Uncertain Air Regulations - Part 1

• By David E. Koch
• Mar 01, 2001

This is the first in a two-par series based on research conducted for the MARKET FOCUS series of the EnvironmentNOW^® News Service. The research involved direct outreach to environmental firms working in the trenches of air quality markets. The majority of participants were from environmental consulting firms that serve clients in the private sector and conduct business in domestic markets. The primary client sectors represented include electric utilities, chemical manufacturers, pulp/paper mills, petroleum refineries, pharmaceutical manufacturers, stone/clay/cement operations and other miscellaneous manufacturing sectors. Part II will address how regulatory developments are translating into business opportunities for air quality firms.

The only certainty in air quality markets appears to be the uncertainty about the future state of regulations. Courts over the past year stalled the pace of U. S. Environmental Protection Agency's (EPA's) programs to control emissions of ozone precursors in the United States. The first of this two-part feature provides capsule summaries on the status of air-related regulatory programs making headlines in recent months. The second component will address how regulatory developments are translating into business opportunities for air quality firms, including a summary of recent procurement activity in the air quality segment. It will also include input from the field on the strongest end use sectors over the near term.

The regulatory scene

Unlike other sectors of the environmental industry where regulatory drivers are also being moved by economic drivers, the air pollution control industry remains largely dependent upon regulations to drive demandupon regulations to drive demand. Based on the results of this research effort, Study participants were asked to identify factors driving demand for their air-related services. Tthe most common drivers in today's air quality markets are associated with the following Clean Air Act (CAA) regulatory programs:

• New Source Review (NSR);,
• Title V Operating Permits;,
• Maximum Achievable Control Technology (MACT) standards;, and
• programs to control emissions of ozone precursors, including nitrogen oxides (NO_x) and volatile organic compounds (VOCs). (i.e., nitrogen oxides (NO_x)).

On a pollutant basis, NO_x emission control programs are ppear to be creating the strongest business opportunities in air quality markets today. In fact, according to Jeffrey Smith, Executive Director of the Institute of Clean Air Companies (ICAC), NO_x is emerging as the "pollutant of the millennium - so far, or at --so far, at least until mercury takes its place."

In addition, environmental firms are also seeing strong demand from the Title V operating permits program. Craig Holbrook, Strategic Planner at Trinity Consultants, admitted to being surprised at the high rate of growth his company was seeing from Title V compliance work this year. According to Holbrook, the majority of work Trinity performs is related to permit renewals, although companies that failed to comply with Title V compliance are also now seeking Trinity's services to obtain the requisite permits.

Not surprisingly, environmental firms are closely watching legal battles related to EPA's ozone control efforts. The following sections summarize the latest developments in each of EPA's priority air quality areas since November 1999, as well as the implications of each for companies doing business in these markets. the industry over the near term.

Ozone NAAQS in limbo, section 126 picks up the slack in Eastern US

The controversy over EPA's National Ambient Air Quality Standards (NAAQS) for ozone and PM2.5 fine particulate continues. In May 1999, the D.C. Circuit Court of Appeals remanded EPA's 8-hour ozone NAAQS and PM2.5 fine particulate NAAQS, citing that EPA assumed an "unconstitutional delegation of legislative power." Although an earlier petition was denied, the U.S. Supreme Court agreed this past May to hear EPA's case. The Supreme Court heard the case during November 2000. At press time, a final decision was expected to be rendered by spring 2001. no date had yet been set. The case is particularly noteworthy because it has potentiallyraises questions about the authority of all federal government agencies to pass regulations. widespread ramifications, given that it calls into question the regulatory powers of government agencies. EPA's appeals process could be a long one, and new air quality requirements to meet an 8-hour ozone NAAQS are likely to be on a long timeframe.

With the new eight-hour NAAQS tied up in court proceedings, EPA officially reinstated the one-hour standard in certain areas of the United States this past July. In the majority of counties, reinstatement of the one-hour standard is not expected to require any additional action. Closer attention, however, will likely be paid to new and expanding sources of air pollution in counties that have exceeded the ozone standard in recent years.

