Regulation of Fuels and Fuel Additives: Baseline Requirements for Gasoline Produced by Foreign Refiners

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[FRL-5883-3]

RIN 2060-AH48

Regulation of Fuels and Fuel Additives: Baseline Requirements for

Gasoline Produced by Foreign Refiners

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

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SUMMARY: This final rule revises the requirements for imported

conventional gasoline. The Agency has revised the rules for

conventional gasoline (59 FR 7716, February 16, 1994) to allow a

foreign refiner to choose to petition EPA to establish an individual

baseline reflecting the quality and quantity of gasoline produced at a

foreign refinery in 1990 that was shipped to the United States. The

foreign refiner is required to meet the same requirements relating to

the establishment and use of individual refinery baselines as are met

by domestic refiners. This final action also includes additional

requirements that address issues that are unique to refiners and

refineries located outside the United States, namely those related to

tracking the movement of gasoline from the refinery to the United

States border, monitoring compliance with the requirements applicable

to foreign refiners, and imposition of appropriate sanctions for

violations. EPA will monitor the quality of imported conventional

gasoline, and if it exceeds a specified benchmark, EPA will apply

appropriate remedial action. Under this final action, the baseline for

gasoline imported from refiners without an individual baseline would be

adjusted to remedy the exceedance.

EPA believes this final rulemaking is consistent with the Agency's

commitment to fully protect public health and the environment, and with

the U.S. commitment to comply with its obligations under the World

Trade Organization agreement.

DATES: This final rule is effective August 27, 1997.

ADDRESSES: Materials relevant to the final rule have been placed in

Public Docket A-97-26 at the address below. Additional materials can be

found in Public Dockets A-91-02 and A-92-12, A-94-25 and A-96-33

located at Room M-1500, Waterside Mall (ground floor), U.S.

Environmental Protection Agency, 401 M Street S.W., Washington, DC

20460. The docket may be inspected from 8 a.m. until 5:30 p.m. Monday

through Friday. A reasonable fee may be charged by EPA for copying

docket materials.

FOR FURTHER INFORMATION CONTACT: Karen Smith, Fuels and Energy

Division, U.S. EPA (6406J), 401 M Street, SW., Washington, DC 20460,

Telephone: (202) 233-9674.

SUPPLEMENTARY INFORMATION:

Availability on the TTNBSS

Copies of this final rule are available electronically from the EPA

Internet Web site and via dial-up modem on the Technology Transfer

Network (TTN), which is an electronic bulletin board system (BBS)

operated by EPA's Office of Air Quality Planning and Standards. Both

services are free of charge, except for your existing cost of Internet

connectivity or the cost of the phone call to TTN. Users are able to

access and download files on their first call using a personal computer

per the following information. The official Federal Register version is

made available on the day of publication on the primary Internet sites

listed below. The EPA Office of Mobile Sources also publishes these

notices on the secondary Web site listed below and on the TTN BBS.

Internet (Web)

http://www.epa.gov/docs/fedrgstr/EPA-AIR/

(either select desired date or use Search feature)

http://www.epa.gov/OMSWWW/

(look in What's New or under the specific rulemaking topic)

TTNBBS: The TTNBBS can be accessed with a dial-in phone line and a

high-speed modem (PH 919-541-5742). The parity of your modem

should be set to none, the data bits to 8, and the stop bits to 1.

Either a 1200, 2400, 9600, or 14400 baud modem should be used. When

first signing on, the user will be required to answer some basic

informational questions for registration purposes. After completing the

registration process, proceed through the following series of menus:

(T) Gateway to TTN Technical Areas (Bulletin Boards)

(M) OMS--Mobile Sources Information

(Alerts display a chronological list of recent documents)

(K) Rulemaking and Reporting

At this point, choose the topic (e.g, Fuels) and subtopic (e.g.,

Reformulated Gasoline) of the rulemaking, and the system will list all

available files in the chosen category in date order with brief

descriptions. To download a file, type the letter ``D'' and hit your

Enter key. Then select a transfer protocol that is supported by the

terminal software on your own computer, and pick the appropriate

command on your own software to receive the file using that same

protocol. After getting the files you want onto your computer, you can

quit the TTN BBS with the ``G''oodbye command.

Please note that due to differences between the software used to

develop the document and the software into which the document may be

downloaded, changes in format, page length, etc. may occur.

Regulated Entities

Entities regulated by this action are those foreign refiners and

importers which produce, import or distribute gasoline for sale in the

United States. Regulated categories and entities include:

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Examples of regulated

Category entities

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Industry.................................. Foreign Refiners, Importers.

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

guide for readers regarding entities potentially regulated by this

action. This table lists the types of entities that EPA is now aware

could potentially be regulated by this action. Other types of entities

not listed in the table could also be

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regulated. To determine whether your company or facility may

potentially be regulated by this action, you should carefully examine

the applicability criteria of part 80, subpart D, of title 40 of the

Code of Federal Regulations. If you have questions regarding the

applicability of this action to a particular entity, consult the person

listed in the preceding FOR FURTHER INFORMATION CONTACT section.

The remainder of this final rulemaking is organized in the

following sections:

I. Background

A. Current Requirements for Imported Gasoline

B. May 1994 Proposal

C. The WTO Dispute Settlement Proceeding

D. Invitation for Public Comment

E. Requiring Individual Baselines for Foreign Refiners

F. Summary of Comments from NPRM

II. Description of Final Rule

A. Introduction

B. Requirements for Foreign Refiners with Individual Refinery

Baselines

1. Establish Refinery Baselines

2. Compliance with CG NOX and Exhaust Toxics

Requirements

3. Requirements for Tracking Refinery of Origin

4. Measures Related to Monitoring Compliance and Enforcement

C. Baseline Adjustment for Imported Gasoline that is Not FRGAS

1. Introduction

2. Monitoring

3. An Appropriate Benchmark

4. Remedial Action Upon an Exceedance

5. Imported Gasoline Subject to the Remedial Action

D. Requirements for U.S. Importers

1. Imported CG FRGAS

2. Imported CG that is not FRGAS

3. Imported RFG

E. Early Use of Individual Foreign Refinery Baselines

F. Requirements for RFG Before 1998

III. Summary of Changes from Proposal

IV. Response to Comments

A. Optional vs. Mandatory Baselines

B. Establishment of Individual Baselines

C. Liability: Party responsible for meeting the gasoline quality

requirements for FRGAS

D. Compliance Related Requirements

1. Sovereign Immunity

2. Agent for Service of Process

3. Bond Requirement

4. Foreign Refiner Commitments

5. Gasoline Tracking Requirements

6. Option to Classify Gasoline as Non-FRGAS

7. Third Party Testing Requirements

8. Diversion of FRGAS to Non-U.S. Markets

9. Attest Requirements

10. Imports from Canada by Truck

E. Remedial Measures

F. Compliance with WTO Obligations

V. Administrative Designation and Regulatory Analysis

A. Public Participation

B. Executive Order 12866

C. Economic Impact and Impact on Small Entities

D. Paperwork Reduction Act

E. Unfunded Mandates

F. Submission to Congress and the General Accounting Office

G. Statutory Authority

Regulation of Fuels and Fuel Additives

I. Background

A. Current Requirements for Imported Gasoline

On December 15, 1993, EPA issued final regulations that establish

requirements for reformulated gasoline (RFG) and conventional gasoline

(CG) (together the Gasoline Rule), as prescribed by section 211(k) of

the Clean Air Act (the Act). See 59 FR 7716 (February 16, 1994). Under

the Gasoline Rule, compliance by refiners and importers with the CG

requirements and certain RFG requirements is measured against baselines

that are intended to reflect a refinery's or importer's 1990 gasoline

quality. Domestic refiners are required to establish individual

refinery baselines of the quality and quantity of the gasoline produced

at each refinery in 1990. Domestic refinery baselines are calculated

using, in hierarchical order based on the availability of data, 1990

gasoline test data (Method 1), 1990 blendstock test data (Method 2), or

post-1990 blendstock and/or gasoline test data (Method 3). Under the

Gasoline Rule domestic blenders of gasoline and importers of foreign-

produced gasoline are treated differently than domestic refiners in

that they are required to establish baselines of the quality and

quantity of gasoline they produced or imported in 1990 using Method 1

data, if available. However, almost all blenders and importers lack the

actual 1990 test data necessary to establish a baseline using Method 1

data. As a result, blenders and importers are assigned the statutory

baseline, a baseline established by EPA in 1993 to approximate average

gasoline quality in the United States in 1990,1 with the

consequence that almost all gasoline produced at foreign refineries is

evaluated through the importer using the statutory

baseline.2 The baseline-setting scheme is specified in 40

CFR 80.91 through 80.93, and is discussed in the Preamble to the final

rule at 59 FR 7791 (February 16, 1994).

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\1\ The statutory baseline is calculated pursuant to section

211(k)(10)(B) of the Act which specifies the properties of

summertime statutory baseline gasoline, and instructs EPA to

establish the average properties of 1990 wintertime gasoline. The

Gasoline Rule specifies the properties of 1990 wintertime gasoline

in Sec. 80.45(b)(2), and the combined summer and winter, or annual,

statutory baseline gasoline properties in Sec. 80.91(c)(5).

Importers are required to meet various conventional gasoline

requirements by comparing the annual average quality of the gasoline

they import against the statutory baseline. An individual batch of

imported conventional gasoline is not subject to any requirements,

only the annual average of gasoline imported by the importer.

Foreign refiners are not subject to the requirements of the current

Gasoline Rule.

\2\ Only one importer had the Method 1 data necessary to

establish an individual baseline.

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In preparing the Gasoline Rule, EPA focused on three major issues

regarding the use of individual baselines for foreign refiners in the

RFG and CG programs. EPA's overriding consideration was the ultimate

environmental consequences of the baseline-setting scheme. The three

issues that EPA focused on were: (1) The technical difficulty of using

baseline-setting Methods 2 and 3 to accurately predict the quality of

the subset of a foreign refinery's gasoline that was exported to the

U.S. in 1990; (2) the ability of the Agency to adequately verify and

enforce the use of individual foreign refinery baselines, including

problems identifying the refinery of origin of imported gasoline and

enforcing gasoline content requirements against a foreign refiner; and

(3) the risk of adverse environmental effects from providing refiners

or importers with options in establishing baselines.

In developing the Gasoline Rule, EPA considered but did not go

forward with allowing foreign refiners the option of petitioning EPA to

establish individual baselines using Methods 1, 2, and 3, or defaulting

to the statutory baseline. EPA's reasons for not adopting the option at

that time are discussed at 59 FR 7785-7788 (February 16, 1994). When

EPA issued the final rule on December 15, 1993, however, it was not

fully satisfied that the baseline-setting scheme applicable to

importers and foreign refiners was the optimum solution and continued

to consider the issue.

B. May 1994 Proposal

In May 1994, EPA proposed to amend the Gasoline Rule to define

criteria and procedures by which foreign refiners would be allowed to

establish individual refinery baselines that reflected the properties

and volume of the gasoline that was produced at a foreign refinery in

1990 and exported for use within the United States. Under this

proposal, if a foreign refiner made the requisite showing through a

petition process EPA would establish an individual foreign refinery

baseline. U.S. importers of RFG produced at the foreign refinery would

have used the individual foreign refinery baseline

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values to demonstrate compliance with the limited number of RFG

requirements that are based on individual baselines. Importers would

not have been allowed to use individual foreign refinery baselines for

the CG requirements. Foreign refinery baselines would have been used

only during the period 1995 through 1997 3 and only up to a

volume of gasoline each year that equaled the foreign refinery's 1990

baseline volume. The proposal also included detailed enforcement and

verification procedures.

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\3\ Individual refinery baselines are used to set certain

content requirements for RFG only through 1997. See 40 CFR 80.41.

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Subsequent to the May 1994 proposal, Congress included restrictive

language in the legislation on EPA's appropriations related to the May

1994 proposal. EPA took no further action on this proposal.

C. The WTO Dispute Settlement Proceeding

In 1995, the governments of Venezuela and Brazil initiated dispute

settlement proceedings before the World Trade Organization (WTO),

challenging as discriminatory the different treatment applied by the

Gasoline Rule to imported gasoline and gasoline produced by U.S.

refiners. Among other defenses, the United States argued that the rule

was justified by the difficulties associated with implementing and

enforcing individual baseline requirements with respect to foreign

refiners and by the potential environmental impact resulting from

providing foreign refiners the choice of employing individual

baselines. The dispute settlement panel reviewing the matter found the

regulation discriminatory under the General Agreement on Tariffs and

Trade 1994 (GATT) and that the United States had not shown that the

GATT's health, enforcement or conservation exceptions applied. The U.S.

appealed, arguing that the measure is covered by the GATT conservation

exception. The WTO Appellate Body recognized that the United States had

legitimate concerns, and modified the findings of the dispute

settlement panel accordingly, but concluded the rule did not satisfy

all the requirements for this exception. The Appellate Body based this

conclusion on its views that (1) the United States had not adequately

explored options available to deal with its compliance assurance

concerns, in particular international cooperative arrangements, and (2)

the United States had been concerned about the costs of the various

regulatory options to domestic refiners but there was no evidence

demonstrating similar concern about the costs to foreign refiners. The

Appellate Body recommended that the United States bring EPA's

regulations into conformity with WTO obligations, leaving the United

States to determine how it would comply.

On June 19, 1996 after the Administration had consulted with

Congress, the United States advised the WTO that the United States

intended to meet U.S. obligations with respect to the results of the

WTO dispute settlement proceedings, that the EPA had initiated an open

process to examine any and all options for compliance, and that a key

criterion in evaluating options would be fully protecting public health

and the environment. On June 28, 1996, EPA published an invitation for

public comment in the Federal Register (61 FR 33703), seeking input and

suggestions from all interested parties. The comment period closed on

September 26, 1996.

D. Invitation for Public Comment

The invitation for public comment was an attempt to identify any

and all options available to the Agency to meet U.S. international

obligations in response to the WTO decision. EPA's goal was to identify

all feasible options that are consistent with EPA's commitment to fully

protect public health and the environment, and at the same time are

consistent with the obligations of the United States under the WTO.

Specifically, EPA invited comment on: (1) How to accurately

establish a reliable and verifiable individual baseline for a foreign

refinery; (2) how EPA could adequately monitor compliance with and

enforce any baseline requirements; (3) how EPA could effectively

determine the refinery of origin of imported gasoline, so as to

determine the appropriate baseline to apply to the imported gasoline;

(4) the potential environmental impacts from implementing any suggested

options; and (5) a method by which EPA could better quantify or

characterize potential environmental impacts of any options proposed.

EPA also requested that commenters provide information and analysis on

the public health, environmental and economic impact associated with

any option presented.

EPA received sixteen comments from various interested parties

during the comment period. Additional comments were received subsequent

to the comment period. To review the comments submitted during the

invitation for public comment see Air Docket A-96-33 or 62 FR 24778

under Section D, Invitation for Public Comment.

E. Requiring Individual Baselines for Foreign Refiners

In preparing the earlier proposal and this final rule EPA attempted

to identify any and all options available to the Agency to meet U.S.

international obligations in response to the WTO decision. EPA's goal

was to identify all feasible options that are consistent with EPA's

commitment to fully protect public health and the environment, and at

the same time are consistent with the obligations of the United States

under the WTO. Comments submitted to EPA during and after the public

comment period, and EPA's consideration of this issue, identified two

broad approaches for consideration involving individual baselines for

foreign refineries.4

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\4\ The discussion in the preamble will focus on imports of CG,

as compared to imports of RFG. After January 1, 1998, individual

baselines have no application in the RFG program. For CG, however,

individual baselines will continue to be used in setting the

compliance requirement for all CG. The application of the final rule

to RFG prior to January 1, 1998 is discussed separately in this

notice at section II.F.

