Acid Rain Program: Permits; Final Rule

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 72

[FRL-5109-8]

RIN 2060--AF59

Acid Rain Program: Permits

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

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SUMMARY: Title IV of the Clean Air Act, as amended by Public Law 101-

549, the Clean Air Act Amendments of 1990 (the Act), authorizes the

Environmental Protection Agency (EPA or Agency) to establish the Acid

Rain Program. On January 11, 1993, the Agency promulgated final rules

under title IV. Several parties filed petitions for review of the

rules. On November 18, 1993, the Agency published a notice of proposed

revisions of those rules implementing sections 404(b) and (c)

(substitution plans) and 408(c)(1)(B) (reduced utilization plans) of

the Act. On May 4, 1994, EPA and other parties signed a settlement

agreement addressing substitution and reduced utilization issues.

After reviewing the record, EPA concludes that the January 11, 1993

rules can be read to give utilities an ability to use substitution and

reduced utilization plans to create excess, new allowances. These

allowances will authorize sulfur dioxide emissions in excess of total

emissions without the plans and will result from emission reductions

made, or required by federal or State law adopted, before enactment of

title IV. This creation of allowances is contrary to the purposes of

sections 404(b) and (c) and 408(c)(1)(B) and can compromise achievement

of the emissions reductions intended under title IV. Consequently, EPA

is modifying sections of part 72 of the January 11, 1993 regulations.

The rule revisions will prevent the use of substitution and reduced

utilization plans to create excess, new allowances and are consistent

with the May 4, 1994 settlement.

EFFECTIVE DATE: December 22, 1994.

ADDRESSES: Docket No. A-93-40, containing supporting information used

to develop the proposal, copies of all comments received, and responses

to comments, is available for public inspection and copying from 8:30

a.m. to 12:00 p.m. and 1:00 p.m. to 3:30 p.m., Monday through Friday,

excluding legal holidays, at EPA's Air Docket Section (LE-131),

Waterside Mall, room 1500, 1st floor, 401 M Street, SW., Washington DC

20460. A reasonable fee may be charged for copying.

FOR FURTHER INFORMATION CONTACT: Dwight C. Alpern, Attorney-advisor, at

(202) 233-9151, Acid Rain Division (6204J), U.S. Environmental

Protection Agency, 401 M St., SW., Washington, DC 20460, or the Acid

Rain Hotline at (202) 233-9620.

SUPPLEMENTARY INFORMATION: The contents of the preamble to the final

rule are as follows:

I. Statutory Purposes of the Substitution and Reduced Utilization

Provisions

II. Need to Modify the January 11, 1993 Regulations

A. The January 11, 1993 Regulations can be Read to Give Utilities

the Ability to Bring Phase II Units Into Phase I and Create Excess,

new Allowances

B. Under the January 11, 1993 Regulations, Entry of Phase II Units

Into Phase I can Significantly Compromise the Emissions Reduction

Goals of Title IV

III. Modifications of the January 11, 1993 Regulations

A. Substitution Plans

1. Limiting the Allowances Allocated to Each Substitution Unit

a. 1989 or 1990 SO2 Emissions Rate

b. Most Stringent Federal or State SO2 Emissions Limitation

c. Baseline

2. Limiting the Number of Substitution Units

3. Requirement That the Substitution Unit be Under Control of the

Table A Unit's Owner or Operator

4. Other Changes

B. Reduced Utilization Plans

1. Limiting the Category of Units That can Qualify as Compensating

Units

2. End-of-Year Review of the Need for Compensating Units

3. Reporting and Allowance Surrender

IV. Applicability of Rule Revisions to Existing Permit Applications

V. Administrative Requirements

A. Docket

B. Executive Order 12866

C. Paperwork Reduction Act

D. Regulatory Flexibility Act

E. Miscellaneous

I. Statutory Purposes of the Substitution and Reduced Utilization

Provisions

The provisions in sections 404(b) and (c) and 408(c)(1)(B) of the

Act concerning substitution and reduced utilization plans have specific

statutory purposes related to the achievement of the sulfur dioxide

emissions reduction goals of title IV. The Agency maintains that

Congress did not intend that these provisions provide utilities an

ability to create excess, new allowances by bringing Phase II units

into Phase I. Because the January 11, 1993 regulations implementing

these provisions can be read to allow the creation of excess, new

allowances in Phase I, the Agency is revising today the regulations to

ensure that this does not occur. See 58 FR 60951 (defining ``excess,

new allowances'').

As discussed in the preamble of the November 18, 1993 proposal (58

FR 60950-60951), Congress established substitution plans as a

compliance option to increase units' compliance flexibility and reduce

their overall costs of compliance in Phase I while still achieving the

emissions reductions intended by Congress under title IV. A

substitution plan allows the owner or operator of a unit listed in

Table A of section 404 to reassign the unit's emissions reduction

obligations to a designated non-Table A unit under the owner's or

operator's control. Upon approval of the reassignment, the non-Table A

unit becomes subject to all requirements for Phase I units with regard

to sulfur dioxide and is allocated allowances. Emissions reductions by

the non-Table A unit may therefore free up allowances, which may be

used by the Table A unit (or any other unit) in lieu of making

emissions reductions.

Section 404(b)(5) of the Act expressly states that, with a

substitution plan, the intended emissions reductions must still be

achieved. That section requires that, in approving a substitution plan,

the Administrator ensure that the substitution results in total

emissions reductions at least equal to the total reductions that

otherwise ``would have been achieved'' by these Table A and non-Table A

units ``without such substitution.'' 42 U.S.C. 7651c(b)(5). EPA

concludes that the substitution provision is intended to provide an

alternative means of achieving Phase I reductions, not a mechanism for

avoiding such emission reductions.

The provision for reduced utilization plans has a statutory purpose

that is also aimed at ensuring realization of emission reductions. As

explained in the November 18, 1993 preamble (58 FR 60951), Congress

recognized that the potential for circumvention of emission limitation

requirements exists because in Phase I only a minority of all utility

units are subject to such requirements. A Phase I unit could simply

reduce its utilization by shifting its generation, and the emissions

that would otherwise result, to a unit that was not required to use

allowances to cover its emissions. Allowances allocated to the Phase I

unit would be freed up for use without achievement, at either unit, of

the intended emissions reductions.

In section 408(c)(1)(B), Congress adopted a solution to this

problem. Owners and operators of any Phase I unit that, for compliance

purposes, propose reducing utilization of the unit below 1985-87

utilization (i.e., its baseline) in order to comply with title IV are

required to submit a reduced utilization plan. In such a plan, the

owners and operators must designate the units that will provide

generation to compensate for the reduced utilization of the Phase I

unit or must account for the reduced utilization through energy

conservation or improved unit efficiency. 42 U.S.C. 7651(c)(1)(B). Each

compensating unit in an approved plan becomes subject to Phase I sulfur

dioxide emissions limitations and is allocated allowances equal to that

unit's baseline times the lesser of the 1985 actual or allowable

emissions rate for the unit. The compensating unit will therefore have

to use allowances to account for its emissions, including any increased

emissions resulting from compensating generation that it provides for

the Phase I unit.

The Administrator approves or disapproves each plan (and

compensating units proposed therein) after determining whether the plan

meets the requirements of title IV, including achievement of the

intended emissions reductions under the Acid Rain Program. 42 U.S.C.

7651g(c)(2); see also 58 FR 60951. Thus, like the provisions for

substitution plans, the provisions for designating compensating units

in reduced utilization plans are intended to allow compliance

flexibility but also to protect the emission reduction goals of title

IV by requiring that plans not result in more emissions than would

occur without the plans. In fact, if the reduced utilization plan

provisions were interpreted to allow the creation of excess, new

allowances, utilities could simply use such plans to circumvent the

limitation on the creation of allowances under substitution plans by

bringing the same Phase II units into Phase I as compensating units

rather than substitution units.1

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\1\This conclusion is not contradicted by the legislative

history, cited by some commenters, discussing the compliance

flexibility and potential cost savings resulting from use of the

allowance market. See, e.g., Senate Rep. No. 101-228 at 316. Such

generic discussion of the ability of units to over- or under-

control emissions and to trade allowances does not address the

specific issue of the entry of Phase II units into Phase I.

Although, under the Partial Settlement in Environmental Defense Fund

v. Carol M. Browner, No. 93-1203 and Alabama Power Co. v. U.S. EPA,

No. 93-1611 (D.C. Cir. 1993) (signed May 4 and 20, 1993), many

comments on the November 18, 1993 proposal were withdrawn, the

Agency is responding--here or in a response-to-comment document--to

the substance of all comments that were originally submitted. (This

settlement is hereafter referred to as ``the May 4, 1994

settlement''.)

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II. Need to Modify the January 11, 1993 Regulations

A. The January 11, 1993 Regulations can be Read to Give Utilities the

Ability to Bring Phase II Units Into Phase I and Create Excess, New

Allowances

On January 11, 1993, EPA promulgated regulations that implemented

the major provisions of title IV, including the substitution and

reduced utilization provisions. As discussed in the November 18, 1993

preamble (58 FR 60951-60953), these provisions can be read to provide

utilities two alternative methods of bringing into Phase I, with few

limitations, selected Phase II units and creating excess, new

allowances. The Agency concludes that both provisions must be revised

in order to eliminate this problem.

Under Sec. 72.41 of the January 11, 1993 regulations, the

designated representative for a unit on Table A may include in the

Phase I permit application a substitution plan designating, as

substitution units, one or more existing units that are Phase II units

and so not on Table A. 40 CFR 72.41(b) (1993). There is no express

requirement that the substitution unit make reductions beyond those

that it would have made without the plan or actually provide allowances

for the Table A unit and no express limit on the number of substitution

units that a Table A unit may designate. Further, for the most part,

the decision whether to designate a particular Phase II unit as a

substitution unit is at the discretion of the utility. See 58 FR 60952.

Section 72.43 of the January 11, 1993 regulations requires, under

certain circumstances, that the designated representative for a Phase I

unit submit a reduced utilization plan designating a compensating unit.

Such a plan must be submitted if the owners and operators of the unit

plan to reduce utilization of the unit below its baseline for purposes

of complying with Phase I emissions limitations and to accomplish this

by shifting generation to a non-Phase I unit. 40 CFR 72.43(b) (1993).

Because of concern that utilities would be unable to designate

compensating units and therefore might engage in uneconomic dispatching

to avoid reduced utilization requiring such designations, the

regulation establishes broad exceptions to the requirement to submit a

plan. 40 CFR 72.43(e) (1993); see also 58 FR 60958-60959. There is no

express requirement that the Phase I unit actually have any reduced

utilization or the compensating unit actually provide any compensating

generation to the Phase I unit. There is also no express limit on the

number of compensating units that a Phase I unit may designate and no

express bar on a compensating unit itself designating a compensating

unit. Further, as with substitution units, a utility's decision to

designate a compensating unit is largely discretionary. See 58 FR

60952.

Because utilities generally have broad discretion and flexibility

in designating substitution and compensating units, such units will

likely be designated only if early entry into Phase I is beneficial,

e.g., where early entry creates new allowances because the units have

lower actual emissions in Phase I than the allowances they will receive

as substitution or compensating units. See 58 FR 60953 and n. 2. Before

the enactment of title IV, some Phase II units had reduced emissions

rates for economic or other reasons and some States had already adopted

laws requiring their utilities to reduce emissions rates prior to Phase

II. Such reductions occurred, or will occur, for reasons independent of

the substitution and reduced utilization provisions. Under the January

11, 1993 regulations, for each Phase I year that a substitution or

reduced utilization plan is in effect, each substitution or

compensating unit under the plan is allocated a number of allowances

equal to the unit's baseline times the lesser of the 1985 actual or

allowable emissions rate for the unit. 40 CFR 72.41(c)(3) and (d) and

72.43(c)(4)(ii) and (d) (1993). Consequently, some Phase II units may

enter Phase I as substitution or compensating units and convert

emission rate reductions into excess, new allowances: i.e., allowances

that would not otherwise be available and that reflect emission rate

reductions that would occur even without plans allowing early entry

into Phase I.

