Acid Rain Program: Phase II Early Reduction Credits

SUMMARY: Title IV of the Clean Air Act, as amended by Clean Air Act

Amendments of 1990, (the Act) authorizes the Environmental Protection

Agency (EPA or Agency) to establish the Acid Rain Program in order to

reduce the adverse health and ecological impacts of acidic deposition.

On March 23, 1993, the Agency promulgated final rules allocating

allowances to utility units, including the criteria and method of

allocating early reduction credits under section 404(e) of the Act.

This action implements a settlement of litigation between EPA and a

utility regarding Phase II early reduction credits. The settlement

provides a method by which additional allowances may be loaned to units

receiving early reduction credits as an incentive to further reduce

emissions prior to the units becoming subject to the applicable Acid

Rain Program emission limitations.

In the proposed rules section of this Federal Register, EPA is

proposing a rule that is identical to this direct final rule. If

significant, adverse comments are timely received on the proposed rule

(see DATES section), this direct final rule will be withdrawn and all

such comments will be addressed in a subsequent final rule based on the

proposed rule. If no significant, adverse comments are timely received

on the proposed rule, then the direct final rule becomes effective as

published and no further action is contemplated on the parallel

proposal published today.

DATES: This rule is effective August 8, 1997, unless significant,

adverse comments are received by July 24, 1997. If significant, adverse

comments are received, EPA will publish notice in the Federal Register

withdrawing the direct final rule.

Judicial Review. Under section 307(b)(1) of the Clean Air Act

(Act), judicial review of this rule is available only by filing a

petition for review in the U.S. Court of Appeals for the District of

Columbia Circuit within 60 days of today's publication of these direct

final revisions. Under section 307(b)(2) of the Act, the requirements

that are the subject of today's document may not be challenged later in

civil or criminal proceedings brought by EPA to enforce these

requirements.

ADDRESSES: Docket and Comments. Docket No. A-97-31, containing

supporting information used to develop these amendments, is available

for public inspection and copying from 8:00 a.m. to 5:30 p.m., Monday

through Friday, excluding legal holidays, at EPA's Air Docket Section

(6102), Waterside Mall, Room M1500, 1st Floor, 401 M Street, SW,

Washington DC 20460, telephone 202-260-7548. Written comments should be

submitted to the same address. Information concerning the original

rules is found in Docket No. A-92-06, the proposed allowance allocation

rule. A reasonable fee may be charged for copying.

FOR FURTHER INFORMATION CONTACT: Kathy Barylski at (202) 233-9074 Acid

Rain Division (6204J), U.S. Environmental Protection Agency, 401 M St.,

S.W., Washington, DC 20460; or the Acid Rain Hotline at (202) 233-9620.

Electronic copies of this rulemaking can be accessed through the Acid

Rain Division website at http://www.epa.gov/acidrain.

SUPPLEMENTARY INFORMATION: In the Proposed Rules Section of this

Federal Register, EPA is proposing rule revisions that provide a method

by which additional allowances may be loaned to units receiving early

reduction credits. This will provide an incentive to further reduce

emissions prior to the units becoming subject to the applicable Acid

Rain Program emission limitations. EPA considers these revisions to be

noncontroversial and anticipates no adverse comments. However, if EPA

timely receives significant, adverse comments, EPA will publish a

document in the Federal Register withdrawing the direct final rule. In

that event, all public comments received will be treated as comments on

the proposed rule as published in the Proposed Rules Section of this

Federal Register and will be addressed in a subsequent final rulemaking

document. EPA will not institute a second comment period on the

document in the Proposed Rules Section of this Federal Register or on

any subsequent final rule addressing withdrawn portions of this final

rule. Any parties interested in commenting on these revisions to part

73 should do so at this time.

I. Affected Entities

II. Background

III. Phase II Early Reduction Credits

A. Review of 1993 Rule

B. Issues Resolved in Settlement

1. General Approach

2. Eligibility Criteria

3. Loan of Allowances

4. Reference Point

C. Environmental Benefit

IV. Administrative Requirements

A. Executive Order 12866

B. Unfunded Mandates Act

C. Paperwork Reduction Act

D. Regulatory Flexibility

E. Miscellaneous

F. Submission to Congress and the General Accounting Office

I. Affected Entities

Entities potentially regulated by this action are fossil-fuel fired

boilers or turbines that serve generators producing electricity for

sale. Regulated categories and entities include:

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

Examples of regulated

Category entities

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

Industry.................................. Electric service providers.

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

This table is not intended to be exhaustive, but rather provides a

guide for readers regarding entities that may be affected by this

action. To determine whether your facility may be affected by this

action, you should carefully examine the applicability criteria in

Sec. 72.6 and the exemptions in Secs. 72.7 and 72.8 of title 40 of the

Code of Federal Regulations and the revised Secs. 72.6, 72.7, 72.8, and

72.14 proposed on December 27, 1996 (61 FR 68340). If you have

questions regarding the applicability of this action to a particular

entity, consult the persons listed in the preceding FOR FURTHER

INFORMATION CONTACT section.

