The Clean Air Interstate Rule was signed on March 10, 2005, and will require 28 states and the District of Columbia to adopt rules that require reductions in NOx and SO2 emitted from power plants and other pollution sources. EPA determined that NOx and SO2 emissions from 23 states and the District of Columbia significantly contribute to elevated fine particulate levels in downwind PM2.5 nonattainment areas. The agency also identified 25 eastern states and the District of Columbia as contributing to ozone pollution in downwind areas that are not achieving the 8-hour national ambient air quality standard for ozone. States must achieve the required NOx and SO2 reductions by meeting a state-specific emissions budget through one of two compliance methods: (i) requiring power plants in the state to participate in an EPA-administered cap-and-trade regime that caps emissions in two phases starting with a first phase in 2009 and a second phase commencing in 2015 or (ii) meeting the budget levels through measures selected by a particular state that are approved by EPA. Assuming most states go with a cap-and-trade program, EPA models concluded that the Clean Air Interstate Rule would bring about a 53% reduction or 1.7 million ton decrease in NOx emissions from 2003 levels by 2009. By 2015, the rule is expected to reduce power plant NOx emissions by two million tons, which is a 61% reduction from 2003 levels. By 2010, the Clean Air Interstate Rule will reduce SO2 emissions by a projected 4.3 million tons, a reduction of 45% from 2003 levels, and by 2015, SO2 emissions will have been reduced by 5.4 million tons or 57% from 2003 levels in the 23 affected states. See http://www.epa.gov/CAIR/.

The rule will require reductions in mercury emissions from existing and new coal-fired power plants in a two-phased "cap-and-trade" approach starting with the first phase in 2010 and the second phase in 2018. In addition to meeting the mercury emission caps, new coal-fired power plants that commence construction on or after January 30, 2004 will have to meet new source performance standards for mercury emissions. During phase I of the mercury rule, the limit on mercury emissions from coal-fired plants is set at 38 tons annually for the entire country. EPA expects that coal-fired plants will be able to meet the phase I reductions as a co-benefit of reducing NOx and SO2 emissions as required by the Clean Air Interstate Rule. The phase 2 mercury cap is 15 tons annually. Once the mercury rule is fully implemented, EPA predicts that mercury emissions from coal-fired power plants will be reduced by almost 70% from the 1999 baseline level. The Acting EPA Administrator signed the rule on March 15, 2005. See http://www.epa.gov/mercuryrule/.

In mid-January, the U.S. Supreme Court issued a decision in Alaska Dept. of Environmental Conservation v. EPA, U.S., No. 02-658 (January 21, 2004) upholding the U.S. Environmental Protection Agency's ability to issue an administrative order under Sections 113 and 167 of the Clean Air Act prohibiting modification of a mine based on the agency's conclusion that the state-issued Prevention of Significant Deterioration (PSD) permit did not comply with the Act's "best available control technology" or BACT requirements. In a 5-4 decision, the U.S. Supreme Court upheld the U.S. Court of Appeals for the Ninth Circuit's ruling that rejected the Alaska Department of Environmental Conservation's claim that EPA lacked the authority to issue an administrative order halting the state-permitted modifications planned by the mine. The Supreme Court concluded that EPA may issue an order in situations where a state agency's permitting decision is not based on a "reasoned analysis." A link to the opinion is as follows: http://www.supremecourtus.gov/opinions/03slipopinion.html

On December 24, 2003, in New York v. EPA (No. 02-1387), the U.S. Court of Appeals for the District of Columbia granted a stay of the implementation of the U.S. Environmental Protection Agency's final rule that exempts certain equipment replacement activities under the "routine maintenance, repair, and replacement" exemption from permitting requirements under the New Source Review program. EPA's final equipment replacement rule was promulgated on October 27, 2003 and was scheduled to take effect on December 26, 2003. In granting the petitioners' request for a stay, the D.C. Circuit concluded that the petitioners "demonstrated the irreparable harm and likelihood of success on the merits required for issuance of a stay pending review."

