EPA Process Vs. Texas Results--Flexible Permits: Understanding The Dispute Between The World's Two Largest Environmental Agencies

EPA Process vs. Texas Results


Flexible Permits: Understanding the Dispute Between

the World’s Two Largest Environmental Agencies
 
 
by Kathleen Hartnett


White

Distinguished Senior

Fellow-in-Residence &

Director, Armstrong Center

for Energy & Environment
 
 
Introduction


On June 15, 2010, the U.S. Environmental Protection

Agency (EPA) ruled that the Texas Flexible

Permit Program (FPP) does not comply with

federal law.1 Th is decision to reject and nominally

federalize a major Texas air quality permitting

program occurs at a perplexing juncture.

See Sidebar.

Over the last decade, as the Texas population

grew by over 4 million people and the state

economy grew by a rate of 40 percent, Texas air

quality dramatically improved—thanks in large

part to the FPP. Th e Houston region, in years

past vying with Los Angeles as the most ozonepolluted

part of the country, reduced ozone levels

from 119 parts per billion (ppb) in 1999 to

84 ppb in 2009. Th e home of the nation’s largest

petrochemical industrial complex, Houston,

TX, met the still legally binding 85 ppb federal

ozone standard.2
 
In spite of the evidence that it is working, EPA


decided that the Texas Flexible Permitting Program

violates the Federal Clean Air Act (CAA).

Th rough this action, EPA is rejecting a state

regulatory program that is key to the air quality

improvement in Texas over the last 10 years.

Th e Texas FPP is an optional performancebased

permitting regime. Th e permit sets strict

emission caps for each facility and allows some

fl exibility to operate under the caps. By contrast,

the traditional federal permitting regimes

require emission limits on individual pieces of

equipment and prescribe methods to reduce

emissions. EPA claims the Texas FPP “hides”

emissions, shields industrial facilities from

more stringent federal requirements and lacks

enforceability.
 
Th is disagreement between the world’s two


largest environmental agencies is technical in

nature, but it has high stakes for the Texas environment

and economy. EPA’s invalidation of the

Texas FPP leaves hundreds of Texas businesses

without a solid legal authorization to operate,

putting thousands of jobs at risk. Th e regulatory

resolution for this legal limbo, however, EPA has

yet to spell out.

• Will EPA take over the issuance of new

‘non-fl exible‘ permits? Or will TCEQ retain

its delegated authority to issue and enforce

the federal permits?

• Will EPA accept TCEQ’s proposed changes

to the FPP? Or will EPA reject the fl exible

approach and demand new, command and

control permits, the administrative process

for which can take two to three years?

• Will EPA allow current fl exible permit

holders to operate under provisional state

permits? Or will EPA enforce against industries

with fl exible permits?

• Will EPA try to fast-track regulation of carbon

dioxide into these permits under its

self-proclaimed new authority to regulate

greenhouse gases?
 
Will the federal courts hold that the Texas


FPP complies with the CAA and that EPA

arbitrarily and capriciously exceeded its authority

in violation of the Administrative

Procedures Act ?
 
SIDEBAR: Flexible Permitting Results


Texas has become a national leader in eff ective and innovative environmental programs. From 2000-08, Texas lowered nitrous oxides

(NOx) levels by 46 percent and ozone levels by 22 percent. Over the same period, national NOx levels fell by only 27 percent and

ozone levels declined by only 8 percent. Stationary sources in the Houston area decreased ozone-forming NOx emissions from 650

tons per day in 1993 to 156 tons per day in 2008. All major urban areas in Texas currently meet the federal eight-hour ozone standard

of 85 ppb, with the exception of the Dallas-Fort Worth area (DFW) at only 1 ppb above the limit. DFW, however, reduced ozone levels

from 96 ppb in 2006 to 86 ppb in 2009, a remarkable improvement.

Houston also decreased highly reactive volatile organic compounds (HRVOCs) by 50 percent. In 2008, all benzene monitors in and

around Houston measured levels below the long-term level for healthy air. According to EPA’s acid rain data base, the NOx emission

rate at Texas power plants is 38 percent less than the national average. Texas attains the national Ambient Air Quality Standards for

nitrogen dioxide, sulfur dioxide and carbon monoxide.3

Stringent, innovative, and targeted controls along with voluntary eff orts based on cutting-edge science drove these improvements

in Texas air quality. Thousands of Texans worked on this eff ort. The Governor, the Texas Legislature, TCEQ, EPA, local governments,

industry, business, private organizations, and individual Texans rolled up their sleeves and cleaned the air of Texas.