The excess, new allowances may become available to affected units

in Phase I and/or in Phase II and enable such units to avoid making

emissions reductions that title IV would otherwise require them to

make. These allowances may thereby diminish the emissions reductions

that Congress intended to be achieved by virtue of title IV. In sum, as

explained in the November 18, 1993 preamble, the January 11, 1993

regulations transform the statutory substitution and reduced

utilization provisions from provisions for facilitating and protecting

anticipated emissions reductions under title IV into potential means of

creating excess, new allowances that can be used to avoid such

reductions. (58 FR 60953.)

Because the regulations provide alternative means (through

substitution plans or reduced utilization plans) of creating excess,

new allowances, the regulations are contrary to Congressional intent

and sections 404(b) and (c) and 408(c)(1)(B) of the Act and therefore

must be modified to eliminate both alternatives.

B. Under the January 11, 1993 Regulations, Entry of Phase II Units Into

Phase I can Significantly Compromise the Emissions Reduction Goals of

Title IV

The potential number of excess, new allowances created by

substitution and compensating units under the January 11, 1993

regulations may be sufficient to compromise significantly the

achievement of the emissions reductions intended by Congress under

title IV. The Agency estimates that entry into Phase I of Phase II

units that will benefit from becoming substitution or compensating

units and that reduced emissions rates between 1985 and 1991 for

economic or other reasons or were required by federal or State law as

of November 15, 1990 to reduce emissions rates between 1985 and 1995

will create about 200,000 allowances per year in Phase I in excess of

emissions without such entry.2 See 58 FR 60953 and n. 4; and

Calculation of Potential Impacts of Phase I Substitution Units, ICF

Inc. at 5 (July 7, 1993). Thus, the current substitution and reduced

utilization provisions will potentially result in the creation of

excess, new allowances authorizing additional emissions of 1,000,000

tons of sulfur dioxide in all of Phase I.

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\2\This is a conservative estimate of the potential for creation

of excess, new allowances. Assuming that all 250 designated

substitution and compensating units in existing permit applications

are activated as substitution units for all of Phase I, about

385,000 excess, new allowances will be created per year under the

January 11, 1993 regulations. Assuming all existing Phase II units

(about 2,000 units) will become substitution units for all of Phase

I, almost 1,000,000 excess, new allowances will be created per year

in Phase I under the January 11, 1993 regulations. See Estimates of

Allowances Impact of Proposed Permits Rule Revisions and Alternative

Regulatory Scenarios at 3, 8, and 52 (Oct. 20, 1993) (comparing

``totals'' for allowance allocations under ``existing'' rule and

``proposed'' rule). The Agency's 200,000-allowance estimate reflects

the assumption that only those units (about 200 to 300 units) with

projected 1995 emissions lower than their 1985 level will be likely

to become substitution units under the current regulations. See

Calculation of Potential Impacts of Phase I Substitution Units at B-

4 (``total'' of units with ``SO2 decrease'' under ``CAT7'')

(July 7, 1993). That estimate also assumes that some allowances that

will be created will result from reduced utilization and will be

subject to surrender to EPA under Secs. 72.91 and 72.92 of the

regulations. Id. at 7 and 9.

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Congress expected the emission limitations in title IV to result in

annual SO2 emissions reductions of 2.8 to 4.4 million tons in

Phase I. Senate Rep. No. 101-228 at 327; Cong. Rec. S16980 (Oct. 27,

1990).3 EPA estimates that the expected reductions by Phase I

units alone during Phase I are about 2.4 million tons in 1995 and 1996

and about 3.5 million tons in 1997, 1998, and 1999. Memorandum from T.

Larry Montgomery to Brian J. McLean (Oct. 15, 1993). As discussed

above, the statutory language and legislative history demonstrate that

Congress did not intend these reductions to be eroded by substitution

or reduced utilization plans. Yet, under the current regulations, Phase

I units can avoid some of these reductions by offsetting their

emissions in Phase I with excess, new allowances resulting from such

plans. The use of 200,000 excess, new allowances per year in Phase I

will negate a significant portion (i.e., 6 to 8 percent) of estimated,

expected reductions for Phase I units.

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\3\Because, as discussed above, Congress did not intend the

substitution and compensating unit provisions to create excess, new

allowances, commenters erred in claiming that such allowances

account for the 2.8 to 4.4 million ton range for estimated Phase I

reductions in SO2. Rather, the range reflected, inter alia,

uncertainty over what emissions decreases or increases would occur

at Phase II units that would not be subject to emissions limitations

until Phase II. Because of the lack of emissions limitations on such

units in Phase I, the Phase I emissions of these units and the

impact on total Phase I reductions could only be projected.

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Alternatively, banking these new allowances for use in Phase II

will diminish the intended emissions reduction impact of the 8.95

million ton cap established by Congress for Phase II. See 58 FR 60954-

60955 (explaining the importance of the Phase II cap). The carryover

and use of the excess, new allowances created by early entry of Phase

II units into Phase I can result in emissions exceeding the cap for

each of the first five years of Phase II by as much as 200,000 tons.

The magnitude of potential erosion of expected emissions reductions

supports the Agency's conclusion, based on statutory language and

legislative history, that Congress did not intend to allow substitution

or compensating units to create allowances for pre-Phase II emissions

reductions that would have been achieved in the absence of substitution

and reduced utilization plans.4 The Agency's conclusion is also

supported by Congress' approach in sections 404(e), 405, and 410 of the

Act. As discussed in the November 18, 1993 preamble (58 FR 60954), the

fact that in those sections Congress carefully limited the ability of

Phase II units to obtain additional allowances for pre-Phase II

reductions strongly suggests that sections 404(b) and (c) and

408(c)(1(B) should not be interpreted to allow allowance allocations

for all such reductions.

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\4\Thus, contrary to the assertion of some commenters, the

Agency's modification of the current regulations is not based on

circular reasoning. The statutory language and legislative history

demonstrate that Congress did not intend for substitution or reduced

utilization plans to result in fewer reductions than without the

plans. The analysis that such plans under the January 11, 1993

regulations can result in about 200,000 excess, new allowances per

year in Phase I shows the potential magnitude of the problem and

supports today's modification of the regulations to ensure

consistency with the statute.

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III. Modifications of the January 11, 1993 Regulations

A. Substitution Plans

The Agency is modifying the January 11, 1993 regulations concerning

substitution plans by limiting the allowances allocated to a

substitution unit to the baseline times the lesser of: the 1985 actual

SO2 emissions rate; the 1985 allowable SO2 emissions rate;

the greater of 1989 or 1990 actual SO2 emissions rate; or the most

stringent federal or State allowable SO2 emissions rate for Phase

I as of November 15, 1990, the date of enactment of title IV of the

Act. In addition, the final regulations eliminate the language in the

January 11, 1993 regulations providing that a Phase II unit that lacks

any common owner or operator but has a common designated representative

with a Phase I unit can, without anything more, be designated as a

substitution unit.

1. Limiting the Allowances Allocated to Each Substitution Unit

The final rule limits the number of allowances allocated to each

substitution unit by calculating the allocation using the lesser of the

unit's 1985 SO2 emissions rate or an SO2 emissions rate that

is reasonably representative of what would have been achieved without

the substitution plan. Specifically, a substitution unit will be

allocated allowances equal to baseline times the lesser of: the unit's

1985 actual SO2 emissions rate; the unit's 1985 allowable SO2

emissions rate; the greater of the unit's 1989 or 1990 actual SO2

emissions rate; or the most stringent federal or State allowable

SO2 emissions rate as of November 15, 1990 applicable to the unit

in 1995-99. The January 11, 1993 regulations consider only the unit's

1985 actual or allowable SO2 emissions rate.

As discussed above, section 404(b)(5) requires that the

substitution plan include a demonstration that the ``reassigned tonnage

limits [under the plan] will, in total, achieve the same or greater

emissions reduction than would have been achieved by the original

affected unit and the substitute unit or units without such

substitution.'' 42 U.S.C. 7651c(b)(5). The Agency interprets this

provision to require that the plan achieve total reductions equal to or

greater than both (i) the Table A unit's reduction obligation in Phase

I and (ii) the reductions that the substitution unit would have made if

it had not entered Phase I, including reductions made, or mandated by

federal or State law adopted, prior to the passage of title IV.

The preamble of the January 11, 1993 regulations sets forth a

different interpretation of section 404(b)(5) that the Agency concludes

is erroneous. As EPA explained in the November 18, 1993 preamble (58 FR

60954-60955):

In the January 11, 1993 preamble, the Agency stated that any

reductions in emissions rate that have been, or will be, made at the

substitution unit after 1985 without the substitution plan (e.g.,

reductions for economic reasons or required by federal or State law)

``will not have resulted from title IV'' and so should ``not be counted

as reductions that would have occurred without the plan.'' 58 FR 3601

(emphasis added). The difficulty with this interpretation is that it

appears to read out of section 404(b)(5) the requirement to ensure that

a substitution plan does not negate reductions ``that would have been

achieved by * * * the substitute unit * * * without such

substitution.'' 42 U.S.C. 7651c(b)(5). In the absence of the plan, the

substitution unit would not be subject to title IV until Phase II. If

only reductions required by title IV were considered under section

404(b)(5), the amount of reductions that would have been achieved by

the substitution unit without the plan (i.e., the reductions in Phase

I) would always be zero * * *. The reference to such reductions would

therefore be meaningless. In interpreting the Act, it should not be

presumed that Congress adopted meaningless language.

Some commenters on the November 18, 1993 proposal suggested a third

interpretation of section 404(b)(5). They claimed that the provision

addresses only situations where, as part of the substitution plan,

allowances that would be allocated to the substitution unit are instead

allocated by EPA to the Table A unit. Specifically, the commenters

alleged that the terms ``reassigned tonnage limits'' and ``such

substitution'' in section 404(b)(5) are synonymous and refer only to

the ``allocation of a number of allowances to the Table A unit in

addition to those that the Table A unit would otherwise receive.''

Comments of UARG at 33 n. 54 and 34. Accordingly, it is argued that

section 404(b)(5) requires only that the number of additional

allowances that are allocated under the plan to the Table A unit cannot

be greater than the number of allowances that are subtracted from the

allocation that the substitution unit would otherwise receive under the

plan.

The Agency rejects this interpretation, which is inconsistent with

the substitution plans that the commenters themselves have submitted to

the Agency and which would reduce section 404(b)(5) to a triviality. As

the commenters noted, section 404(b) describes a substitution plan as

``a proposal to reassign, in whole or in part, the affected [Table A]

unit's sulfur dioxide reduction requirements to any other unit(s)''

under the control of the owner or operator of the Table A unit. 42

U.S.C. 7651c(b) and Comments of UARG at 33. According to the

commenters, such reassignment occurs only where allowances otherwise

allocated to a substitution unit are instead allocated to the Table A

unit. Id. at 34 and 40-1. This is allegedly the only circumstance to

which section 404(b)(5) would apply.

