Clean Air Act: EPA Should Use Available Data to Monitor the Effects of Its Revisions to the New Source Review Program
Published: 2003-08-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: A recent Environmental Protection Agency (EPA) final rule changing the Clean Air Act's New Source Review (NSR) program--a key means to protect public health and enhance air quality--has been under scrutiny by the Congress, industry, environmental groups, state and local air quality agencies, and the courts. GAO was asked to determine the basis of EPA's conclusions that (1) the rule's economic impacts would not be significant enough to merit a detailed analysis and (2) the NSR program, prior to the rule, discouraged some energy efficiency projects. GAO, among other things, reviewed EPA's analysis of the rule and its impacts, as well as guidance from EPA and the Office of Management and Budget (OMB) on analyzing such impacts. GAO also met with industry and environmental stakeholders.
section_title: What GAO Found
paragraphs: Consistent with agency guidance, EPA used a limited screening analysis that relied on staff's professional judgment and public comments from earlier reform proposals to conclude that the final rule would decrease emissions and health risks and not impose significant costs. EPA determined that neither the rule's benefits nor its costs would exceed a $100 million threshold that triggers requirements to conduct a more comprehensive assessment. EPA issued the rule to streamline the NSR permitting process and provide flexibility to industry. For example, the rule provides a mechanism for companies to develop plantwide emissions limits, which would allow them to make changes in one part of a facility's operations as long as they offset emissions increases with decreases elsewhere within the facility. While OMB agreed with EPA's conclusion that the rule would not have significant economic effects, it determined that the rule was significant for policy reasons. Therefore, OMB asked EPA if it could better quantify the rule's potential impacts, but the agency lacked the necessary data to do so. EPA lacked comprehensive data on the program's economic impacts, and could not predict how many facilities would use the rule's optional provisions. Several states and environmental groups disagree with EPA's conclusions, claiming that it will enable facilities to increase their emissions. These parties have filed suit against EPA challenging the rule and also have petitioned EPA to reconsider the rule. We did not identify any comprehensive assessments that contradicted or supported EPA's conclusions or the assertions of those who oppose the rule. Because of the data limitations, it was not possible to verify EPA's conclusions about the rule's effects. Because it lacked comprehensive data, EPA relied on anecdotes from the four industries it believes are most affected by NSR to conclude that the NSR program (prior to the rule) discouraged some energy efficiency projects, such as upgrades to industrial boilers, including some that would have decreased emissions. Because the information is anecdotal, EPA's findings do not necessarily represent the program's effects across the industries subject to the program. Several environmental groups disputed EPA's findings. One such group said that factors other than NSR, such as economic downturns, discouraged the projects. Furthermore, EPA's conclusion that some projects would have decreased emissions assumed that facilities would not increase production after performing the projects. However, according to EPA and the executive director of an industry group, companies often expand production after implementing energy efficiency projects because it is advantageous to maximize production at the most efficient facilities. Such expansions could increase emissions and related health risks, although EPA asserts that this would be offset by decreased production and emissions at less efficient facilities.

section_title: Letter
paragraphs: Recent changes to the Clean Air Act’s New Source Review (NSR)  program—one of the act’s key mechanisms for maintaining air quality to  protect public health—have been the subject of congressional debate and  have drawn scrutiny from numerous stakeholders, including  representatives of industry, environmental groups, and state and local air  pollution control authorities. While some industry officials describe the  existing program as costly and characterized by uncertainty,  environmental groups and a coalition of state attorneys general assert that  it is, and has been, an important component of the Clean Air Act. In recent  years, the program has become increasingly controversial, as the  Environmental Protection Agency (EPA) has taken enforcement action  against companies in several industries, including some electricity  producers, forest products manufacturers, and petroleum refineries,  alleging noncompliance with the program. Some of the affected companies  have agreed to settlements that will cost hundreds of millions of dollars  and require emissions reductions, while others are in various stages of  litigation.
The NSR program, which seeks to protect public health, maintain  compliance with air quality standards, and preserve and enhance air  quality in national parks and scenic areas, requires companies that are  major sources of air pollution to install pollution controls in their facilities  when constructed. The program also requires companies to install such  controls in existing facilities when making physical or operational  changes—such as the addition of new production equipment—that cause a  significant increase in air emissions. Such changes are called “major  modifications.” Congress believed that incorporating pollution controls  into the design and construction of new and modified air pollution sources  was generally an efficient way of controlling air pollution from large  industrial sources. Congress also excluded existing facilities from NSR  requirements until they made changes that increased their emissions.  Companies that want to make major modifications in existing facilities  must apply to state or local agencies for an NSR permit and then install the  controls. The cost of installing controls varies but can reach hundreds of  millions of dollars for some facilities, according to an EPA program  manager. However, companies can qualify for exemptions from these  requirements if, for example, (1) a modification is considered “routine  maintenance and repair,” (2) the company agrees not to significantly  increase its emissions after making a physical or operational change to its  facility, or (3) the company offsets any emissions increases resulting from  a change in a facility with emissions reductions achieved elsewhere within  that facility.
EPA has long recognized a need to revise the NSR program and began a  reform process in 1992 that resulted in proposed changes to the program  in 1996 and 1998. The agency received wide-ranging comments from the  public on how the program should be revised and held meetings with the  public and other stakeholders, but did not develop final rules by the time  the new administration took office in 2001. In May 2001, as part of its  proposed national energy policy, the Vice President’s National Energy  Policy Development Group recommended that EPA report to the President  on the NSR program’s impact on energy efficiency investments, among  other things. In response to this recommendation, EPA concluded in its  June 2002 NSR Report to the President, that NSR had discouraged some  energy efficiency investments at existing industrial facilities.