The Texas Flexible Permitting Program signifi cantly contributed to the dramatic improvement in air quality, particularly in the Houston

region. Coal and petroleum coke-fi red power plants with fl exible permits have decreased sulfur dioxide (SOx) by 25,803 tons per year

(tpy) and NOx by 10,330 tpy and particulate matter by 795 tpy. For refi neries, fl exible permits decreased SOx by 3.9 tpy, NOx by 15,844

tpy and volatile organic compounds by 920 tpy.4
 
“Regulatory uncertainty is the enemy of economic development,”


said one senior executive for the largest refi nery company

in Texas recently. “If you can’t estimate the value of a

project, you don’t make the investment.”5

Core of the Issue

As a performance-based regulation, Texas fl exible permits

put the priority on “what;” i.e., the bottom-line environmental

results. Under the emission caps, the operator of a complex

industrial facility may choose how most effi ciently to achieve

the environmental mandates. EPA’s quarrel with the Texas

FPP puts more priority on “how”—how the permit details every

mandate and how legal compliance is proved. Although

EPA has yet to conclude what will make the FPP legally acceptable,

EPA apparently wants TCEQ to impose more prescriptive

dictates for individual pieces of equipment instead

of facility-wide emission caps.

Federal and State Authorities—

Confl icting or Cooperating?

Th e legal relation between EPA and TCEQ involves overlapping

authorities. EPA’s rejection of the state’s FPP relies on

an EPA power to approve all state rules relevant to the State

Implementation Plans (SIP). Yet EPA, acting under SIP authority,

is superseding the state authority otherwise federally

delegated to TCEQ. Th e federal Clean Air Act (CAA), Federal

New Source Review (FNSR) permitting rules, federal Title V

operating permits rules, Texas State Implementation Plans for

Ozone, and the Texas Clean Air Act are all interwoven in the

current dispute
 
Th e federal CAA sets out diff erent roles for the federal and


state governments. Once characterized as an example of cooperative

federalism, the CAA directs EPA to establish standards

and gives states discretion to establish the path to attain

them. In an early iteration of the federal CAA, Congress found

“that prevention and control of air pollution at its source is the

primary responsibility of the States and local government.”6

Subsequent amendments increased EPA’s oversight authority

over state decisions, but always re-affi rmed the state’s role in

implementing federal dictates.

For decades, EPA and TCEQ have predominantly cooperated

as partners. In recent years, however, EPA has assumed

a more heavy-handed and adversarial role, treating the state

agency more as an instrument of the federal government than
 
as a partner. TCEQ has long been in discussions with EPA


about federal approval of the FPP. But, in 2007, instead of acting

on the FPP rules, EPA sent letters to all fl exible permit

holders in Texas, implying their fl exible permits were not federally

valid.

Faced with uncertainty about the legal status of their permits,

a business group fi led suit in 2008 to compel EPA to make a

fi nal decision on the FPP as well as 30 other state rules which

EPA had suspended in legal limbo for years.7 Federal law requires

EPA’s fi nal decisions on these SIP related state rules

within 18 months of the state’s submission. EPA’s decisions

were over 10 years late for many of the 30 state rules in question.

In a settlement of the litigation, EPA agreed to a schedule

for fi nal action through a Consent Decree issued by a federal

court in Dallas.8

Th is lawsuit heightened TCEQ’s negotiations with EPA about

the state’s FPP. To accommodate EPA’s concerns, TCEQ proposed

revisions to the rules in question on May 28, 2010.9

Acting on the timetable in the Consent Decree, EPA, however,

issued its fi nal rule disapproving the Texas FPP. EPA’s

invalidation of the state rules acknowledged but gave no consideration

to TCEQ’s proposed rule changes.10
 
On July 23, 2010, Attorney General Greg Abbott challenged


EPA’s disapproval in a Petition for Review before the U.S. Court

of Appeals for the Fift h Circuit.11 TCEQ continues negotiating

with EPA to resolve this dispute. In addition to changes in

the FPP rules, TCEQ has proposed an alternative permitting

mechanism to “de-fl ex” the current fl exible permits—intended

as a quick means of putting the many businesses with fl exible

permits back into compliance. In the meantime, EPA has

created a cloud of regulatory uncertainty that can only reduce

business activity, weaken the state’s economy, and eliminate

jobs.12

Impact on Texas

Th e full consequences of EPA’s action are still unclear.