If the commenters' interpretation were correct, then only those

plans that actually provide for such an additional allocation of

allowances to the Table A unit would be substitution plans, as defined

by section 404(b). However, although Sec. 72.41(c)(4)(ii) of the

January 11, 1993 regulations provides the option to redistribute

allowance allocations in this way, such redistribution is not required

by Sec. 72.41. Moreover, EPA has not received a single substitution

plan for any units that includes such a redistribution of allowance

allocations. See 58 FR 32667-32670 (June 11, 1993); 58 FR 34582 (June

25, 1993); 58 FR 38373-38375 (July 16, 1993); 58 FR 39543-39544 (July

23, 1993); 58 FR 40812-40813 (July 30, 1993); 58 FR 42065-42069 (Aug.

6, 1993); and 58 FR 43110 (Aug. 13, 1993) (summarizing the allowance

allocations under the proposed plans, none of which included any

redistribution of allowances from a substitution unit to a Table A

unit). Under the commenters' approach, none of the substitution plans

submitted to date are ``proposals to reassign * * * reduction

requirements'' under section 404(b). Further, the commenters'

interpretation of section 404(b)(5) would reduce that provision to a

trivial requirement that EPA cannot give more additional allowances to

the Table A unit than it takes from the substitution unit.\5\

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\5\Apparently, EPA could, under the commenters' interpretation,

allocate fewer additional allowances to the Table A unit than are

subtracted from the substitution unit's allowance allocation.

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When section 404(b)(5) is properly interpreted, these problems

evaporate. The term ``reassigned tonnage limits'' refers to the total

allowance allocations made, in every substitution plan, to the Table A

and substitution units under the plan and not simply to redistributed

allowances. Thus, section 404(b)(5) requires that each substitution

plan must result in ``the same or greater'' reductions of sulfur

dioxide emissions as would have been made by the Table A and

substitution units without a substitution plan.\6\ 42 U.S.C.

7651c(b)(5).

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\6\The commenters relied on Senate Report No. 101-228 (at 307

and a floor statement by Senator Baucus (136 Cong. Rec. S16980

(daily ed. Oct. 27, 1990) to support the claim that section

404(b)(5) requires consideration only of the emissions reductions

that would be achieved by the Table A unit, and not those by the

substitution unit, in the absence of the plan. Such reliance is

misplaced because section 404(b)(5) explicitly requires that the

emissions reductions at both the Table A and the substitution units

without the plan be considered. 42 U.S.C. 7651c(b)(5).

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The Agency concludes that section 404(b)(5) must be interpreted to

take into account, and avoid allocating allowances to the substitution

unit for, reductions that would otherwise have been made at the

substitution unit since 1985 in the absence of a substitution plan. The

Agency maintains that there are two categories of reductions that would

otherwise have been made and that therefore should be excluded from the

allocation of allowances to substitution units: (1) emissions rate

reductions that were made voluntarily, for economic or other reasons,

by a substitution unit after 1985 and before enactment of title IV; and

(2) emissions rate reductions by a substitution unit between 1985 and

2000 that were mandated by federal or State law as of the enactment of

title IV.

a. 1989 or 1990 SO2 emissions rate. With regard to the first

category of emissions reductions, EPA is modifying the January 11, 1993

regulations to provide that substitution units will not be allocated

allowances for voluntary emissions rate reductions made before

enactment of title IV: i.e., reductions before title IV's enactment

that were not mandated by federal or State law and that were made for

economic or other reasons. To the extent a unit's emissions rate

reductions are caused by economic or other factors that would have

existed in Phase I even if the unit did not become a substitution unit,

such reductions would have occurred without a substitution plan and

therefore must be taken into account under section 404(b)(5) and

excluded from allowance allocations. In theory, any reductions made by

a unit between 1985 and 1999 could potentially be in response to such

factors and, if so, could be considered as reductions that would have

occurred without the substitution plan.

The Agency maintains that there must be a bright line drawn to

determine whether a unit's voluntary reductions in emissions rate would

occur even if the unit were not a substitution unit. It would be

difficult to make accurate case-by-case determinations, concerning a

large number of units, as to whether the owners and operator of a

particular unit took actions after 1985 to reduce its emissions rate in

anticipation of the unit becoming a substitution unit. Such

determinations would require analyzing economic and other factors that

may be involved (e.g., fuel costs, the timing for retrofitting of

pollution controls, and the regulatory benefits and risks of becoming a

substitution unit), balancing the factors favoring or disfavoring

action to reduce the emissions rate, and judging what the owners and

operator would have done in the past concerning the unit's emissions in

the absence of substitution plans.\7\ See Comments of Environment

Defense Fund and the Natural Resources Defense Council at 16 (submitted

Feb. 10, 1994). Similar determinations would presumably have to be made

for each approved substitution unit, and allowance allocations might

have to be adjusted, each time the owners and operators of the unit

take actions after approval of the substitution plan that reduce the

unit's emissions rate in Phase I.

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\7\Thus, particularly where there are a large number of units

involved, the Agency does not agree with those commenters that

claimed that a showing that post-1990 reductions would not have

occurred in the absence of a substitution plan would be ``easily''

evaluated. Id.

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The Agency concludes that the best approach to developing a

reasonable approximation of what a unit's emissions rate would be in

Phase I in the absence of a substitution plan is to treat all voluntary

emissions rate reductions after 1985 and through 1990 (the year in

which title IV of the Act was passed) as reductions that would have

occurred in Phase I in the absence of a substitution plan. Prior to

enactment of the Clean Air Act Amendments of 1990, utilities had no

reasonable expectation that emissions reductions would generate

nationally tradable allowances under the Act. The reductions were not

made in response to the availability of allowances under substitution

plans. December 31, 1990 (rather than November 15, 1990, the specific

date of title IV's enactment) is used as the cut-off point for

determining what reductions that would have occurred without the plan

because emissions rate data is available on a calendar year basis. Even

though some reductions after 1990 perhaps would have occurred without

the plan, it would be difficult to sort out, for a large number of

units, the impact of the availability of substitution plans for the

period after the substitution provision was enacted.

Further, reductions reflected in a unit's 1989 or 1990 SO2

emissions rate will be treated as representative of reductions that

would continue to be made up through 1999. In the November 18, 1993

proposal, the Agency proposed to use the 1990 actual SO2 emissions

rate as the measure of emissions reductions made before passage of

title IV. The 1990 rate was proposed because, as the emissions rate

closest to November 15, 1990, it is more likely to reflect all the

reductions made prior to passage of title IV. The rate for an earlier

year is less likely to reflect all reductions made before passage of

title IV. However, several commenters expressed concern that a unit's

emissions rate for a single year (i.e., 1990) might be unusually low

and therefore unrepresentative of its emissions rate prior to the

passage of title IV. These commenters suggested that, if post-1985

emissions rates are used, the Agency should use a formula that allows

consideration of actual emissions rates for 1988, 1989, and 1990. See

Comments of Utility Air Regulatory Group at 45 (submitted Feb. 10,

1994); Comments of Northern States Power Company at 6 (submitted Feb.

10, 1994). Other commenters claimed that the 1990 emission rate may be

lower than the 1985 emission rate because of normal variability in the

sulfur content of coal or in scrubber performance. They suggested a

case-by-case determination of whether such variability accounts for the

lower 1990 emissions rate.

Balancing these factors, the final rule uses the greater of the

1989 or 1990 actual SO2 emissions rate to reflect pre-title IV

emissions rate reductions. A unit's 1989 or 1990 emissions rate (which

are the most recent, actual rates prior to the enactment of title IV)

will be treated as representative of its emissions rate in Phase I in

the absence of a substitution plan. This provides some flexibility to

avoid using a single and perhaps unrepresentative year. All voluntary

emissions rate reductions made after 1990 will be treated as reductions

that would not otherwise have occurred.

Several commenters opposed the use of any post-1985 actual

emissions rate in limiting allowance allocations to substitution units.

Commenters argued the use of the 1990 actual emissions rate is

arbitrary. Allegedly, this approach is arbitrary because it assumes

that emissions-reducing actions that were taken before 1991 for

economic reasons will not necessarily continue to be taken after

passage of the Clean Air Act Amendments of 1990, which changed the

economics of such actions. Commenters stated that utilities might

redirect low sulfur coal from the potential substitution unit to

another unit and burn higher sulfur coal at the former unit. They also

suggested that when the lower sulfur coal contract expires, the utility

might contract for higher sulfur coal.

There are several problems with these commenters' arguments. A

reduction in a unit's 1989 or 1990 emissions rate from 1985 could be

the result of several types of actions, including the addition of

pollution control equipment or the use of low sulfur coal. To the

extent that the reduction reflects a capital investment in pollution

control equipment, it is reasonable to assume that the equipment will

probably remain in place and continue to be used. Even where the

reductions were achieved through the use of low sulfur coal, the use of

such coal or switching to high sulfur coal requires, in many cases,

capital investment in new equipment. This reduces the likelihood that

emissions reductions made before enactment of title IV would be

reversed after passage of title IV.

Moreover, in section 404(b)(5), Congress required EPA to ensure

that the reductions achieved under each substitution plan be ``the same

or greater than'' the reductions that would otherwise be achieved

without the substitution plan. 42 U.S.C. 7651c. Because of the

paramount importance apparently placed on the goal of achieving

intended emissions reductions, Congress required the Agency to adopt an

approach that would ensure no fewer reductions with substitution plans

than without such plans but that could result in more reductions with

than without the plans. In light of this statutory requirement and the

difficulty of determining what reductions would have been made without

substitution plans, the Agency concludes that the 1989 or 1990 actual

emissions rate is a reasonable proxy for a unit's Phase I emissions

rate without the substitution plan. To the extent that the Agency's

approach of using 1989 or 1990 emissions rate overstates the reductions

that would be achieved without the plan, the approach errs in a

direction that ensures achievement of the paramount statutory objective

and is consistent with section 404(b)(5).

In contrast, commenters' preferred alternative--using only 1985

actual or allowable emissions rates--would guarantee, in some cases,

violation of the statutory objective of no fewer reductions with, than

without, the plan. One particularly graphic example of that result is

where a Phase II unit is voluntarily and permanently shutdown between

1985 and 1991 and is brought into Phase I as a substitution unit.

Without a substitution plan, the unit would emit no sulfur dioxide and

receive no allowances in Phase I. With the plan, the unit would still

have no emissions but would be allocated a significant number of new

allowances reflecting its 1985 emissions and other units could use the

newly created allowances to authorize emissions that would not

otherwise have been allowed. See, e.g., 58 FR 38375 (noticing permit

application with plan designating, as substitution units, Poston units

1, 2, and 3, which were permanently shut down in 1987). The Agency's

use of the most recent actual emissions rates prior to passage of title

IV is a reasonable approach to achieving the purposes of section

404(b)(5).

Commenters also argued that the Agency's approach penalizes those

utilities that were ``environmentally * * * progressive'' and will

discourage voluntary emissions reductions in the future. Comments of

the Class of '85 Regulatory Response Group at 8 (submitted Feb. 10,

1994). However, each utility that made emissions reductions at Phase II

units after 1985 and before the date (January 1, 2000) such reductions

are required under title IV already benefits in Phase II of the Acid

Rain Program, during which the units are allocated allowances

reflecting in part the 1985 emissions rate. See Comments of Northern

States Power Company at 3 (noting that allocations to most of the

utility's units in Phase I and Phase II exceed 1990 emissions levels).