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One approach would require the use of individual baselines (IB) by

foreign refiners. Use of individual baselines by foreign refiners would

be mandatory, not optional. Under this approach, EPA would apply

basically the same requirements that apply to domestic refiners to

foreign refiners. For the reasons discussed in the proposal, and later

in this notice, EPA is not adopting this approach. EPA is instead

adopting the approach proposed, which allows foreign refiners to

establish and use an IB but does not mandate it. EPA will monitor the

emissions quality of imported gasoline and adjust the baselines for

gasoline imported from refiners without an individual baseline if a

specified benchmark is exceeded.

The mandatory approach would require all foreign refiners who

market gasoline to the U.S. to submit petitions to establish an

individual refinery baseline, using the same methods and procedures

currently in the regulations. Once an IB was assigned for a refinery,

that IB would be used in developing a volume weighted compliance

baseline. Under one approach, the foreign refiner would meet the

NOX and exhaust toxics requirements for CG exported to the

U.S. by that foreign refinery, in the same manner as domestic refiners.

Under an alternative approach the domestic importer would establish a

volume weighted compliance baseline reflecting the quantity and IBs of

gasoline imported from various foreign

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refineries, and the domestic importer would meet the applicable CG

requirements. In either case, the use of a foreign refinery IB would be

subject to a volume cap, as for domestic refiners. Foreign refiners

would be subject to audits and inspections to verify the IB and to

verify the quantity and quality of gasoline sent to the U.S. from that

foreign refinery.5

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\5\ These and many other elements of a mandatory IB approach

would also apply where foreign refiners are provided an option to

establish and use an IB. As discussed later, it is the application

of these factors across all imported gasoline that leads to the

concerns raised by DOE relating to the supply and price of gasoline

in the U.S. market.

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Significant additional requirements would also need to be imposed

on gasoline imported under a foreign refiner's IB. For domestic

refiners, almost all gasoline is produced for the U.S. market and the

very small volume that is exported can be readily tracked and

subtracted from the domestic refiner's compliance calculations. The

domestic refiner then bases its CG compliance calculations on the

quality and quantity of finished gasoline when it leaves the refinery.

At that point it has entered the U.S. gasoline market, and there is no

need to track the gasoline or to segregate it from gasoline produced by

another refinery.

For a foreign refiner, only a portion of the refinery's total

production is likely to be sent to the U.S., ranging from a very small

percentage to a significant minority of production. The gasoline also

may travel through a long and complicated distribution system from the

point it leaves the refinery gate to the point it enters the U.S.

market. However the IB for a specific foreign refinery would properly

apply only to gasoline produced at that foreign refinery, and would not

apply to gasoline produced at a different foreign refinery.

Several facts would therefore need to be clearly established to

properly apply a foreign refinery's IB to a batch of imported gasoline.

First, the refinery that produced the specific batch of imported

gasoline must be identified. Second, it must be demonstrated that this

batch of gasoline has not been mixed with gasoline produced by a

different foreign refinery with a different IB, from the point it left

the refinery-of-origin to the point it entered the U.S. market. Third,

the total amount of CG and RFG produced by the foreign refinery and

sent to the U.S. market must be determined, to establish when the

volume cap is exceeded. As with domestic refiners, it would also be

important to track blendstocks produced and sent to the U.S. from a

foreign refinery, so a foreign refiner could not avoid a stringent IB

by shipping blendstocks instead of finished gasoline. Tracking and

segregation requirements would need to be adopted to implement this.

A certain amount of gasoline is imported from fungible gasoline

supplies, where the refinery of origin is not known. This occurred in

1990, and would be expected to continue to occur in the future. It

would be reasonable to allow the practice to continue, and gasoline

imported from such sources would continue to be subject to the

statutory baseline (SB). However a mechanism would need to be imposed

so that this supply of fungible gasoline could not be used as a way to

avoid a more stringent IB.

Under this approach, EPA would need to establish IBs for all

foreign refineries, most of which sent only a small volume of gasoline

to the U.S. in 1990. The methods used to set IBs for domestic refiners

could still be used to establish the quality and quantity of gasoline

sent to the U.S. by a foreign refiner in 1990. Given the large number

of foreign refineries involved and the potential for widely varying

technical and other ability to establish IBs, it is not clear that all

foreign refiners would have the information necessary to establish an

accurate IB for gasoline sent to the U.S. in 1990.

The Department of Energy (DOE) has advised EPA that this approach

could seriously affect the supply and price of gasoline in the U.S.

market. Currently gasoline is imported into the U.S. market from a free

moving and fungible distribution system for imported gasoline. The

volume of imported gasoline, while small compared to the total U.S.

gasoline supply, can have a significant impact on gasoline prices.

Imported gasoline tends to moderate price increases by increasing the

sources of gasoline to meet U.S. demand, whether in response to a trend

of increasing demand over time, or a short term supply problem based on

local or temporary changes in domestic supply or demand.

The mandatory approach outlined above would significantly change

the way gasoline is imported to the U.S. market, greatly increasing the

complexity and making it more likely that gasoline could not be quickly

and readily diverted to the U.S. market to meet demand. This would make

it more likely that imported gasoline would not play the same role that

it currently does in moderating price increases. The long term supply

implications are harder to predict.

The increase in complexity from this approach is based on the need

to ensure that the right IB is applied to a batch of imported gasoline,

that an IB is only used up to the applicable volume cap, and that

parties do not circumvent the appropriate IB by shifting gasoline or

blendstocks through other parties. Modifying the tracking and

monitoring restrictions described above to try and resolve the supply

concerns would increase the risk of adverse environmental effects from

this approach.

EPA is also concerned that this approach might produce incentives

that would tend to reduce the average quality of imported CG. For

example, gasoline from refiners with cleaner IBs would be measured

against a more stringent baseline than under the current rules, while

gasoline from refiners with dirtier IBs would be measured against a

less stringent baseline than under the current rules. Additional costs

would be associated with segregation, tracking, and other requirements

described above. To the extent these changes put refiners with clean

IBs at an economic disadvantage compared to refiners with either the SB

or an IB dirtier than the SB, it could potentially push the supply of

gasoline away from refiners with clean IBs.

After evaluating this approach, EPA did not propose it. While it

appears generally neutral in requiring individual baselines for both

domestic and foreign refiners, upon full consideration this approach

presents too great a risk of adverse effects on gasoline supply and

prices. EPA also has questions as to its potential environmental

impact. The Agency instead proposed the optional use of individual

baselines, with specific provisions for monitoring gasoline quality and

remedying any adverse environmental effects. EPA's rationale (including

the Department of Energy's analysis) for selecting this option is

further outlined below in Section IV. Response to Comments: Mandatory

vs. Optional Baselines.

F. Summary of Comments from NPRM

EPA received comments from nine associations representing various

groups including domestic gasoline producers, domestic importers, and

environmental organizations. Three domestic refiners individually

submitted statements supporting the comments submitted by their

representing associations. Three foreign refiners commented. One state

environmental organization submitted favorable comments to the NPRM.

EPA also received comments from the Commission of the European

Communities.

[[Page 45537]]

The issues addressed in the public comments include: the question

of mandatory versus optional baselines; EPA's use of cost

considerations in the final rule; the consideration of seasonal impacts

to prevent additional competitive advantages for foreign refiners;

whether or not the Agency has established appropriate and adequate

monitoring, compliance and enforcement requirements; the requirement

for a waiver of sovereign immunity; and the implementation of the

remedial action. This is not intended to be an exhaustive list of

comments. A complete set of comments is available from the Air Docket

(A-97-26). The major issues and comments are addressed in the Response

to Comment section of this final rule.

II. Description of Final Rule

A. Introduction

Today's final action allows foreign refiners the option to

establish and use IBs under the conventional gasoline program. Specific

regulatory provisions will be implemented to ensure that the optional

use of an IB will not lead to adverse environmental impacts. This

involves monitoring the average quality of imported gasoline, and if a

specified benchmark is exceeded, remedial action will be taken. The

remedial action involves making the requirements for imported gasoline

not subject to an IB more stringent. This will ensure the environmental

neutrality of this approach.

Under this final rule, the procedures and methods for setting an

IB, as well as the tracking, segregation and other compliance related

provisions described below will all apply. However, they will only

apply where a foreign refiner chooses to apply for an IB.

The volume of gasoline that can be imported under the IB for a

foreign refinery is limited in the same manner as for domestic

refiners, relative to a refinery's 1990 baseline volume. Since the

foreign refiner seeks an IB in order to specifically produce gasoline

for the U.S. market, the tracking and segregation requirements noted

above should not have a significant impact on the ready availability of

gasoline for import. The current requirements for imported gasoline

will continue to apply for all of the other gasoline imported into the

U.S.

There was some concern about the possible environmental impact of

providing this option to foreign refiners. A foreign refiner may only

have an economic incentive to seek an IB if it will be less stringent

than the SB. Gasoline produced by this foreign refiner would then be

measured against this less stringent IB. Other imported gasoline would

be measured against the SB through the importer. As compared to the

situation in 1990, there would be the potential for the quality of

imported gasoline to degrade from an emissions perspective.

The size and amount of this impact, however, is difficult to

quantify. It would depend on the number of foreign refiners that

receive an IB, the specific emissions levels of the IBs assigned, and

the volume of gasoline included in the IB. It would also depend on the

source and amount of CG and RFG imported into the U.S. in a specific

year. It is also hard to quantify to what extent, if any, foreign

refiners who produced gasoline in 1990 that was cleaner than the SB

would ship gasoline that is dirtier than what they shipped in 1990.

These circumstances, as well as the existence of a volume cap on the

use of IB's, and the large variation in the total levels of CG and RFG

imports each year make it difficult to assess in advance the risk of an

adverse environmental impact.

EPA is addressing these potential environmental concerns in the

final rule by: (1) Establishing a benchmark for the quality of imported

gasoline that will reasonably identify when the factors identified

above have led to an adverse environmental impact; (2) monitoring

imported gasoline to determine whether the benchmark has been exceeded;

and (3) if the benchmark is exceeded, imposing a remedy that

compensates for the adverse environmental impact.6

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\6\ EPA has adopted an analogous approach in the RFG program.

See 40 CFR 80.41 and 80.68.

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The benchmark for imported gasoline quality is the volume-weighted

average of the IBs for domestic refiners. EPA is finalizing a benchmark

for NOX emissions performance set at the volume weighted

average for domestic baselines. No benchmark is being set at this time

for exhaust toxics emissions performance, as there does not appear to

be the same potential for environmental degradation that there could be

for NOX.

EPA will monitor the quality of imported gasoline based on the

annual compliance reports filed by importers and foreign refiners

producing gasoline that is exported to the U.S. Each year EPA will

evaluate the volume weighted annual average quality of the three prior

years and compare it to the benchmark. If the average quality of

imported gasoline exceeds the benchmark, NOX requirements

for gasoline imported from refiners without an IB (currently set at the

SB) will increase in stringency the following year by an amount

equivalent to the exceedance. This will occur each time the annual

monitoring indicates that the benchmark is exceeded. If the amount of

an exceedance either increases or decreases, the amount of the remedy

will be correspondingly adjusted on an annual basis. If the annual

monitoring shows that imported gasoline does not exceed the benchmark,

the compliance requirements will be reduced to the SB for the following

year. The more stringent requirements will apply to all imported

gasoline except for gasoline produced by foreign refiners with an IB.

This approach meets the goals of environmental protection and

compliance with international obligations, as announced in the June

1996 Invitation for Public Comment, and avoids the potential supply,

price and environmental consequences of the alternative approaches

considered by EPA.

The remainder of this section describes the contents of this final

rule. The following sections describe the changes made from the

proposal as well as the response to comments received by the Agency.

The preamble to the proposal also provides additional information

related to provisions that EPA is finalizing without change from the

proposal.

B. Requirements for Foreign Refiners With Individual Refinery Baselines

1. Establish Refinery Baselines

Under this final action, a foreign refiner has the option of

submitting an individual refinery baseline petition to EPA. The

refinery baseline would reflect the quality and quantity of gasoline

produced at the foreign refinery in 1990 that was exported to the U.S.

The procedures for establishing individual refinery baselines are

located in sections 80.90 through 80.93. These same procedures were

used by domestic refiners to develop their IBs based on their overall

gasoline quantity and quality for 1990.

EPA is requiring that foreign refiners that elect to develop

individual refinery baselines would also follow these procedures to

determine the quality and quantity of gasoline they produced in 1990

that was exported to the U.S. As is the case for domestic refiners,

under section 80.92 baseline petitions would have to be supported by

the report of an EPA-approved baseline auditor.

i. Required Information: The requirements for establishing

individual baselines for foreign refineries are essentially the same as

the baseline establishment requirements for domestic refineries. EPA is

adopting additional requirements for foreign

[[Page 45538]]

refineries that address the unique circumstances associated with

establishing and enforcing the establishment and use of an individual

baseline by a foreign refiner.

The procedures for developing individual refinery baselines, set

forth in sections 80.90 through 80.93, are highlighted below and

discussed with respect to foreign refineries.

A foreign refinery's individual baseline (i.e., quality

and quantity information) must be calculated using, in hierarchical

order based on the availability of data, 1990 gasoline test data

(Method 1), 1990 blendstock test data (Method 2), or post-1990

blendstock and/or gasoline test data (Method 3) to determine the

quality and quantity of the subset of gasoline exported to the United

States in 1990.

All data collected beginning in 1990 and through the last

date of any data collection under section 80.91(d)(1)(i)(B) must be

used in the development of the foreign refineries baseline.

Baseline petitions must be submitted in the same manner as

is required of domestic refiners under section 80.93. Baseline

petitions must be submitted before January 1, 2002. EPA is requiring

the same type and quality of information and level of accuracy in

establishing a baseline no matter when a foreign refiner applies for a

baseline.

EPA is requiring that in order for a refinery to receive

an approved baseline, the refinery must commit to give EPA's auditors

full access to the foreign refinery to conduct announced and

unannounced inspections and audits related to the baseline development

and submission. EPA baseline audits could occur at any time after a

baseline petition has been submitted, either before or after EPA

approves a refinery baseline.

Under section 80.93(b)(1)(i) foreign refiners are required

to provide any additional information requested by EPA to support a

baseline submittal or petition, as is required for domestic refiners.

Under section 80.93(c) a separate baseline will be

established for each foreign refinery. However, as is the case of U.S.

refiners a foreign refiner could petition EPA for a single refinery

baseline for two closely integrated facilities under section

80.91(e)(1). In addition, as is the case for U.S. refiners, a foreign

refiner who operates more than one refinery with individual baselines

would be able to aggregate the baselines of some or all of its

refineries under section 80.101(h).

All documentation included in a baseline submission or

petition must be in the English language or include an English language

translation.

ii. EPA Action on Baseline Submissions: As for the domestic refiner

baseline approval process, EPA will subject foreign refinery baseline

submissions to an in-depth analysis and review. EPA also reserves the

right to inspect, audit and review all records or facilities used to

generate data submitted to the Agency prior to acting on a baseline

submission or petition.