EPA’s fi nal disapproval, however, apparently suspends

the permitting authority delegated to the state by EPA.

In addition, EPA has asserted federal control over several

fl exible permits and threatened enforcement against over 120

entities operating under state fl exible permits. Th ese permits

cover most refi neries, chemical plants, large manufacturing

plants and some power plants, a large portion of the Texas

industrial base. Th ousands of Texas jobs fl ow from these
 
Although the dispute is between


EPA and TCEQ about rule language,

EPA now considers the hundreds of

facilities, although in full compliance

with state rules, to be in violation of

the federal Clean Air Act and subject

to enforcement if EPA so chooses.
 
industries. Among the many businesses left hanging are the


new $6.5 billion Motiva Refi nery in Port Arthur and Total’s $3

billion investment in a refi nery expansion. As a result of EPA’s

action, the predictable regulatory system that business needs

to remain effi cient and competitive is now fractured.

Although the dispute is between EPA and TCEQ about rule

language, EPA now considers the hundreds of facilities, although

in full compliance with state rules, to be in violation of

the federal Clean Air Act and subject to enforcement if EPA

so chooses. Even before fi nal invalidation of the TCEQ rules

in late June, EPA brandished the coercive club of enforcement

authority. EPA proposed in the Federal Register an Audit

Program for Texas Flexible Permit Holders accompanied by

a Consent Agreement and Final Order; i.e., an enforcement

decree. Labeled as voluntary, the audit agreement to allow

continued operation “is not subject to negotiation,” requires

an admission of violating federal law, and mandates payment

for a “community project,” none of which is required by federal

law.13

The Texas Flexible Permit Program

In 1994, EPA delegated air quality permitting authority under

the CAA to the Texas Natural Resource Commission

(TNRCC), the predecessor agency of the TCEQ. Th e agency

then developed the Flexible Permitting Program to encourage

grandfathered facilities to adopt emission controls not otherwise

legally required. Th e rules were designed to allow some

operational fl exibility under an enforceable emission cap

instead of individual limits on individual emission sources.

Although EPA was required to approve—or disapprove—

TCEQ’s rule within 18 months aft er the state’s submission,

EPA did not respond until the June 30, 2010 disapproval.

Over those 16 years, the state issued over 120 fl exible permits

with no formal EPA opposition. As result, Texas, unlike many

other states, no longer has any grandfathered facilities under

the federal CAA.

Th e distinguishing feature of the Texas FPP is the use of pollutant-

specifi c emission caps in contrast to emission limits

for individual pieces of equipment as required in traditional

federal New Source Review (NSR) permitting programs such

as Prevention of Signifi cant Deterioration (PSD) and New

Source Non-Attainment Review (NNSR) permits. In Texas

Flexible Permits, the emission caps are established according

to Best Available Control Technology (BACT) limits for all

facilities contributing to the cap and use worst case scenarios

to calculate the caps.14

Stricter than federal rules, the Texas FPP requires BACT

emission controls even on minor (smaller) sources of emissions.

Emission caps are set for specifi c emission categories,

typically for federal criteria pollutants and Volatile Organic

Compounds (VOCs). Individual emission limits for specifi c

pollutants, such as toxics, may also be applied.

Th e ”fl exibility” in the Texas permits extends to control technology

and operation. Control fl exibility means the permit

holders may “over control” one facility by going beyond

BACT established emission caps “in order not to add additional

controls at another facility, provided that the net sum

of emissions is at least as stringent as BACT being applied to

each existing facility.”15 Operational fl exibility is allowed “to

the extent that a permit holder may vary throughput rates,

charge rates, fi ring rates, etc., as long as control requirements


are met and compliance with emission caps and/or individual

emission limits is maintained.”16

EPA Concerns

EPA’s concerns revolve around two primary issues: federal

applicability and federal enforceability. EPA claims the Texas

fl exible permits likely conceal the full volume of pollutants at

issue and thus shield the business from more onerous federal

requirements. EPA also maintains that the permit terms are

not detailed enough to prove compliance. TCEQ’s extensive

responses to EPA explain how the state rules, indeed, prevent

the fl exible permit holder from circumventing federal (NSR)