After completing this report, EPA modified certain of the proposed 1996  NSR revisions and finalized them as a rule in December 2002 (hereafter  referred to as the NSR final rule). According to EPA, the rule will, among  other things, provide greater certainty for facilities regulated under the  program and streamline the NSR permitting process while ensuring the  current level of environmental protection. As part of this process, EPA  analyzed the rule’s anticipated economic effects, such as its impacts on  emissions, health risks, the costs of installing and maintaining pollution  control equipment, and administrative costs incurred by government  agencies. Under Executive Order 12866 and the Unfunded Mandates  Reform Act of 1995, agencies must perform detailed assessments of  economically significant rules—those rules that may have an annual effect  on the economy of $100 million or more. If a rule’s impacts are not  expected to exceed this threshold, a more detailed economic analysis is  generally not required. According to the Office of Management and Budget  (OMB), the agency responsible for overseeing agency compliance with  Executive Order 12866, agencies may use their discretion when  conducting a screening analysis to determine whether a rule’s economic  impacts may reach the $100 million threshold and require a more detailed  assessment. EPA’s Office of Air Quality Planning and Standards has  developed a guidance document that the agency uses to analyze the  impacts of air quality rules, which discusses how to conduct a screening  analysis.
You asked us to determine the basis of (1) EPA’s analysis of the economic  impacts of the final rule and its conclusion that the rule would not create  significant enough benefits or costs to require a more detailed analysis and  (2) EPA’s conclusions that the NSR program (prior to the final rule)  discouraged some energy efficiency projects. You also asked us to provide  information on several other aspects of the final rule and proposed  revisions to the definition of routine maintenance and repair under NSR,  which we will address in subsequent reports.
To respond to these objectives, among other things, we used OMB and  EPA guidance to review EPA’s screening analysis of the final rule’s  economic impacts. We also met with the NSR program manager within  EPA, other senior EPA officials within the agency’s Office of Air Quality  Planning and Standards, and senior OMB staff within the Office of  Information and Regulatory Affairs who were responsible for reviewing  EPA’s analysis. In addition, we reviewed the information that EPA relied  on in preparing its findings on the NSR program’s effects on energy  efficiency projects. We also met with representatives of industry and an  environmental group. Appendix I provides a more detailed description of  our scope and methodology.
subsections: section_title: Background
paragraphs: Under the Clean Air Act, EPA establishes health-based air quality  standards that the states must meet and regulates air pollutant emissions  from various sources, including industrial facilities and mobile sources  such as automobiles and other transportation. Figure 1 compares the  emissions of key pollutants from industrial facilities to those from  transportation and other sources.
EPA has issued health-based air quality standards for six primary  pollutants—carbon monoxide, lead, nitrogen oxides, ozone, particulate  matter, and sulfur dioxide—that have been linked to a variety of health  problems. For example, ozone can inflame lung tissue and increase  susceptibility to bronchitis and pneumonia. In addition, nitrogen oxides  and sulfur dioxide contribute to the formation of fine particles that have  been linked to aggravated asthma, chronic bronchitis, and premature  death. In 2001 (the most recent year for which data were available), 133  million Americans lived in areas with air pollution levels above at least one  of the health-based air quality standards, according to EPA.
The New Source Review program was established in 1977 and is intended  to protect public health, as well as national parks and wilderness areas,  from additional air pollution when new industrial facilities are built and  existing ones expand. The fundamental logic of the program, according to  EPA, is that industrial facilities should install modern pollution controls at  the time of construction or when making physical or operational changes,  such as adding new production equipment, that cause a significant  increase in air emissions. Subject to EPA’s oversight, state and local air  quality agencies generally administer air quality programs, including the  NSR program. In recent years, EPA has taken enforcement action against  companies in several industries, including some electricity producers,  forest products manufacturers, and petroleum refineries, alleging  noncompliance with the program. Some of these parties settled these  cases soon after the enforcement actions were filed, although electricity  producers assert that the actions are inconsistent with the Clean Air Act,  according to the U.S. Department of Justice (DOJ). In January 2002,  however, DOJ concluded that the enforcement actions are consistent with  the act.
Recognizing the need for revisions to the NSR program, EPA began a  reform effort in 1992 and 1993 when it held workshops with stakeholders  and established a federal advisory committee in 1993. Largely on the basis  of this committee’s recommendations, EPA issued proposed NSR revisions  in 1996 that were intended to reduce costs imposed on companies that  undergo NSR permitting without interfering with efforts to attain air  quality goals. EPA solicited public comment on the proposals at that time  and again in 1998, when it sought additional information on an alternative  method for determining whether a facility modification should be subject  to NSR. The agency received numerous comments that provided wide- ranging views on how the program should be revised. Despite additional  public meetings and discussions with stakeholders on NSR reforms, EPA  had not developed final rules by the time the new administration took  office in 2001.
In May 2001, when the Vice President’s National Energy Policy  Development Group issued its proposed national energy policy, it  recommended that EPA report to the President on the NSR program’s  impact on investments in new utility and refinery generation capacity,  energy efficiency, and environmental protection. In response to this  recommendation, and given that EPA does not maintain such information,  the agency solicited public input on how the NSR program had affected  the ability of companies to undertake energy efficiency projects in their  existing facilities. EPA defined energy efficiency projects as those that  would have produced greater output per unit of fuel input (e.g., more  electricity per ton of coal burned), regardless of the effect on emissions. In  its June 2002 NSR Report to the President, EPA concluded, among other  things, that NSR had not affected investments in new power plants and  refineries but had discouraged some energy efficiency projects at existing  facilities, including some that would have reduced air emissions.
After completing this report, EPA modified the 1996 proposed NSR  revisions to provide regulatory flexibility to industrial facilities so that  they could pursue energy efficiency projects, among other things. EPA  assessed the economic impacts of implementing these revisions, and  finalized them as a rulemaking—hereafter referred to as the “final rule”— in December 2002. Table 1 provides a chronology of the NSR program.
Specific revisions in the final rule include the following:  a revised method for determining a facility’s baseline emissions level that  a company would use as the starting point for determining whether any  changes in emissions resulting from a planned physical change or change  in the method of operation subjected the company to NSR; a revised test that a company would use after establishing a facility’s  baseline emissions level to determine if a physical or operational change  would increase emissions beyond the NSR threshold; exemptions from the program if companies demonstrate that (1)  equipment qualifies as a “clean unit” because they already use state-of-the- art pollution control equipment or (2) a proposed modification specifically  controls air pollution and achieves an environmental benefit; and a mechanism for companies to work with state or local permitting  authorities to develop plantwide emissions limits, which would allow  companies to make changes in one part of a facility’s operations as long as  they offset any emissions increases with decreases elsewhere within the  facility.