After conducting its review of the data and analysis in a baseline

submission, EPA will assign an individual baseline that represents the

quality and quantity of gasoline exported to the U.S. in 1990. EPA

believes that individual refinery baselines can be established for

foreign refineries for which individual baselines are sought to the

same degree of confidence as the baselines established for domestic

refineries. Further guidance on EPA's expectations for the petition

submission and approval process is provided in the proposed rule at 62

FR 24781 (May 6, 1997).

2. Compliance With CG NOX and Exhaust Toxics Requirements

The gasoline produced at a foreign refinery with an individual

refinery baseline that is imported into the United States is called

``Foreign Refinery Gasoline,'' or ``FRGAS.'' Foreign refiners with

individual baselines are required to designate all FRGAS into one of

two categories: conventional gasoline FRGAS that is included in the

foreign refiner's NOX and exhaust toxics compliance

calculations, which is called ``certified FRGAS,'' and all other FRGAS,

which is called ``non-certified FRGAS.'' The non-certified FRGAS

category includes gasoline that meets the quality requirements for RFG,

as well as gasoline that is not RFG quality and has not been included

in the foreign refiner's NOX and exhaust toxics compliance

calculations.

Foreign refiners who obtain individual foreign refinery baselines

will have to meet the NOX and exhaust toxics emissions

performance requirements for all gasoline classified as certified

FRGAS.7

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\7\ Non-certified FRGAS will be regulated through the importer.

If the importer classifies it as RFG, it will have to meet the RFG

requirements. If the importer classifies it as CG, it will have to

meet the importers compliance baseline for CG, which in almost all

cases is the statutory baseline.

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In addition, foreign refiners with an individual refinery baseline

will be required to meet all requirements used to demonstrate

compliance with the CG emissions requirements. Certain adjustments to

these provisions are specified in the regulations to apply them to

foreign refiners. These are the same requirements that apply to

domestic refiners, and include the following:

To register with EPA, section 80.103.

To designate each batch of FRGAS as certified or non-

certified, section 80.65(d).

To determine the volume and properties of each certified

FRGAS batch through sampling and testing, section 80.101(i).

To determine the volume of each batch of non-certified

FRGAS in order to complete the compliance baseline calculation in

section 80.101(f).

To prepare product transfer documents for FRGAS, sections

80.77 and 80.106.

To keep certain records for five years, sections 80.74 and

80.104.

To submit reports to EPA on each batch of FRGAS, on the

volume of non-certified FRGAS, and on the annual average quality of

certified FRGAS, sections 80.75 and 80.105.

To comply with an annual cap on the volume of specified

blendstocks that are transferred to others and used to produce gasoline

for the U.S., section 80.102.

To have an independent audit performed of refinery

operations each year to review certain activities related to the FRGAS

requirements, sections 80.125 through 80.130. However, the audit

procedures for non-certified FRGAS would be limited to the procedures

that evaluate the quantity of non-certified FRGAS, and audits would not

be required to include procedures intended to verify information about

non-certified FRGAS that is unrelated to the compliance baseline

calculation, such as the quality of non-certified FRGAS quality or VOC-

control designations.

Under section 80.101(f) a compliance baseline for NOX

and exhaust toxics compliance is calculated for each calendar year

averaging period based on a refinery's 1990 baseline volume and

baseline NOX and exhaust toxics values, and the total

gasoline volume (CG and RFG) produced at the refinery and imported into

the U.S. during the averaging period. As a result, a foreign refiner

with an individual refinery baseline will be required to establish the

volume of U.S. market gasoline that is non-certified FRGAS in order to

calculate the refinery's compliance baseline for the NOX and

exhaust toxics CG requirements (see footnotes at 62 FR 24782 for

further clarification).

[[Page 45539]]

Therefore, a foreign refiner with an individual refinery baseline

will be required to designate each batch of U.S. market gasoline as

certified FRGAS or non-certified FRGAS, to establish the volume and

properties of gasoline designated as certified FRGAS, and to establish

the volume of gasoline designated as non-certified FRGAS.

All foreign refiners with individual refinery baselines will be

required to submit annual reports to EPA that demonstrate the average

NOX and exhaust toxics emissions for certified FRGAS meets

the refinery's compliance baseline for the averaging period.

Under today's final action, certified FRGAS will be treated

basically under the same rules as gasoline produced for the U.S. market

at a domestic refinery. The certified FRGAS will be subject to the same

conventional gasoline requirements as the conventional gasoline

produced by domestic refiners. During 1997, under section 80.101(b)(1)

a refinery's annual average for sulfur, T-90, olefins and exhaust

benzene emissions may not exceed its individual baseline for these fuel

characteristics. Starting in 1998 a refinery's annual average

conventional gasoline NOX and exhaust toxics emissions may

not exceed its individual baseline for these fuel characteristics. In

order to evaluate compliance, however, certified FRGAS must be

designated as such at the point of production, and must be tracked to

determine that it in fact is exported to the U.S.

In order to determine compliance with the NOX and

exhaust toxics requirements for certified FRGAS, the quality and

quantity of each batch of certified FRGAS must be determined. The

volume of non-certified FRGAS also will have to be determined, because

the compliance baseline applicable to a refinery depends on the total

volume of gasoline produced at a refinery and imported into the U.S.

market, including both certified and non-certified FRGAS. To determine

the quality and/or quantity of this gasoline, a foreign refiner will

have to designate FRGAS when it is produced. It also is important that

gasoline used in a foreign refinery's compliance calculation all be

designated as FRGAS and actually imported into the U.S.

In the case of certified FRGAS the foreign refiner must include the

gasoline in the refinery's NOX and exhaust toxics compliance

calculations, and meet the refinery tracking requirements, described

below. Gasoline that is not classified as FRGAS and is not imported

into the U.S. must be excluded from the refinery's compliance

calculations, and the refiner is not required to meet the refinery

tracking requirements for this gasoline.

However, the foreign refiner will continue to be required to

include all non-certified FRGAS in the refinery's compliance baseline

calculations and to meet the refinery tracking requirements for all

non-certified FRGAS. This is necessary in order to prevent adverse

environmental effects. As in the case of domestic refiners, all

gasoline imported into the United States must be included in a

refinery's compliance baseline calculation because a larger volume of

non-certified FRGAS results in a more stringent compliance baseline

applicable to the certified FRGAS.

3. Requirements for Tracking Refinery of Origin

EPA is finalizing a series of requirements to accurately identify

both certified and non-certified FRGAS gasoline upon its arrival into

the U.S. There is the potential for adverse environmental results if a

foreign refiner includes gasoline in its CG NOX and exhaust

toxics compliance calculations that is not imported into the U.S. In

addition, there is environmental risk if a foreign refiner fails to

include in its compliance baseline calculations the volume of any

gasoline that is imported into the U.S.

i. Segregation of FRGAS: EPA is requiring that certified FRGAS must

remain physically segregated from non-certified FRGAS and from

certified FRGAS produced at another refinery, from the foreign refinery

to the U.S. port of entry. As a result of this requirement, when a

foreign refiner loads FRGAS onto a ship for transport to the U.S. the

foreign refiner must know the gasoline is exclusively FRGAS that is

being included in the refinery compliance calculations (for certified

FRGAS), or compliance baseline calculations (in the case of non-

certified FRGAS).

This segregation requirement would not prohibit a foreign refiner

from combining batches of certified FRGAS, or combining batches of non-

certified FRGAS, that are produced at a single refinery into larger

volumes for shipment. In addition, where multiple refineries have been

aggregated under Sec. 80.101(h), certified FRGAS produced at the

aggregated refineries may be combined, and non-certified FRGAS produced

at the aggregated refineries may be combined.

ii. Foreign Refiner Certification of FRGAS: EPA is requiring that

foreign refiners of FRGAS prepare a certification, signed by an

appropriate foreign refiner official, for FRGAS when it is loaded onto

a ship for transport to the U.S. This certification must identify the

gasoline as being FRGAS, whether the FRGAS is certified or non-

certified, the foreign refinery where the FRGAS was produced, and the

volume of the FRGAS being transported. In the case of certified FRGAS

the certification must also include the properties of the gasoline

being transported and a declaration that the gasoline is being included

in the NOX and exhaust toxics compliance calculations for

the foreign refinery. A single declaration may apply to the entire

contents of a vessel where the gasoline is only certified FRGAS or is

only non-certified FRGAS.

The foreign refiner certification must be supported by an

inspection by an independent, EPA-approved third party such as an

independent laboratory. The independent party must confirm the refinery

of origin, guarantee that no prohibited mixing occurred, and determine

the volume and properties of the certified FRGAS, and the volume of

non-certified FRGAS.

The independent party is required to prepare a report on these

inspections that becomes a part of the foreign refiner's certification.

The independent party also must submit an inspection report to EPA.

iii. U.S. Importer Receipt of FRGAS: Under this final rule, the

U.S. importer must classify certified-FRGAS as such if the gasoline is

accompanied by a foreign refiner certification that is properly

supported by an independent party's report, and if test results from

the load port are consistent with test results from the U.S. port of

entry.

The regulations require the importer to test the FRGAS, and include

criteria for comparing the load port and port of entry testing. The

test results have to agree, for five specified parameters (sulfur,

benzene, gravity, E200 and E300), within the reproducibility limits for

the test procedures for these parameters. The two volume

determinations, corrected for temperature, have to agree within one

percent. EPA believes this level of volume correlation is appropriate

because it is well within the level of correlation normally expected in

commercial transactions. EPA understands that protests normally are

initiated if ship volume determinations in commercial dealings differ

by 0.5%.

Importers are required to include in their NOX and

exhaust toxics compliance calculations any FRGAS for which the importer

does not obtain a certificate by the foreign refiner supported by a

report prepared by an independent third party, or FRGAS where the load

and entry port comparison is outside the range specified in the

regulations.

[[Page 45540]]

In the case of FRGAS for which the importer obtains a properly

supported foreign refiner certificate, but where the volume and/or

parameter results from the load port and port of entry do not meet the

range requirements, the gasoline must be imported as non-certified

FRGAS.8 In addition, the foreign refiner is required to

remove the volume and properties of the FRGAS from its NOX

and exhaust toxics compliance calculations, because the gasoline now is

classified as non-certified FRGAS. However, the foreign refiner must

retain the volume of the FRGAS in its compliance baseline calculation,

the same as any other non-certified FRGAS, unless the foreign refiner

can demonstrate that the importer did not classify the gasoline or as

RFG or use it to produce RFG.

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\8\ The importer may also treat as GTAB any gasoline classified

as non-certified FRGAS.

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In a case of load port and port of entry test results that are

outside the specified range for certified FRGAS, the regulations also

allow the gasoline to retain this classification if the NOX

and exhaust toxics emissions performance based upon port of entry test

results is ``cleaner'' for both pollutants than the emissions

performance based upon the load port test results.

U.S. importers are required to report to EPA on each batch of FRGAS

imported, identifying the foreign refinery, whether the FRGAS is

certified or non-certified, the volume and properties of certified

FRGAS, and the volume of non-certified FRGAS.9

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\9\ Non-certified FRGAS also must be included in the U.S.

importer's compliance calculations for RFG or conventional gasoline.

The importer must meet all current requirements for such gasoline,

such as sampling, testing and reporting.

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iv. Attest Engagement Requirements: Under today's final rule,

foreign refiners of FRGAS must meet the independent attest engagement

requirements in sections 80.125 through 80.130, the same as domestic

refiners, although the attest requirements for non-certified FRGAS are

limited to those related to the volume of non-certified FRGAS produced

at a foreign refinery.10 EPA is adopting additional attest

requirements that relate to the FRGAS requirements. These attest

requirements supplement the requirements regarding an independent party

determination of the refinery that produced FRGAS loaded onto a ship.

The focus of the attest requirements will be on the foreign refinery

operations, while the requirements for certification by an independent

party focus on the transportation and storage of gasoline from the

refinery to the point of ship loading.

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\10\ ``Attest engagement'' is a term of art used by auditors to

describe the conduct of specified audit procedures--the auditor

attests to the conduct and results of the specified audit, or

attest, procedures completed during the attest engagement. The

requirements in sections 80.125 through 80.130 consist of specified

attest procedures dealing with the Gasoline Rule and instructions

for the conduct of these procedures.

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For further details on the procedures an auditor will be required

to perform see 62 FR 24784 (May 6, 1997) ``Attest Engagement

Requirements.''

v. Requirements for Third Parties: EPA is requiring that FRGAS

sampling, volume and fuel quality determinations and determinations of

refinery of origin at the loading port will have to be performed by an

independent party. The criteria for independence are the same criteria

that apply for the independent sampling and testing requirement for

domestic refiners and importers, and that are specified at section

80.65(f)(2)(ii). In addition, persons performing this work must be EPA

approved. EPA approval will be based on the ability to perform the

required work as demonstrated through a petition process.

Independent parties will have to agree to allow EPA inspections and

audits relative to their work under the Gasoline Rule for the foreign

refiner that are similar to the commitments required by foreign

refiners, described below.

Third party sampling and testing is a necessary part of the foreign

refiner FRGAS program. However, in response to comments EPA is

modifying these requirements in several ways for this final rule, as

discussed below.

4. Measures Related to Monitoring Compliance and Enforcement

i. Introduction: The requirements for foreign refiners with

individual refinery baselines must be subject to strong measures for

monitoring compliance and enforcing violations, as are domestic

refiners. However, there are a number of unique circumstances

associated with monitoring compliance and enforcing requirements for

foreign refiners. EPA is adopting a range of provisions designed to

address these concerns in a comprehensive manner. These provisions will

promote EPA's ability to monitor compliance with the requirements

related to foreign refinery baselines, to conduct enforcement actions

when violations of these requirements are found, and to impose

sanctions that will constitute a deterrent to future violations.

The purpose of the provisions is to ensure that EPA's compliance

and enforcement activities with regard to foreign refiners will be on a

par with those for domestic refiners, in order to assure achievement of

the environmental objectives of the gasoline programs.

ii. Inspections and audits: EPA intends to inspect and audit

foreign refineries with individual baselines and other facilities

located overseas to determine compliance with requirements related to

establishing a baseline, identifying refineries or origin, and other

requirements proposed today. Foreign refiner inspections and audits

will be like domestic refiner inspections and audits with regard to

types of facilities visited, types of information reviewed, and types

of persons who conduct the inspections and audits. As with domestic

inspections and audits, some of the inspections and audits may be

announced while some will be unannounced.

With the exception of the limited waiver of sovereign immunity, all

aspects of section (ii) inspections and audits (62 FR 24784-24785, May

6, 1997) outlined in the proposal are adopted by today's action. For a

detailed list of the inspection and audit requirements refer to that

section of the proposed rule. EPA's response to comment and final

action on the limited waiver of sovereign immunity is addressed below

in section D.

Where a foreign refiner fails to abide by the terms of the foreign

refiner commitments, or a foreign government fails to allow entry for

the purpose of EPA inspections and audits, EPA may withdraw or suspend

the refiner's individual refinery baseline.

iii. Administrative, civil, and criminal enforcement actions: A

foreign refiner with an individual refinery baseline who submits false

documents to EPA or who fails to meet other requirements will be

subject to civil, and in certain cases criminal, enforcement, and EPA

is adopting requirements that will facilitate prosecution of such

violations. These requirements consist of provisions relating to a

waiver of sovereign immunity, and commitments the foreign refiner must

include in a baseline petition submitted to EPA.