In December 2003, the U.S. Environmental Protection Agency's announced that it would propose a new Interstate Air Quality Rule. The new transport rule is intended to regulate upwind sources that significantly contribute to fine particulate and ozone pollution in downwind states. The rule is expected to focus on major sources in twenty-nine states and the District of Columbia that significantly contribute to fine particulate and ozone pollution in the eastern United States. The rule calls for a reduction in SO2 emissions from power plants by 3.6 million tons by 2010, approximately a 40 percent decrease from current levels, and a further cut of 2.0 million tons by 2015 for a total reduction of about 70 percent from current SO2 levels. Under the proposed transport rule, NOx emissions would be reduced by 1.5 million tons by 2010, and an additional cut of 1.8 million tons would be required by 2015 for a total NOx reduction of about 65 percent from today's levels. Under the new transport rule the SO2 and NOx emissions would be permanently capped and could not increase in the affected states. A final rule is expected to be issued in 2005. See http://www.epa.gov/interstateairquality/

On December 15, 2003, the U.S. Environmental Protection Agency's proposed alternative approaches to regulate mercury and nickel emissions from coal and oil-fired electric generating facilities. The proposed Utility Mercury Reductions Rule seeks comments on two approaches for reducing the estimated 48 tons of mercury currently emitted each year by coal-burning power plants in the United States. One approach would require coal-fired power plants to install pollution controls to achieve "maximum achievable control technology" (MACT) standards issued pursuant to section 112 of the Clean Air Act. If implemented, this proposal would reduce nationwide emissions of mercury to approximately 34 tons (29 percent reduction) by the end of 2007. The second approach would set a mandatory, declining cap on the total mercury emissions allowed from coal-burning power plants nationwide. Emissions trading is a key component of the second approach, and EPA predicts that mercury emissions would be reduced by nearly 70 percent from current levels once facilities comply with the final mercury emissions cap which takes effect in 2018. See http://www.epa.gov/mercury/.

On August 27, 2003, the U.S. Environmental Protection Agency finalized changes to the definition of "equipment replacement" under the New Source Review Program. Under the final rule, an equipment replacement activity will be excluded from New Source Review permitting requirements if (i) it involves replacement of any existing components of a process unit with an identical and functionally equivalent component; (ii) the fixed capital cost of replacement component plus any related repair and maintenance activities does not exceed 20 percent of the replacement value of the entire process unit; (iii) the replacement equipment does not change the basic design parameters of the process unit; and (iv) the replacement equipment does not cause the process unit to exceed any applicable emission limits. A fact sheet on the rule and a copy of the text of the rule may be downloaded from EPA's website at www.epa.gov/nsr.

EPA released a final rule to reform several provisions of the "new source review," or "NSR" air permitting program. The final rule was published in the Federal Register on December 31, 2002 (67 Fed. Reg. 80186). The EPA final rule will implement some important changes in the program, and includes five key components.

• Baseline Actual Emissions - Non-power plant sources will calculate pre-change emissions based on a "baseline" period of any consecutive 24-month period in the past 10 years. The current policy applicable to power plants - a baseline period of a consecutive 24-month period in the past 5 years - would be codified.
• "Emission increases" Calculation - EPA's rule for calculating emission increases for power plants that have begun normal operations (i.e., comparing past actual emissions to projected future actual emissions) will be applicable to other industrial facilities.
• Plantwide Applicability Limits or PALs - Sources that keep their emissions below a plant wide cap would be able to make operational changes and equipment modifications without undergoing a major source NSR permitting process. A PAL would generally be effective for ten years.
• Clean Unit Exemption - Plants that have recently installed state-of-the-art pollution control technology on new or modified emission units as part of an NSR or similar state permitting process would be provided with operational flexibility to make certain future changes without trigging additional NSR permitting for a ten year period.
• Pollution Control Projects - EPA will codify its policy of excluding pollution control and prevention projects from NSR permitting review where such projects result in a net beneficial impact on the environment. The final rule contains a presumptive list of technologies that will automatically qualify for the exclusion.

In addition to the above reforms in the final rule, EPA proposed a separate rule that is intended to define what qualifies as exempt "routine maintenance, repair and replacement." The proposed rule was also published in the Federal Register on December 31, 2002 (67 Fed. Reg. 80290). Comments are due on or before March 3, 2003. The EPA proposal sets out a range of options for two types of qualifying categories of "routine maintenance, repair, and replacement." These categories include:

• Annual Maintenance, Repair and Replacement Allowance - An industry specific cost allowance would be established, and certain types of activities which fall under the allowance cap would qualify for the exemption.
• Equipment Replacement Approach - Most projects involving the replacement of existing equipment with functionally equivalent new equipment would qualify for the exemption.

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