Faced with court challenges to a more stringent ozone ozone NAAQS, EPA is now focused on another tool at states' disposal: Section 126 petitions. By filing Section 126 petitions, states can request EPA use its authority to control emissions originating from sources in upwind states. In December 1999, EPA granted Section 126 petitions submitted by New York, Connecticut, Massachusetts and Pennsylvania. The decision, in effect, charged nearly 400 sources in a dozen states to reduce their total NO_x emissions by 0.5 millionM tons from projected 2007 levels. The scope of regulated facilities could expand further. At press time, petitions from other states were still outstanding. . Although attorneys for the regulated facilities have promised to appeal the Section 126 petitions, Smith from the ICAC believes that "EPA is on firm legal ground with the section 126 petitions," and that the requisite control programs will proceed on schedule.

NO_x SIP call back on track

Yet another EPA regulation mired in legal battles is the agency's October 1998 NO_x State Implementation Plan (SIP) Call - known as the NO_x SIP call. EPA's rule was designed to address the effects of interstate transport of ozone precursors. The rule outlines a program that would require sources in 22 eastern states and the District of Columbia to reduce NO_x emissions during the ozone season, reaching a permanent emissions cap in 2007. The air pollution program has been hotly contested by states, electric utilities, manufacturers and the trucking industry. who argue thatAs a the impact of cross-border pollution has been exaggerated and the controls needed to alleviate the problem would be too expensive. In May 1999, the result of legal challenges by the new rule's opponents, the D.C. Circuit Court of Appeals in May 1999 stayed the implementation of EPA's September 1999 deadline for states to submit their implementation plans for complying with the NO_x SIP c all.

Last spring, however, much to the relief of eastern states, the D.C. Circuit Court of Appeals made a final ruling upholding EPA's NO_x SIP call. The decision once again starts a compliance clock for states to submit SIPs that outline control measures necessary to reduce NO_x emissions from the highest-polluting power plants and other industrial sources in the region.. According to Smith from the ICAC, "in light of the decision from the U.S. District Court, NO_x emission control continues to be the focus of air pollution control efforts in the United States."

Most of the NO_x reductions are expected to come from coal-burning power plants in the Midwest and Southeast. Originally, the NO_x SIP call gave states one year to submit their SIPs, and affected facilities had a three-year compliance period once SIPs received EPA approval. At press time, EPA was developing a proposed amendment to the NO_x SIP call rule that would establish due dates for state SIP submittals. had yet to set a new deadline for SIP submittals. Many electric utilities and owners of large industrial boilers and combustion turbines are already anticipating the need to meet future NO_x emission reduction requirements, creating opportunity for environmental firms.

States' ozone control efforts continue despite EPA's legal obstacles

Despite the legal wrangling in the federal ozone program, certain states are continuing to actively tighten their own air pollution emission limits. Electric utility plants seem destined for closer scrutiny across the United States, particularly plants that rely on coal as their primary fuel input. States including California, Connecticut and Texas recently passed regulations that specifically target electric utilities.

Texas has been a hot spot of air-related activity over the past year. In 1999, the state's legislature passed a rule urging older facilities that were exempted from the Texas' permitting requirements to voluntarily obtain permits and reduce air pollutant emissions by September 1, 2001. Since the law was passed, a number of companies joined the program, including Eastman Chemical and Alcoa Inc. If additional grandfathered units follow the same path, it could drive additional air-related work in this area over the near term.

In January 2000, air pollution markets in Texas got another boost when the Texas Natural Resource Conservation Commission approved a set of comprehensive air pollution control plans designed to reduce NO_x emissions by 25 percent to 75 percent in the state's three major nonattainment areas - Houston/Galveston, Dallas/Fort Worth and Beaumont/Port Arthur. The plans also set NO_x emission reduction goals for other areas of Texas. State efforts to control air pollution are expected to continue, particularly in eastern states, and environmental firms watch closely for emerging business opportunities.