In addition to the final rule, EPA has proposed further NSR revisions that  the agency believes will provide greater certainty about activities that are  considered routine maintenance, repair, and replacement. According to a  NSR program manager, the agency is reviewing public comments on this  proposal and expects to finalize the rule by December 2003.
section_title: EPA’s Economic Analysis of the Final Rule Complied with EPA and OMB Cost- Benefit Analysis Requirements, but Some Stakeholders Have Sought to Have EPA Reconsider the Rule
paragraphs: EPA relied primarily on the professional judgment of its staff, as well as  public comments on the agency’s prior proposal to revise the NSR  program, in concluding from its screening analysis that the final rule  would not create benefits or costs beyond the $100 million threshold that  triggers requirements for a more detailed economic analysis. EPA’s  approach, while limited, is consistent with agency guidance for assessing  the economic impacts of proposed rules. In addition, EPA would have had  difficulty conducting a more quantitative analysis because of data  limitations. OMB agreed that the rule would not have a significant  economic impact but was significant for policy reasons. OMB asked EPA if  it could better quantify impacts and was convinced that the agency lacked  the necessary data to do so. EPA did later conduct two additional analyses  of some of the rule’s costs and benefits, but they also were not  comprehensive economic assessments. Some stakeholders have formally  asked EPA to reconsider the rule, arguing, among other things, that it will  enable facilities to increase their emissions. Because of the limited data on  the NSR program, it was not possible to verify agency or stakeholder  conclusions about the rule’s anticipated economic impacts.
subsections: section_title: EPA’s Reliance on Professional Judgment Was Consistent with Agency Guidance for Screening the Economic Impacts of Rules
paragraphs: EPA’s screening analysis of the final rule’s anticipated effects was  consistent with the agency’s guidance for conducting economic analyses.  According to senior OMB staff, the office does not have guidance for  agencies to use when conducting a screening analysis to determine  whether a rule will impose significant economic impacts and, thus, merit  further analysis. Therefore, agencies have latitude in determining how best  to conduct a screening analysis. EPA’s Office of Air Quality Planning and  Standards has developed a guidance document that describes the process  agency economists should use when analyzing air quality rules.  Recognizing the need to focus agency resources on rules that have a large  impact, the guidance states that a screening analysis of benefits and costs  may be qualitative in nature or rely on limited data.
According to a NSR program manager in EPA, agency staff relied primarily  on their professional judgment in estimating the rule’s economic impacts,  such as its effect on air pollutant emissions and the costs companies incur  when they install pollution controls, as well as public comments the  agency received on its 1996 and 1998 NSR revision proposals. For  example, several industry trade associations submitted information  asserting that the ability to use plantwide emissions limits would reduce  costs for industry and provide other benefits without compromising air  quality. On the basis of this information, EPA staff determined that the  rule would lead to overall economic and environmental benefits by  encouraging energy efficiency projects, reducing emissions and related  health risks, and providing economic benefits to companies affected by  the NSR program, according to the NSR program manager. For example,  EPA forecasted that the rule would encourage companies to implement  energy efficiency projects that would reduce emissions, such as upgrades  to boilers used to generate power.
In its screening analysis, EPA assumed that the final rule would not  impose significant economic costs on companies because the rule created  voluntary options and companies would most likely only elect to use them  if they thought the provisions would achieve an overall economic benefit.  Therefore, the agency assumed that any time a company opted to use one  of the provisions, the benefits to the company would outweigh any costs  incurred. In addition, because EPA concluded that the rule would  decrease emissions, it did not forecast any increases in public health costs  resulting from the final rule, such as increased incidence of asthma or  other respiratory problems. Consistent with its guidance, EPA then  concluded that, because the rule was not expected to create $100 million  in benefits or costs, the agency could proceed in finalizing the rule without  a more quantitative and comprehensive analysis.
section_title: EPA Lacked Data to Conduct a More Comprehensive Analysis of the Economic Impacts of the NSR Final Rule
paragraphs: Even if EPA had been required to conduct a more detailed economic  analysis, it would have had difficulty doing so because the agency is not  required to systematically collect comprehensive data on the economic  effects of the NSR program. Regarding the benefits of the program, EPA  does not maintain comprehensive data on the number and type of facilities  that obtain NSR permits, or the reduced air emissions achieved after  facilities install pollution controls, according to a senior agency  economist. In 2001, EPA attempted to estimate the emissions reductions at  facilities that obtained NSR permits; however, senior agency officials  responsible for the analysis acknowledged that it had several limitations.  For example, these officials said the analysis included only facilities that  were located in areas that met federal air quality standards, thereby  excluding a large portion of the universe of affected facilities. In addition,  EPA had incomplete data on facilities located in EPA region 6, which  includes Arkansas, Louisiana, New Mexico, Oklahoma, and Texas.  Furthermore, the analysis did not distinguish between benefits that  resulted from the installation of pollution controls at new facilities and  those at existing facilities, which are the focus of the final rule. With  respect to costs, EPA is not required to maintain comprehensive  information on the costs of the NSR program, and would therefore have  had difficulty quantifying all of the costs of the rule, according to a NSR  program manager.