Each foreign refiner seeking an individual refinery baseline must

identify an agent for service in the U.S. and agree that service on

this agent constitutes service on the foreign refiner and its

employees. This agent for service need not be a general agent for

service; the agent need only be authorized to accept service by EPA, or

otherwise by the U.S., for enforcement actions related to these

regulatory provisions. The agent for service must be located in the

District of Columbia.

Foreign refiners have to acknowledge that the forum for civil

enforcement actions will be governed by Clean Air

[[Page 45541]]

Act (CAA) section 205. CAA section 205(b) specifies that the venue for

district court actions is either the district where the violation

occurred or where the defendant resides or in the Administrator's

principal place of business. However, EPA believes that the U.S.

district court for the District of Columbia would be the appropriate

court for violations related to the requirements proposed today that

are committed by defendants who reside outside the U.S. Administrative

assessment of civil penalties is allowed under CAA section 205(c) where

the penalty amount does not exceed $200,000, or where the EPA

Administrator and the Attorney General jointly determine that a case

involving a larger penalty is appropriate for administrative penalty

assessment.

Foreign refiners of FRGAS must acknowledge that civil and criminal

enforcement actions will use the same U.S. civil and criminal

substantive and procedural laws that apply in enforcement actions

against domestic refiners. All of these requirements are finalized in

today's rulemaking.

iv. Sanctions for civil and criminal violations: The sanctions for

civil and criminal violations committed by foreign refiners with

individual refinery baselines or employees of such foreign refiners

include the sanctions specified in the Clean Air Act. Under CAA section

211(d) the penalty for civil violations of the RFG and conventional

gasoline requirements is up to $25,000 per day of violation plus the

amount of economic benefit or savings resulting from the violation.

Injunctive authority is included under section 211(d)(2) as well. CAA

section 113(c) specifies that the criminal penalty for first violations

of knowingly making false statements or reports is a fine pursuant to

title 18 of the U.S. Code, or imprisonment for up to 5 years, or both.

The period of maximum imprisonment and the maximum fine are doubled for

repeat convictions.

Foreign refiners seeking and then operating under an individual

refinery baseline must post a bond with the U.S. Treasury that will be

available to satisfy any civil penalty or criminal fine that is imposed

against the refiner or its employees, but only with regards to

enforcement of the regulatory provisions adopted today. The amount of

this bond is $0.01 per gallon of certified FRGAS imported from the

refiner into the U.S. per year, based on the maximum annual volume of

certified FRGAS imports during the most recent five year period during

which the foreign refiner exported certified FRGAS to the U.S. using an

individual refinery baseline. However, the initial bond amount will be

based on the volume of conventional gasoline or certified FRGAS

produced at a foreign refinery that was imported into the U.S. during

the year immediately preceding the year the baseline petition is

submitted.11 The foreign refiner must submit with its

baseline petition a bond to reflect this volume, and include with its

baseline petition information necessary to accurately establish the

conventional gasoline volume for the preceding year. The foreign

refiner then each year would take into account in its bond amount

calculation the certified FRGAS volume for an additional year until

there is a five year history, at which time the certified FRGAS volume

review would include only the most recent five years.

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\11\ A foreign refinery's 1990 baseline volume would not be

appropriate for setting the bond amount, because in 1990 the

Gasoline Rule was not in effect, so there was no gasoline identified

as conventional or RFG.

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As an alternative to posting the bond with the U.S. Treasury, a

foreign refiner may meet the bond requirement by obtaining a bond in

the proper amount from a third party surety agent that would be payable

to satisfy U.S. judicial judgments for civil or administrative

penalties against the foreign refiner provided that EPA agrees in

advance to the third party and the nature of the surety agreement. In

addition, the bond requirement may be met by an alternative commitment

that results in assets of an appropriate liquidity and value being

readily available to the United States, provided that EPA agrees in

advance to the alternative.

As with domestic refiners, any violation of a regulatory

requirement by a foreign refiner could result in the imposition of

penalties. For foreign refiners with individual refinery baselines the

assessment of a penalty could then result in the forfeiture of a bond

to satisfy the penalty. This would, for example, include a failure to

allow EPA inspections and audits; failure to submit required audit

reports prepared by an independent auditor; or failure to properly

identify the source refinery for FRGAS.

If a foreign refiner with an individual refinery baseline fails to

meet any requirements, including those that apply to all refiners under

the current regulations, and/or the additional requirements that would

apply only to foreign refiners, then EPA may administratively withdraw

or suspend its individual refinery baseline.

Withdrawal or suspension of an individual refinery baseline may be

imposed for all of the refineries operated by a foreign refiner, or for

a subset of a foreign refiner's refineries where appropriate. EPA will

impose this sanction in a particular case only after evaluating the

circumstances and exercising its discretion based on factors such as

egregiousness, willfulness and prior violations. The withdrawal or

suspension may be imposed for a limited time.

C. Baseline Adjustment for Imported Gasoline That Is Non-FRGAS or Non-

Certified FRGAS

1. Introduction

Allowing foreign refiners to choose whether to establish an IB

creates a potential for adverse environmental impact. This potential is

addressed by monitoring the quality of imported gasoline, comparing it

to a benchmark, and taking remedial action if the benchmark is

exceeded. The details of this approach are described below.

2. Monitoring

Under the current regulations, importers submit an annual report

concerning the quality of the CG they import. See 40 CFR 80.105.

Importers submit an annual report after the end of the calendar year,

comparing the quality of the gasoline they imported against the

applicable annual average requirements. Starting in 1998, these

requirements are for NOX and exhaust toxics emission

performance, determined under the Complex Model.

Under the current rules, the annual report is due by the last day

of February following the end of the annual averaging period. An attest

engagement report is due by May 30. The importer's report must include

the total gallons of CG imported, the annual average compliance

baseline, and the annual average for the gasoline imported that

calendar year. The importer must also include the volume, grade and

qualities for each batch of imported gasoline.

Under today's final rule, importers will continue to submit the

reports described above for CG produced by foreign refiners without an

IB. For gasoline produced by a foreign refiner with an IB, both the

importer and the foreign refiner will submit reports to EPA. In

combination these reports will contain all of the information submitted

for gasoline produced by refiners without an IB.

These annual reports submitted by importers and foreign refiners

provide EPA with batch by batch information for all CG imported during

that year. From these, EPA will determine the volume weighted average

quality for all imported CG. This will be a simple and straightforward

way to monitor

[[Page 45542]]

imported gasoline quality. Additional sampling and testing by EPA would

be duplicative, as the importer must sample and test each batch of

imported gasoline. 40 CFR 80.101(i).

3. An Appropriate Benchmark

The purpose of the benchmark is to reasonably determine when

allowing foreign refiners the option to use an IB or to not use an IB

has caused degradation of the quality of imported gasoline from 1990

quality of imported gasoline.

Ideally, EPA would use the volume weighted average of the quality

of gasoline sent to the U.S. by foreign refineries in 1990. EPA does

not have this information, but does have information on the volume

weighted average baselines for domestic refineries. This average

accounts for approximately 95% of the U.S. gasoline market in 1990, and

reflects a wide diversity in types and kinds of refineries. There is no

available data indicating that gasoline imported from foreign

refineries was not consistent with this average, and absent evidence to

the contrary it is not unreasonable to assume that average foreign

gasoline quality in 1990 was generally equivalent to domestic gasoline

quality. Also it would not be reasonable to measure overall quality for

gasoline produced by foreign refiners using stricter criteria than that

applied to domestic refiners, in the absence of evidence to support

such an action.

The benchmark should be set at a point such that an exceedance of

the benchmark reasonably indicates that the average quality of imported

gasoline has degraded from 1990 levels because of the option provided

to foreign refiners in using or not using an IB. Many additional

factors also affect the average quality of imported gasoline. For

example, there is a wide variety in the level of imports from year to

year. The source and volume of imports from specific countries and

refineries also varies significantly from year to year. Despite general

trends in amount and source of imported gasoline, there remains a lot

of year to year variability. A change in average gasoline quality

during any particular year therefore might indicate the effects of

allowing the option for IBs, or it might reflect the unique

circumstances of that year, which may well change the next year.

Since the existence of an exceedance of the benchmark is designed

to detect a multi-year trend, EPA will use a three year average for

comparison against the benchmark. This will be a rolling average; e.g.

the average for years 1 through 3 will be compared to the benchmark one

year, the next year the average for years 2 through 4 will be compared,

and so on.

EPA is setting this benchmark for NOX at the volume

weighted baseline average for domestic refiners: 1465 mg/mile for

NOX.12

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\12\ This value is based on the Phase 2 Complex Model, and will

be used prior to and after 2000.

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For toxics, the evidence to date tends to show there would not

likely be an adverse impact from allowing the option to use IBs. In

1995, the volume weighted annual average of imported gasoline for

exhaust toxics was 86.64 mg/mile. This was cleaner than both the

statutory baseline (104.5 mg/mile) and the volume weighted average for

domestic baselines (97.34 mg/mile).\13\ In addition, one foreign

refiner that is a major supplier to the U.S. market has submitted

detailed information to EPA on their expected IB, and the information

submitted by the foreign refiner to date indicates that their IB for

exhaust toxics would be cleaner than the SB.\14\ Further information is

discussed in the response to comments section. EPA believes the present

circumstances do not indicate that there is a risk of adverse

environmental impact, and a benchmark and provisions for remedial

action are not needed for exhaust toxics at this time. Instead, EPA

will monitor the average quality of imported gasoline for exhaust

toxics as for NOX, and if an adverse trend occurs EPA will

develop a benchmark and remedial provisions analogous to that adopted

for NOX.

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\13\ In 1995 the volume weighted average for NOX for

imported gasoline was 1415.9 mg/mile, while the SB was 1461 mg/mile,

and the volume weighted average for domestic baselines was 1465 mg/

mile.

\14\ See 59 FR 22809 (May 3, 1994).

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At the start of the program, the volume weighted average for 1998

and 1999 will be compared to the benchmark, and then the average for

1998, 1999 and 2000, to start the three year rolling average. A one

year average for 1998 alone would not by itself appear adequate to

detect a multi-year trend, while a two year average would be more

effective in this regard. The effects of imports in 1998 would still be

fully accounted for, in the two year average including 1999. Since an

IB might start to be used in 1997, EPA will include with the 1998

imports all gasoline imported in 1997 after the date any gasoline

subject to an IB is imported in 1997.

4. Remedial Action Upon an Exceedance

If a volume weighted three year annual average for imported CG

exceeds the benchmark for NOX then EPA will take remedial

action. The remedial action will be an adjustment applied to the

compliance baseline for CG not included in the CG compliance

calculations of a foreign refiner with an IB. The adjustment to the

baseline will equal the amount of the exceedance of the benchmark.

This will be reevaluated each year by comparing the average for the

three prior years to the benchmark. If there is no exceedance, then a

prior adjustment will be terminated. If there is an exceedance, then a

new adjustment will be imposed that equals the amount of the current

exceedance. For example, if the three year annual average exceeds the

NOX benchmark by 5 mg/mile, then the compliance baseline for

NOX will be adjusted by 5 mg/mile. If there is no exceedance

in the next years comparison, then the adjustment will be dropped.\15\

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\15\ For the initial years of the program, an exceedance for

1998 and 1999 will lead to a remedial adjustment that equals the

exceedance, but no more than 1% of the SB for NOX. The 1%

cap is designed to avoid imposing an unnecessarily stringent

adjustment that could result from the absence of data from a

complete three year cycle.

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5. Imported Gasoline Subject to the Remedial Action

A foreign refiner using an IB will follow the same procedures as a

domestic refiner--the quality of its CG will be measured against the IB

of the refiner that produced it. Foreign refiners without an IB would

have chosen to have their gasoline measured against the SB instead of

an IB, and reasonably could be expected to include refiners whose IB

would have been more stringent than the SB. It is the use of IBs by

some refiners, and the degradation below 1990 quality in CG produced by

foreign refiners without an IB, that has the potential to cause the

average CG quality to be adversely affected when other refiners are

subject to an IB. Since the foreign refiner with an IB would be acting

no differently than domestic refiners with an IB, the remedial action

will be applied to CG imported from refiners without an IB.

D. Requirements for U.S. Importers

Under today's action U.S. importers must meet NOX and

exhaust toxics requirements for all imported CG that is not designated

as certified FRGAS, and must exclude from importer CG compliance

calculations all CG that is designated as certified FRGAS. A mechanism

is provided by which U.S. importers would demonstrate that imported CG

is certified FRGAS. The baseline that will apply to U.S. importers of

non-FRGAS and non-

[[Page 45543]]

certified FRGAS will be the statutory baseline or any adjusted baseline

as discussed in section II.C above. EPA is not changing the current

requirement that U.S. importers meet all requirements for imported RFG.

1. Imported Certified FRGAS

Certified FRGAS must be excluded from the U.S. importer's CG

compliance calculations. This prevents the double counting that would

result if certified FRGAS were included in the CG compliance

calculations of both the foreign refiner and the U.S. importer.

However, the U.S. importer must determine the quality and quantity of

certified FRGAS at the U.S. port of entry, which the importer then

reports to the foreign refiner and to EPA in order to be compared with

the foreign load port testing.

A U.S. importer must classify an imported gasoline batch as

certified FRGAS if the gasoline is accompanied by a certification

prepared by the foreign refiner that identifies the gasoline as

certified FRGAS to be included in the foreign refinery CG compliance

calculations, and a report on the certified FRGAS batch prepared by an

independent third party, and the load and entry port comparison is

within the specified range. In this way the U.S. importer acts like a

domestic distributor and would not be responsible for meeting the

NOX and exhaust toxics requirements for this gasoline. The

U.S. importer is not responsible for whether the foreign refiner meets

the annual NOX and exhaust toxics requirements for certified

FRGAS, including whether the foreign refiner properly calculates the

refinery's compliance baseline each year.

However, the U.S. importer is responsible for ensuring the foreign

refiner certification was in fact prepared by the foreign refiner named

on the certificate, and that the foreign refinery has been assigned an

individual refinery baseline by EPA. If a certified FRGAS certification

was not prepared by the named foreign refiner, for example if it is a

forgery, the U.S. importer will be required to classify the gasoline as

non-FRGAS and include the gasoline in the importer's CG compliance

calculations. Similarly, if the certificate accompanying a batch of

certified FRGAS names a foreign refinery that has not been assigned an

individual baseline, the U.S. importer will be required to classify the

gasoline as non-FRGAS and include the gasoline in the importer's CG

compliance calculations. It is necessary to make U.S. importers

responsible for accounting for imported CG in these situations in order

to enable EPA to enforce the CG requirements effectively. EPA would

have great difficulty enforcing requirements against a foreign party

who may have created fraudulent FRGAS certification documents, other

than a foreign refiner who has established an individual refinery

baseline.

EPA believes U.S. importers can easily protect themselves against

this type of liability. EPA will publish on its computer bulletin board

the identity of foreign refineries that have been assigned individual

baselines, that may be used by importers to identify legitimate foreign

refiners of FRGAS. Importers can avoid relying on false certificates by

selecting reliable business partners, or by contacting the foreign

refiner to ensure the authenticity of the certificate for any

particular certified FRGAS batch.

The U.S. importer must use an independent third party to determine

information about each certified FRGAS batch. The batch quality and

quantity must be determined through sampling and testing prior to off

loading the ship, and that will be compared with the quality and

quantity determined at the load port after the ship was loaded. The

independent party also must use the product transfer documents to

determine the identity of the foreign refinery where the certified

FRGAS was produced. The importer submits a report to the foreign

refiner and to EPA containing the batch information.