rules and establish enforceability.17 In truly cooperative federal-

state programs, a measure of mutual trust is necessary
 
Later amendments to the original CAA diminished the basis


for federal trust of state decisions. As David Schoenbrod, former

senior litigator for the Natural Resources Defense Council

and current professor at the New York Law School, has

observed, “Th e EPA is built on the premise that no one below

it in the chain of command, including state and local government,

can be trusted.”18

Under the Texas FPP, when a permit application for new emission

source or an amendment to an existing permit triggers

additional federal requirements because of emission volumes,

pollutant type or location in a non-attainment area, TCEQ

imposes all the federal requirements. As an example, one of

the facilities whose fl exible permit was recently federalized by

EPA had its emission cap for NOx, over time, lowered 90 percent

from when the fi rst emission cap was set in 1994. If the

analysis triggers more stringent limits, such as for federal PSD

or NNSR (non-attainment review) requirements, the tighter

limits, such as Lowest Available Emission Rate (LAER), are

plugged into the emission cap and off sets are stipulated. TCEQ

consolidates the state fl exible permit and the federal NSR permit

into one document with diff erent permit numbers. Nothing

in the CAA prohibits this use of emission caps.

TCEQ’s rules require fl exible permit holders to conduct monitoring

and record-keeping suffi cient to assure compliance.

Special conditions stipulate the methods to verify compliance.

TCEQ requires the same methods used in traditional

federal permits: compliance stack testing, periodic stack testing,

continuous emissions monitoring and other parametric

monitoring, as well as and record keeping. Because of the

wide variety of industries authorized under fl exible permits

in Texas, the TCEQ may tailor the compliance requirements

to the specifi c facility, process and equipment involved. One

size has never fi t all in Texas! EPA, however, tends to view

site-specifi c variation with suspicion.

EPA’s Previous Support for

Federal Flexible Air Permits

Oddly, EPA headquarters has for years supported fl exible

permitting schemes conceptually identical to the Texas program.

Since the milestone amendments to the CAA in 1990, EPA

has promoted the environmental benefi ts of emission caps.

When EPA promulgated rules for the new Title V of the CAA

in 1990, EPA required states to create permitting programs

that allow operational fl exibility.19 “It is possible to use …

these regulations to allow for operational fl exibility around

federally enforceable emission limits or caps.”20

Even before Texas developed the FPP in 1994, EPA carried out

a study on the eff ectiveness of regulating under emission caps

versus individual emission limits. “Regulators had set limits on

the amounts of pollution that could come out of each of [the

refi nery’s] many smokestacks, pipes, and vents and, further,

prescribed the methods to be used to achieve those limits. Researchers

asked the refi nery managers whether, if freed from

these highly particular instructions, they could achieve similar

environmental results more economically.”21 Th e refi nery

proved that it could get 97 percent of EPA’s required emission

reductions when it chose the methods of control and at 25

percent of the cost of EPA’s detailed approach. “Th ese savings

could be achieved if a facility-wide release reduction target

[emission cap] existed […] if regulations did not prescribe

the methods to use, and if facility operators could determine

the best approach to reach that target.”22

EPA introduced a federal Plant-Wide Applicability Limit

(PAL) permitting mechanism similar to the Texas FPP in

1996, described as “an emissions cap or an emissions budget,

an annual emissions limit that allows managers to make almost

any change anytime as long as the plant’s emissions do

not exceed the cap.”23 In a subsequent rule making, EPA again

underlined the benefi ts of emission caps. “Overall, we found

signifi cant environmental benefi ts [….] We found that in a

cap-based program, sources strive to create enough headroom

[under the emission cap] for future expansions by voluntarily


controlling the emissions.”24 And as recently as October 2009,

EPA promulgated rules for federal Flexible Air Permitting

(FAP). “Th e purpose of this rulemaking is to clarify and reaffi

rm opportunities within the existing regulatory framework

to encourage the wider use of the FAP approaches.”25

Why has EPA invalidated the Texas Flexible Permitting Program,

taken over several major facilities’ permits, and threatened

enforcement against more than 100 major Texas businesses

in full compliance with their Flexible Permits? If Texas

air quality were declining, EPA’s actions might be warranted.