The issue here is whether, if such a utility elects to bring selected

Phase II units into Phase I, the utility should receive additional

benefit (in the form of extra allowances for pre-title IV reductions)

that violates section 404(b)(5) of the Act. The Agency believes that

the approach in the final rule is a reasonable implementation of

section 404(b)(5).

b. Most stringent federal or State SO2 emissions limitation.

In addition to limiting a substitution unit's allowance allocation

using the unit's 1989 or 1990 SO2 emissions rate, EPA is also

modifying the January 11, 1993 regulations to provide that a

substitution unit will be allocated allowances based on an emissions

rate that does not exceed the most stringent SO2 emissions

limitation imposed in Phase I by federal or State law, as of November

15, 1990. By definition, emissions rate reductions that were mandated

prior to title IV's enactment and that are required regardless of

whether the unit is a substitution unit are reductions that would have

occurred in the absence of the plan.

The agency recognizes the difficulty of determining whether any

particular federal or State emissions reduction requirement (whether a

tightening or a loosening of emissions limitations), adopted after

title IV's enactment, would have been adopted in the absence of

substitution plans under title IV.8 This is similar to the problem

of determining whether voluntary emissions rate reductions after 1990

would have been made without a substitution plan, except that, with

regard to federal or State emissions limitations, political factors

favoring or disfavoring imposition of the limitations would have to be

weighed. Consequently, the Agency maintains that a bright line, based

on title IV's date of enactment, should be established and that

emissions rate reductions that were mandated by federal or State law

adopted after November 15, 1990 should not be treated as reductions

that would otherwise have occurred. As explained in the preamble of the

November 18, 1993 proposal (58 FR 60956), the most stringent allowable

rate for purposes of substitution-unit allowance allocations will be

the most stringent rate as of November 15, 1990 after conversion to

pounds per mmBtu but without any annualization.

---------------------------------------------------------------------------

\8\In contrast, State emissions limitations adopted prior to

passage of title IV do not raise the same question about whether

they would have been adopted in the absence of title IV. Such

emissions limitations, e.g., the Massachusetts acid rain law passed

in 1985, were in fact adopted in the absence of any federal acid

rain program. The Massachusetts statute included a provision stating

that the Massachusetts legislature intended that reductions made

under that statute be credited to Massachusetts' share of required

reductions if a federal acid rain program was established in the

future. Massachusetts, Acts of 1985, Chap. 590 Sec. 9. Some

commenters challenged, as contrary to the intent of the

Massachusetts law, the use of the Massachusetts emissions

limitations to limit allowance allocations under title IV. However,

Congressional intent, not the intent of the Massachusetts

legislature, is relevant to interpreting title IV.

---------------------------------------------------------------------------

Some commenters argued that the Agency should distinguish between

federal emissions limitations and State emissions limitations and

consider only federal limitations in allocating allowances to

substitution units. They alleged that it is unfair to ``penalize''

utilities in States ``tak[ing] the lead in controlling air emissions''

and that title IV references federal, but not State, emissions

limitations. Comments of Dairyland Power Cooperative at 2 (submitted

Jan. 26, 1994). However, section 404(b)(5) requires that emissions

reductions with the substitution plan be no less than reductions

without the plan and does not distinguish between reductions without

the plan that are due to State law from those due to federal law. Thus,

contrary to the commenters, there is no basis for considering only

federal, and ignoring State, emissions limitations in applying section

404(b)(5). Further, the Agency reiterates that:

[S]ince reliance on substitution plans is optional and the use

of the most stringent allowable rate (in conjunction with the 1985

actual or allowable rate and the [1989 or] 1990 actual rate) to

allocate allowances under such plans is necessary to meet statutory

emissions reduction goals, it is difficult to see how such use of

the most stringent allowable rate could be viewed as unfair to

utilities located in States that mandated reductions. This approach

simply prevents the creation of excess, new allowances and thereby

ensures that reductions mandated by such States are not used to

increase emissions elsewhere above the levels that title IV was

intended to achieve.

58 FR 60956.

Using federal or State emissions limitations to limit a particular

substitution unit's allowance allocation raises certain questions,

particularly where some emissions limitations are not unit specific.

For example, under some State laws (e.g., the acid rain laws for

Massachusetts and Wisconsin), a utility has a maximum average emissions

rate for its units in the State. Under other State laws (e.g., for New

Hampshire and Minnesota), a utility has a total tonnage emissions cap

for all its units in the State. Maximum average emissions rates or

maximum total tonnage limits allow utilities the flexibility to exceed

such maximum rates or limits at individual units so long as the maximum

rates or limits are met on a utility-wide basis. Since individual units

may exceed such maximum rates or limits, the Agency concludes that it

should not treat the maximum rates or limits as the most stringent

limitation for each individual unit. However, while utility-wide

limitations provide some flexibility, such limitations impose bounds on

the emissions of individual units, albeit bounds that depend on the

emissions from other units owned or operated by the same utility. There

is no basis for ignoring the fact that a unit may have to make

emissions reductions because of a utility-wide limitation, just as it

may have to reduce emissions because of a unit-specific limitation.

Consequently, the final revised rule provides that the Agency will

develop a method for using both the unit-specific and non-unit-specific

emissions limitations to limit the allocation of allowances to a

substitution unit. This method will not treat non-unit-specific

limitations as if they were unit specific and will not allow allocation

of allowances for reductions that were necessary to meet non-unit-

specific limitations. Because there are significant differences among

State laws and the manner in which they express non-unit-specific

emissions limitations, the final revised rule gives the Agency the

authority to develop this method on a case-by-case basis for each

proposed substitution unit. This approach will give the Agency the

flexibility to take account of variations among States and will allow

interested parties an opportunity, e.g., in proceedings on individual

permits, to comment on the method that the Agency proposes to use with

regard to a particular non-unit-specific limitation.

Several commenters made specific recommendations concerning the

method that EPA should use to apply the unit-specific limitations under

Wisconsin's acid rain law. Under the Wisconsin law, each major utility

that generates electricity in the State must achieve an annual average

sulfur dioxide emissions rate that does not exceed 1.2 lbs per mmBtu

starting in 1995 from all fossil fuel-fired boilers under the utility's

ownership or control. A Wisconsin utility that meets certain

requirements may trade emissions with another Wisconsin utility. One

utility accepts--and adds to its annual emissions--emissions from

another utility, which subtracts those emissions from its annual

emissions and thereby reduces its annual average emissions rate in

order to meet the utility-wide limit. Some commenters suggested that,

in initially allocating allowances to substitution units in Wisconsin,

EPA consider only those Federal and State limitations that are

expressed as unit-specific limitations and not the utility-wide limits

under Wisconsin's acid rain law. These commenters supported an end-of-

year review in which each Wisconsin utility will have to demonstrate

whether, if the allowances allocated to its substitution units in

Wisconsin are treated as emissions by those units, the utility will

still be in compliance for that year with 1.2 lbs per mmBtu limit. In

this demonstration, the utility will sum the actual annual emissions of

each boiler owned or controlled by the utility, except in the case of a

substitution unit where the allocated allowances will be used. Where

emissions were traded for the year, traded emissions will be subtracted

by one utility from, and added by another utility to, the sum of

emissions and allowances. The total will be divided by the sum of the

annual mmBtu utilization of all the boilers involved. To the extent

that the result exceeds 1.2 lbs per mmBtu, the utility will be required

to surrender, and EPA will deduct, allowances allocated to the

substitution units for that year. No commenters supported imposing

limits on the ability to transfer the substitution unit's allowances

prior to the end-of-year review. However, one commenter opposed the use

of any end-of-year review to apply the Wisconsin utility-wide emissions

limit.

The Agency is not deciding in the instant rulemaking what

particular procedure will be used for applying non-specific emissions

limitations and whether to adopt an approach involving end-of-year

review. However, such review may be the best way to take account of the

flexibility that the Wisconsin acid rain law and other State provisions

provide to individual units in meeting State emissions limitations. The

final revised rule, therefore, allows EPA to decide on a case-by-case

basis, e.g., in individual permit proceedings on proposed substitution

units, whether to require end-of-year review to apply non-unit-specific

emissions limitations. The final revised rule also authorizes the

Agency to require allowance surrender, and make allowance deductions,

by the allowance transfer deadline as a result of such review.9

---------------------------------------------------------------------------

\9\Contrary to one commenter's claim, the fact that section

402(3) of the Act defines ``allowance'' as ``an authorization * * *

to emit * * * one ton of sulfur dioxide'' in no way bars the

imposition of a requirement, consistent with other sections of the

Act, to surrender allowances. 42 U.S.C. 7651a(3). Section 403(f) of

the Act states that an allowance allocated under title IV is ``a

limited authorization to emit sulfur dioxide in accordance with the

provisions of this title.'' 42 U.S.C. 7651b(f).

---------------------------------------------------------------------------

The Agency maintains that it is unnecessary to impose, pending any

end-of-year review, limitations on the ability to transfer a

substitution unit's allowances. The risk that a substitution unit will

not have allowances in its Allowance Tracking System account to cover

the deduction is small. As of the allowance transfer deadline, the

unit's account must contain, in any event, sufficient allowances to

cover its emissions for the prior year. The deduction of allowances

resulting from the substitution unit's end-of-year review must be made

before the Agency determines whether the unit's emissions exceeded its

available allowances. Consequently, the failure of the substitution

unit to have sufficient allowances to cover any deduction resulting

from the end-of-year review will constitute a violation of Sec. 72.41

(and so the Clean Air Act itself) and will result in excess emissions

and trigger excess emissions penalties. Not only are limitations on

transferability unnecesssary, but also they would reduce the compliance

flexibility that Congress intended to provide through substitution

plans. The final rule therefore does not impose any limits of

transferability, pending any end-of-year review.

In sum, the Agency concludes that a substitution unit should be

allocated allowances based on the lesser of four emissions rates for

the unit: 1985 actual SO2 emissions rate; 1985 allowable SO2

emissions rate; the greater of 1989 or 1990 actual SO2 emissions

rate, or the most stringent Federal or State allowable SO2

emissions rate applicable in 1995-99 as of November 15, 1990. The first

two emissions rates are set forth in section 404(b)(2) of the Act. The

latter rates are added in order to ensure, in accordance with section

404(b)(5), that a substitution plan will result in at least the same

amount of reductions that would have occurred without the plan.

This approach requires the submission to EPA of data on the 1989

and 1990 emissions rates and the emissions limitations for 1995-99. For

the reasons set forth in the November 18, 1993 preamble (58 FR 60956),

the Agency maintains that section 404(b) provides adequate authority to

require submission of this data and to use the data to calculate the

allowance allocation under the plan.

c. Baseline. Under the final revised rule, a substitution unit's

allowance allocation is calculated by multiplying the lower of the

above-discussed emissions rates by the baseline, which reflects 1985-87

utilization. The January 11, 1993 regulations used baseline (and only

the 1985 actual or allowable SO2 emissions rate) to calculate the

allowance allocation. In the November 18, 1993 preamble, the Agency

discussed the options of basing allocations on utilization at the time

a permit application is submitted or requiring utilities to project

what future utilization of the substitution units would be in Phase I

without the substitution plan and using the projected utilization to

allocate allowances. No commenters supported the use of projected

utilization, and those that specifically addressed the matter preferred

continued use of baseline. For the reasons set forth in the preamble

(58 FR 60956-57), the Agency concludes that a substitution unit's

baseline should continue to be used to calculate the allowance

allocation.