U.S. importers may not classify certified FRGAS as ``gasoline

treated as blendstock,'' (GTAB), because to do so would result in the

same CG being included in two compliance calculations.16 In

addition, U.S. importers may not use GTAB procedures to convert

certified FRGAS into RFG, for the same reason that domestic regulated

parties are not allowed to convert CG into RFG. Conversion of CG into

RFG is prohibited because of concern such conversions could result in

degradation of the CG gasoline pool. For example, in the absence of

this constraint a refiner could produce very clean CG that in fact

meets the RFG requirements, include this gasoline in the refiner's CG

compliance calculations to offset other dirty CG, and then convert this

gasoline into RFG. The result of this would be degradation in the

average quality of the refiner's CG. This same effect would be possible

if importers could convert certified FRGAS into RFG.

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\16\ EPA has issued guidance under the current regulations that

allows importers to classify imported gasoline as blendstock, called

GTAB, that the importer must use to produce gasoline at a refinery

operated by the importer-company. The purpose of the GTAB procedures

is to enable importers to conduct remedial blending of imported

gasoline, or to reclassify gasoline with regard to RFG or CG, before

imported gasoline is introduced into U.S. commerce. This puts

importers on a more equal footing with refiners, who are able to

reblend or reclassify gasoline prior to shipping gasoline from the

refinery.

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2. Imported Non-FRGAS or Non-Certified FRGAS

U.S. importers must meet all current requirements for imported

gasoline that is produced at a foreign refinery without an individual

baseline (i.e., non-FRGAS), and for gasoline produced at a foreign

refinery with an individual baseline where the gasoline is not included

in the foreign refinery's NOX and exhaust toxics compliance

calculations (i.e., non-certified FRGAS). If the importer classifies

the gasoline as conventional, the importer must include the gasoline in

its NOX and exhaust toxics compliance calculations. However,

the baseline used by importers would be the baseline described in

section II.C of this preamble. If the imported gasoline is classified

as RFG, the importer must meet all RFG quality and other requirements

for the gasoline.

Importers are allowed to use the current GTAB procedures to reblend

or reclassify imported non-FRGAS and non-certified FRGAS.

In the case of non-FRGAS, importers have no requirements related to

tracking the refinery of origin. In the case of non-certified FRGAS the

importer must meet additional requirements related to tracking the

refinery of origin. The importer must have an independent laboratory

determine the volume of each non-certified FRGAS batch, and report this

volume to the foreign refiner and to EPA to be compared with the load

port volume. The volume of non-certified FRGAS produced at a foreign

refinery with an individual baseline is used to calculate the

refinery's CG compliance baseline, which constitutes a volume cap on

use of an individual refinery baseline.

E. Early Use of Individual Foreign Refinery Baselines

A foreign refiner who submits a petition for an individual refinery

baseline may begin using the individual baseline prior to EPA approval

of the baseline petition, provided EPA makes a preliminary finding the

baseline petition is complete, and the foreign refiner also has

completed certain requirements proposed today. However, any gasoline

imported under a requested IB will be subject to the actual IB assigned

by EPA.

[[Page 45544]]

EPA will conduct a completeness evaluation as the first step in

baseline review process, and will notify a foreign refiner of the

results of the completeness review on request. However, the initial

completeness review does not bar EPA from requiring a foreign refiner

to submit additional information later in the baseline review process.

The additional requirements a foreign refiner will have to complete

in order to use an individual baseline early are related to ensuring

EPA's ability to monitor and enforce compliance by the foreign refiner

with all applicable requirements during the early use period. The

particular requirements that will have to be met are: (1) The

commitments regarding EPA inspections and the forum for enforcement

actions, and (2) the requirements related to posting of a bond.

If these conditions are met, the foreign refiner may begin

classifying gasoline as certified and non-certified FRGAS, and may use

the individual refinery baseline to demonstrate compliance with the

NOX and exhaust toxics requirements.17 However, a

foreign refiner will be required to meet the NOX and exhaust

toxics requirements for certified FRGAS using the refinery baseline

values that ultimately are approved by EPA. Thus, if a foreign refiner

elects to use an individual refinery baseline early, and uses baseline

values that are less stringent than the baseline values ultimately

approved by EPA, the refiner's compliance with the NOX and

exhaust toxics requirements will nevertheless be measured relative to

the approved baseline values. If this evaluation results in a violation

of the NOX and exhaust toxics requirements, the foreign

refiner will be held liable.

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\17\ During 1997, under section 80.101(b)(1) the CG requirements

are for sulfur, T-90, olefins and exhaust benzene emissions.

Beginning in 1998 the CG requirements are for NOX and

exhaust toxics emissions performance.

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F. Requirements for RFG Before 1998

The scope of this final rule is limited to requirements for

conventional gasoline. The CG requirements rely on refinery baselines

both now and in the future. The RFG requirements for sulfur, T-90 and

olefin content also rely on individual refinery baselines, but only

until the Complex Model applies beginning in January, 1998. In the

proposed rule EPA requested comments on whether the regulations should

allow individual refinery baselines to be used for these RFG

requirements if a foreign refiner obtains an individual baseline before

January, 1998. The only comments on this issue stated that there would

be insufficient time before January, 1998 to justify use of individual

baselines for RFG and no commenters requested that this rule apply to

RFG. This final rule is therefore limited to conventional gasoline.

III. Summary of Changes From Proposal

The following list identifies aspects of the proposed rule (62 FR

24776) that were modified in the final rule.

The proposal would have required foreign refiners to

submit baseline information on the foreign refinery's overall gasoline

production for 1990. This requirement is deleted in the final rule.

Baseline information must be submitted for the gasoline sent to the

U.S. in 1990, however, EPA reserves the right to seek further

information where appropriate.

The proposal would have required that where a foreign

refiner is owned or operated by a foreign government, the government

would have to sign a waiver of sovereign immunity. The final rule

instead includes a regulatory requirement that if a foreign refiner

establishes and uses an individual baseline it will constitute a waiver

of sovereign immunity for purposes of EPA or other U.S. enforcement

actions based on violations of the requirements adopted today.

The proposal would have required that the foreign refiner

post a bond in order to receive an individual refinery baseline. In the

final rule the bond requirement and bond amount are retained, however

the foreign refiner many meet the bond requirement with other assets,

subject to EPA approval.

The proposal would have established various requirements

relating to verifying the source of gasoline imported under an

individual baseline--sampling and testing by independent third parties

at the load port and discharge port, comparisons of the test results,

and certifications as to identity and source of the gasoline. If the

gasoline failed the load and entry port comparison it would still be

included in the foreign refiner's compliance calculation. In addition,

no gasoline classified by the foreign refiner as intended for the U.S.

could be diverted to a non-U.S. market. Many of the details of those

related provisions have been modified to increase the flexibility for

importers and foreign refiners, to be consistent with the tracking

purpose of the provisions, and to take into account any potential for

adverse environmental impact.

IV. Response to Comments

A. Optional vs. Mandatory Baselines

1. EPA's Proposal

EPA proposed that foreign refiners would be allowed to establish

and use individual baselines, but it would not be mandatory. If a

refiner did not establish and use an IB, the gasoline they export to

the U.S. would be regulated through the importer, and subject to the

importer's baseline. Specific regulatory provisions would be

implemented to ensure that the option to use an individual baseline

would not lead to adverse environmental impacts. This would involve

monitoring the average quality of imported gasoline, and if a specified

benchmark is exceeded, remedial action would be taken by adjusting the

requirements applicable to imported gasoline.

Under this approach, the volume of gasoline that could be imported

under the individual baseline for a foreign refinery would be limited

in the same manner as for domestic refiners, relative to a refinery's

1990 baseline volume.

2. Comments: Optional Versus Mandatory Individual Baseline Approach

Several parties from the domestic refining and distribution

industry commented that EPA should not offer foreign refineries the

opportunity to choose between either an individual baseline or the

statutory baseline. The commenters suggested that offering the choice

discriminates against domestic refiners who do not have the opportunity

to choose, and offers the foreign refiners a competitive advantage.

These commenters argued that foreign refiners already have a

competitive advantage because they are subject to fewer environmental

costs at their refineries relative to U.S. refiners, and they are not

subject to U.S. RFG or anti-dumping regulations on the majority of

their production which is not for the U.S. market. These commenters

urge EPA to avoid any final regulation which would further upset the

competitive balance and concluded that foreign refiners should be

treated in the same manner as domestic refiners.

These commenters argued that foreign refiners who would otherwise

have individual baselines more stringent than the statutory baseline

would not apply for an IB (their product would be regulated through the

importer, who is subject to the statutory baseline), while those with

baselines less stringent than the statutory baseline would choose to

establish and use an individual baseline. The domestic industry also

[[Page 45545]]

noted that many U.S. refiners with baselines more stringent than

average could significantly benefit if they were given the choice of

choosing the statutory baseline.

To avoid this perceived inequity, domestic refiners maintain that

if all foreign refiners are not held to the statutory baseline, then

they must be required all to establish an individual baseline for

product shipped to the U.S. in 1990, or domestic refiners should be

offered the same option to operate at the statutory baseline if they

choose to do so.

One commenter stated that EPA is obligated under the Clean Air Act

to favor protecting the environment over energy and economic

considerations. The commenter stated that in American Petroleum

Institute v. EPA (52 F. 3d 113, 1120 (D.C. Cir. 1995), the court

explicitly noted that these non-environmental factors are not to be

used as an independent grant of authority for EPA rulemaking.

The same commenter suggested that EPA and DOE concerns regarding

price and supply impacts were an inappropriate foundation for this

rulemaking. The commenter stated that the structure of the Clean Air

Act, with its emphasis on protecting public health, meant that supply

or price concerns cannot provide the foundation for this rule. The

commenter concluded that EPA has an overriding obligation to consider

air quality before any other factors, and that obligation should lead

EPA to a decision to require mandatory baselines for all foreign

refiners.

Another commenter suggested that EPA's reliance on DOE's analysis

was inadequate for selecting optional baselines over mandatory

baselines. The commenter, an association representing certain domestic

refiners, stated that they do not believe DOE or any other organization

can credibly quantify the impact of foreign refiner baseline

restrictions on the U.S. market just as DOE could not quantify the

impact of baseline requirements on domestic refiners.

Another association representing the domestic refining and

distribution industry commented that despite DOE's concerns, a more

serious threat to U.S. gasoline supply is adopting a rule which

discriminates against domestic refiners. The commenter suggested that

domestic refiners' business is extremely sensitive to unequal treatment

in the international marketplace. The commenter suggested that during a

short term supply emergency, EPA could establish a temporary waiver

procedure to provide limited relief from baseline requirements. This

commenter also suggested that any waiver should apply to all suppliers

in an affected region and not be limited to foreign suppliers.

Foreign refiners, domestic gasoline marketers and domestic

importers and blenders and others commented that the optional

individual baseline is appropriate.

3. EPA Response

Optional Baselines for Domestic Refiners

EPA analyzed two approaches to establishing individual baselines

for foreign refiners. One involved mandating that all foreign refiners

obtain and use an IB in order to market conventional gasoline in the

United States, the other approach provided this as an option but did

not mandate it. For the reasons described in the proposal, and in this

notice, EPA believes there are serious problems with the mandatory

approach based on the risk that it could significantly disrupt the

marketing of foreign conventional gasoline to the United States and

therefore have significant impacts on the cost of gasoline. The

proposal also discussed the potential for degradation in emissions

quality of gasoline from the mandatory baseline approach. Because of

this, EPA proposed and is adopting an optional approach.

EPA does not agree that this discriminates against the domestic

refining and distribution industry, or that domestic refiners should be

provided the same option. While foreign refiners are provided a choice

that domestic refiners are not provided, this is because the supply and

price impacts from mandating the use of IBs for imported gasoline

differ significantly from those for domestic gasoline. In addition,

this choice can be provided to foreign refiners without adverse

environmental impacts, through the use of the baseline adjustment

mechanism to monitor and offset any potential degradation in the pool

of imported gasoline. Providing the same choice to domestic refiners

would very likely lead to a significant degradation of the much larger

pool of domestically produced gasoline, that could only be remedied

through an expensive and cost-ineffective adjustment mechanism.

In establishing the rules for conventional and reformulated

gasoline, EPA determined that domestic refiners are all able to

establish individual baselines. Under section 211(k)(8) of the Act, EPA

therefore requires that domestic refiners establish and use IBs. This

is a cost-effective way to ensure that domestically produced

conventional gasoline does not degrade in emissions related quality

below 1990 levels. It has been successfully implemented without

significant disruptions to the supply or price of conventional

gasoline. Continuing this approach for domestic refiners does not

present a risk of significantly disrupting the gasoline supply and

price market. This would be a much less cost effective way to keep

conventional gasoline quality at 1990 levels than mandating the use of

IBs for domestic refiners.

Providing domestic refiners the choice between use of an IB and use

of the statutory baseline would likely lead, according to commenters,

to many domestic refiners making this choice.\18\ EPA would have to

establish a benchmark and adjustment mechanism, similar to that

proposed for imported gasoline, to monitor for and offset any

degradation of the gasoline pool resulting from providing such an

option. Given the large volume of gasoline involved, which is much

larger than the volume of imported gasoline at issue here, and the

expectation that exercising such a choice to use the SB would be based

on the economic value of producing gasoline designed to meet a less

stringent baseline with the resulting bias for a dirtier gasoline pool,

EPA would almost assuredly be called on to impose an across the board

adjustment to baselines for domestic refiners to offset degradation of

the gasoline pool from 1990 levels. This would result in the kind of

``reformulation'' of conventional gasoline to stay at 1990 levels that

the mandatory use of IBs was meant to avoid.

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\18\ Since domestic refiners have adequate data to establish an

IB, this would not be consistent with the requirements of section

211(k)(8).

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As compared to gasoline produced by domestic refiners, EPA has two

potential parties whom it can regulate with respect to gasoline

produced by foreign refiners. For imported gasoline EPA could regulate

either the importer, or the foreign refiner. EPA therefore has

discretion under section 211(k)(8) as to which party, and under what

conditions, it imposes the requirements for conventional gasoline that

is imported. For example, under the current regulations all foreign

produced gasoline is regulated through the importer, and importers are

not provided an option concerning establishment and use of an IB, while

foreign refiners are not directly regulated.

For the reasons and circumstances described in section I.E. and in

the proposal, EPA has rejected the approach of mandating that all

foreign refiners establish and use an IB in order to

[[Page 45546]]

market conventional gasoline in the U.S. EPA has instead determined

that it is appropriate to continue regulating imported conventional

gasoline through the importer in all cases except those where a foreign

refiner has adequate data and chooses to establish and use an IB. The

concerns on price and supply which lead to rejecting the mandatory

approach for foreign refiners do not apply to domestic refiners, and

therefore do not provide a basis for changing the mandatory approach

currently applied for domestic refiners. In addition, providing this

option to foreign refiners is less likely to lead to a degradation of

the average qualities of imported gasoline than the much more likely

degradation that would occur to the much larger pool of domestically

produced gasoline if the same option were provided to domestic

refiners.