In addition to EPA’s lack of data on the NSR program’s benefits and costs,  a senior agency economist said that uncertainty about the extent to which  companies might elect to use the NSR alternatives provided in the final  rule also limited EPA’s ability to estimate the rule’s impacts. For example,  the economist said that the final rule allows companies to develop a  plantwide emissions limit as an alternative to NSR, but only those  companies that find this provision advantageous are likely to use it and  EPA could not accurately determine how many companies this might  include. According to EPA, companies’ decisions about whether to pursue  voluntary options are case-specific and dependent on a number of factors.  Therefore, the agency was unable to model how often and when the final  rule’s options would be used. In contrast, most of the other rules EPA  develops generally impose new requirements on a known universe of  companies, according to a NSR program manager. In these cases, it is  much easier to determine the costs and benefits of a rule because the  agency can gather information from the affected companies. For example,  if EPA required all companies within a particular industry to install certain  pollution controls, it could gather information on the average costs of such  equipment and the anticipated reductions in air emissions. Because of  these data limitations we identified, it was not possible to conduct our  own assessment of the final rule’s possible effects and verify EPA’s  analyses and conclusions.
section_title: OMB Concurred with EPA’s Analysis and Conclusions and Determined That Data Limitations Precluded More Quantitative Analysis
paragraphs: According to senior EPA and OMB staff, OMB agreed with EPA’s finding  that the final rule was not economically significant because it was not  expected to impose costs or provide benefits beyond the $100 million  threshold that triggers requirements to conduct a more thorough analysis.  Nevertheless, according to senior OMB staff responsible for reviewing the  analysis, while the office found EPA’s analysis—which was presented in  an oral briefing but not documented—persuasive, OMB determined that  the final rule was significant for policy reasons. Under Executive Order  12866, rules that “raise novel legal or policy issues arising out of legal  mandates, the President’s priorities” or other criteria can be categorized as  significant. According to the Executive Order, when rules fall into this  category, the agency issuing the rule must provide OMB with an  assessment of the potential costs and benefits of the regulatory action, but  the order does not elaborate on the form of the assessment. The senior  OMB staff said that EPA’s screening analysis satisfied this requirement.  Nevertheless, OMB staff asked EPA if it would be possible to conduct an  analysis that quantified the rule’s effects. However, as we previously  discussed, EPA identified numerous data limitations that it claimed  prevented its staff from conducting such an analysis, and OMB  acknowledged these limitations and concurred with EPA.
section_title: EPA Conducted Two Additional Analyses of the Rule’s Effects, but They Did Not Comprehensively Assess Economic Impacts
paragraphs: In November 2002, EPA issued a supplemental analysis intended to  provide the public with additional information on the rule’s potential  environmental effects. According to EPA, this analysis was not intended as  a comprehensive economic analysis of the rule’s benefits and costs and  was not used to make decisions about the rule. Like the screening  analysis, it relied primarily on qualitative information and arrived at  similar conclusions. For example, EPA asserted that the exemption for  companies that use state-of-the-art pollution controls would save  companies NSR permitting costs. EPA also asserted that this provision  would induce facilities to voluntarily install controls to avoid NSR, thereby  reducing emissions.
While the supplemental analysis was qualitative, it used some data from a  limited number of facilities to estimate the effects of some of the rule’s  provisions on a wider universe of facilities. Specifically, the analysis  considered the experiences of six companies that had used regulatory  options similar to those provided for in the final rule to determine that  such limits would lead to emissions reductions. For example, on the basis  of these six case studies, EPA stated that if 75 percent of facilities in three  industry sectors opted to use plantwide emissions limits, emissions of  volatile organic compounds could be cut by up to 17,000 tons annually  (less than 1 percent of the total volatile organic compounds emitted in  2001, the most recent year for which data were available). EPA also said  that the emissions reductions would be greater if the analysis was  extended to other industry sectors and pollutants.
However, EPA did not use statistically valid methods to identify the six  companies on which it based this portion of its analysis. Therefore, the  experiences of these companies may not be representative of how  plantwide limits will affect emissions at other industrial companies that  may opt to use this provision. In addition, the Secretary of the Delaware  Department of Natural Resources and Environmental Control—the state in  which one of the six companies was located—wrote the EPA  Administrator cautioning against using the experience of the Delaware  company to support the final rule. The Secretary noted that the regulatory  option used by that company provided for emissions reductions as a  prerequisite for participation, while EPA’s plantwide emission limit does  not.
As noted above, EPA could not determine with any certainty the number  of facilities that would opt to use the final rule’s voluntary provisions, or  the changes in the number of NSR permits, amount of emissions, or other  effects that would result. However, EPA was required under the  Paperwork Reduction Act to assess some of the costs and benefits that  would accrue to companies and government agencies under the final rule.  Specifically, the act requires agencies to estimate the record keeping  burden associated with a rule and report this information to OMB.  Therefore, EPA relied on limited available data and its professional  judgment to make estimates necessary to satisfy this requirement. In  February 2003, after issuing the final rule, EPA estimated that it would  impose about $6.5 million in annual burden on state and local air quality  agencies, which include legal and other costs associated with  incorporating the final rule into the state’s air pollution control plan,  collecting public comment on the changes, and obtaining state  legislatures’ approval of the changes. This analysis also estimated that 14  facilities would use the final rule’s provisions during each of the first 3  years of implementation, reducing the previous annual burden by  $650,000. This analysis, like the screening analysis, found that the rule  would impose less than $100 million in annual costs on companies and  government agencies. However, a senior EPA economist said this was a  limited analysis intended to identify information collection and record  keeping requirements that the final rule would impose. In addition, this  analysis does not comprehensively address all of the costs that are likely  to result from implementation of the rule.
section_title: Some State Attorneys General and Environmental Organizations Question EPA’s Conclusions and Assert That the Final Rule Will Increase Emissions, Harming Public Health
paragraphs: Nine northeast states filed a petition in the U.S. Court of Appeals for the  District of Columbia Circuit on December 31, 2002—the day the rule was  finalized—disagreeing with EPA’s conclusions about the rule’s effects.  They asserted, among other things, that the final rule violated the Clean  Air Act and would enable companies to increase their emissions because,  by using the provisions to opt out of NSR, they will no longer be required  to install pollution control equipment. According to New York’s Attorney  General, the final rule will lead to more smog, asthma, and respiratory  disease. In addition, Earthjustice—acting on behalf of a coalition of  environmental and public health advocacy groups—filed similar petitions  for review, also in the U.S. Court of Appeals for the District of Columbia  Circuit. According to the American Lung Association, one of the groups  represented by Earthjustice, the final rule creates loopholes that allow  companies to increase their emissions without installing pollution  controls. Similarly, Environmental Defense, another group represented by  Earthjustice, claims that the final rule will enable thousands of factories,  power plants, and other industrial companies to pollute more. On  February 6, 2002, the nine Northeast states, along with Pennsylvania, filed  a motion, which the court denied, seeking to halt implementation of the  final rule pending a ruling on the earlier petitions.
