Is the EPA Sandbagging Business?

Billions are at stake in a switch in clean-air enforcement that the White House will review

In the waning years of the Clinton Administration, the Environmental Protection Agency surprised eight big utilities by declaring that previously ignored plant modifications violated the Clean Air Act. Working with the EPA, the Justice Dept. and several Northeastern states eager to cut pollution levels sued for billions of dollars in penalties. Now, in the face of an impending energy crisis--and with friends in high places--those utilities that did not settle or that reached tentative settlements with the EPA are hoping that a review by the Bush White House may make the agency back off.

That has ignited a debate that reaches far beyond utilities and refiners, affecting businesses from paper mills to chipmakers. Industry says that unless the EPA changes its strict interpretation of the rules, innovation and efficiency in power plants and factories will remain stalled. Even before the November election, utilities and others have been pushing for a new approach to regulating air pollution to end this impasse. The basic idea: Instead of requiring companies to install costly pollution controls when they make "significant modifications" to their facilities--a hard-to-define criterion--regulators would set general emissions-reduction goals and give industry flexibility to meet them. The current rules have "been very, very destructive as far as what changes manufacturers feel they can make to their facilities," says Jeffrey Marks, director of air quality at the National Association of Manufacturers. "It is very important to establish more simplicity to a process that has gotten out of control."

To environmentalists and many at the EPA, these companies have been skirting the law, making America's air dirtier than it has to be. To the companies, the EPA gave them a green light and then handed them a traffic ticket.

Case in point: Virginia Power. In 1988, the utility needed to make some repairs to its coal-fired plant in northeastern West Virginia. A crucial bundle of tubes used to generate steam at one of the plant's three units was about to wear out. Virginia Power, a unit of energy giant Dominion Resources Inc. in Richmond, Va., says it checked with the EPA to ensure such changes were in compliance with the law. "We were sure they were O.K. because they were routine maintenance," says James L. Sanderlin, Dominion's chief counsel.

Fast-forward to summer, 2000. A full 12 years after Virginia Power made the change, the EPA told the company it was in violation of the Clean Air Act. The modifications at the aptly named Mount Storm Power Station were so extensive, the EPA said, that the company should have applied for a Clean Air permit--and, more important, spent big bucks to cut emissions.

At the center of the Virginia Power case and the entire debate is a seemingly arcane provision of the Clean Air Act known as "new source review," which requires companies to get a permit from the EPA and typically meet strict emissions standards when they make a "significant modification" to an existing plant. Trouble is, what constitutes a "significant modification" is not clearly defined. Until the late 1990s, the EPA took a conservative approach, routinely ignoring the replacing of pipes and other equipment in power plants.

UNDER THE RADAR? But EPA regulators came to believe that America's air wasn't getting clean fast enough. In a 1997 memo, the agency laid out a new strategy to "aggressively pursue" emissions reductions. The problem, the memo said, was that the utility industry "has largely avoided installing costly pollution controls Thirty-year-old plants are operating longeryet few (if any) have ever admitted to `modifications."' The result: The agency charged that utilities had broken the law by making major changes without also making the emissions reductions required under the new source-review provisions--and filed the 1999 lawsuits.

Environmentalists argue that bringing scores of older plants--those grandfathered under the Clean Air Act--into compliance with a strict interpretation of the new source review rules would improve public health. According to a study released last fall by the Boston-based Clean Air Task Force, pollution from U.S. power plants causes some 30,000 premature deaths a year. While overall emissions have been reduced since the 1970s, "so much more needs to be done," says Peter W. Iwanowicz, director of environmental health at the American Lung Association of New York. Indeed, a Harvard University study released in January showed that applying modern emissions rules to seven old coal-fired plants owned by Midwest Generation would reduce the 300 deaths associated with the plants each year by two-thirds.

To industry, however, the use of the new source-review provision to try to knock down air pollution is a misinterpretation of the law. And it's forcing companies in a whole range of industries to delay improvements. "Historically, the regulations were interpreted in a common-sense manner," says Thomas R. Kuhn, president of Edison Electric Institute, a Washington lobbying group for electric utilities. "Then there was a whole new interpretation that pulled the rug out from under the utilities."

In the face of this legal onslaught, there have been settlements, though not all have been finalized. Dominion reached a tentative pact with the EPA and the attorneys general of several Northeastern states for $1.2 billion last November. Likewise, Cinergy Corp. in Cincinnati has yet to finalize the $1.4 billion settlement it reached last December. Industry lawyers insist this doesn't mean they are guilty as charged. For example, attorneys say, Dominion was going to make most of the improvements agreed to anyway, to meet other provisions of the Clean Air Act.

Now that the Administration has agreed to review the issue, the action shifts to the White House. Environmentalists are worried that the industry-friendly Bush Administration will interpret new source review in a way that helps utilities and doesn't improve air quality. They also worry that the review of existing cases by the Attorney General will lead the feds to back away from enforcement actions against the utilities. "It's injecting politics into the legal process," argues David G. Hawkins, director of the climate center at the Natural Resources Defense Council. "There could be a huge weakening of the Clean Air Act if the Bush Administration were to reverse course."

But even EPA veterans think the old system needs to be replaced. Deciding whether or not a change in a plant triggers the source-review rules "is a game of trying to beat or stretch a definition," says Robert Perciasepe, who was assistant administrator of the EPA's Office of Air & Radiation under Clinton. "In the long haul, this isn't good for either business or the environment."

There may be a better way. An idea being floated both by industry and members of Congress is to set emission limits for a whole industry and give each company the flexibility to meet them in the best possible way. Two bills have already been introduced, and more are expected this summer. In mid-March, for instance, a bipartisan group of lawmakers--including the new Independent, Senator James Jeffords of Vermont--introduced a bill that would mandate reductions of key pollutants such as nitrogen oxides, mercury, and sulphur dioxide. Rather than require that every plant install the best available emissions controls, industry would be able to meet the limits in a variety of ways, from installing scrubbers to trading for the right to emit pollution. Such a change could break the impasse over older plants, help business, and clean up the air at the same time.

By Laura Cohn, with John Carey, in Washington, and with Ann Therese Palmer in Chicago

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