EPA targets new source review violators

The Clean Air Act's New Source Review (NSR) program requires facility owners to obtain permits and install best available control technologies (BACT) during any "major modification" that is expected to result in a significant increase in criteria pollutant emissions. In November 1999, the NSR program made headlines when EPA and the U.S. Department of Justice (DOJ) brought an unprecedented legal action against several major electric utilities. Although most of the utilities charged in the suit announced their intent to appeal, Tampa Electric Company in February 2000 became the first defendant to reach a settlement agreement. Under the agreement, Tampa Electric will invest $1 billionB in air pollution control measures, and establish a comprehensive cleanup program in an effort to dramatically decrease emissions from the company's coal-fired power plants. If similar agreements are reached with the other utilities named in the suit, the demand for air pollution control equipment and expertise will be signi ficant.

In February 2000, EPA vowed to continue to rectify what the agency believes improve what the agency believes is pervasive noncompliance with NSR provisions. True to its promise, EPA has since already brought enforcement actions against companies in the pulp/paper and petroleum refining industries. For instance, mMajor pulp/paper mills, including Appleton Papers Inc., Westvaco Corp. and Willamette Industries, have found themselves in EPA's crosshairs for alleged NSR violations. The fines are weighty. Appleton, for instance, must pay a $490,000 penalty, as well as investing $10 millionM in pollution control upgrades at one of the mills in Pennsylvania.

EPA wielded its regulatory force again July 2000 when it reached record-breaking agreements valued at nearly $600 millionM with two of the nation's largest petroleum refiners, BP Amoco and Koch Petroleum Group. The agreements, the largest ever reached with petroleum refiners under the CAA, affect 12 refineries in 10 states across the United States, accounting for 15 percent of the nation's refining capacity. The noteworthy agreement was the result of an EPA-led agreements, which investigation of the entire refining industry, and will enable both companies to avoid a planned enforcement action by EPA.

In light of recent legal activities, the mandate is clear. EPA is expected to continue closely scrutinizing the expansion activities of petroleum refineries, chemical manufacturers and pulp/paper mills. Environmental firms serving these industries are already providing clients with the technical expertise necessary to prepare for almost certain scrutiny by EPA regulators.

States' Ozone Control Efforts Continue Despite EPA's Legal Obstacles

Despite the legal wrangling in the federal ozone program, certain states are continuing to actively tighten their own air pollution emission limits. Electric utility plants seem destined for closer scrutiny across the US, particularly plants that rely on coal as their primary fuel input. States from California to Texas to New England have recently passed regulations that specifically target electric utilities.

Texas has been a hot spot of air-related activity over the past year. In 1999, Texas passed legislation urging older facilities that were exempted from the state's permitting requirements to voluntarily obtain permits and reduce their air pollutant emissions by September 1, 2001. Since the law was passed, a number of companies joined the program, including Eastman Chemical and Alcoa Inc. Holbrook at Trinity Consultants expects additional air-related work to come from grandfathered units in Texas, noting that "some of the bigger grandfathered sources are in a state of disarray, promising to drive a lot of work in this area over the near term." In January 2000, air pollution markets in Texas got another boost when the Texas Natural Resource Conservation Commission (TNRCC) approved a set of comprehensive air pollution control plans designed to reduce NO_x emissions by 25% to 75% in the state's three major nonattainment areas: Houston-Galveston, Dallas-Fort Worth, and Beaumont-Port Arthur. The plans also set NO_x emission reduction goals for other areas of Texas. With state efforts to control air pollution expected to continue, particularly in the eastern US, environmental firms watch closely for emerging business opportunities.

Much remains to be done on MACT front

Environmental firms also view the ongoing implementation of EPA's MACT program as a key driver of demand for their air quality-related services. The pace at which EPA is promulgating MACT standards has increased dramatically over the past year, as the agency strives to meet its obligations under the CAA. The following table summarizes the latest industries to fall under the regulatory arm of MACT standards.

