# Regulation of Fuels and Fuel Additives: Baseline Requirements for Gasoline Produced by Foreign Refiners > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A97-22803 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** August 28, 1997 - **Citation:** 62 FR 45533 ## Text 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. ----------------------------------------------------------------------- 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: ------------------------------------------------------------------------ Examples of regulated Category entities ------------------------------------------------------------------------ Industry.................................. Foreign Refiners, Importers. ------------------------------------------------------------------------ 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 [[Page 45534]] 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). --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 [[Page 45535]] 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. --------------------------------------------------------------------------- \3\ Individual refinery baselines are used to set certain content requirements for RFG only through 1997. See 40 CFR 80.41. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 [[Page 45536]] 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \6\ EPA has adopted an analogous approach in the RFG program. See 40 CFR 80.41 and 80.68. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \8\ The importer may also treat as GTAB any gasoline classified as non-certified FRGAS. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \12\ This value is based on the Phase 2 Complex Model, and will be used prior to and after 2000. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \18\ Since domestic refiners have adequate data to establish an IB, this would not be consistent with the requirements of section 211(k)(8). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- \21\ Comments from DOE on EPA's May 6, 1997 NPRM, page 2. --------------------------------------------------------------------------- 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 refin [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A97-22803. Public record. Not legal advice.