's allowable emissions. In some cases, however, the 

amount calculated for a particular source in the attainment year may not be considered 

representative of the source's normal operating conditions. In these cases, the CAA 

allows for use of an alternative calculation method for sources whose annual emissions 

are "irregular, cyclical, or otherwise vary significantly from year to year." 

We believe an acceptable alternative method that could be used for calculating the 

"baseline amount" for such sources would be the method for calculating "baseline actual 

emissions" found in EPA's regulations for Prevention of Significant Deterioration of Air 

Quality (PSD) (40 CFR 52.21 (b)(48)).4 "Baseline actual emissions" is defined in the 

PSD rule for purposes of establishing a pre-change average emissions rate to be a 

baseline emissions rate for sources proposing to undergo physical or operational changes 

that result in an emissions increase. This definition of "baseline actual emissions" 

enables a source to calculate its baseline rate using the actual operational data from a 

period other than the period immediately preceding a proposed change in order to select a 

period of time that is more representative of the source's normal operation. Under the 

PSD regulations, sources generally may use the relevant source records for any 

See http://www.bls.nov/cpi/ which provides a tool for calculating adjustments based on the CPI. 4 This alternative method is provided for States to use at their discretion when they conclude that the 

"baseline amount" as calculated under section 185(b)(2) is not appropriate for purposes of setting the 

section 185 penalty fee because the source's emissions vary significantly from year-to-year. 
24-consecutive month period within the past 10 years ("2-in- 10" concept) to calculate an 

average actual annual emissions rate (tons per year).5 

In the PSD context EPA determined that is fair and reasonable for a source to use 

a 10-year look back period for calculating "baseline actual emissions" because it allows 

the source to consider a full business cycle in setting a baseline emissions rate that 

represents normal operation of the source for that time period. However, the PSD rule's 

"2-in-10" concept does not apply to electrical utility steam generating units. For utilities, 

the PSD rules require use of a 24-consecutive month period within the past 5 years, or a 

different 5 year historical period if the State determines that it is more representative of 

normal source operations for a particular s~urce.~ 

The PSD rules require adequate source information for the selected 

24-consecutive month period.7 As indicated in the PSD rules, the data (needed to 

calculate the actual emissions factors, utilization rate, etc.) must adequately describe the 

operation and associated pollution levels for each emissions unit. Otherwise, another 

24-consecutive month period must be selected (40 CFR 52.21(b)(48)(i)(d) and (ii)(e). 

Once calculated, the average annual emissions rate must be adjusted downward to reflect 

(1) any noncompliant emissions8 (40 CFR 52.21(b)(48)(i)(b) and (ii)(b), and (2) for each 

non-utility emissions unit, the most current legally enforceable emissions limitationsg that 

restrict the source's ability to emit a particular pollutant or to operate at the levels that 

existed during the 24-month period that was selected (40 CFR 52.212(b)(48)(ii)(c). 

For a source with emissions units capable of burning more than one type of fuel, 

the current emissions factors must be related to the fuel or fuels that were actually used 

during the selected 24-consecutive month period. For example, when calculating the 

baseline emissions for a source that burned natural gas for a portion of the 24-month 

period and fuel oil for the remainder, the PSD rules require States to retain that fuel 

apportionment, but to also use the current legally enforceable emissions factors for 

natural gas and fuel oil, respectively, to calculate the baseline emissions. If, however, the 

In establishing the "2-in-10" concept for the PSD rules, EPA relied on a 1997 study of business cycles for 

several industries. The study examined the business fluctuations for certain source categories using 

industry output data for the years 1982 to 1994, inclusive, based on the Office of Management and 

Budget's SIC codes for individual industries (OMB, 1987). 

6 For utilities, we determined that a 5-year cycle, rather than a 10-year cycle, generally was appropriate for 

addressing the emissions variability associated with demand for electricity as influenced by annual 

variability in climate and economic conditions as well as changes at other plants in the utility system that 

affect dispatch of a particular plant. 

The adequacy of given source operating data for the selected time period is to be determined on a case-bycase basis by the reviewing authority. 

The result of this restriction is that the plant capacity utilized during a particular period of time (assuming 

that capacity was within allowable levels) may be referenced, but not the non-compliant pollution levels. 

The second restriction similarly limits baseline emissions to levels that are consistent with current legally 

allowable emissions rates. 

Such legally enforceable emission limits would include, but not be limited to, any State, or Federal 

requirements such as RACT, BACT, LAER, NSPS and NESHAP, processing limits, fuel limitations, or 

other limitations voluntarily accepted by the source for netting, emissions offsets or the creation of 

emission reduction credits. 
source is no longer allowed or able to use one of those fuel types, then the calculations 

must assume use of the currently allowed fuel for the entire 24-month period. This 

applies to sources that use multiple feedstock or raw materials, which may vary in use 

during the source's ongoing production process. 

The intent of this guidance document is to set forth EPA's views on the issues 

discussed herein. The statutory provisions and EPA regulations described in this 

document contain legally binding requirements. This document is not a regulation in 

itself nor does it change or substitute for those provisions and regulations. Thus, it does 

not impose legally binding requirements on EPA, States or the regulated community. 

EPA and other decision makers retain the discretion to adopt approaches on a case-bycase basis that differ from those described in this guidance where appropriate. When 

EPA issues final rules based on its views, those rules will be binding on the States, the 

public and EPA as a matter of law. We will work with your staff to answer any 

additional questions including how this guidance applies to individual sources that are 

covered by emissions cap-and-trade programs. 

If you have any questions on the section 185 fee provisions, please contact Denise 

Gerth at 9 19-54 1-5550, and if you have questions on the alternative method for 

calculating the emissions baseline based on the PSD rule, please contact Dan DeRoeck at 

919-541-5593.