While these parties do not support the final rule, several states, including  Indiana, Kansas, Nebraska, North Dakota, South Carolina, South Dakota,  and Utah, as well as the American Petroleum Institute and other industry  groups, have filed petitions with the court in support of the final rule. In  July 2003, EPA responded in part to the petitions for reconsideration by  requesting public comment on six limited issues in the final rule.  The  agency said that the decision to reconsider these issues did not mean that  EPA had decided to change any aspect of the rule and that the agency  would make that decision after the comment period closed.
Our review did not identify any comprehensive assessments of the final  rule’s effects that contradicted or supported the results of EPA’s analysis  or the assertions of those who oppose the final rule. As a result, the  economic impacts of the final rule are uncertain. Two studies  commissioned by the Environmental Integrity Project of the Rockefeller  Family Fund and performed by Abt Associates, an EPA contractor,  focused on facilities that obtained NSR permits and installed emissions  controls prior to the final rule. The studies found that the facilities would  not have been required to install pollution controls if they had made their  modifications after implementation of the final rule, and could have  increased their emissions. However, because these analyses focus on just  two facilities and only one of the four provisions of the final rule, their  results may not be representative of the rule’s overall environmental  effects. In addition, EPA asserts that these studies were based on an  incorrect interpretation and application of the final rule’s provisions.
section_title: EPA Relied Primarily on Anecdotes from Industries Most Affected by NSR to Conclude That It Discouraged Some Energy Efficiency Projects
paragraphs: EPA relied primarily on anecdotal information from industry in concluding  that the NSR program, prior to the final rule, discouraged some energy  efficiency projects—such as upgrades to industrial boilers—including  some projects that would have reduced air emissions. The anecdotes,  which were provided primarily by four of the industries most affected by  the NSR program, suggested that the program imposed several barriers  that deterred energy efficiency projects, including delays in obtaining  permits and the high costs of installing pollution controls. Several  environmental groups disputed EPA’s findings, and a representative of one  group cited other factors, such as poor economic conditions and a lack of  willingness to control air pollution, as the barriers to energy efficiency  projects, although EPA program managers said that the agency found  industry’s claims to be more persuasive. Nonetheless, because EPA relied  on anecdotal information rather than a statistically valid sample or  industrywide survey, the agency’s findings do not necessarily represent  NSR’s effect on energy efficiency projects throughout the industries  subject to the program.
subsections: section_title: EPA’s Conclusion That NSR Discouraged Energy Efficiency Projects Was Based Primarily on Anecdotes from Four of the Industries It Believes Are Most Affected by the Program
paragraphs: According to EPA officials responsible for the NSR Report to the  President, during development of the proposed NSR revisions, the agency  received information regarding the program’s effect on energy efficiency  projects from numerous stakeholders. This input included written  responses to EPA’s request for information, as well as case-specific  anecdotes and supplemental documents. In assessing this information, the  agency defined any project that included a facility modification that would  directly result in greater output per fuel input (such as more electricity  generated from each ton of coal burned) as an energy efficiency project.  Although EPA based its conclusion about NSR’s impact on such projects  on the total available information, it relied heavily on anecdotes describing  cases in which chemical manufacturers, electric utilities, forest products  manufacturers, and petroleum refineries—four of the industries EPA  identified as most affected by the program—had decided not to pursue  energy efficiency projects because of NSR. While EPA also received  comments from several environmental organizations and state and local  air quality agencies that disputed industry’s claims, an EPA program  manager said that the specific examples provided by industry were  convincing.
After obtaining the anecdotes submitted to EPA by the parties the agency  identified as its primary data sources—including trade associations,  individual firms, and other business interests—and removing those that  did not address energy efficiency or contain complete information, we  reviewed 69 anecdotes that described how NSR deterred companies from  making energy efficiency investments. We determined that these  anecdotes generally went through two rounds of review. First, trade  associations said that their members reviewed and discussed the  anecdotes before submitting them to EPA. After receiving the  submissions, EPA program managers said they used their expertise and  judgment to evaluate the credibility and reliability of the anecdotes.  According to these managers, they paid specific attention to whether (1)  the project described in an anecdote was technically feasible; (2) an  anecdote’s conclusions about how NSR discouraged a project were  consistent with EPA’s understanding of how the NSR provisions would  apply to that project; and (3) the conclusions were based on “real-life,”  rather than hypothetical, situations. EPA program managers found the  anecdotes to be generally credible. While some may have been more  relevant than others (e.g., “real life” examples were more relevant than  hypothetical ones), none was dismissed for failing to meet these criteria,  according to an EPA program manager. Agency staff familiar with the NSR  program then compiled, reviewed, and synthesized this information and  concluded that complying with NSR may have deterred some investments  in energy efficiency projects, including some that may have reduced air  emissions. It is important to note that the energy efficiency findings in the  Report to the President were not the basis of the analysis of the economic  impacts of the final rule, which found that the final rule would encourage  energy efficiency projects, according to an EPA manager of the NSR  program.
The anecdotes generally cited three ways in which these industries believe  complying with NSR discouraged energy efficiency projects, including  concerns that (1) EPA would subsequently determine that projects  companies initiated as routine maintenance, repair, and replacement  without an NSR permit were actually major modifications subject to NSR  and enforcement action; (2) the test used to measure the emissions  impacts of company modifications was not fair; and (3) the NSR  permitting process caused unanticipated project delays and increased  costs.