In sum, the mandatory use of IBs for domestic refiners has worked

successfully, without significantly disrupting the supply and cost of

conventional gasoline. Requiring the same approach for imported

conventional gasoline, presents the risk of this kind of significant

disruption. Providing domestic refiners with an option to establish and

use IBs would very likely lead to a degradation in the emissions

quality of conventional gasoline, over a very large percentage of the

total volume of conventional gasoline. This degradation could be

remedied by a baseline adjustment mechanism, however this would be a

less-cost effective way to avoid such degradation than not providing

such an option. Providing foreign refiners with the option to establish

and use an IB presents a risk of environmental degradation, but this

covers a much smaller pool of gasoline and it is unclear whether and to

what extent there will in fact be a degradation in the pool of imported

gasoline. If there is, it can be readily remedied consistent with the

flexibility currently available to importers and foreign refiners to

determine what gasoline is imported into the U.S., without the

potential supply and price impacts from mandating the use of IBs for

imported gasoline.

Consideration of Environmental Impact of Providing an Option for an

Individual Baseline

Several commenters suggested that the Agency's proposal put trade

and economic considerations over its concern for protecting the

environment. On the contrary, the Agency believes that this final rule

is fully consistent with the Agency's commitment to fully protect

public health and the environment.

EPA considered two different approaches to the use of IBs by

foreign refiners.19 It is reasonable for EPA to consider the

cost impacts of the two approaches and adopt the one that avoids the

risks attendant with seriously disrupting the importation of

conventional gasoline into the U.S. In this case, the provisions

adopted concerning the option to establish and use an individual

baseline will fully protect the public health and environment, and

achieve the Clean Air Act goals for the conventional gasoline program.

This will be achieved without risking significant disruption to the

supply or price of conventional gasoline.

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\19\ The potential for an adverse environmental impact from

providing an option to foreign refiners, and EPA's mechanism to

monitor for and fully offset any such adverse impact, is explained

in detail in the proposal and elsewhere in this notice. The

potential for an adverse environmental impact from the mandatory IB

approach is described in the proposal at 62 FR 24779.

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Impact of Mandatory Approach on Gasoline Supply/Price

Commenters objected that EPA did not have an adequate basis to

reject the mandatory baseline approach based on supply and cost

considerations.

Based on the information presented by DOE, EPA believes that

requiring individual baselines for all foreign refiners presents too

great a risk of adverse effects on gasoline supply and prices. To fully

understand how mandatory baselines for imported conventional gasoline

could impact the gasoline market it is first important to understand

the role imports play in the domestic market. Foreign imports account

for 6%-8% of total U.S. gasoline consumption. Almost all (over 95%) of

imports come into Petroleum Administration for Defense Districts (PADD)

I, the U.S. east coast, where they represent about 20% of total

gasoline supply.

Imported gasoline plays a significant role in the domestic gasoline

market. Imported gasoline augments the supply of gasoline on the east

coast of the United States, an area with an already large demand.

During the summer of 1996, U.S. east coast and gulf coast refinery

operating utilization rates were in excess of 96%. Only about 150

thousand barrels a day of additional domestic gasoline production

capacity was available. However, the market was demanding about 500

thousand barrels a day of additional gasoline. Imported gasoline made

up the gap with over two-thirds of the imports meeting a need that

could not be served by U.S. refineries.20

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\20\ Analysis provided in comments submitted by the Department

of Energy, July 23, 1997 in response to the May 6, 1997, NPRM.

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

One commenter suggested that EPA's optional individual baseline

approach discriminates against domestic refiners to such a degree that

domestic refining capacity in the United States could contract as a

result of this unequal treatment, which would have a more severe impact

on the gasoline market in the United States. However, the current

production rates of east coast and gulf coast refineries would indicate

that this consequence is highly unlikely. It is clear that U.S. demand

for gasoline will continue to increase at a rate surpassing U.S.

production. The suggestion that domestic refineries will reduce their

production in light of such a demand seems implausible.

One commenter suggested that EPA establish a temporary waiver

procedure to provide limited relief from baseline requirements during

short-term supply emergencies. Although EPA arguably may have the

authority to establish such a waiver provision, it would be an

impracticable solution in this instance. It is clear from the DOE's

analysis outlined below that the disruption mandatory baselines would

cause to the sale and importation of opportunistic gasoline could leave

the U.S. market with a constant risk of short term supply and price

disruptions, and the temporary waiver provision could not be

implemented in a time frame that would eliminate this risk. Moreover it

would require the U.S. government to arbitrarily determine the

appropriate market price of gasoline.

Much of the gasoline imported into PADD I is shipped into the

United States on an ad hoc basis. Currently gasoline is imported into

the U.S. market from a free moving and fungible distribution system.

This opportunistic sale of gasoline is an important element in the

U.S., and particularly the east coast, gasoline supply system. The

broad based use of tracking and monitoring restrictions which would be

required by mandatory individual baselines would eliminate the

flexibility necessary to quickly divert opportunistic gasoline to the

U.S. should the market demand it. This would make it more likely that

imported gasoline would not play the same role that it currently does

in moderating price increases.

The amount of opportunistic gasoline imported into the United

States is not inconsequential. DOE's analysis indicates that in 1996, a

total of 25

[[Page 45547]]

separate importers brought gasoline, of all types, to the U.S. east

coast from about 40 refineries in 28 countries. Of this amount, over

40% was imported as opportunistic gasoline. The ability to quickly draw

gasoline supplies from various parts of the world to the U.S. market is

important in moderating price swings and meeting consumer demand.

While most imported gasoline enters the U.S. market on the east

coast it impacts gasoline prices nationwide. Imported gasoline tends to

moderate price increases by increasing the sources of gasoline to meet

U.S. demand. DOE examined New York harbor, Chicago and Gulf Coast spot

prices for conventional gasoline which showed highly correlated

movements throughout 1996. The pipelines linkages between PADD III and

PADDs I and II are the key mechanism for linking the prices.

The DOE analysis concluded that a 1 cent per gallon change in New

York spot prices, driven by a shortage of imports, could affect the

over 4 million B/D of conventional gasoline being used in PADD's I, II

and III. A 1 cent/gallon price change, lasting as little as one week

(typical of the time required to get additional gasoline shipments to

the U.S. east coast from Europe or from the gulf coast by water), could

cost or save gasoline consumers over $10 million.21

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\21\ Comments from DOE on EPA's May 6, 1997 NPRM, page 2.

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While a number of factors are at work in market fluctuations it is

clear that the volume of imported gasoline is price responsive. By

rapidly providing additional supply, consumer demand is met without the

large price increases that would be necessary to control gasoline

demand.

EPA disagrees with the comment that an option to establish an

individual baseline should not be provided because it would give

foreign refiners a competitive advantage over domestic refiners.

Foreign refiners who establish an individual baseline will be subject

to the same requirements as domestic refiners, with additional

requirements dictated by their unique circumstances. Foreign refiners

will be required to fulfill the additional burden of tracking and

segregating their imported gasoline to ensure that the correct

individual baseline is being used for the purposes of the compliance

calculation.

Gasoline from foreign refiners who do not establish an individual

baseline would be subject, through the importer, to an adjustment to

the importer baseline needed to offset any adverse environmental impact

from a foreign refiner's choice not to seek an individual baseline.

As described above, this option is provided to foreign refiners

based on the significant difference in circumstances between applying

the mandatory use of individual baselines to domestic or foreign

refiners, and the significant difference in potential adverse impact on

the environment and gasoline supply and prices.

Role of Consideration of Costs

One commenter argued that EPA's obligation under the Clean Air Act

to protect the environment take priority over costs and economic

concerns in this rulemaking.

EPA's authority to take costs and economic factors into

consideration when establishing rules protective of the environment

depends on the terms of the specific statutory provision at issue. As

in prior rulemakings establishing the conventional gasoline program,

EPA's authority is based on sections 211(k)(8) and 211(c)(1) of the

Act. Each of these provisions gives EPA discretion to take cost and

other relevant factors into consideration when establishing

requirements that meet the air quality goals of the conventional

gasoline program. In the prior rulemakings for the conventional

gasoline program, EPA has taken these factors into consideration when

establishing the requirements needed to meet the air quality

requirements of this program. For example, EPA's CG requirements

include the ability to obtain an adjustment to the IB under certain

circumstances related to economics; establish testing, recordkeeping

and reporting requirements which reasonably take into account the

burden of the measures, and reflect the decision in the 1993 rulemaking

to not establish specific emissions requirements for VOCs, CO, and non-

exhaust toxics, based in part on economic considerations. In this case

it is also reasonable to consider adverse supply and cost impacts when

determining the appropriate approach. The statutory provisions noted

above provide EPA with the discretion to consider these factors.

B. Establishment of an Individual Baseline (IB)

1. Overview

Comments were submitted on a number of issues with regard to

establishment of individual baselines by foreign refiners. These issues

included the proposed requirement to submit baseline information on the

foreign refinery's overall gasoline production as well as the subset of

gasoline which was sent to the U.S. in 1990; the proposed January 1,

2002 deadline for submittal of foreign refinery baseline petitions; and

foreign refinery aggregation for compliance purposes.

In summary, EPA is not requiring foreign refiners to submit

baseline information on the foreign refinery's overall gasoline

production. EPA reserves the right to require such information in a

specific case if it is needed to reasonably evaluate a baseline

submission. EPA is retaining the proposed January 1, 2002 deadline for

baseline petition submittals. In general, with regard to other baseline

issues, such as aggregation, baseline volumes, and baseline review,

audit and approval, EPA is maintaining the same requirements for

foreign refiners as for domestic refiners, as proposed.

2. Use of Total 1990 Product Data

EPA proposed that a foreign refinery would have to submit

information regarding its total 1990 gasoline production as well as

information regarding the subset of the refinery's gasoline production

which was sent to the U.S. in 1990. EPA believed that information on

the total refinery gasoline production would be useful in the

calculation and verification of the quality of the subset of gasoline

sent to the U.S. in 1990.

Commenters indicated that requiring an individual baseline

calculation for the total gasoline production was burdensome, costly,

and, in general, of little additional value. Commenters indicated that

the quality of the subset of gasoline sent to the U.S. in 1990 could be

accurately determined without the additional information on the

refinery's total gasoline production. One commenter also stated that

EPA previously concluded that the overall quality from a foreign

refinery might bear scant resemblance to the quality of the portion

going to the U.S. market. This commenter also stated that requiring

information on a foreign refiner's overall gasoline production is

wholly unnecessary.

In general, EPA agrees with the commenters that requiring

information in all cases on the overall 1990 gasoline production of a

foreign refinery may be costly and may provide little additional value.

Thus, EPA will only require that a foreign refiner's baseline petition

contain information relevant to the calculation of the baseline for the

subset of gasoline sent to the U.S. in 1990. Nonetheless, the

calculation of a refinery baseline per these regulations is complex,

with wide variances in the types and amounts of data available on

[[Page 45548]]

the subset of 1990 gasoline which came to the U.S. As with domestic

refiners, EPA reserves the right to request additional information to

evaluate a petition for an IB, where such information is needed to

reasonably determine an accurate IB. In specific cases this might

include much or all of the information pertaining to the refinery's

1990 total gasoline production.

3. January 2002 Deadline

EPA proposed that baseline submissions would have to be submitted

to the Agency by January 1, 2002. EPA proposed this date in order to

allow for the collection of both summer and winter data and the

preparation of a baseline petition subsequent to June 1, 2000, the

scheduled date EPA would announce the average quality of imported

gasoline for the first monitoring period of 1998 and 1999. Domestic

refiners had approximately one year following issuance of the final

regulations in December 1993 to prepare (including completion of

sampling, testing and analysis) and submit their individual baselines

to EPA prior to the start of the program on January 1, 1995.

EPA received comments indicating that the proposed deadline was

appropriate, and others indicating that such a deadline was

unnecessary, and perhaps arbitrary. Commenters opposing a deadline

thought that foreign refiners should be allowed to apply for an

individual baseline when they desire to, for example, when export

volumes to the U.S. increase and/or pricing conditions are favorable.

One commenter questioned whether baseline petitions would be accepted

prior to January 1, 2000, and suggested that EPA specify a reasonable

period of time in which it will act on a baseline submission, as the

commenter indicated EPA did with domestic refiners.

EPA continues to believe that a deadline for the receipt of foreign

refiner baselines is appropriate in order to avoid the increased

uncertainty in determining an individual baseline too many years after

the 1990 time period that an IB is based upon. A reasonable deadline

such as January 1, 2002 provides foreign refiners several years to

exercise the option provided here, and will assure that EPA has a

reasonable factual basis to determine an accurate IB regarding 1990

gasoline volume and quality. It will also maintain requirements similar

to those imposed on domestic refiners. While a foreign refiner would

not have the right under the regulations to seek an IB after January 1,

2002, after this date a foreign refiner could still petition EPA to

revise this rule and establish an IB, for example, where the refiner

could demonstrate that it is able to establish an accurate and

verifiable IB.

Foreign refiners may submit a baseline petition to EPA at any time

prior to January 1, 2002. However, if gasoline is imported using an IB

while a petition for an IB is pending, the foreign refiner will be

subject to the ultimate approved baseline, which may change

significantly (to their benefit or detriment) from the original

submission due to errors or omissions uncovered during EPA review. In

general, baselines are reviewed in the order received, but a well

prepared and ultimately correct baseline may be approved prior to a

baseline submitted earlier which was less well prepared or incorrect.

EPA is not establishing a specific time frame to act upon

baselines, due to the many uncertainties, discussed above, regarding

the completeness of the original submittals and the number of questions

EPA may have for a refiner before determining that a submittal is

complete, accurate, and appropriate for approval. The Agency's review

of submissions by domestic refiners took between a few months and two

years, depending on the quality and completeness of the original

submission. EPA will review foreign refiner baseline submissions in an

expeditious and timely manner but cannot specify a time frame in which

a foreign refiner baseline will be acted upon. Foreign refiners can

export conventional gasoline to the U.S. using an IB under the program

requirements finalized today without an approved baseline. Foreign

refiners should note that once a baseline petition is submitted and a

refiner begins to use an IB, the refiner will be held to compliance

with the ultimately approved baseline.

4. Aggregation

As stated in the proposal, a foreign refiner who operates more than

one refinery with an individual baseline would be able to aggregate the

baselines of some or all of its refineries, as allowed for domestic

refiners.

Commenters said that allowing a foreign refiner to aggregate

refineries with both unique individual baselines and statutory

baselines gave additional flexibility to foreign refiners who would

already have the option of having or not having an individual baseline.

One commenter also stated that foreign refiners should be subject to

the same one-time decision regarding aggregation as domestic refiners.

Commenters also said that foreign refiners should not be allowed to

game the system by electing either an individual baseline (for

refineries dirtier than the statutory baseline) or the statutory

baseline (for refineries cleaner than the statutory baseline) on a

refinery-by-refinery basis for facilities owned by a single entity.

These commenters claimed that allowing some individual baseline

refineries and some statutory baseline refineries under a single owner

would ``aggravate the competitive discrimination against domestic

refiners.'' According to these commenters, all refineries owned by a

single entity should all have either an individual baseline or all have

the statutory baseline, and if a baseline for one of the refineries

could not be established, then no individual baseline should be given

to any of the refineries of a single entity.

EPA did not propose that all or none of the refineries of a foreign

refiner would have to have an individual baseline, because a central

element of the proposal was to provide foreign refiners an option:

either obtain an individual baseline and fulfill all of the

requirements accompanying the use of an individual baseline by a

foreign refinery, or continue with the current requirements with

respect to gasoline produced for the U.S., subject to any remedial

baseline adjustment.