2. Limiting the Number of Substitution Units

The Agency rejects modifications of the January 11, 1993

regulations making upfront approval of the designation of substitution

units and allocation of allowances to such units contingent on an end-

of-year review of the need for such units for each year that the plan

was in effect. Under such an approach, the Agency would allow only

those designations of substitution units that actually proved to be

needed. No commenters supported that approach.

Because allowance allocations for substitution units are limited as

discussed above, the Agency concludes that requiring end-of-year review

of the need for substitution units and thereby limiting the number of

such units is unnecessary. If a substitution unit is not allocated

allowances for emissions rate reductions that would have occurred

without a substitution plan, then the unit will use up all or most of

its allocated allowances unless the unit made new emissions rate

reductions that would not otherwise have been made. To the extent that

a substitution unit frees up allowances by making such new emissions

rate reductions, section 404(b)(1)(5) is not violated. See 58 FR 60957.

In short, because today's final rule prevents any substitution unit

from creating new, excess allowances, there is no need to impose

further requirements limiting the number of substitution units.

3. Requirement That the Substitution Unit Be Under Control of the Table

A Unit's Owner or Operator

The January 11, 1993 regulations provide that the statutory

requirement that the substitution unit be under the control of the

Table A unit's owner or operator is satisfied where such units have

only a common designated representative. This was based on the

determination that a common designated representative qualifies, in

such cases as an operator. 40 CFR 72.41(b)(1)(i); see also 42 U.S.C.

7651c(b). In the November 18, 1993 preamble, the Agency proposed to

reverse its interpretation that having a common designated

representative, without more, meets this statutory requirement and to

revise the regulations accordingly. 58 FR 60957-60958. The Agency today

adopts the reasoning, set forth in the November 18, 1993 preamble (Id.)

and in the preamble of the Acid Rain regulations on nitrogen oxides (59

FR 13554-55), that a designated representative is not, merely by

holding that position, also an operator.

In the preamble of the January 11, 1993 regulations, the Agency

stated that, under some circumstances, a designated representative's

``duties and level of responsibility can be equivalent to that of an

operator.'' 58 FR 3600. One such case, identified by the Agency, was

where a designated representative represents multiple sources

participating in a substitution plan and otherwise lacking the same

owner or operator. In that case, the designated representative's

responsibilities are allegedly ``broad enough to bring him or her

within the definition of operator.'' Id. As discussed in the November

18, 1993 proposal and the March 22, 1994 final NOX rule, a

designated representative's responsibilities in a multi-source

substitution plan are not actually any broader or more complex than

they are under other compliance options. Therefore, there is no basis

for treating a designated representative in such a substitution plan

any differently than a designated representative under any other

compliance option. In all such cases, a designated representative is

not an operator. The final revised rule reflects this conclusion by

eliminating language from the January 11, 1993 regulations that

provided that units with a common designated representative, and

nothing more, could participate in a substitution plan.

Some commenters note that, although Sec. 72.41(b)(1)(i) requires

that the substitution and Table A units have ``the same owner or

operator'' (40 CFR 72.41(b)(1)(i) (1993)), section 404(b) itself states

that the substitution unit must be ``under the control of the owner or

operator'' of the Table A unit. They argue that, in implementing

section 404 (b) and (c), the Agency should focus on whether there is

such control. They suggest that the ownership of the units is not

necessarily determinative of whether the control requirement is met.

They allege that, on one hand, where the units have multiple owners

only one of which is in common, the control requirement may not be met.

On the other hand, where the units lack the same owner or operator, the

control requirement allegedly may be met through contractual

arrangements under which the owner and operator of the substitution

unit commit, inter alia, to make emissions reductions and deliver

allowances to the owner and operator of the Phase I unit.

In this final rule, the Agency is not addressing these additional

issues concerning under what circumstances a proposed substitution unit

is considered to be under the control of the owners or operator of a

Phase I unit. EPA is addressing these issues, and the related comments,

in a separate direct final rule in this Federal Register. In order to

preserve these issues for resolution, the Agency is adopting, in

today's final rule, the statutory language requiring that the owner or

operator of the Phase I unit ``control'' the substitution unit that it

designates.

4. Other Changes

The Agency has adopted several other minor changes to clarify the

current Sec. 72.41. For example, as discussed above, a substitution

plan may distribute allowances between the substitution unit and the

Table A unit. The final rule makes it clear in Sec. 72.41(c)(4)(ii)

that, where there is more than one Table A unit in a plan, allowances

may be distributed from a substitution unit only to the Table A unit

that designated that substitution unit. The final rule also eliminates

the superfluous, but potentially confusing, final sentence in that

section of the January 11, 1993 rules because the sentence simply

repeats the limitation in Sec. 72.41(c)(3)(ii) on the total number of

allowances available under a substitution plan. See 40 CFR

72.41(c)(4)(ii) (1993).

B. Reduced Utilization Plans

The January 11, 1993 regulations implementing substitution and

reduced utilization plans pose similar problems concerning the creation

of excess, new allowances. However, because section 408(c)(1)(B) of the

Act (unlike sections 404(b) and (c)) specifies the formula for

allocating allowances, the Agency is adopting a different approach in

modifying the requirements for compensating units than the one adopted

today for substitution units. In order to ensure that reduced

utilization plans are used as a means of accounting for emissions from

load shifting from Phase I units and not as a method of creating

excess, new allowances through early entry of Phase II units into Phase

I, the Agency must limit the circumstances under which Phase II units

can become compensating units.

In the November 18, 1993 notice of proposed rulemaking, the Agency

suggested two options for limiting the designation of compensating

units: the first option requiring that the compensating units be

actually needed to compensate for reduced utilization and involving an

end-of-year review of need; and the second option limiting up-front the

category of units that can qualify to become compensating units. The

Agency is today rejecting the first option and is adopting the second

option with some modifications.

1. Limiting the Category of Units That Can Qualify as Compensating

Units

Under the option (Option 2 in the November 18, 1993 proposal)

adopted today with some changes, the category of units that may be

designated as compensating units is limited to those units whose

designation cannot create excess, new allowances. The final revised

rule provides that a unit can be designated as a compensating unit only

if (1) the unit's baseline multiplied by the lesser of the unit's 1985

actual or allowable SO2 emissions rate does not exceed (2) the

baseline multiplied by the lesser of (i) the greater of the unit's 1989

or 1990 actual SO2 emissions rate or (ii) the unit's most

stringent federally enforceable or State enforceable SO2 emissions

limitation for SO2 for 1995-99 as of November 15, 1990 plus (iii)

the lesser of 10 percent of the tonnage calculated under (1) or 200

tons.

Consistent with its conclusions concerning substitution units, the

Agency maintains that excess allowances may be created by the

designation, as a compensating unit, of any Phase II unit whose

baseline, multiplied by what its annual SO2 emissions rate in

Phase I would be in the absence of the designation, is less than the

annual allowances allocated to the unit as a compensating unit. Even if

such a Phase II unit increases its own generation to provide

compensating generation, the unit may be able to use its own allowance

allocation to cover its own emissions without making any more emission

rate reductions than it would have otherwise made. In addition, the

unit may have extra allowances to transfer, sell, or bank for future

use. In order to prevent the creation of excess, new allowances, such

units will not be allowed to be designated as compensating units.

For the reasons discussed above, the Agency concludes that excess,

new allowances are created when Phase II units entering Phase I (e.g.,

compensating units) are allocated allowances for emissions rate

reductions made, or mandated by federal or State law adopted, before

passage of title IV. The general approach in the final rule is to bar,

from becoming compensating units, those units that would otherwise

receive such allocations if they were compensating units. Units that

qualify as compensating units will be allocated allowances under the

formula in section 408(c)(1)(B), i.e., baseline times the 1985 actual

or allowable emissions rate.10

---------------------------------------------------------------------------

\1\0Thus, despite the claim of some commenters, Option 2 of the

proposal does not change the allocation formula, which applies once

it is determined that a unit qualifies as a compensating unit.

---------------------------------------------------------------------------

Contrary to some commenters, section 408(c)(1)(B) does not require

the Administrator to approve whatever units a utility designates as

compensating for reduced utilization. The Administrator must approve

only those compensating-unit designations that are consistent with the

purposes of title IV. 42 U.S.C. 7651h(c)(2). Section 408(c)(1)(B) does

not expressly require the Administrator to consider a unit's 1989 or

1990 actual emissions rate or its most stringent emissions limitation.

However, in reviewing proposed compensating units using these factors,

the Agency is implementing section 408(c)(1)(B) in a way that precludes

``a pattern or practice''--i.e., designation of compensating units that

would receive excess, new allowances--``that is counter to the intent

of section 404 and * * * title [IV of the Act].'' Senate Rep. 101-228

at 334.

This approach is similar to that adopted with regard to

substitution units except that, while the final rule allows units to

become substitution units and adjusts their allocations, the final rule

completely bars certain units from becoming compensating units.

Consistent with the provisions concerning substitution units, the

provisions for compensating units use the greater of the unit's 1989 or

1990 emissions rate as reasonably reflecting voluntary emissions

reductions made before passage of title IV. Similarly, the provisions

for substitution units and the provisions for compensating units take

the same approach (including the treatment of non-unit-specific

emissions limitations) to using the most stringent federal or State

emissions limitations. See section III(A)(1)(b) of this preamble.

However, because some units could otherwise be completely barred

from becoming compensating units because of very small differences

(e.g., due to normal variability in coal quality) between their 1985

emissions and their actual or mandated emissions as of the passage of

title IV, the Agency is building some extra flexibility into the

provisions governing compensating units. The final rule allows the

designation of compensating units whose baseline times the 1985

emissions rate is greater by only a very small amount (i.e., the lesser

of 10 percent or 200 tons) than their baseline times the lesser of

their 1989 (or 1990) emissions rate or their most stringent emissions

limitation for Phase I. The flexibility band is measured in tons of

emissions in order to ensure that the potential for creating excess,

new allowances is restricted. Further, the flexibility band is also

limited as a percentage of 1985 emissions because the band must apply

to all potential compensating units, which can vary significantly in

size and thus in total emissions. Using only a percentage limit or only

a specific tonnage would have an inconsistent impact on units of

different sizes.

Because of the inherent unreliability of projected utilization

figures (discussed above in section III(A)(1)(c) of this preamble),

baseline, not projected utilization, will be used to determine whether

a unit qualifies as a compensating unit. If a utilization projection

less than baseline were used to determine that a unit qualified as a

compensating unit but subsequently the unit had a higher actual

utilization in Phase I that would have otherwise disqualified the unit,

the unit could create excess, new allowances.

In order to be approved, the designation of a compensating unit, of

course, must meet the requirements in the January 11, 1993 regulations

for reduced utilization plans as well as the additional requirement

imposed in today's final revised rule. After determining that a

particular proposed compensating unit meets all these upfront

requirements, the Agency will approve the designation and allocate

allowances for the unit. The Agency will not conduct any end-of-year

review of the need for the compensating unit.

If a designated representative of a Phase I unit has no Phase II

unit that will provide compensating generation and that meets all the

upfront requirements for designation, the designated representative

will not be required to submit a reduced utilization plan designating a

compensating unit. The allowance surrender provisions in Secs. 72.91

and 72.92 will continue to apply.