The first barrier, concerns about possible enforcement actions, stemmed  from recent EPA enforcement litigation against certain electricity  producers in which EPA contested industry’s claims that certain projects  were exempt from NSR because they qualified as routine maintenance.  EPA maintained that these projects were in fact major modifications that  should have triggered NSR. According to senior industry representatives,  this meant that EPA could consider potentially thousands of projects that  industry had previously completed without an NSR permit under this  exemption as NSR violations, including some that state and local air  quality agencies had approved and confirmed did not trigger NSR. This  prompted some industry officials to allege that EPA was reinterpreting  what could be considered routine maintenance exempt from NSR. EPA’s  Office of Enforcement, however, maintains that the agency is correctly  interpreting and enforcing the program.
According to senior representatives of the electric utility and refining  industries, this litigation has produced substantial uncertainty for  companies pursuing facility modifications. Part of this uncertainty may  stem from what industry officials describe as a lack of clear policy  guidance on what qualifies as routine maintenance. EPA has never  explicitly defined routine maintenance since the exclusion was  established, although some clarification has grown out of EPA  enforcement, most notably in the case of Wisconsin Electric Power Co. v.  Reilly (WEPCO). This court decision upheld EPA’s consideration of the  nature, extent, purpose, frequency, and cost of facility modifications, as  well as other relevant factors, when determining whether a project  qualifies for the routine maintenance and repair exemption. EPA  maintains that it takes a case-by-case approach to determining whether a  modification constitutes routine maintenance, and has cited WEPCO as  support for its recent enforcement actions.
However, industry comments submitted to EPA claim that the agency’s  enforcement actions, combined with what they regard as a lack of clear  guidance, make it difficult for them to reliably predict when their projects  will trigger NSR, especially when EPA may later disagree with state and  local NSR determinations. Companies are therefore reluctant to perform  projects that could trigger NSR or possible enforcement litigation,  including, they assert, energy efficiency projects. According to EPA, the  agency’s proposed rule on the routine maintenance exemption would  address some of these concerns by changing its definition.  EPA expects to  issue the rule by the end of 2003.
Several environmental groups disputed EPA’s findings. For example, an  environmental advocacy group involved in NSR issues claimed that the  proposed rule would simply broaden the exemption in violation of the  Clean Air Act. One alternative in the proposed rule would allow companies  to claim as routine maintenance any modifications as long as they cost less  than a certain percentage—depending on the industry—of the total cost of  the polluting unit, such as a boiler, or the entire facility. Another  alternative would allow companies to invoke the routine maintenance  exemption if they are replacing equipment that performs the same  function as its predecessor and does not alter the basic design of a facility.  Environmentalists assert that these exemptions will allow companies to  falsely treat major plant modifications as routine maintenance, avoid NSR  requirements, and increase emissions.
The second barrier cited in the anecdotes was the test used to determine  whether a modification would increase emissions beyond the NSR  threshold. Under the program prior to the final rule, companies making  physical or operational changes that did not qualify for exemptions, such  as the routine maintenance exemption, had to undergo this test to gauge  the changes’ effects on emissions. Before the final rule, a company was to  compare a facility’s emissions during the previous 24 months to its future  potential emissions if its facility was run at maximum capacity or the  highest capacity allowed by the existing NSR permit after making the  change, even if the facility had not run at this level before, or did not plan  to in the future. If the expected future emissions resulting from the change  were more than 40 tons per year higher after making the change, the  project qualified as a significant emission increase and triggered NSR.  Companies (except electric utilities) could request that the permitting  agency allow the use of any different two-year period based on a  demonstration that it is more representative of normal operation. Electric  utilities may use any 2-year period in the previous 5 years as their actual  emissions baseline.
Industry submissions to EPA on the NSR program asserted that having to  assume maximum capacity biased the test and significantly overstated the  true emissions impact of a project. They cited cases where they expected a  project to reduce emissions, but the test showed that it would increase  them. For example, a refinery planned to implement a project that it  expected would improve the energy efficiency of a furnace by 5 percent.  While the furnace was permitted to emit 45 tons of air pollution per year, it  was not operating at full capacity and was therefore only emitting 35 tons  per year. According to the facility’s submission, the project would  decrease annual emissions to 32 tons per year through more efficient fuel  combustion while running at the same capacity. However, the emissions  test required the refinery to compare its historical emissions—35 tons per  year—with its future potential emissions running at full capacity—45 tons  per year. Because the facility was located in an area where a 10 ton per  year increase triggers NSR requirements, the facility would have had to  obtain an NSR permit for the modification.
Likewise, a pulp and paper mill planned to install an air flow system that  would allow its boiler to more efficiently burn natural gas, creating annual  savings of $1 million. By using less fuel, the project was also expected to  reduce future emissions of carbon monoxide, nitrogen oxides, and volatile  organic compounds. However, the facility had been operating below its  maximum capacity during the 24 months preceding the planned  installation. Therefore, when managers compared the facility’s actual  emissions during this period to its future potential emissions, assuming it  would operate at maximum capacity after the modification, the projected  emissions increase qualified as a major modification, even though the  project was expected to reduce emissions. If the company proceeded with  the project under NSR and installed the best available pollution controls, it  would incur $17 million in total costs, making the project cost-prohibitive,  according to the industry submission.
While these anecdotes assert that having to assume maximum capacity  under this test was unfair, the NSR program required facilities to assume  that the changed equipment would operate at the maximum level allowed  in its operating permit unless the owners or operators of the facility made  a legally binding commitment to operate at lower production levels,  according to EPA. Otherwise, EPA and state and local air quality agencies  would have no way of ensuring that companies would not have a  significant increase in emissions under the NSR rules after making a  physical change, according to EPA. In addition, EPA acknowledged in its  Report to the President that performing an energy efficiency project can  provide an economic incentive to increase production levels at more  efficient facilities, potentially resulting in increased emissions. However,  EPA’s new final rule now gives a company the option to compare a  facility’s previous emissions to its projected actual emissions, instead of  its maximum potential emissions. EPA believes that this new test will  remove disincentives that discourage facilities from making the types of  changes that improve operating efficiency, implement pollution prevention  projects, and result in other environmentally beneficial changes. In  addition, EPA asserts that the new record keeping and reporting measures  required with this option will provide the information necessary for  reviewing authorities to ensure that such changes are made consistent  with the Clean Air Act.