Many of the comments above focused on foreign refineries with

statutory baselines. In fact, under today's rule, no foreign refinery

which does not apply for an individual baseline will have the statutory

baseline. Foreign refineries which apply for and receive an individual

baseline will either have a unique individual baseline or will have the

statutory baseline (with a zero baseline volume) e.g., where the

refinery was not in operation in 1990 or produced no gasoline for the

U.S. in 1990. All other foreign refineries will have no baseline, and

their gasoline will be regulated through the importer's baseline,

typically the statutory baseline. Thus, under this rule, it is possible

that some refineries of a foreign refiner would have an approved

individual baseline and some would have no baseline. An aggregate

baseline (or baselines) of a foreign refiner could only be composed of

the baselines of its facilities with approved individual baselines.

Foreign refineries without an individual baseline cannot be included in

an aggregate baseline.

A foreign refiner may choose to obtain an individual baseline for

one, some, all or none of its refineries. Limiting the option to cases

where all of a refiner's refineries receive IBs is counter to the

reasons for providing an option. For

[[Page 45549]]

example, it would lead to cases where a foreign refiner wanted to

establish an IB for a refinery and had adequate data to do so, but was

precluded from this because it could not establish an IB for a

different refinery, or to situations where EPA or the foreign refiner

would have to prove a negative in order to establish an IB, i.e., that

no IB could be developed for one refinery as a condition of allowing an

IB for a different refinery where the data was available. These results

would be inconsistent with the general approach of giving foreign

refiners an option to establish individual baselines where they want,

and have adequate data to do so.

In summary, the requirements for aggregating baselines for foreign

refiners are the same as those for domestic refiners, namely, all

facilities in an aggregate baseline must have an assigned individual

baseline, either a unique individual baseline or the statutory

baseline. Aggregate baselines may be composed of some or all of a

refiner's refineries with assigned individual baselines, and a refiner

may have more than one aggregate baseline. Each refinery, though, can

only be part of one aggregation. As with domestic refiners, the

decision to form an aggregate baseline is a one-time decision.

5. Baseline Volumes

Several commenters indicated that foreign refiners should be

subject to the same baseline volume constraints as domestic refiners,

namely, that the individual baseline applies up to their baseline

volume limit, and the statutory baseline applies to all volume in

excess of the baseline volume per the calculation of compliance

baseline values in 80.101(f), namely, a volume-weighted average of the

individual baseline value and the corresponding statutory baseline

value. EPA agrees. EPA proposed and is finalizing a requirement that

foreign refiners would be subject to the same restrictions for

individual baseline volumes as are domestic refiners, per 80.101(f).

One commenter suggested, that where it is difficult to quantify

volumes exported to the U.S. by a refiner, that Energy Information

Administration (EIA) reported country totals be used to verify and cap

quantities reported by foreign refiners. The commenter suggested that

the sum of all baseline volumes reported to EPA from a country cannot

exceed the total country volume reported by EIA in 1990. According to

the commenter, this should be done on a seasonal basis to assure that

complex model winter/summer differences are properly accounted for.

EPA proposed and is finalizing that those foreign refiners which

petition the Agency for an individual baseline will have to adequately

account for the volumes of gasoline they sent to the U.S. in 1990. EPA

agrees that EIA data would be a useful tool for checking that the sum

of the baseline volumes of each facility did not exceed the 1990

country levels reported in EIA.

16. Baseline Audits

Several commenters indicated their concern that foreign refiners

submitting baseline petitions should be subject to the same

requirements with regard to review by an EPA-approved independent

baseline auditor, and EPA audits and approval of baselines. EPA

proposed and is finalizing requirements that all foreign refinery

individual baseline petitions be reviewed by an EPA-approved

independent baseline auditor. Once submitted to the Agency, they will

undergo the same comprehensive and detailed review process used to

evaluate baseline submissions by domestic refiners.

7. Miscellaneous

Several commenters indicated that foreign refiners would have a

competitive advantage vis-a-vis the proposed regulations in a number of

areas, including the fact that they are not subject to conventional

gasoline and other environmental requirements for all of the non-U.S.

bound gasoline they produce. Commenters claimed that clean gasoline for

the U.S. could be made less expensively because foreign refiners could

``dump'' dirty components into the gasoline destined for their home

markets and other non-U.S. markets which have fewer restrictions on

gasoline quality than the U.S. One commenter suggested that a foreign

refiner seeking an individual baseline should be required to

demonstrate that it is not, in fact, dumping dirty components into

gasoline sold in its home market.

EPA acknowledges that foreign refiners may have additional

flexibility, as indicated by commenters. However, as EPA has indicated

previously, section 211(k) of the Clean Air Act is not aimed at

regulating the quality of gasoline used in other countries, nor at

regulating foreign refiners except with regard to the gasoline they

send to the U.S.

C. Type of Requirement for FRGAS

1. Summer vs. Winter Averaging

A few commenters suggested that foreign refiners with individual

baselines would have additional flexibility over domestic refiners

because of seasonal differences in the complex model. They stated that

the same gasoline evaluated under the winter model produces

significantly higher emissions than gasoline evaluated under the summer

model, and because of this, foreign refiners could meet their emission

requirements with poorer quality gasoline by increasing imports of

summer gasoline (or importing a lower portion of winter gasoline).

Commenters also stated that gasoline imports have traditionally been

higher in the summer. According to commenters, domestic refiners are

essentially limited to domestic markets and fixed seasonal demand, and

do not have the opportunity to systematically control their summer/

winter production. Commenters suggested that EPA require foreign

refiner compliance on a seasonal basis, or offer the seasonal basis

option to domestic refiners. One commenter also suggested that the

benchmark be based on the last 3 year running average of imported

summer gasoline.

Starting in 1998, compliance with IBs only applies to conventional

gasoline for which only certain exhaust emissions are of concern. The

winter complex model does produce higher exhaust emissions for a given

fuel than the summer version of the model. However, EPA disagrees that

foreign refiners could take advantage of this by systematically

producing more summer than winter gasoline. First, U.S. gasoline demand

increases nationwide during the summer. Domestic refiners produce more

gasoline in the summer, and it would seem logical that imports would

also increase during the summer. EPA agrees that domestic refiners are

essentially limited to domestic markets, however, EPA believes that

both foreign and domestic refiners are limited to the seasonal demand.

It would not be prudent for a foreign or domestic refiner to market

additional volumes of summer gasoline beyond what it could reasonably

expect to be used, because of storage issues and the fact that, for

foreign refiner's with an individual baseline, gasoline in excess of

their baseline volume is evaluated at the statutory baseline, just as

for domestic refiners.22

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

\22\ On a related matter, EPA recently proposed a requirement

that conventional gasoline will be classified as summer gasoline

only where the gasoline both meets A federal RVP requirements under

section 80.27, and is intended for use in an area subject to the RVP

requirements during the period these requirements are in effect. If

adopted this would limit inappropriate classification of winter

gasoline as summer gasoline. If the agency adopts this proposal, all

gasoline produced for use in the continental United States between

May 1 and September 15 each year would be classified as summer

gasoline. This proposal was created to reduce the amount of gasoline

that was being accounted for as summer gasoline which really only

had summer RVP but was intended for use outside the summer time

period. (See 62 FR 37338).

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[[Page 45550]]

Providing different averaging periods for foreign and domestic

refiners of CG would not be consistent with EPA's basic approach of

applying the same requirements to foreign and domestic refiners except

where clear and convincing reasons call for different requirements

(such as providing an option to establish and use an IB to foreign

refiners as compared to mandating an IB, imposing additional

requirements related to tracking of gasoline and compliance assurance,

and establishing a mechanism to offset any adverse environmental impact

from providing the option to establish and use and IB). In addition,

providing domestic but not foreign refiners with an option to average

seasonally would clearly lead to adverse environmental impacts, as

domestic refiners would choose the averaging period that required less

control of gasoline quality. For these reasons EPA is not adopting the

suggested approach.

2. Other

One commenter suggested that foreign refiners have yet another

advantage because they can blend components such as MTBE into their

gasoline prior to entry into the U.S. at the tariff rate for motor

fuels while domestic refiners must pay a significantly higher chemical

duty on MTBE imported for gasoline blending. While the tariff situation

described by the commenter could provide an advantage to foreign

refiners, this tariff differential already exists, and is not a result

of, nor will it necessarily be exacerbated by, today's rule.

D. Liability

1. Party Responsible for Meeting the Gasoline Quality Requirements for

FRGAS

a. EPA's Proposal: EPA proposed that a foreign refiner who obtains

an individual refinery baseline would be responsible for meeting the

NOX and exhaust toxics requirements for the conventional

gasoline produced at the foreign refinery and imported into the United

States. This is like the requirements that apply to a domestic refiner,

who must meet the NOX and exhaust toxics and requirements

for conventional gasoline produced at the domestic refinery and used in

the United States. EPA also requested comments on an alternative

option, where the U.S. importer would be responsible for meeting the

NOX and exhaust toxics requirements for imported

conventional gasoline produced by a foreign refiner with an individual

refinery baseline, but using the baseline that applies to the foreign

refinery.

b. Comments: EPA received comments from two foreign refiners who

supported the alternative option of making the U.S. importer

responsible for meeting the conventional gasoline NOX and

exhaust toxics requirements. EPA also received comments from a group of

U.S. importers who opposed placing this responsibility on U.S.

importers if the importer would have liability for violations that

result if a foreign refiner specifies incorrect baseline values for

specific FRGAS batches.

One foreign refiner suggested an approach they believe would allow

U.S. importers to meet the NOX and exhaust toxics

requirements for imported FRGAS without risk of incorrect baseline

values, by removing any uncertainty regarding the baseline values that

apply to each individual batch of imported FRGAS. This foreign refiner

suggested that for a foreign refiner with an individual baseline, the

annual compliance baseline for an upcoming year would be established at

the beginning of that year, using an assumption for the total volume of

gasoline (conventional gasoline plus RFG) that will be produced and

shipped to the U.S. during the upcoming year.23

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

\23\ Under section 80.101(f) a compliance baseline for

NOX and exhaust toxics compliance is calculated for each

calendar year averaging period based on a refinery's 1990 baseline

volume and baseline NOX and exhaust toxics values, and

the total U.S. gasoline volume (conventional gasoline and RFG)

produced at the refinery during the year. The compliance baseline

equation caps use of a refinery's individual baseline values at the

refinery's baseline volume, and any additional gasoline volume

(conventional gasoline and RFG) for a year moves the refinery's

compliance baseline values in the direction of the statutory

baseline. Thus, a refinery's annual compliance baseline, and as a

result the refinery's NOX and exhaust toxics requirements

for the year, are not finally established until the end of the year

when the refinery's total gasoline volume for the year is known.

Section 80.101(b) requires use of compliance baselines only for

the simple model requirements that apply before 1998. However, in

another rulemaking EPA has proposed to require use of compliance

baselines for the complex model requirements that apply beginning in

1998. See 62 FR 37363 (July 11, 1997). EPA believes this proposed

change will be final before the beginning of 1998. In any case, the

same provision will apply to both domestic and foreign refiners.

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

The foreign refiner suggested that this assumed volume would be the

refinery's prior year volume or the refinery's volume projections for

the upcoming year, and that EPA would approve each foreign refiner's

volume assumption in advance of each year. In this way the foreign

refiner and U.S. importers of that refiner's gasoline would have

certainty at the beginning of each year of the compliance baseline that

applies to gasoline produced at the foreign refinery during the year.

This foreign refiner also suggested that if the refinery's actual

gasoline volume during the year is different than the assumed volume a

correction would be applied to the refinery's compliance baseline in a

subsequent year.

The foreign refiner stated that this approach, as compared to the

approach where the foreign refiner would meet the NOX and

exhaust toxics requirements, would be simpler, more feasible, and would

require fewer resources to implement, largely because U.S. importers

would be responsible for demonstrating compliance with the

NOX and exhaust toxics requirements.

Another foreign refiner commented that in a case where the gasoline

produced by a foreign refiner with an individual refinery baseline is

imported into the U.S. by a single importer, the U.S. importer could

take all compliance responsibility for this gasoline.

c. EPA's Response: EPA is finalizing this foreign refiner

requirement as proposed for the following reasons.

Requiring U.S. importers to meet the NOX and exhaust

toxics requirements for FRGAS presents an inherent difficulty, in that

the compliance baseline that applies to conventional gasoline is not

known until the end of each year. Domestic refiners are able to operate

with this uncertainty, because the refiner can update a refinery's

projected compliance baseline throughout the year based on gasoline

volumes, and the refiner has the ability to adjust conventional

gasoline quality to meet these projections. In contrast, U.S. importers

of FRGAS would have to rely on the foreign refiner to estimate the

compliance baseline that applies to each FRGAS batch, and the U.S.

importer would be liable if imported conventional gasoline quality

failed to meet these projections. U.S. importers have commented that it

is this uncertainty that most hampers their operations--that an

importer could rely in good faith on the foreign refiner's compliance

baseline estimate, yet the importer would be liable if the estimate

ultimately is incorrect.

[[Page 45551]]

While the alternative suggested by one foreign refiner (using EPA-

approved volume projections each year to specify a foreign refinery's

compliance baseline at the beginning of the year) would remove this

uncertainty, it has the disadvantage of constantly requiring

corrections in a subsequent year. It is unlikely a foreign refiner's

annual volume projections will ever exactly match the refinery's actual

annual volume. As a result, if this approach were adopted EPA probably

would be required to calculate and implement corrections each year for

each foreign refinery with an individual baseline. In addition, these

corrections could not be applied immediately, because a foreign

refinery's annual volume will not be established until reports could be

filed, and the correction calculated, which would necessarily occur in

the subsequent year. As a result, it is likely there would be a one

year lag in applying corrections, e.g., if a foreign refiner's volume

projection for 1998 were incorrect the details of this error would not

be known until some time in 1999, and the correction could not occur

until 2000. It is preferable that NOX and exhaust toxics

requirements be met each year without the expectation of constant

subsequent correction, if other considerations are equal. This also

avoids any risk of adverse environmental consequences that could result

if the foreign refiner ceased supplying gasoline to the United States

before the correction could be completed.

In addition, domestic refiners do not have the option of using an

incorrect compliance baseline each year and correcting for the error in

a subsequent year, and there are no compelling reasons to treat foreign

refiners differently in this regard.

EPA agrees that, in general, it is easier to monitor and enforce

requirements that apply to parties present in the United States such as

U.S. importers, as compared to parties located outside the United

States such as foreign refiners. However, even if EPA were to adopt the

suggested approach of requiring U.S. importers to meet the

NOX and exhaust toxics requirements for FRGAS, foreign

refiners of FRGAS would continue to have significant responsibilities

under the regulations that EPA would monitor and enforce. The foreign

refiner would have to establish individual refinery baselines; submit

supported volume projections to EPA; and meet a range of requirements

associated with establishing the refinery's actual volume of FRGAS each

year, including designation of FRGAS, load port sampling and testing,

record keeping and reporting, and attest requirements. EPA would have

to monitor compliance with these requirements even if U.S. importers

met the NOX and exhaust toxics requirements.

EPA disagrees with the comment by one foreign refiner that the U.S.

importer could be responsible for meeting all requirements associated

with FRGAS where a foreign refiner's FRGAS is imported by a single U.S.

importer. A foreign refinery's annual compliance baseline is based on

the refinery's volume of conventional gasoline and RFG FRGAS, and this

volume can most properly be established using information available

only at the foreign refinery. As a result, regardless of the

responsibilities assumed by the U.S. importer the foreign refiner still

must, inter alia, keep records, file reports, commission an attest

engagement, and agree to allow EPA inspections and audits.