II. Background

The overall goal of the Acid Rain Program is to achieve significant

environmental benefits through reductions in emissions of sulfur

dioxide (SO2) and nitrogen oxides (NOx), the

primary causes of acid rain. To achieve this goal at the lowest cost to

society, the program employs both traditional and innovative, market-

based approaches for controlling air pollution. In addition, the

program encourages energy efficiency and promotes pollution prevention.

Title IV of the Clean Air Act sets as a primary goal the reduction

of annual SO2 emissions by 10 million tons below 1980

levels. To achieve these SO2 emissions reductions, the law

requires a two-phase tightening of restrictions placed on fossil fuel-

fired power plants. Phase I began in 1995 and affected 110 mostly coal-

burning electric utility plants located in 21 eastern and midwestern

states. Phase II, beginning in 2000, tightens the annual emissions

limits imposed on these large, higher

[[Page 34149]]

emitting plants and also sets restrictions on smaller or cleaner plants

fired by coal, oil, or gas. Title IV also requires certain coal-fired

units to reduce their emissions of NOX to a level achievable

through installation of applicable NOX control technology.

See 40 CFR part 76.

The centerpiece of the Acid Rain Program is a unique trading system

in which allowances (each authorizing the emission of up to one ton of

SO2) may be bought and sold at prices determined by the free

market. Most existing utility units are allocated allowances based on

their historic fuel use and emission rates specified in the Act.

Affected utility units are required to limit SO2 emissions

to the number of allowances they hold, but because allowances are

transferrable, utilities may meet their emissions control requirements

in the most cost-effective manner.

This rule relates to a small number of utilities eligible for

allowances under section 404(e) of the Act. Section 404(e) allows a

carefully delineated group of utilities to receive allowances for

SO2 emissions reductions achieved before their units are

subject to the Acid Rain Program SO2 emissions limitations.

For Phase I of early reduction credits, from 1991 through 1994, a

utility received 314,248 allowances. This rule modifies the Phase II

early reduction credits program, from 1995 through 1999.

III. Phase II Early Reduction Credits

A. Review of 1993 Rule

Section 404(e) of the Act provided a lengthy delineation of

eligibility criteria for utility units to be allocated the additional

allowances for early reduction. However, the Act was less specific

regarding how the reduction of emissions would be calculated. The March

23, 1993 rule (58 FR 15634) provided a methodology that EPA believed

fairly represented the intent of the statute and accurately measured

the reduction in emissions.

The first issue was to determine the calculation approach. EPA

considered a pure emissions approach, an emissions rate approach, and a

hybrid. EPA developed the hybrid approach to encourage the utilities to

increase utilization at cleaner plants and to discourage operational

shifts that would result in additional emissions. This approach is not

addressed in today's rule.

The second issue was what comparison year to measure the reduction

against. The 1993 rule finalized use of calendar year 1990 as the

comparison year.

B. Issues Resolved in Settlement

1. General Approach

One utility with Phase II affected units that are eligible for

early reduction credits for emission reductions from 1995 through 1999

initiated litigation regarding both the method of calculating early

reduction credits and the comparison year for measuring the reduction.

EPA and the utility worked together for over two years to craft a

settlement. Under the settlement, the utility may be loaned allowances

for fifteen years, while EPA is reasonably assured that the utility

will make additional emissions reductions, thus benefitting the

environment. These loaned allowances will be in addition to the early

reduction credits calculated under the existing rule.

2. Eligibility Criteria

In order to ensure that the settlement results in an environmental

benefit, EPA and the utility agreed that the additional loaned

allowances will only be available if the weighted average emission rate

(based on heat input) for the Phase I year in question for all of the

affected units in the unit's dispatch system is below the system-wide

weighted average emission rate for 1990. The utility's dispatch system

will be the dispatch system as it existed in 1990. In addition, the

1990 SO2 emission rate for any unit that did not operate at

all during 1990 will be deemed to be equal to the weighted average

emission rate of all the other units at the same plant that did operate

during 1990.

3. Loan of Allowances

The additional allowances will be awarded to the year 2000

subaccount. For each additional allowance, one allowance will be

deducted from the year 2015 subaccount. If there are not enough

allowances allocated under subpart B of part 73 to a unit's ATS

subaccount for the year 2015 to permit the deduction of the entire

number of allowances required to be deducted, additional allowances

shall be deducted from the unit's ATS subaccount for subsequent years,

as necessary to ensure that the required deduction is made. The unit's

designated representative may designate by serial number any allowances

to be deducted from the subaccount.