The anecdotes also identified a third barrier. According to industry,  unpredictable delays associated with the NSR process disrupt a project’s  planning and construction timetables, increasing project costs. Program  managers and technical directors representing forest product companies,  chemical manufacturers, refineries, and utilities commented on this issue,  stating that the NSR permitting process can last anywhere from 6 to 24  months, thereby delaying or disrupting project planning and construction.  Petroleum refinery representatives claimed to be uniquely affected by this,  asserting that NSR permitting delays made it difficult for them to meet  federal mandates and deadlines for producing cleaner-burning gasoline,  potentially subjecting them to fines and enforcement actions. Industry  officials also claimed that project delays they attributed to NSR permitting  resulted in equipment wearing out, increasing replacement costs, and  raising safety issues. They also stated that certain repair projects required  quick decisions and turnaround, both of which are not compatible with the  amount of time it takes to obtain an NSR permit and install the appropriate  pollution controls. An EPA NSR program manager confirmed that  permitting delays could hinder energy efficiency upgrades in emergency  situations where a company needs to quickly replace broken or worn out  machinery and would like to install more efficient equipment. However,  the program manager said such situations are rare and that the timelines  for planned facility upgrades are generally compatible with the NSR  permitting schedule. In addition to permitting delays, some of the  anecdotes also asserted that, if a project triggered NSR requirements, the  costs of installing pollution controls would have outweighed the  anticipated benefits of the project.
section_title: The National Academy of Public Administration and Environmental Stakeholders Reached Different Conclusions about NSR’s Effects on Energy Efficiency
paragraphs: In an April 2003 report to the Congress on the NSR program, the  National Academy of Public Administration (NAPA) stated that while a  lack of data prevented the organization from determining the extent to  which NSR has impeded energy efficiency improvements, NSR might  indeed have discouraged some industrial sources from undertaking  economically and environmentally sound maintenance and energy  efficiency projects. However, according to NAPA, some facilities continue  to operate without modern pollution controls because of widespread  noncompliance with NSR or flaws in its implementation. NAPA said that  these facilities have an advantage over their competitors because they  have not incurred the costs of controlling emissions, and that such  facilities have little basis to complain that NSR has adversely affected the  efficiency of their operations. An EPA manager for the NSR program took  exception to NAPA's findings, stating that EPA and the states have  enforced the program over the years. The official also said that facilities  only trigger NSR when they make physical changes in, or changes in the  method of operation of, their facilities that significantly increase  emissions.  Therefore, if the facilities NAPA refers to have not undertaken  such modifications, they have complied with the program, according to  the official.
Several environmental groups experienced in NSR issues disagreed with  industry’s claims about the NSR program’s effects on energy efficiency. A  representative of one such group, who has testified before the Congress  on NSR, pointed out that if companies truly wanted to avoid NSR, they  could accept an emissions limit in their operating permit and make a  formal commitment to not emit above the NSR threshold. Companies that  agree to such limits may make any modifications they want without  triggering NSR, provided they do not exceed the limit. With this option  available, the representative asserted that the NSR process could not deter  energy efficiency projects that were expected to reduce emissions because  they would not trigger NSR, since they would not increase emissions  above the program threshold. For example, a source with an operating  permit limit could make a physical or operational change without an NSR  permit and increase emissions by 39.9 tons per year (where the threshold  is 40 tons per year) and not trigger NSR. The environmental representative  cited other factors, such as poor economic conditions and a lack of  willingness to control air emissions, as the primary factors hindering  companies from pursuing these projects, rather than compliance with  NSR.
Representatives of the chemical, forest products, and electric utility  industries disagreed with this position and said that companies are  reluctant to accept an operating permit limit because they would be giving  up their flexibility to increase production in response to changing  economic and market conditions, just for the sake of one energy efficiency  project. A trade association representing the chemical industry also told us  that the lengthy and protracted process for obtaining an operating permit  makes it impractical to renegotiate a permit limit every time a company  wants to undertake an energy efficiency project.
section_title: The Anecdotes Do Not Necessarily Represent NSR’s Effect on Energy Efficiency Projects Industrywide or Their Overall Impact on Emissions
paragraphs: As EPA notes in its Report to the President, its conclusions about the  effect of NSR on energy efficiency projects are based on anecdotal  information because the agency lacked comprehensive data on the  number of projects that did not go forward as a result of NSR, according to  EPA program managers. Because EPA based its conclusions on anecdotes,  the agency’s findings do not necessarily represent NSR’s effect on energy  efficiency projects within the industries that provided the anecdotes or  across all industries subject to the program. Reaching such conclusions  about the program’s broader effects on energy efficiency projects would  have required gathering information from either a statistically valid sample  of companies subject to the program or a comprehensive survey of  affected industries. Conducting such an analysis, however, would have  required substantial resources.
In addition, EPA’s conclusion that the NSR program had discouraged some  energy efficiency investments that would have reduced emissions was  based on the assumption that the companies would not increase their  production after completing the energy efficiency project, according to an  EPA official responsible for the analysis. Under this assumption, 23 of the  69 anecdotes predicted that the proposed projects would decrease  emissions, 11 predicted an increase, 2 predicted no change, and 33 (or 48  percent) did not include sufficient data to determine the emissions  impact. However, facilities’ future production levels and air pollutant  emissions may fluctuate in response to changing economic conditions and  other factors. In addition, performing an energy efficiency project can  provide an economic incentive to increase production levels at more  efficient facilities, potentially increasing emissions and related health  risks.
The executive director of one industry trade association stated that it  would make economic sense to increase production at more efficient  facilities. The representative “could not imagine a utility spending money  on extra capacity, and then not utilizing it.” In addition, according to EPA,  production at more efficient facilities could supplant that at less efficient  and higher-emitting facilities. Therefore, even in cases where an energy  efficiency project was expected to reduce emissions, future increases in  production after implementing a project could possibly increase  emissions, as well as related health risks, past the NSR threshold.
