An Aerial View of 2002

The year 2002 should be a banner one for air quality management issues at both the federal and state level. Issues currently on the table include New Source Review (NSR), energy facility regulation and enforcement. In addition, the terrorist attacks of September 11, 2001 have highlighted attention on risk management plans under Section 112 (r) of the Clean Air Act (CAA). This focused government attention on what level of facility information disclosure is appropriate and focused facility attention on whether their disaster planning is appropriate in today's climate. In evaluating your disaster plans, you should be mindful of your tort liability and insurance coverage.

New Source Review

At the federal level under the new administration, U.S. Environmental Protection Agency (EPA) should finally decide how it wants to address new facility construction or modifications under NSR. In the past, evolving EPA interpretations that made NSR applicability uncertain plagued facilities wanting to modify equipment or change processes. In addition, EPA enforcement initiatives under NSR have been based on these new interpretations, making reliance on past NSR decisions potentially risky. EPA has changed the interpretation of what constitutes routine repair and maintenance, what constitutes fugitive emissions and even what constitutes your source (such as the new concepts of co-located facilities or support facilities). All of these new interpretations make NSR applicability far more likely than it was before.

Several new ideas have surfaced regarding how NSR should apply in the future. One concept is to make NSR applicability dependant on emissions comparisons of past actual to future actual, as with electric utilities. The existing test for most facilities compares past actual emissions (before the change) with the future potential of the facility to emit (after the change). Since most facilities do not operate at capacity, their past actual emissions are very low when compared to their potential emissions, even without a physical or operational change. Therefore, virtually any physical change will calculate an emissions increase above significance levels and NSR will apply. If adopted, a past actual to future actual comparison test would make NSR applicability less draconian. While routine repair and replacement is excluded from the NSR test, recent interpretations have greatly reduced what qualifies as routine repair and replacement. Another NSR reform concept is to provide an exemption for low cost modifications, similar to the new source performance standard exemption. While many NSR reform ideas have surfaced, both at EPA and in Congress, the jury is still out. EPA's plans for future NSR action should have been announced already, but have been delayed due to the September 11, 2001 events. This debate will reach some form of final resolution in 2002.

One of the driving forces behind NSR reform is the argument that existing NSR policies have essentially stopped the development of any new major industrial facility for some of America's core industries. NSR reform is necessary because, with few exceptions, we have not had a new pulp and paper mill, petroleum refinery, steel mill, coal fired utility power plant or similar facility built in the United States for many years. Our core industrial process infrastructure is inadequate and aging. This was brought home with clarity during the summer of 2001 with severe power shortages, particularly in California. That power problem also prompted several legislative moves to address the energy crisis.

Energy Facility Legislation

One legislative option was an energy bill that would place certain emissions limitations on construction or modification of new energy sources, such as coal-fired power plants or petroleum refineries. In exchange for the additional controls, these sources would be excused from, or have diminished obligations under NSR or other permitting requirements. These energy bills quickly attracted the attention of other core industrial sectors that felt that they should also have been included in the energy bill since their processes were central to our economy. The debate quickly moved from an energy bill to an industrial revitalization bill and now is moving back to just an energy bill. It is still uncertain what industrial activities would be included in any such relief, if it is adopted, and whether it should be implemented on a legislative or administrative basis. Since California power production has not increased significantly, this debate may resurface early in 2002 if some solution is not achieved. One aspect of the energy legislation was possible legislative termination of existing EPA enforcement actions against the electric utility industry for NSR violations.

Enforcement

CAA enforcement will certainly be another critical CAA issue for 2002. As mentioned earlier, in the past, EPA lauched major new enforcement initiatives under NSR against industrial sectors, such as the pulp and paper industry, electric utility generating industry and others. These enforcement initiatives were based not on new regulations, but on new interpretations of what constitutes NSR applicability under existing regulations. EPA sought major fines and expensive retrofit, particularly at coal fired power plants. Some of those cases have settled, some continue. Under the Bush administration it is unlikely that we will see new major enforcement initiative against industrial sectors. The remaining active enforcement actions will probably continue through both settlement and litigation. That does not mean, however, that enforcement will be reduced in 2002; in fact, quite the opposite will happen.