4. Reference Point

The utility interested in Phase II early reduction credits had

commented that it believed the credits should be based on the

difference between a projected emission rate in Phase I and the actual

rate. EPA is not reconsidering or modifying here the rule provisions

that base the early reduction credits upon the difference between the

actual Phase I emission rate and the 1990 emission rate. However, EPA

and the utility agreed that a projected emission rate will be used for

awarding the additional loaned allowances.

The utility had provided a report prepared in 1991 estimating that

the utility's average fuel sulfur content would rise through Phase I,

resulting in an average emission rate of 1.75 lb/mmBtu, in the absence

of any early reduction credit program. During the course of settlement,

the utility provided additional materials from 1995 that confirmed that

its average fuel sulfur content would otherwise rise to at least 1.75

lb/mmBtu. Thus, the Agency and the utility agreed that a ``projected

baseline emission rate'' of 1.75 lb/mmBtu would be used to calculate

the loaned allowances.

The Agency and the utility agreed that the additional loaned

allowances would be calculated in an amount equal to the product,

rounded to the nearest whole number, of (a) the unit's Phase I year

utilization (in mmBtu) and (b) the amount (in lbs/mmBtu) by which the

unit's ``projected baseline emission rate'' exceeds the greater of its

actual Phase I year emission rate or its 1990 emission rate.

C. Environmental Benefit

Under the existing early reduction credit program (without the

allowance loan provisions), the utility would only significantly reduce

the emission rate at one large coal plant (to 1.2 lb/mmBtu) and would

sign new coal contracts for an average of 1.75 lb/mmBtu. This would

result in total early reduction credits of about 106,000 and total

system-wide SO2 emissions of approximately 1.34 million

tons, over the five year period from 1995 through 1999.

The utility has estimated that, with the new allowance loan

provisions, it would likely sign new coal contracts or buy spot market

coal with lower sulfur content and would reduce the emission rate at

most of its units. Using an estimate that new coal contracts could

average 1.4 lb/mmBtu, the early reduction credit program, as revised by

today's rule, could result in 173,000 early reduction credits, 158,000

loaned allowances, and total SO2 emissions of 1.19 million

tons.

The environment could experience a reduction of 150,000 tons of

SO2 over five years (1.34 million tons minus 1.19 million

tons), and 67,000 tons of the reduction (173,000 early reduction

credits minus 106,000 early reduction

[[Page 34150]]

credits) would be offset by early reduction credits. Therefore, the

utility would receive 158,000 loaned allowances to compensate for an

additional 83,000 tons of emission reductions (150,000 tons of emission

reductions minus 67,000 tons of emission reductions offset by early

reduction credits). EPA believes that, because the allowances are

merely loaned, the environment may benefit by up to 83,000 tons less of

SO2 emitted to the atmosphere.

IV. Administrative Requirements

A. Executive Order 12866

Under Executive Order 12866, 58 FR 51735 (October 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 not a ``significant regulatory action''

because the rule does not meet any of the criteria listed above. As

such, this action was not submitted to OMB for review.

B. Unfunded Mandates Act

Section 202 of the Unfunded Mandates Reform Act of 1995 (``Unfunded

Mandates Act'') requires that the Agency prepare a budgetary impact

statement before promulgating a rule that includes a federal mandate

that may result in expenditure by State, local, and tribal governments,

in aggregate, or by the private sector, of $100 million or more in any

one year. Section 203 requires the Agency to establish a plan for

obtaining input from and informing, educating, and advising any small

governments that may be significantly or uniquely affected by the rule.

Under section 205 of the Unfunded Mandates Act, the Agency must

identify and consider a reasonable number of regulatory alternatives

before promulgating a rule for which a budgetary impact statement must

be prepared. The Agency must select from those alternatives the least

costly, most cost-effective, or least burdensome alternative that

achieves the objectives of the rule, unless the Agency explains why

this alternative is not selected or the selection of this alternative

is inconsistent with law.

Because this rule is estimated to result in the expenditure by

State, local, and tribal governments or the private sector of less than

$100 million in any one year, the Agency has not prepared a budgetary

impact statement or specifically addressed the selection of the least

costly, most cost-effective, or least burdensome alternative. Because

small governments will not be significantly or uniquely affected by

this rule, the Agency is not required to develop a plan with regard to

small governments.

The revisions to part 73 will not have a significant effect on

regulated entities or State permitting authorities. The revisions

represent an economic benefit to the affected utility and a benefit to

the environment. The early reduction credit program is operated

entirely by the EPA and, therefore, the changes will not burden the

State or local permitting authorities.

C. Paperwork Reduction Act

This rule will increase the information collection requirements of

the existing regulations, but only for utilities that are eligible and

wish to participate in the early reduction credit program. As only two

utilities are eligible for early reduction credits, an information

collection report is not required in connection with today's rule.