On the other hand, according to an EPA official responsible for the  agency’s energy efficiency analysis, the agency expected that if a company  increased production at its more efficient facilities, it could decrease  production at its less efficient facilities. Therefore, any emissions  increases due to higher production levels at more efficient facilities would  be offset by decreased production elsewhere. In addition, a facility’s  emissions could decrease more than expected after implementing an  energy efficiency project if the facility decreased production, for example,  due to poor economic conditions. An EPA program manager said that the  agency has not analyzed the air pollution impacts of shifts in production  that facilities make after implementing energy efficiency projects.
section_title: Conclusions
paragraphs: While EPA determined that the final rule would lead to overall economic  and environmental benefits, these effects are uncertain because of limited  data and difficulty in determining how industrial companies will respond  to the rule. Consistent with the relevant executive order and guidance,  EPA conducted a limited analysis that determined that the rule was not  economically significant, and OMB concurred. In addition, EPA identified  data limitations that prevented the agency from conducting a more  quantitative analysis. Some stakeholders disagree with EPA about the  rule’s effects, contending that the rule will allow companies to increase air  pollutant emissions, resulting in adverse public health effects. If these  stakeholders are correct, the final rule could exacerbate existing air  pollution problems—133 million Americans already live in areas with air  pollution levels above at least one of the health-based air quality  standards—and impose negative economic impacts that EPA did not  account for in its analysis of the rule.
section_title: Recommendations for Executive Action
paragraphs: Because of the lack of data and uncertainties about the NSR final rule’s  impacts, we recommend that the EPA Administrator:    determine what data are available that the agency could use to monitor  the emissions impacts of the rule,   work with state and local air quality agencies to identify any additional  data needs and possible ways to fill them, and   use the monitoring results to determine whether the rule has created  adverse effects that the agency needs to address.
section_title: Agency Comments
paragraphs: We provided EPA and OMB with a draft of this report for review and  comment. We subsequently received comments from both agencies. EPA  said that the report was accurate and that the agency agreed with our  conclusions and recommendation. OMB said that the report was accurate  but raised several questions about EPA’s potential implementation of the  recommendation. Specifically, OMB said it would be difficult for EPA to  gather data to monitor the rule’s effects and that attributing emissions  changes to the final rule would pose challenges. For example, OMB said  that it would be difficult to determine the level of emissions facilities  would have released in the absence of the final rule. EPA, however, said  that the recommendation acknowledges these challenges and provides  flexibility for the agency to work with state and local agencies to identify  data collection strategies. EPA and OMB also recommended a number of  technical changes to the report, which we have incorporated into this  report as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 10 days from the  report date. At that time, we will send copies to the EPA Administrator,  the Director, Office of Management and Budget, interested congressional  committees, and other interested parties. We will also make copies  available to others upon request. In addition, this report will be available  at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staffs have any questions, please call me at (202) 512-3841. I  can also be reached at StephensonJ@gao.gov. Key contributors to this  report are listed in appendix II.
section_title: Appendix I: Objectives, Scope, and Appendix I: Objectives, Scope, and Methodology
paragraphs: The Ranking Minority Member of the Senate Environment and Public  Works Committee and Senator Lieberman asked us to determine the basis  of (1) EPA’s analysis of the economic impacts of the final rule and its  conclusion that the rule would not create significant enough benefits or  costs to merit a more detailed analysis and (2) EPA’s conclusions that the  NSR program (prior to the final rule) discouraged some energy efficiency  projects.
To respond to the first objective, we used OMB and EPA guidance to  review EPA’s screening analysis of the final rule’s economic impacts. EPA  issued its guidance to ensure that its economic analyses comply with the  Unfunded Mandates Reform Act of 1995 and Executive Order 12866. These  directives require federal agencies to analyze the economic effects of rules  that may impose annual costs on the government or private entities of  more than $100 million. In addition to reviewing EPA, OMB, and other  federal requirements and guidance on conducting economic analyses of  proposed rules, we reviewed two additional EPA analyses of the final  rule’s effects, as well as documents from environmental groups, industry  trade associations, and other interested parties related to the costs and  benefits of the final rule. Furthermore, we met with the NSR program  manager within EPA and other senior officials within the agency’s Office  of Air Quality Planning and Standards. We also met with senior OMB staff  responsible for reviewing EPA’s analysis within the Office of Information  and Regulatory Affairs.
To respond to the second objective, we reviewed information provided to  EPA by outside organizations that the agency relied on in preparing its  findings on the NSR program’s effects on energy efficiency projects at  industrial companies. This information consisted of written comments,  case-specific examples of foregone energy efficiency projects, and  supplemental documentation submitted to EPA by individual firms,  industry trade associations, and environmental advocacy groups during  EPA’s public comment period. We obtained documents through the EPA  public docket A-2001-19, and directly from those companies and  organizations who submitted information to EPA. We also obtained  documents or conducted interviews with parties identified by EPA as the  primary data sources underlying its energy efficiency findings, including  representatives of the American Chemistry Council, the American Forest  and Paper Association, the American Petroleum Institute, the American  Public Power Association, British Petroleum, Detroit Edison, Duke  Energy, the Edison Electric Institute, Excel Energy, Exxon Mobil, the  National Coal Council, and the National Petrochemical & Refiners  Association. Once we obtained anecdotes provided by the parties EPA  identified as its primary data sources, we removed those that did not  pertain to the NSR program’s effects on energy efficiency as well as those  that did not provide sufficient information for analysis. We then reviewed  the 69 remaining anecdotes to assess their anticipated effects on  emissions. We did not independently verify the factual basis of the  anecdotes. We also spoke with the Natural Resources Defense Council, a  national environmental advocacy organization that disputed EPA findings.  Finally, we spoke with the NSR program manager within EPA and another  official within the agency’s Office of Air Quality Planning and Standards  who were responsible for the Report to the President.
We conducted our work between August 2002 and August 2003 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to the individuals named above Tim Guinane, David Hancock,  and Michael Hix made key contributions to this report. Nancy Crothers,  Karen Keegan, Jeffrey Larson, Judy Pagano, Lisa Turner, and Laura  Yannayon also made important contributions.