Source Category	Status of Standard	Date of Latest Action
Secondary aluminum production	Finalized	March 2000
Vegetable oil production	Proposed	May 2000
Fiberglass manufacturing	Proposed	May 2000
Boat manufacturing	Proposed	July 2000
Metal coil coating	Proposed	July 2000
Cellulose products manufacturing	Proposed	August 2000
Leather finishing	Proposed	September 2000
Paper and other web coating	Proposed	September 2000
Rubber tire manufacturing	Proposed	October 2000

Rules for a significant number of source categories are still outstanding. At press time, EPA still had nearly 50 source categories remaining to have MACT proposed or promulgated. This is a significant body of upcoming regulations, compared with the 54 categories for which MACT standards have either already been promulgated or are in the proposal stage since the CAA amendments were passed in 1990. Industries soon to fall under EPA's MACT umbrella include: combustion sources at paper mills, primary copper smelting operations, resin production, certain petroleum refining processes, secondary aluminum production and ethylene processes.

EPA is also already moving ahead on an Urban Air Toxics program to require smaller sources in urban areas to take steps to reduce air toxics emissions. MACT standards for these additional sources, however, are on a longer time frame, with promulgation not expected until at least 2001.

Electric utilities build and expand despite strict regulations

It comes as no surprise that electric utilities are being increasingly regulated by EPA for their emissions of sulfur dioxide (SO₂), NO_x, mercury and particulate matter, as well as other pollutants. According to the latest EPA statistics, electric utility plants are responsible for nearly 70 percent of SO₂ emissions in the US, and 30 percent of NO_x emissions. Based on a review of recent contract awards and Requests for Proposals (RFPs) as reported in EnvironmentNOW^® News Service, the electric utility sector is driving the majority of demand for air-related environmental services. Part of the reason for this is that the requirements faced by utilities seeking to expand existing facilities, or build new facilities, are becoming more stringent. Construction of new plants or modifications to existing electricity generating plants could face intense scrutiny, especially in metropolitan areas that are in nonattainment with EPA's ozone NAAQS.

Despite tighter emission limits, new power plants are being built in record numbers across the United States as major electricity providers gear up for industry deregulation. Earlier this year, Duke Energy North America (Houston, Texas) announced plans to open three new power plants by 2001. All new electric utility plants must now comply with a number of air quality regulations concerning the achievement or maintenance of attainment with the federal NAAQS, which typically require the installation of BACT. Such requirements are creating demand for the services of environmental firms, particularly for complex dispersion modeling to determine the effect that one type of pollutant control may have on the emissions of another.

In addition, electric utility restructuring is exerting a powerful force on the demand for air-related services as electric utilities undertake discretionary environmental projects and commit to voluntary emission reductions in order to gain the favor of regulatory agencies and the general public. Business opportunities are emerging at existing power plants as they seek to upgrade aging facilities, improve efficiency, and reduce costs in anticipation of deregulated markets. Utilities are also repowering plants to incorporate existing equipment, which also has cost benefits related to site permits. The use of steam turbines is increasing, primarily for their ability to reduce NO_x and SO₂ emissions. Modifications at electric utilities are also increasingly involving the use of scrubbers for SO₂ control and low-NO_x burners and selective catalytic reduction (SCR) systems for NO_x control. With the recent DOJ case, utilities are paying even more attention to determine whether particular modifications to their operations will trigger NSR applicability.

Many environmental firms continue to view the electric utility sector as a strong growth market and are closely following developments in the EPA/NSR case, as well as the section 126 petitions and NO_x SIP call for their implications at electric utility plants. In addition, in light of EPA's recent legal action against major electric utilities and companies in other sectors, clients' compliance with NSR becomes an even greater concern. As shown by the recent $1 billionB settlement reached by Tampa Bay Electric, the cost of noncompliance can be steep.

This article appeared in the March 2001 issue of Environmental Protection, Vol. 12, No. 3, on page 24.

This article originally appeared in the 03/01/2001 issue of Environmental Protection.