Therefore, no information collection report has been prepared or

submitted to the OMB under the Paperwork Reduction Act, 44 U.S.C. 3501,

et seq.

D. Regulatory Flexibility

EPA has determined that it is not necessary to prepare a regulatory

flexibility analysis in connection with this rule. EPA has also

determined that this rule will not have a significant economic impact

on a substantial number of small entities. Only two utilities are

potentially affected by this rule, and neither of those utilities is a

small entity.

E. Miscellaneous

In accordance with section 117 of the Act, issuance of this rule

was preceded by consultation with any appropriate advisory committees,

independent experts, and federal departments and agencies.

F. Submission to Congress and the General Accounting Office

Under 5 U.S.C. 801(a)(1)(A) as added by the Small Business

Regulatory Enforcement Fairness Act of 1996, EPA submitted a report

containing this rule and other required information to the U.S. Senate,

the U.S. House of Representatives, and the Comptroller General of the

General Accounting Office prior to publication of the rule in today's

Federal Register. This rule is not a ``major rule'' as defined by 5

U.S.C. 804(2).

List of Subjects in 40 CFR Part 73

Air pollution control, Electric utilities, Reporting and

recordkeeping requirements, Sulfur dioxide.

Dated: June 16, 1997.

Carol M. Browner,

Administrator.

For the reasons set forth in the preamble, 40 CFR part 73 is

amended as set forth below.

PART 73--[AMENDED]

1. The authority citation for part 73 continues to read as follows:

Authority: 42 U.S.C. 7601 and 7651 et seq.

2. Section 73.20 is amended by revising paragraph (e)(4) and by

adding paragraph (f) to read as follows:

Sec. 73.20 Phase II early reduction credits.

* * * * *

(e) * * *

(4) For any unit that did not operate during 1990, the unit's 1990

SO2 emission rate will be equal to the weighted average

emission rate of all of the other units at the same source that did

operate during 1990.

* * * * *

(f) Allowance loan program. (1) Eligibility. Units eligible for

Phase II early reduction credits under paragraph (a) of this section

are eligible for allowances under this paragraph (f) if the weighted

average emission rate (based on heat input) for the prior year for all

of the affected units in the unit's dispatch system was less than the

system-wide weighted average emission rate for 1990. The weighted

average emission rate shall be calculated as follows:

[[Page 34151]]

[GRAPHIC] [TIFF OMITTED] TR24JN97.000

For the purposes of this calculation, the unit's dispatch system

will be the dispatch system as it existed as of November 15, 1990.

(2) Allowance Calculation. Allowances under this paragraph (f)

shall be calculated as follows:

[GRAPHIC] [TIFF OMITTED] TR24JN97.001

(3) Allowance Loan. (i) The number of allowances calculated under

paragraph (f)(2) of this section shall be allocated to the unit's year

2000 subaccount.

(ii) The number of allowances calculated under paragraph (f)(2) of

this section shall be deducted, contemporaneously with the allocation

under paragraph (f)(3)(i) of this section, from the unit's year 2015

subaccount.

(iii) Notwithstanding paragraph (f)(3)(ii) of this section, if the

number of allowances to be deducted exceeds the amount of allowances

allocated to the unit for the year 2015, allowances in the year 2015

subaccount equal to the amount of allowances allocated to the unit for

the year 2015 shall be deducted. In addition to the deduction from the

year 2015 subaccount, a sufficient amount of allowances in the year

2016 subaccount (up to the amount of allowances allocated to the unit

for the year 2016) shall be deducted contemporaneously, such that the

sum of the allowances deducted from the subaccounts equals the number

of allowances required to be deducted under paragraph (f)(3)(ii) of

this section.

(iv) Notwithstanding paragraph (f)(3)(ii) of this section, the

procedure in paragraph (f)(3)(iii) shall be applied as follows to each

year after 2015 (year-by-year in numerical order) for which the number

of allowances to be deducted from that year's subaccount exceeds the

number allocated to the unit for that year: allowances equal to the

number allocated for that year shall be deducted from that year's

subaccount and the remainder (up to the amount allocated) necessary to

equal the number of allowances required to be deducted under paragraph

(f)(3)(ii) of this section shall be deducted from the next year's

subaccount.

(v) The owners and operators of the unit shall ensure that

sufficient allowances are available to make the full deductions

required under paragraphs (f)(3)(ii), (iii), and (iv) of this section.

The designated representative may specify the serial number of each

allowance to be deducted.

(4) ERC Units. Any unit to which allowances are allocated under

paragraph (f)(3)(i) of this section shall be considered an ERC unit for

purposes of applying the restrictions in paragraph (e)(6) of this

section.

[FR Doc. 97-16511 Filed 6-23-97; 8:45 am]

BILLING CODE 6560-50-P