Measured levels at the many Texas air quality monitors, however,

demonstrate the success of the state’s air quality programs
 
The large capital investments and


advanced planning necessitated

in complex industries cannot

long operate in a capricious legal

climate or one that not only

dictates what environmental

standard business must meet but

also how business must operate
 
Most of the fl exible permits are held by large industrial facilities


in the Houston region where the greatest air quality

improvement has occurred. Why is EPA not applauding

Texas as an example for other states lagging far behind the

environmental record of this state? Th e confl ict between EPA

and TCEQ about permit terms is absorbing resources more

prudently focused on actual environmental improvement.

Federal law, however, gives EPA broad authority to trump

state authorities—if EPA elects to fully use the federal club.

As Schoenbrod observes, “EPA talks fl exibility but generally

practices rigidity.”26

Over the last four decades, the scope of EPA’s regulatory authority

has steadily increased to the point where regulation

of environmental impact is tantamount to regulation of basic

economic activity. A federal air quality permit may directly

control only emissions but indirectly controls what is produced

and how it is produced. In the words of one founding

trustee of the Environmental Defense Fund whose view

of EPA has changed over the years: the EPA’s regulation “has

grown to the point where it amounts to nothing less than a

massive eff ort at Soviet-style planning of the economy in order

to achieve environmental goals.”27

Rule of Law

Th e protracted disagreement between EPA and TCEQ about

air quality rules may seem an idle dispute. EPA actions, however,

jeopardize the economic vigor, environmental improvement,

and stable regulatory climate Texas has achieved over

the last decade. Th e stakes are high. EPA’s actions have ruptured

the stability of the regulatory system and the constitutional

due process guarantees that have long distinguished

federal regulation in the U.S. from governmental actions typical

of autocratically-ruled countries.

To plan and thus prosper, business depends upon a predictable

legal system in which to operate. When environmental

regulations and permits no longer secure clear and reliable

obligations, legal uncertainties freeze business decisions. Industries

then relocate to more stable legal environments in

which to operate. Th e large capital investments and advanced

planning necessitated in complex industries cannot long operate

in a capricious legal climate or one that not only dictates

what environmental standard business must meet but also

how business must operate. Th e heretofore reasonable regulatory

climate is a major reason why the U.S., and particularly

Texas, has attracted and kept more successful businesses than

countries like Venezuela and states like California. Th e issue

is not primarily how stringent are the rules but how reliable

the rules and regulatory process will remain.

It is vital that Texas retain the state air quality permitting

authority through the “cooperative federalism” originally

intended by the CAA. Texas authority will provide greater

environmental accountability. Local knowledge matters. Th e

state, through TCEQ, is closer to the regulated entity and the

communities in which businesses operate. TCEQ staff has

hands-on knowledge of the regulated entities, and a far more

practical understanding of real world eff ects, than distant

bureaucrats in Washington, D.C. Texans care deeply about

healthy air quality and a healthy economy. Measured, ongoing

environmental results in Texas must trump process and


paper control by an EPA turned adversarial.􀃕
 
Endnotes


1 EPA, Approval and Promulgation of Implementation Plans; Texas; Revisions to the New Source Review (NSR) State Implementation Plan (SIP); Flexible

Permits; Final Rule, 75 Fed. Reg. 41,312 (July 15, 2010) Docket ID No. EPA-R06-OAR-2005-TX-0032.

2 Comments attachment from Texas Commission on Environmental Quality on EPA proposed rulemaking, Approval and Promulgation of Implementation

Plans; Texas; Revisions to the New Source Review (NSR) State Implementation Plan (SIP); Flexible Permits, 74 Fed. Reg. 48,480 (Sept. 23,

2009) Docket ID No. EPA-R06-OAR-2005-TX-0032.

3 Susana Hildebrand, TCEQ Chief Engineer, Update of Air Quality in Texas (presented at Oct. 29, 2009 Commission Work Session) http://www.tceq.

com.

4 TCEQ, supra note 2.

5 Valero Energy Corporation Vice President Rich Walsh, Oral Testimony to the Texas Senate Natural Resources Committee, August 18, 2010.