2. End-of-Year Review of the Need for Compensating Units

Under the rejected option (Option 1 in the November 18, 1993

proposal), units would have been allowed to remain as compensating

units and would have retained allocated allowances only where the

compensating units were actually needed to account for reduced

utilization. See 58 FR 60959-60961. The Agency proposed in Option 1 to

modify the reduced utilization provisions by granting upfront approval

of a reduced utilization plan with compensating units but making

approval contingent on an end-of-year determination by the

Administrator that each compensating unit was needed for the year. A

unit designated as a compensating unit would have become a Phase I unit

and would have been allocated allowances upon upfront approval of the

reduced utilization plan. However, a compensating unit would not have

been allowed to transfer allowances allocated for any given year in

Phase I unless and until an end-of-year determination of need was made

for that unit for that year. If the unit was not shown to be needed,

the unit would have been retroactively de-designated for the year and

the allowances allocated for the year would have been deducted.

Under Option 1, a unit could be deemed, in the end-of-year review,

to be needed as a compensating unit only for years in which: the Phase

I unit actually had utilization below baseline; the Phase I units in

the initial Phase I unit's dispatch system actually had total net

utilization below the sum of their baselines after taking account of

all sulfur-generation acquired by the dispatch system; and the proposed

compensating unit actually provided compensating generation to that

dispatch system. Further, the Administrator would determine how much

compensating generation each compensating unit proposed for any Phase I

unit potentially could have provided. The only compensating unit

designations that would be allowed for any Phase I units in the

dispatch system would be designations of compensating units whose

potential excess generation would have been necessary to meet the

potential need for compensating generation for the dispatch system as a

whole.

The Agency is rejecting Option 1 because Option 2 is a simpler

approach that ensures that, consistent with title IV and Congressional

intent, compensating units cannot be used to create excess, new

allowances. In contrast to Option 2, Option 1 would require designated

representatives to make complicated end-of-year demonstrations of need,

summarized above, and EPA to review and evaluate those demonstrations.

Trading of allowances allocated to compensating units would be

inhibited in that such trading would be barred pending completion of

the Agency's review.11 Further, while Option 1 would reduce the

number of compensating units and thus the total amount of excess, new

allowances that they could create, that option would not entirely

eliminate the problem: those compensating units meeting the

requirements of Option 1 could still create some excess, new

allowances. Finally, the vast majority of commenters supported the use

of Option 2 over Option 1.

---------------------------------------------------------------------------

\1\1Because the Agency is rejecting all the limitations,

discussed in the November 18, 1993 proposal, on the trading of

allowances allocated to compensating or substitution units, the

Agency has decided not to adopt any revisions to Sec. 73.52 in the

Allowance System rule.

---------------------------------------------------------------------------

3. Reporting and Allowance Surrender

The November 18, 1993 proposal included a number of changes --both

substantive and nonsubstantive changes--to Secs. 72.43 and 72.91

concerning reporting and allowance surrender requirements. 58 FR 60961-

60962 (describing these changes). These changes are included in the

final revised rule.

Commenters addressed only two of these changes. Under the proposal

and the final revised rule, where a sulfur-free generator is designated

outside a unit's dispatch system, the designated representative must

submit, as part of the reduced utilization plan, the contractual

agreements governing the ``acquisition'' of electricity by the unit's

dispatch system from that generator. In addition, where a shift of

generation from any designated sulfur-free generator (whether the

generator is within or outside the dispatch system) is claimed, the

designated representative must document that at least the amount

claimed to have been shifted was actually ``acquired'' by the unit's

dispatch system from the generator. The January 11, 1993 regulations

referred to the contractual agreements governing and documentation

concerning the ``purchase'', rather than the ``acquisition'', of

electricity from sulfur-free generators. See 48 FR 3672 and 3682

(Secs. 72.43(c)(4)(iv) and 72.91(a)(6) (1993)). Commenters supported

this change adopted in the November 18, 1993 proposal. Some sulfur-free

generators have multiple owners and may be owned in part by the unit's

dispatch system. In such cases, the unit's dispatch system may not

acquire electricity from the generator through a ``purchase'' but

rather may acquire the electricity based on its ownership share.

Further, it is important to ensure that multiple owners of sulfur-free

generators claim only their respective shares of the sulfur-free

generation. Consequently, the Agency is requiring documentation

concerning the ``acquisition,'' which encompasses not only

``purchases'' (as under the January 11, 1993 rule) but also

acquisitions based on ownership. Further, the requirement to document

actual acquisition applies to all designated sulfur-free generators.

One commenter stated that the documentation required, under the

proposal, for acquisition of sulfur-free generation is more stringent

than necessary. The commenter noted that, under the proposal, the

designated representative must demonstrate that electricity was

actually acquired from ``a particular sulfur-free generator.'' Comments

of Oglethorpe Power Corporation at 7. Allegedly, it is ``extremely

difficult to trace energy back'' to the sulfur-free generator. Id. The

commenter further alleged that requiring that ``a unit power or similar

power sale agreement'' govern the acquisition will result in

``significant regulatory or other approval delays.'' Id. at 6. The

commenter suggested that, instead of these requirements, the Agency

require that the designated representative of the Phase I unit simply

obtain the consent of an owner of the sulfur-free generator to claim,

for purposes of the reduced utilization plan, some or all of that

owner's share of generation from the sulfur-free generator. In order to

ensure that the designated representative does not make such claims

without actually getting the consent of the generator-owner, the

commenter urged that EPA require that a copy of any reduced utilization

plan involving a sulfur-free generator be given to all owners of the

generator and the designated representative of the Phase I unit certify

to EPA that the necessary consent was obtained. Id. at 5.

Under the commenter's approach, a Phase I unit would be relieved of

the obligation to surrender allowances simply because it obtained the

consent of an owner of a sulfur-free generator to ``claim'' some of

that owner's electricity from the generator. As explained by the

commenter, there would not have to be any actual acquisition of

electricity by the dispatch system of the Phase I unit from the sulfur-

free generator. However, the rationale for allowing the Phase I unit to

avoid surrendering allowances if it designates a sulfur-free generator

is that the Phase I unit is replacing the reduction in its own

generation below its 1985-87 level with electricity from a source

(i.e., a sulfur-free generator) that does not emit any sulfur dioxide

when producing that electricity. To the extent the Phase I unit

replaces its own reduced generation with electricity from units that

emit sulfur dioxide in the process, allowances must be surrendered in

order to account for the emissions consequences of the reduced

utilization of the Phase I unit. Otherwise, the Phase I unit could bank

its unused allowances ``notwithstanding the fact that actual emissions

reductions had not been paid for or achieved'' at that unit. 56 FR

63019.

The Agency recognizes that the complexity of the movement of

electricity through interconnected transmission and distribution

systems make it difficult to determine precisely the source of

compensating generation. 56 FR 63023. That does not mean that all

efforts, in the allowance surrender procedure, to reflect actual

electricity transactions and to approximate resulting emissions should

be abandoned. Under the commenter's approach, ``paper'' claims to

sulfur-free generation that may have no actual, underlying energy

transactions could be used to avoid allowance surrender. Such an

approach would run contrary to the rationale for allowing the

designation of sulfur-free generators and therefore is rejected.

Thus, the final revised rule includes the requirements that the

designated representative of the Phase I unit submit: Contractual

agreements that expressly provide for the acquisition of electricity by

the unit's dispatch system from the designated sulfur-free generator

outside the dispatch system, which generator must be identified in the

agreements; and documentation that such acquisition from the identified

generator actually took place. (Similarly, to ensure that claims of

compensating generation are based on actual transactions, the same

approach is taken for compensating units outside the dispatch system.

See 58 FR 60961 (proposing parallel treatment of sulfur-free generators

and compensating units).)

In light of these requirements, commenter's concern--that Phase I

units lacking a common owner with a sulfur-free generator may claim to

have acquired from the generator electricity that is actually sulfur-

free generation retained by an owner of the generator--is misplaced. A

sulfur-free generator can be designated only by those Phase I units

that meet certain requirements. A Phase I unit whose dispatch system

includes the generator may designate that generator.12 If the

generator is outside the dispatch system of a Phase I unit, the Phase I

unit may designate the generator if the dispatch system has a contract

specifically providing for the acquisition of electricity from the

particular generator. A contact to purchase power from the dispatch

system of an owner of the sulfur-free generator, where the sulfur-free

generator is not specified as the source of the power, is not

sufficient. If the dispatch system of the Phase I unit has a contract

specifically to purchase power generated at the sulfur-free generator

and the contract is with a third party that is not an owner of the

generator, the designated representative must show that the third party

in turn has an agreement with an owner of the generator specifically to

purchase power from the generator. Further, Sec. 72.91(a) (5) and (6)

require that the designated representative document the amount of power

actually acquired from the sulfur-free generator and that the

designated representatives of all Phase I units claiming generation

from the same generator must agree on apportionment of the available

generation. It is difficult to see how a Phase I unit could take credit

for electricity legitimately claimed by an owner of the sulfur-free

generator. Consequently, it is unnecessary to impose the additional

requirements suggested by the commenter.

---------------------------------------------------------------------------

\1\2No contract to acquire power from the sulfur-free generator

is required if the generator is in the Phase I unit's dispatch

system. Since a given sulfur-free generator can be included in only

one dispatch system, Phase I units in any other dispatch system must

have such a contract in order to desigate the generator.

---------------------------------------------------------------------------

IV. Applicability of Rule Revisions to Existing Permit Applications

In the November 18, 1993 proposal, the Agency requested comment on

how to address any reliance by owners and operators on the January 11,

1993 regulations. The Agency noted that it had proposed in draft Acid

Rain permits to approve for 1995, under the January 11, 1993

regulations, those substitution plans and those reduced utilization

plans with compensating units that EPA determined to be in compliance

with those regulations. 58 FR 60962. In a subsequent extension of the

period for comments on the November 18, 1993 proposal, the Agency

requested comments on whether any of the allowances allocated to

substitution or compensating units under the January 11, 1993

regulations should be returned to EPA at some future time. 59 FR 3660

(Jan. 26, 1994).

In the November 18, 1993 proposal, it was also noted that, in the

draft permits, EPA had proposed to defer action on those compliance

options with regard to 1996-1999 pending completion of the instant

rulemaking. 58 FR 60962-60963. In notices of draft permits, the Agency

had stated that it intended to take this approach for all substitution

and reduced utilization plans submitted before July 16, 1993 but that,

with regard to such plans submitted on or after July 16, 1993, it

intended to defer action for all of Phase I on those compliance options

until completion of the rulemaking. 58 FR 38371 (July 16, 1993); 58 FR

39542-39543 (July 23, 1993); 58 FR 40812 (July 30, 1993); 58 FR 42065

(Aug. 6, 1993); 58 FR 43107 (Aug. 13, 1993).

The Agency had explained in draft permits, notices of draft

permits, and the November 18, 1993 proposal that it was taking the

position that it had the authority under the January 11, 1993

regulations to defer action on compliance options. See, e.g., 58 FR

60963. Nevertheless, the Agency proposed, in the November 18, 1993

notice of proposed rulemaking, to add language to Secs. 72.62 and 72.82

of the January 11, 1993 regulations ``making this authority more

explicit.'' Id.

However, the Agency concludes that it is no longer necessary to

defer action for any period on any substitution or reduced utilization

plans that have been submitted. The Agency has already issued direct

final permits addressing these plans for all years during 1995-1999 for

which the plans were proposed. See, e.g., 59 FR 37755 (July 25, 1994);

59 FR 38454 (July 28, 1994); 59 FR 39339 (Aug. 2, 1994); and 59 FR

39767 (Aug. 4, 1994). Most of the permits automatically became final.