CAA enforcement is likely to increase in 2002 for a variety or reasons. First, today's comprehensive Title V permits place a significantly greater number of substantive, monitoring, record keeping and reporting obligations on facilities than they had in the past -- so the potential is greater that at least some of those requirements will not be met. Second, the Title V reporting system brings those potential violations to the notice of government regulators (and citizen oversight groups) much faster and more clearly. Third, we have institutionalized the process of decision-making regarding when compliance and enforcement should be initiated, through EPA policies and federal-state memorandums of agreement. Those policies contain highly detailed checklists of facts that mandate a wide range of "non-compliance" situations, which must be pursued to full enforcement. While the direction of the Bush administration may be towards less enforcement, the existing institutionalized EPA enforcement policies allow regional offices and lower level managers to continue aggressive enforcement decisions under existing policy guidance that has not been changed to reflect the new softer enforcement posture.

Not only will CAA enforcement increase, but so will civil penalties. EPA and the states currently employ two primary theories to recover any economic gain a company may have received from non-compliance -- the wrongful profits theory and the cost avoided theory (BEN model). The first theory assumes that if you made profits from manufacturing a product with non-compliant material, that profit must be eliminated to ensure a compliance incentive. Assume you manufacture automobiles and glue the mirror to the windshield with one drop of a non-compliant adhesive. This policy would seek to recover the profit you made on the entire automobile by using the one drop of non-compliant glue, a result that seems unwarranted. The second theory assumes you benefited from capital and operations and maintenance expenses that were not expended during the non-compliance period. The BEN model attempts to evaluate the present economic benefit you derived from not making past expenditures to purchase and operate control equipment. But, assume you utilized a non-compliant coating that cost $8.00 per gallon when you could have purchased a compliant coating for $6.00 per gallon. Utilizing the BEN model to calculate your savings from not purchasing and operating an emissions incinerator would not accurately reflect your "economic benefit." These two theories are pushed strongly by EPA, and by the states under EPA pressure, particularly as minimal settlement penalties. With that pressure, CAA penalties are likely to increase.

In addition to these traditional issues, we are faced with a host of air issues resulting from the September 11 attacks. First, environmental agencies generally, and the air divisions of those agencies in particular, have been the repositories for tremendous amounts of information regarding facilities, their operations, the consequences of certain process failures at those facilities and the off-site consequences of those failures. Generally that information was made available to the public under Freedom of Information Act requests and sometimes it was placed on the Internet for unrestricted public review. Recent events have shown how sensitive that information can be and how difficult it will be to draw the appropriate line between legitimate information disclosure to keep the public informed and reasonable security concerns. Nearly all federal and state environmental agencies are reevaluating their procedures for information disclosure.

Facilities are faced with an equally difficult task. First, they must evaluate their disaster management plans and see what changes are necessary in light of recent events. Then they must see how this would mandate changes in their Risk Management Plans under Section 112(r) of the CAA. This is particularly important because the 112(r) plans traditionally evaluated only single process or container failures. Obviously, intentional scenarios can arise where there will be multiple process or container failures. Where necessary, changes to the facility disaster management plans must be reflected in revised 112(r) plans. But the facility may wish to be less specific in the 112(r) plans to avoid disclosure for security reasons.

Tort Liability and Insurance Coverage

All of these decisions must be undertaken with an eye on two issues: potential tort litigation and insurance. Any significant air release, including one caused by intentional acts of third parties, can give rise to tort litigation. That litigation will essentially ask if you did enough to anticipate, prevent or control these reasonably foreseeable events. Every decision, discussion and memorandum your make in the disaster management or 112(r) planning process may be discovered during that litigation. Prudent managers will ensure the possibility of tort litigation is in their minds as they discuss and prepare disaster management and 112(r) plans.

The second issue affecting disaster management and 112(r) planning is insurance. Nearly all traditional general liability insurance historically included coverage for terrorist acts, so long as it was not an act of war. However, as of December 31, 2001, many, if not all, major reinsurers will discontinue terrorism coverage under general liability policies. You may find yourself without insurance coverage after December 31, 2001 for property damage or personal injury caused by terrorism or you may find the additional coverage rider prohibitively expensive. Business continuation insurance is somewhat different. Many existing business continuation insurance policies have never covered loss from acts of terrorism and do not cover loss caused by police actions to restrict access to your facility due to terrorism at another facility nearby. In light of these potential liability exposures, you may wish to change your disaster management or 112(r) plans to reflect a more conservative approach.

The aerial view of 2002 shows a variety of significant air issues at both the governmental and facility level.

e-sources

EPA New Source Review Homepage -- www.epa.gov/ttn/nsr

Information about the BEN Model -- www.epa.gov/oeca/models/ben.html

Air & Waste Management Association -- www.awma.org

EPA's Guidance Documents for Chemical Accident Prevention and Risk Management Plans -- www.epa.gov/swercepp/ap-tegu.htm

This article originally appeared in the 01/01/2002 issue of Environmental Protection.

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