6 42 U.S.C.S. § 7401. (For original language on “primary responsibility of States and local governments” see “Amendments—1990—Subsec. (a)(3)” in

the annotations to §7401).

7 Complaint, BCCA Appeal Group v. EPA, No. 3-08CV1491-G (N.D. Texas 2008). A large group of businesses fi led a citizen’s suit under the CAA to

compel EPA to perform a non-discretionary duty to take fi nal action on the over thirty state rules requiring EPA approval. The CAA dictates that EPA

must take fi nal action on the state rules within 18 months after the state submits the rules for EPA consideration. Many of the state rules at issue

had been pending before EPA for over a decade.

8 Consent Decree, BCCA Appeal Group v. EPA, No. 3-08CV1491-G (N.D. Texas 2008).

9 TCEQ, Flexible Permit Program Revisions, 2010-007-116-PR (June 16, 2010) http://www.tceq.state.tx.us/rules/prop.html.

10 Supra Note 3. EPA could have delayed fi nal disapproval of the FPP and given full consideration to TCEQ’s changes to the fl exible permit rules.

The Consent Decree explicitly provides for modifi cation of the stipulated schedule: “Any motion to modify the schedule established in this Consent

Decree may be accompanied by a motion for expedited consideration. Neither Party to the Decree shall oppose such a motion for expedited

consideration.“

11 Petition for Review, Texas v. EPA, No. ___ (5th Cir. July 23, 2010).

12 Letter from Bryan Shaw, Chairman, TCEQ, to Alfredo Armendáriz, Regional Administrator, EPA (Aug 9, 2010).

13 EPA, Audit Program for Texas Flexible Permit Holders, 75 Fed. Reg. 34,445 (June 17, 2010).

14 30 Tex. Admin. Code §§ 116.710 et seq. (2010).

15 TCEQ, supra note 2.

16 Ibid.

17 Ibid.

18 David Schoenbrod, Saving our Environment from Washington, 64 (Yale 2005).

19 40 C.F.R. § 70.4 (b)(12)(iii).

20 57 Fed. Reg. 32,250 at 32, 627 (July 21, 1992).
 
21 Schoenbrod, supra, p. 183, quoting, Howard Klee, Jr. and Mahesh Podar, Amoco/USEPA Emission Prevention Project: Executive Summary (Amoco


& EPA, May 1920, at v).

22 Ibid.

23 61 Fed. Reg. 38,250 at 38,251 (July 23, 1996).

24 67 Fed. Reg. 80,186 at 20,027 (Dec. 31, 2002).

25 75 Fed. Reg. 51,418 (Oct. 6, 2009).

26 Schoenbrod, supra, p.184.

27 Richard B. Stewart, Controlling Environmental Risks through Incentives, 13 Columbia Journal of Environmental Law 153, 154. (1988).
 
About the Author


Kathleen Hartnett White joined the Texas Public Policy Foundation in January 2008. She is a

Distinguished Senior Fellow-in-Residence and Director of the Armstrong Center for Energy & the

Environment. Prior to joining the Foundation, White served a six-year term as Chairman and Commissioner

of the Texas Commission on Environmental Quality (TCEQ). With regulatory jurisdiction over air quality,

water quality, water rights & utilities, storage and disposal of waste, TCEQ’s staff of 3000, annual budget of

over $600 million and 16 regional offi ces make it the second largest environmental regulatory agency in

the world after the U.S. Environmental Protection Agency.

Prior to Governor Rick Perry’s appointment of White to the TCEQ in 2001, she served as then Governor

George Bush appointee to the Texas Water Development Board where she sat until appointed to TCEQ.

She also served on the Texas Economic Development Commission and the Environmental Flows Study

Commission. A writer and consultant on environmental laws, free market natural resource policy, private

property rights, and ranching history, White received her bachelor cum laude and master degrees from

Stanford University where for three years she held the Elizabeth Wheeler Lyman Scholarship for an

Outstanding Woman in the Humanities. She was also awarded a Danforth National Fellowship for doctoral

work at Princeton University in Comparative Religion and there won the Jonathan Edwards Award for

Academic Excellence. She also studied law under a Lineberry Foundation Fellowship at Tech University
 
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