Significant, adverse comment was received on several permits, which

were reproposed and have now been issued in final form. See 59 FR

49395-49396 (Sept. 28, 1994). As provided in the May 4, 1994

settlement, the substitution and compensating units designated in the

plans are allocated allowances in Phase I under settlement provisions

consistent with today's final revised rule and receive for one or two

years any additional allowances (referred to, in the settlement, as

``excess'' allowances) that would be provided under the January 11,

1993 regulations. Consistent with the May 4, 1994 settlement,

allowances equal to the number of additional allowances allocated for

one or two years will be deducted from a future year subaccount in the

unit's Allowance Tracking System account.

Consequently, the Agency is withdrawing its position, set forth in

draft permits, notices of draft permits, and the November 18, 1993

proposal, that it has the authority under the January 11, 1993

regulations to defer action on compliance options. The Agency is taking

no position at this time on whether it has such authority. Further,

under these circumstances, the Agency is not adopting the revisions to

Secs. 72.62 and 72.82 as proposed on November 18, 1993. The comments

that were submitted on these proposed revisions and on the Agency's

authority to defer action on compliance options are therefore no longer

relevant and require no response at this time.

Moreover, the Agency is not addressing, in this rulemaking,

questions concerning whether and how to apply today's final revised

rule to permit applications submitted to the Agency prior to the

effective date of the final revised rule. These matters--including the

question of whether allowances allocated to substitution or

compensating units under the January 11, 1993 rules should be returned

to EPA in the future--were addressed when, as noted above, the final

permits were issued with regard to these permit applications. The

Agency considered, in the individual permit application proceedings,

both the comments on this matter submitted in this rulemaking and those

comments submitted on the draft permits.

V. Administrative Requirements

A. Docket

The docket is the organized and complete file of all the

information considered by EPA in the development of this rulemaking.

The Agency notes that, consistent with the May 4, 1994 settlement,

several parties withdrew comments or portions of comments that they had

submitted concerning matters addressed in the November 18, 1993

proposal. Along with the preamble of the proposal and final rule, the

contents of the docket--except for interagency review materials and all

comments or portions of comments that were withdrawn prior to the date

of the Administrator's signature on this final rule--will constitute

the record in case of judicial review. See 42 U.S.C. 7607(d)(7)(A).

B. Executive Order 12866

Under Executive Order 12866, 58 FR 51735 (Oct. 4, 1993), the

Administrator must determine whether the regulatory action is

``significant'' and therefore subject to Office of Management and

Budget (OMB) review and the requirements of the Executive Order. The

Order defines ``significant regulatory action'' as one that is likely

to result in a rule that may:

(1) Have an annual effect on the economy of $100 million or more or

adversely affect in a material way the economy, a sector of the

economy, productivity, competition, jobs, the environment, public

health or safety, or State, local, or tribal governments or

communities;

(2) Create a serious inconsistency or otherwise interfere with an

action taken or planned by another agency;

(3) Materially alter the budgetary impact of entitlements, grants,

user fees, or loan programs or the rights and obligations of recipients

thereof; or

(4) Raise novel legal or policy issues arising out of legal

mandates, the President's priorities, or the principles set forth in

the Executive Order.

Pursuant to the terms of Executive Order 12866, it has been

determined that this rule is a ``significant regulatory action''

because the rule seems to raise novel legal or policy issues. As such,

this action was submitted to OMB for review. Any changes made in

response to OMB suggestions or recommendations are documented in the

public record. Any written comments from OMB to EPA and any written EPA

response to those comments are included in the docket. The docket is

available for public inspection at the EPA's Air Docket Section, which

is listed in the ADDRESSES section of this preamble.

C. Paperwork Reduction Act

The information collection requirements in this rule have been

approved by OMB under the Paperwork Reduction Act, 44 U.S.C. 3501, et

seq., and have been assigned control number 2060-0258.

This collection of information has an estimated burden averaging

from 8 to 16 hours per response for about 124 responses. These

estimates include time for reviewing instructions, searching existing

data sources, gathering and maintaining the data needed, and completing

and reviewing the collection of information.

An Information Collection Request document and estimates of the

public reporting burden were prepared in connection with the January

11, 1993 regulations. 56 FR 63098; 58 FR 3650. The regulation

modifications contained in today's proposal will not significantly

change the reporting burden that was previously estimated.

Send comments regarding this burden analysis or any other aspect of

this collection of information, including suggestions for reducing the

burden, to Chief, Information Policy Branch, EPA, 401 M Street, S.W.

(Mail Code 2136), Washington, DC 20460; and to the Office of

Information and Regulatory Affairs, Office of Management and Budget,

Washington, DC 20503, marked ``Attention: Desk Officer for EPA.''

D. Regulatory Flexibility Act

The Regulatory Flexibility Act, 5 U.S.C. 601, et seq., requires

each federal agency to consider potential impacts of its regulations on

small business ``entities.'' Under 5 U.S.C. 604(a), an agency issuing a

notice of proposed rulemaking must prepare and make available for

public comment a regulatory flexibility analysis. Such an analysis is

not required if the head of an agency certifies that a rule will not

have a significant economic impact on a substantial number of small

entities, pursuant to 5 U.S.C. 605(b).

In the preamble of the January 11, 1993 regulations, the

Administrator certified that those regulations, including the

provisions revised by today's final rule, would not have a significant

impact. 58 FR 3649. The final rule revisions adopted today are not

significant enough to change the economic impact addressed in the

preamble of the January 11, 1993 regulations, which were certified as

not having a significant impact. The revisions will prevent the

creation of about 200,000 excess, new allowances and thus will have an

annual impact of about $318,000 per year in Phase I, i.e., 200,000

allowances times $159 (the weighted average winning bid for 1995

allowances in the EPA 1994 Allowance Auction on March 28, 1994. See 59

FR 19712, 19714 (Apr. 25, 1994)). Pursuant to the provisions of 5

U.S.C. 605(b), I hereby certify that the revised rule will not have a

significant, adverse impact on a substantial number of small entities.

E. Miscellaneous

In accordance with section 117 of the Act, publication of this rule

was preceded by consultation with any appropriate advisory committees,

independent experts, and federal departments and agencies.

List of Subjects in 40 CFR Part 72

Environmental protection, Acid rain, Air pollution control,

Electric utilities, Permits, Reporting and recordkeeping requirements,

Sulfur dioxide.

Dated: November 14, 1994.

Carol M. Browner,

Administrator.

For the reasons set forth in the preamble, chapter I of title 40 of

the Code of Federal Regulations is amended as follows.

PART 72--[AMENDED]

1. The authority citation for part 72 is revised to read as

follows:

Authority: 42 U.S.C. 7601 and 7651, et seq.

2. Section 72.41 is amended by revising paragraphs (b)(1)(i),

(c)(3) introductory text, (c)(3)(i)(B), (c)(3)(i)(C), (c)(3)(ii),

(c)(4)(ii), (d)(2), and (e)(1)(i) and adding paragraphs (c)(3)(i)(D),

(c)(3)(iii), and (d)(3) to read as follows:

Sec. 72.41 Phase I substitution plans.

* * * * *

(b)(1) * * *

(i) Each unit under paragraph (a)(2) of this section is under the

control of the owner or operator of each unit under paragraph (a)(1) of

this section that designates the unit under paragraph (a)(2) of this

section as a substitution unit; and

* * * * *

(c) * * *

(3) Demonstration that the total emissions reductions achieved

under the substitution plan will be equal to or greater than the total

emissions reductions that would have been achieved without the plan, as

follows:

(i) * * *

(B) Each of the following: the unit's 1985 actual SO2

emissions rate; the unit's 1985 allowable SO2 emissions rate; the

unit's 1989 actual SO2 emissions rate; the unit's 1990 actual

SO2 emissions rate; and, as of November 15, 1990, the most

stringent unit-specific federally enforceable or State enforceable

SO2 emissions limitation covering the unit for 1995-1999. For

purposes of determining the most stringent emissions limitation,

applicable emissions limitations shall be converted to lbs/mmBtu in

accordance with appendix B of this part. Where the most stringent

emissions limitation is not the same for every year in 1995-1999, the

most stringent emissions limitation shall be stated separately for each

year.

(C) The lesser of: the unit's 1985 actual SO2 emissions rate;

the unit's 1985 allowable SO2 emissions rate; the greater of the

unit's 1989 or 1990 actual SO2 emissions rate; or, as of November

15, 1990, the most stringent unit-specific federally enforceable or

State enforceable SO2 emissions limitation covering the unit for

1995-99. Where the most stringent emissions limitation is not the same

for every year during 1995-1999, the lesser of the emissions rates

shall be determined separately for each year using the most stringent

emissions limitation for that year.

(D) The product of the baseline in paragraph (c)(3)(i)(A) of this

section and the emissions rate in paragraph (c)(3)(i)(C) of this

section, divided by 2000 lbs/ton. Where the most stringent emissions

limitation is not the same for every year during 1995-1999, the product

in the prior sentence shall be calculated separately for each year

using the emissions rate determined for that year in paragraph

(c)(3)(i)(C) of this section.

(ii)(A) The sum of the amounts in paragraph (c)(3)(i)(D) of this

section for all substitution units to be governed by the plan. Except

as provided in paragraph (c)(3)(ii)(B) of this section, this sum is the

total number of allowances available each year under the substitution

plan.

(B) Where the most stringent unit-specific federally enforceable or

State enforceable SO2 emissions limitation is not the same for

every year during 1995-1999, the sum in paragraph (c)(3)(ii)(A) of this

section shall be calculated separately for each year using the amounts

calculated for that year in paragraph (c)(3)(i)(D) of this section.

Each separate sum is the total number of allowances available for the

respective year under the substitution plan.

(iii) Where, as of November 15, 1990, a non-unit-specific federally

enforceable or State enforceable SO2 emissions limitation covers

the unit for any year during 1995-1999, the designated representative

shall state each such limitation and propose a method for applying the

unit-specific and non-unit-specific emissions limitations under

paragraph (d) of this section.

(4) * * *

* * * * *

(ii) A list showing any annual distribution of the allowances in

paragraph (c)(3)(ii) of this section from a substitution unit to a unit

under paragraph (a)(1) of this section that, under the plan, designates

the substitution unit.

* * * * *

(d) * * *

(2) In no event shall allowances be allocated to a substitution

unit, under an approved substitution plan, for any year in excess of

the sum calculated and applicable to that year under paragraph

(c)(3)(ii) of this section, as adjusted by the Administrator in

approving the plan.

(3) Where, as of November 15, 1990, a non-unit-specific federally

enforceable or State enforceable SO2 emissions limitation covers

the unit for any year during 1995-1999, the Administrator will specify

on a case-by-case basis a method for using unit-specific and non-unit-

specific emissions limitations in allocating allowances to the

substitution unit. The specified method will not treat a non-unit-

specific emissions limitation as a unit-specific emissions limitation

and will not result in substitution units retaining allowances

allocated under paragraph (d)(1) of this section for emissions

reductions necessary to meet a non-unit- specific emissions limitation.

Such method may require an end-of-year review and the adjustment of the

allowances allocated to the substitution unit and may require the

designated representative of the substitution unit to surrender

allowances by the allowance transfer deadline of the year that is

subject to the review. Any surrendered allowances shall have the same

or an earlier compliance use date as the allowances originally

allocated for the year, and the designated representative may identify

the serial numbers of the allowances to be deducted. In the absence of

such identification, such allowances will be deducted on a first-in,

first-out basis under Sec. 73.35(c)(2) of this chapter.

(e) * * *

(1) Emissions Limitations. (i) Each substitution unit governed by

an approved substitution plan shall become a Phase I unit from January

1 of the year for which the plan takes effect until January 1 of the

year for which the plan is no longer in effect or is terminated. The

designated representative of a substitution unit shall surrender

allowances, and the Administrator will deduct allowances, in accordance

with paragraph (d)(3) of this section.