On balance, EPA believes the proposed approach of requiring foreign

refiners of FRGAS to meet the NOX and exhaust toxics

requirements is the best approach in that it does not impose

unwarranted uncertainties on importers, avoids the uncertainty of

subsequent corrections on a yearly basis, and is consistent with the

requirements on domestic refiners.

2. Sovereign Immunity and Agent for Service of Process

a. EPA's Proposal: EPA proposed that where a foreign refiner is

owned or operated by a foreign government, the government would have to

issue a waiver of sovereign immunity before the refiner could obtain an

individual refinery baseline. As proposed, this waiver would have to be

signed by an official of the foreign government at the cabinet

secretary level or higher who has responsibility for the foreign

refinery, and would have to specify the waiver would apply in any case

of prosecution by the United States for civil or criminal violations

related to FRGAS requirements including requirements in relevant Clean

Air Act sections and Title 18 United States Code.

b. Comments: EPA received comments addressing the sovereign

immunity waiver proposal from several foreign government-owned refiners

and from a domestic association that represents independent gasoline

marketers. In addition, EPA received comments from associations

representing domestic refiners that generally addressed EPA's proposed

enforcement requirements without specifically discussing the proposed

sovereign immunity waiver requirement.

The foreign government-owned refiners and the association of

domestic marketers commented that the proposed waiver of sovereign

immunity is unnecessary. One of these foreign refiners commented that

in the antitrust context the U.S. Department of Justice has taken the

position that foreign government-owned corporations operating in the

commercial marketplace are subject to U.S. antitrust laws to the same

extent as foreign private-owned firms. This commenter concluded that

waivers of sovereign immunity are unnecessary to enforce the antitrust

laws, and that this same conclusion also should apply to enforcement

under the Clean Air Act.

Two other foreign refiners referred to 28 U.S.C. 1605(a)(2) of the

Foreign Sovereign Immunities Act (FSIA), which provides that a foreign

sovereign is not entitled to immunity in an action based on certain

``commercial activity.'' These commenters further stated or implied

that a foreign refiner, by engaging in the production and sale of

gasoline for export to the U.S., would be covered by the provisions of

this section and, hence, would not be entitled to sovereign immunity

under the FSIA with respect to matters covered by this regulation.

These commenters concluded, as a result, that the proposed sovereign

immunity waiver requirement is unnecessary. One foreign refiner

commenter said the proposed sovereign immunity waiver requirement is

particularly objectionable if the waiver must be signed by a cabinet

secretary.

One foreign refiner said the proposed scope of the waiver is too

broad, because EPA had proposed that the waiver would need to apply to

all provisions of Title 18, United States Code. This foreign refiner

said, in addition, that sovereign immunity cannot be a condition for

according national treatment under Article III of GATT 1994.

The association of domestic marketers commented that the proposed

requirement to waive sovereign immunity is inflammatory, and that other

proposed enforcement mechanisms are sufficient for appropriate EPA

enforcement, including the possibility of revoking an individual

refinery baseline, and the required foreign refiner commitments

regarding EPA inspections and audits, naming an agent for service, and

bond posting.

The associations representing domestic refiners did not

specifically address the proposed sovereign immunity waiver

requirement, but did support EPA's proposed enforcement

[[Page 45552]]

requirements in general. In addition, one of these associations

commented that EPA also should require there be an extradition treaty

in place with a foreign government before allowing a refiner in that

country to obtain an individual refinery baseline. This commenter

stated that in the absence of an extradition treaty there could not be

adequate enforcement of criminal violations.

c. EPA's Response: EPA continues to believe that to provide

adequate enforcement mechanisms related to the establishment and use of

individual baselines by foreign refiners, the issue of sovereign

immunity needs to be addressed for foreign government-owned refiners.

Therefore, EPA has retained a specific provision in the final rule

addressing sovereign immunity. However, the form of this sovereign

immunity provision is being revised based on EPA's evaluation of the

comments and prior U.S. administrative practice in this area.

Under the FSIA a foreign refiner who obtains an individual refinery

baseline from EPA, exports FRGAS to the United States, and violates

requirements applicable to the foreign refiner under this rule has

engaged in the kind of activity that falls within an exception to

sovereign immunity under 28 U.S.C. 1605(a)(2), (commonly referred to as

the ``commercial activity'' exception) as asserted by the commenters.

However, EPA is aware of no judicial precedent directly addressing

these issues in the context of a regulatory enforcement action by an

agency of the United States. As a result, a degree of uncertainty

remains on the issue of whether United States courts would rule in all

cases that a foreign refiner who obtains and uses an individual

refinery baseline automatically is ineligible to claim sovereign

immunity in the context of an EPA enforcement action for violations of

the FRGAS requirements.

Under 28 U.S.C. 1605(a)(1) the issue of sovereign immunity can be

resolved where the foreign government waives sovereign immunity. EPA

has evaluated and adopted an approach to a sovereign immunity waiver

that provides EPA with the ability to effectively enforce the

requirements applicable to a foreign refiner, in combination with other

provisions adopted today. This is similar to the approach used by the

U.S. Department of Transportation in the context of economic licenses

issued to foreign air carriers that are necessary for those carriers to

conduct commercial operations in foreign air transportation to and from

the United States. The DOT approach does not require an official of the

foreign government to sign a separate document waiving sovereign

immunity. Rather, DOT licenses for foreign air carriers, whether

government or privately owned, include a condition that states, in

essence, that operation under the license by a foreign air carrier

constitutes a waiver of sovereign immunity under the FSIA.24

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\24\ The Department of Transportation's Conditions of Authority

that applies to foreign air carriers includes the following

provision:

In the conduct of the operations authorized, the holder shall:

* * * * *

(7) Agree that operations under this authority constitute a

waiver of sovereign immunity, for purposes of 28 U.S.C. 1605(a), but

only with respect to those actions or proceedings instituted against

it in any court or other tribunal in the United States that are: (a)

based on its operations in international air transportation that,

according to the contract of carriage, include a point in the United

States as a point of origin, point of destination, or agreed

stopping place

* * * * *

DOT Order 87-8-8 (issued July 31, 1987).

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DOT has included this type of waiver of sovereign immunity clause

in its foreign air carrier licenses for several decades, and sovereign

immunity has not been raised as an issue in DOT enforcement of its

requirements against foreign government-owned air carriers. Foreign

government-owned air carriers have willingly operated under this waiver

of sovereign immunity license term, indicating that this approach for

addressing the issue of sovereign immunity has been acceptable to all

foreign governments concerned.

Based on the success of this administrative approach by another

U.S. agency, EPA is including a similar provision in the foreign

refiner final rule that is like the DOT approach, but uses regulatory

language that is somewhat different from the language used by DOT. The

regulatory language used by EPA acts to preclude a defense of sovereign

immunity for purposes of the FSIA as well as for any enforcement

actions that may be taken which may not be subject to the provisions of

the FSIA. The sole purpose and effect of the regulatory language is

limited to precluding the use of sovereign immunity as a defense to an

otherwise valid EPA or other U.S. enforcement action based on a

violation of the requirements that apply to a foreign refiner as a

result of obtaining and using an individual refinery baseline.

Under this regulatory provision, when a foreign government-owned

refiner submits a petition to EPA for an individual refinery baseline,

the baseline submission constitutes a waiver of sovereign immunity for

purposes of 28 U.S.C. 1605(a)(1) of the FSIA, e.g., for an enforcement

action based on incorrect or fraudulent submissions. In addition, when

a foreign government-owned refiner operates under an individual

refinery baseline by supplying FRGAS to the U.S., this constitutes an

additional waiver of sovereign immunity under the FSIA, e.g., for

enforcement actions based on failure to comply with the exhaust toxics

or NOX emissions requirements, failure to submit reports, or

failure to provide access to inspectors. This waiver of sovereign

immunity would also apply for any enforcement action not otherwise

subject to the FSIA.

If a foreign government-owned refiner states that it reserves the

right to or will assert a sovereign immunity defense in the context of

any EPA enforcement action for violations of the requirements under

these regulations, or in fact raises such a claim, then EPA may, in

addition to other remedies in law, take action to deny or withdraw all

individual refinery baselines that have been issued to the foreign

refiner.

3. Agent for Service of Process

a. EPA Proposal: EPA proposed that in order to obtain an individual

refinery baseline a foreign refiner would be required to name an agent

for service of process located in Washington, D.C.

b. Comments: One foreign government-owned refiner objected to the

proposed requirement to name an agent for service of process located in

Washington, D.C. as being unnecessary for a foreign government-owned

refiner. This commenter stated that the FSIA specifies procedures for

achieving service of process that do not involve a named agent. In

addition, the commenter said the requirement for an agent for service

of process should be limited to service of process in EPA enforcement

actions and should not cover service of process in non-related actions,

such as private commercial claims raised by other parties.

c. EPA's Response: EPA remains convinced that the final rule should

include a provision as proposed for all foreign refiners acting under

an individual baseline, including foreign refiners that are foreign

government-owned, to name an agent for service of process in

Washington, D.C. While it is true the FSIA includes procedures for

service of process on foreign government-owned firms, the FSIA

procedures are cumbersome at best.25 In

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addition, 28 U.S.C. 1608(b)(1) of the FSIA states that service of

process on an agency or instrumentality of a foreign government may be

by delivery of a copy of the summons and complaint in accordance with

any ``special arrangement'' for service between the plaintiff and the

agency or instrumentality of the foreign government. EPA believes a

foreign government-owned refiner naming an agent for service of

process, as proposed, would constitute a ``special arrangement'' for

service under 28 U.S.C. 1608(b)(1), and service on such an agent by EPA

would resolve any question regarding whether service has been

accomplished.

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\25\ For example, 28 U.S.C. 1608(b)(2) provides that service on

an agency or instrumentality of a foreign state must be accomplished

by delivery of copies of the summons and complaint to an officer,

general agent, or other agent authorized by appointment or law to

receive service of process in the United States, or in accordance

with applicable international conventions on service of judicial

documents; and section 1608(b)(3) provides that if service cannot be

made under section 1608(b)(2), by delivering copies of the summons

and complaint, with translations into the official language of the

foreign state, if reasonably calculated to give actual notice, as

directed by an authority of the foreign state or political

subdivision in response to a letter rogatory, by return receipt mail

from the clerk of the court to the agency or instrumentality to be

served, or as directed by the court consistent with the law of the

foreign state.

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Commenters have not described any reason why it would be difficult

or expensive for a foreign government-owned refiner to name an agent

for service of process in Washington, D.C., but only that there is an

alternative under the FSIA. EPA believes that, on balance, it is more

appropriate to require all foreign refiners seeking an individual

refinery baseline, including foreign government-owned refiners, to name

an agent for service, instead of relying on the alternative under 28

U.S.C. 1608(b) (2) and (3) of the FSIA. It will reduce the

administrative burden on EPA and will not add any significant burden on

the foreign refiner.

Finally, EPA agrees that the agent for service of process need not

be authorized to receive process from parties other than EPA or others

in the United States government, or for enforcement actions other than

those that result from a foreign refiner having petitioned for and used

an individual refinery baseline.

4. Bond Requirement

a. EPA Proposal: EPA proposed that a foreign refiner would be

required to post a bond in order to receive an individual refinery

baseline. The amount proposed for this bond would be calculated by

multiplying the annual volume of conventional gasoline exported to the

U.S. by the foreign refiner, in gallons, times $0.01. The bond amount

that applies each year would be calculated using the annual volume for

the single year that had the greatest volume among the immediately

preceding five years. EPA also proposed that the bond requirement could

be met if a bond is obtained from a third party surety agent, provided

that EPA approves the surety agreement.

b. Comments: EPA received comments on the bond proposal from two

foreign refiners who opposed requiring bonds or believed them to be

unnecessary, and from an association of domestic refiners who supported

the bond proposal.

One foreign refiner commented that although it could accept a bond

requirement, such a requirement is not necessary. This commenter also

stated that the amount proposed for the bond is too large, and that the

bond amount required for any particular foreign refiner should be

reduced over time based on the refiner's compliance record. This

commenter stated that bonds need not be for the full amount of any

possible liability, because a lesser, but significant, bond amount

would create an incentive for good conduct, which serves one purpose of

a bond. However, this commenter did not suggest any alternative bond

amount.

The other foreign refiner, who also objected to the proposed bond

requirement, interpreted the proposal as requiring that bond amounts be

calculated based on the cumulative volume of FRGAS exported to the U.S.

by a refiner over the prior five years, and stated that the bond amount

that would result raises questions under Article II and Article III of

the GATT. This commenter also stated it is aware of no surety agent who

would issue a bond to cover judgments against a foreign refiner for

Clean Air Act violations. Further, this commenter stated that EPA

should rely on penalties other than bonds, such as imposing a sanction

of prohibiting the sale in the U.S. of gasoline produced by a foreign

refiner who has violated the Clean Air Act.

The association representing certain domestic refiners commented in

support of the bond proposal, stating that posting of bonds by foreign

refiners is critical for effective enforcement.

c. EPA's Response: A bond requirement was proposed because of

concern that collecting a judgment against a refiner located outside

the United States for an enforcement action related to the requirements

of this rule is more difficult than collecting a judgment against a

domestic refiner. None of the comments refuted this basic concern. The

bond requirement has the effect of enabling EPA to collect penalties

against foreign refiners in a straightforward manner, analogous to

penalty collections against domestic refiners.

The bond amount EPA proposed, annual conventional gasoline gallons

times $0.01, was based on an estimate of the penalty that could result

if a foreign refiner violated the exhaust toxics or NOX

requirements. These requirements are met based on average conventional

gasoline quality over a calendar year averaging period, and penalty

amounts are calculated, in part, based on the volume of gasoline in

violation. As a result, it is appropriate to use a foreign refiners's

annual conventional gasoline volume as the yardstick for calculating

bond amounts. Penalty amounts also are based on the amount the exhaust

toxics and/or NOX requirements are exceeded, and for

egregious violations penalty amounts may well exceed $0.01 per gallon.

As a result, the proposed penalty amount does not cover the maximum

possible penalty. Nevertheless, EPA believes the proposed amount is

appropriate because it ensures that a penalty up to this amount may be

collected, which constitutes a significant incentive for a foreign

refiner to avoid violations.

The comments of one foreign refiner, that bond amounts would be

calculated using the foreign refiner's five year cumulative gasoline

volume, were based on an apparent misunderstanding of the bond

proposal. EPA intends that bond amounts be calculated using the annual

conventional gasoline volume for a single year, that year which has the

highest volume for the preceding five years. EPA is slightly revising

the language in the bond provision to make this intent clear. The bond

amount applicable each year is calculated using the single year, among

the past five years, when the largest volume of conventional gasoline

was exported to the U.S.

EPA's review indicates that these concerns appear to be unfounded.

Surety agents will be available to issue bonds to cover judgments for

violations of the FRGAS requirements. Representatives of two national

associations of surety agents, the Surety Association of America and

the American Surety Association, told EPA there is nothing inherent in

the FRGAS requirements that would prevent surety agents from writing

bonds for foreign refiners as contemplated. The representatives said

the proposed FRGAS bond requirement is analogous to the bonds required

by the U.S. Customs Service, which routinely are issued by third party

surety agents. These representatives concluded that foreign refiners

can locate third party surety agents who would issue bonds to

[[Page 45554]]

meet the FRGAS requirement, and that the annual fee probably wo

This text is long and has been trimmed here. Open the source document for the complete record.