* * * * *

3. Section 72.43 is amended by revising paragraphs (a) introductory

text, (a)(1) introductory text, (b)(1) introductory text,

(b)(1)(ii)(A), (b)(3)(i), (c)(4)(i), (c)(4)(ii), (c)(4)(iv), (d), and

(f)(1)(ii) and adding paragraph (a)(2) to read as follows:

Sec. 72.43 Phase I reduced utilization plans.

(a) Applicability. This section shall apply to the designated

representative of:

(1) Any Phase I unit, including.

* * * * *

(2) Any affected unit that:

(i) Is not otherwise subject to any Acid Rain emissions limitation

or emissions reduction requirements during Phase I; and

(ii) Meets the requirement, as set forth in paragraphs (c)(4)(ii)

and (d) of this section, that for each year for which the unit is to be

covered by the reduced utilization plan, the unit's baseline divided by

2,000 lbs/ton and multiplied by the lesser of the unit's 1985 actual

SO2 emissions rate or 1985 allowable SO2 emissions rate does

not exceed the sum of

(A) The lesser of 10 percent of the amount under paragraph

(a)(2)(ii) of this section or 200 tons, plus

(B) The unit's baseline divided by 2,000 lbs/ton and multiplied by

the lesser of: The greater of the unit's 1989 or 1990 actual SO2

emissions rate; or, as of November 15, 1990, the most stringent

federally enforceable or State enforceable SO2 emissions

limitation covering the unit for 1995-1999.

(b)(1) The designated representative of any unit under paragraph

(a)(1) of this section shall include in the Acid Rain permit

application for the unit a reduced utilization plan, meeting the

requirements of this section, when the owners and operators of the unit

plan to:

* * * * *

(ii) * * *

(A) Shifting generation of the unit to a unit under paragraph

(a)(2) of this section or to a sulfur-free generator; or

* * * * *

(3)(i) Improved unit efficiency measures shall be implemented in

the unit after December 31, 1987. Such measures include supply-side

measures listed in appendix A, section 2.1 of part 73 of this chapter.

* * * * *

(c) * * *

(4) * * *

(i) Identification of each compensating unit or sulfur-free

generator.

(ii) For each compensating unit.

(A) Each of the following: The unit's 1985 actual SO2

emissions rate; the unit's 1985 allowable emissions rate; the unit's

1989 actual SO2 emissions rate; the unit's 1990 actual SO2

emissions rate; and, as of November 15, 1990, the most stringent unit-

specific federally enforceable or State enforceable SO2 emissions

limitation covering the unit for 1995-1999. For purposes of determining

the most stringent emissions limitation, applicable emissions

limitations shall be converted to lbs/mmBtu in accordance with appendix

B of this part. Where the most stringent emissions limitation is not

the same for every year in 1995-1999, the most stringent emissions

limitation shall be stated separately for each year.

(B) The unit's baseline divided by 2,000 lbs/ton and multiplied by

the lesser of the unit's 1985 actual SO2 emissions rate or 1985

allowable SO2 emissions rate.

(C) The unit's baseline divided by 2000 lbs/ton and multiplied by

the lesser of: The greater of the unit's 1989 or 1990 actual SO2

emissions rate; or, as of November 15, 1990, the most stringent unit-

specific federally enforceable or State enforceable SO2 emissions

limitation covering the unit for 1995-1999. Where the most stringent

emissions limitation is not the same for every year in 1995-1999, the

calculation in the prior sentence shall be made separately for each

year.

(D) The difference between the amount under paragraph (c)(4)(ii)(B)

of this section and the amount under paragraph (c)(4)(ii)(C) of this

section. If the difference calculated in the prior sentence for any

year exceeds the lesser of 10 percent of the amount under paragraph

(c)(4)(ii)(B) of this section or 200 tons, the unit shall not be

designated as a compensating unit for the year. Where the most

stringent unit-specific federally enforceable or State enforceable

SO2 emissions limitation is not the same for every year in 1995-

1999, the difference shall be calculated separately for each year.

(E) The allowance allocation calculated as the amount under

paragraph (c)(4)(ii)(B) of this section. If the compensating unit is a

new unit, it shall be deemed to have a baseline of zero and shall be

allocated no allowances.

(F) Where, as of November 15, 1990, a non-unit-specific federally

enforceable or State enforceable SO2 emissions limitation covers

the unit for any year in 1995-1999, the designated representative shall

state each such limitation and propose a method for applying unit-

specific and non-unit-specific emissions limitations under paragraph

(d) of this section.

* * * * *

(iv) For each compensating unit or sulfur-free generator not in the

dispatch system of the unit reducing utilization under the plan, the

system directives or power purchase agreements or other contractual

agreements governing the acquisition, by the dispatch system, of the

electrical energy that is generated by the compensating unit or sulfur-

free generator and on which the plan relies to accomplish reduced

utilization. Such contractual agreements shall identify the specific

compensating unit or sulfur-free generator from which the dispatch

system acquires such electrical energy.

* * * * *

(d) Administrator's Action. (1) If the Administrator approves the

reduced utilization plan, he or she will allocate allowances, as

provided in the approved plan, to the Allowance Tracking System account

for any designated compensating unit upon issuance of an Acid Rain

permit containing the plan, except that, if the plan is conditionally

approved, the allowances will be allocated upon revision of the permit

to activate the plan.

(2) Where, as of November 15, 1990, a non-unit-specific federally

enforceable or State enforceable emissions limitation covers the unit

for any year during 1995-1999, the Administrator will specify on a

case-by-case basis a method for using unit-specific and non-unit

specific emissions limitations in approving or disapproving the

compensating unit. The specified method will not treat a non-unit-

specific emissions limitation as a unit-specific emissions limitation

and will not result in compensating units retaining allowances

allocated under paragraph (d)(1) of this section for emissions

reductions necessary to meet a non-unit-specific emissions limitation.

Such method may require an end-of-year review and the disapproval and

de-designation, and adjustment of the allowances allocated to, the

compensating unit and may require the designated representative of the

compensating unit to surrender allowances by the allowance transfer

deadline of the year that is subject to the review. Any surrendered

allowances shall have the same or an earlier compliance use date as the

allowances originally allocated for the year, and the designated

representative may identify the serial numbers of the allowances to be

deducted. In the absence of such identification, such allowances will

be deducted on a first-in, first-out basis under Sec. 73.35(c)(2) of

this chapter.

* * * * *

(f) * * *

(1) * * *

(ii) The designated representative of any Phase I unit (including a

unit governed by a reduced utilization plan relying on energy

conservation, improved unit efficiency, sulfur-free generation, or a

compensating unit) shall surrender allowances, and the Administrator

will deduct or return allowances, in accordance with paragraph (d)(2)

of this section and subpart I of this part.

* * * * *

4. Section 72.91 is amended by revising paragraphs (a)(3)(iii)

introductory text (formula is unchanged), (a)(3)(iv), (a)(4), (a)(5),

(a)(6), and (b)(2) and adding paragraph (a)(7) to read as follows:

Sec. 72.91 Phase I unit adjusted utilization.

(a) * * *

(3) * * *

(iii) ``Shifts to designated sulfur-free generators'' is the

reduction in utilization (in mmBtu), for the calendar year, that is

accounted for by all sulfur-free generators designated under the

reduced utilization plan in effect for the calendar year. This term

equals the sum, for all such generators, of the ``shift to sulfur-free

generator.'' ``Shift to sulfur-free generator'' shall equal the amount,

to the extent documented under paragraph (a)(6) of this section,

calculated for each generator using the following formula:

* * * * *

(iv) ``Shifts to designated compensating units'' is the reduction

in utilization (in mmBtu) for the calendar year that is accounted for

by increased generation at compensating units designated under the

reduced utilization plan in effect for the calendar year. This term

equals the heat rate, under paragraph (a)(3) of this section, of the

unit reducing utilization multiplied by the sum, for all such

compensating units, of the ``shift to compensating unit'' for each

compensating unit. ``Shift to compensating unit'' shall equal the

amount of compensating generation (in Kwh), to the extent documented

under paragraph (a)(6) of this section, that the designated

representatives of the unit reducing utilization and the compensating

unit have certified (in their respective annual compliance

certification reports) as the amount that will be converted to mmBtus

and used, in accordance with paragraph (a)(4) of this section, in

calculating the adjusted utilization for the compensating unit.

(4) ``Compensating generation provided to other units'' is the

total amount of utilization (in mmBtu) necessary to provide the

generation (if any) that was shifted to the unit as a designated

compensating unit under any other reduced utilization plans that were

in effect for the unit and for the calendar year. This term equals the

heat rate, under paragraph (a)(3) of this section, of such unit

multiplied by the sum of each ``shift to compensating unit'' that is

attributed to the unit in the annual compliance certification reports

submitted by the Phase I units under such other plans and that is

certified under paragraph (a)(3)(iv) of this section.

(5) Notwithstanding paragraphs (a)(3) (i), (ii), and (iii) of this

section, where two or more Phase I units include in ``plan

reductions'', in their annual compliance certification reports for the

calendar year, expected kilowatt hour savings or reduction in heat rate

from the same specific conservation or improved unit efficiency

measures or increased utilization of the same sulfur-free generator:

(i) The designated representatives of all such units shall submit

with their annual reports a certification signed by all such designated

representatives. The certification shall apportion the total kilowatt

hour savings, reduction in heat rate, or increased utilization among

such units.

(ii) Each designated representative shall include in the annual

report only the respective unit's share of the total kilowatt hour

savings, reduction in heat rate, or increased utilization, in

accordance with the certification under paragraph (a)(5)(i) of this

section.

(6)(i) Where a unit includes in ``plan reductions'' under paragraph

(a)(3) of this section the increase in utilization of any sulfur-free

generator, the designated representative of the unit shall submit, with

the annual compliance certification report, documentation demonstrating

that an amount of electrical energy at least equal to the ``shift to

sulfur-free generator'' attributed to the sulfur-free generator in the

annual report was actually acquired by the unit's dispatch system from

the sulfur-free generator.

(ii) Where a unit includes in ``plan reductions'' under paragraph

(a)(3) of this section utilization of any compensating unit, the

designated representative of the unit shall submit with the annual

compliance certification report, documentation demonstrating that an

amount of electrical energy at least equal to the ``shift to

compensating unit'' attributed to the compensating unit in the annual

report was actually acquired by the unit's dispatch system from the

compensating unit.

(7) Notwithstanding paragraphs (a)(3)(i), (ii), (iii), and (iv),

(a)(4), and (a)(5) of this section, ``plan reductions'' minus

``compensating generation provided to other units'' shall not exceed

``baseline'' minus ``actual utilization.''

(b) * * *

(2) Notwithstanding paragraph (b)(1)(i) of this section, where two

or more Phase I units include in the confirmation report the verified

kilowatt hour savings or reduction in heat rate from the same specific

conservation or improved unit efficiency measures:

(i) The designated representatives of all such units shall submit

with their confirmation reports a certification signed by all such

designated representatives. The certification shall apportion the total

kilowatt hour savings or reduction in heat rate among such units.

(ii) Each designated representative shall include in the

confirmation report only the respective unit's share of the total

savings or reduction in heat rate in accordance with the certification

under paragraph (b)(2)(i) of this section.

* * * * *

[FR Doc. 94-28708 Filed 11-21-94; 8:45 am]

BILLING CODE 6560-50-P