Speeches/Testimony

NPRA Comments at the EPA Hearing on the Clean Air Act New Source Review Program
July 10, 2001
Cincinnati, Ohio

Thank you for the opportunity to discuss EPA's New Source Review program and its impact on refinery capacity and fuel supplies. My name is Bob Slaughter, and I am General Counsel of the National Petrochemical and Refiners Association (NPRA). NPRA members include the owners and operators of approximately 98% of U.S. refining capacity, as well as petrochemical manufacturers with processes similar to refining.

NPRA welcomes the President's decision to review the current state of the NSR program and to evaluate changes to improve its efficiency. NPRA also supports the President's Executive Orders to require an energy impact statement as part of all significant regulatory actions and to encourage expedited permitting. The NSR program, as currently interpreted, threatens current and future energy supplies. It also discourages the installation of new technology that could enhance energy efficiency and/or help produce cleaner fuels.

On June 27, NPRA and 12 of its member companies met with EPA to discuss problems with the NSR program. The companies brought along many specific examples of how the program postponed the production of cleaner fuels, prevented the implementation of energy efficiency projects, and delayed or prevented the expansion of domestic refining capacity at existing facilities. We will submit these examples for the record. We look forward to continuing to work with EPA to reform the NSR program so that it facilitates, rather than impedes, economic growth, energy supply and environmental progress.

In addition, we have reviewed EPA's preliminary background report on the NSR program, which was published on the EPA website on June 22. Although helpful in some respects, the NSR permitting timelines reflected in that study significantly understate the time required to get such a permit in the real world. We also believe that the study attempts to downplay the real effect of the current NSR program on refining investment decisions. It does this by trying to restrict NSR impacts to situations in which NSR is a sole factor; not, as in the vast majority of cases, where NSR has a very serious impact but is joined with one or more additional considerations. We will offer additional comments on the study as part of the record.

Emissions are Decreasing and the Air is Getting Cleaner

At the outset, we should remember that the refining industry has dramatically reduced its direct and indirect emissions since Clean Air Act regulation began. According to EPA's figures, between 1980 and 1996 the refining industry reduced its criteria pollutant air emissions by 74%. Congress and the EPA have required us to attain additional dramatic reductions in the next few years, largely through rulemaking activities taken under the authority of the 1990 Clean Air Act Amendments.

The refining industry's contributions to improved air quality reflect the progress made by the nation as a whole. On June 26 the EPA announced that between 1970 and 1999 total emissions of the Clean Air Act's six criteria pollutants decreased 31% at a time of considerable growth in both the economy and population. The agency attributed the improved air quality to effective implementation of clean air laws and regulations and improved efficiency of industrial technologies. Updating and improving the NSR program should be viewed in the context of this trend of improving air quality and should be considered as a way to maintain it. EPA should make all data regarding air quality improvements a part of the record during this review.

NSR Reform is Needed to Increase Energy Supply

Recently, American consumers have been concerned that supplies of gasoline and other petroleum products may not be sufficient to meet their needs. These concerns resulted from short-term supply disruptions, primarily in California and the Midwest, caused by several factors, the most significant being stress upon the fuel refining and distribution system and more stringent or different fuel specifications than in other areas.

At this moment, gasoline supply and price concerns have abated somewhat, because the refining industry produced record amounts of gasoline over the past two months in preparation for this summer's driving season. This record production was possible only because domestic refineries ran at near 99% rates of utilization for a considerable period of time. During this critical period, the industry was spared the type of unforeseeable equipment upsets in the refining and distribution system that occurred last year.

No industry can perform at near 100% rates of utilization for all or even most of the time. The manufacturing industry considers 85% utilization as full capacity. Yet the domestic refining industry has performed at greater than a 95% average rate of utilization each year since 1996. The industry has had to run at maximum levels because, while U.S. demand for petroleum products continues to rise, the number of refineries fell by one-fourth between 1990 and 2000. By adding capacity to existing sites, the industry was able to prevent a reduction in total U.S. capacity during that period. However, with rising demand, the difference was made up by increased imports of refined products.

The U.S. Energy Information Administration projects that the demand for petroleum products will increase roughly 1.4% per year during the next twenty years. Domestic refining capacity must increase to supply the fuel needed for our growing economy. We must have a flexible and efficient NSR program and permitting system to allow this capacity expansion to take place while maintaining our commitment to protect and enhance air quality. The NSR program, as currently interpreted, cannot be relied upon to facilitate this growth and, in fact, discourages environmental improvement.

NSR Reform is Needed to Produce Cleaner Fuels

The refining industry also must implement extensive new environmental regulations in the next 3 to 5 years. These include requirements for control of refinery emissions as well as for ultra low sulfur gasoline and diesel fuel. In the case of gasoline, regulations also require the reduction of selected air toxics. Also, Congress or the EPA may consider requiring the phase-down or elimination of the gasoline additive MTBE, as the states of California, New York and Connecticut are doing, necessitating further changes in gasoline production.

Refiners face tremendous logistical challenges in meeting the ambitious goals and deadlines of these important new regulations. Refiners must make many infrastructure and process changes to comply. The current state of the NSR program directly threatens the industry's ability to meet the deadlines for this suite of new regulations.

The Current NSR Program Creates Gridlock and Retards Progress

NPRA's members are greatly concerned about the current condition of the NSR/PSD program. EPA's current approach to NSR applicability makes it extremely difficult for refiners to determine when NSR permitting controls are required and leaves refiners in enforcement jeopardy unless they consider NSR for any and all operational changes. The breakdown of the NSR program results from the fact that EPA has reinterpreted the program in recent years so as to enable the Agency to allege that virtually any change a source might make requires NSR permitting and controls, even if emissions have not increased.

In creating NSR, Congress intended that facilities that significantly increase emissions, by adding new equipment or making major changes, must install the latest pollution control equipment. NSR was never intended to impose new controls on older facilities simply because of their age and/or need for routine maintenance.

The NSR Program Should Be Fixed and Flexibility Options Added

NPRA believes that the NSR program can be substantially improved by incorporating a market-based compliance alternative. This is a flexible alternative featuring a cap and trade mechanism based upon performance standards. This mechanism would allow the flexibility to make changes in a facility or to acquire credits, while ensuring there would be no net increase in emissions. Such an approach would encourage facility operators to find the most cost-efficient means of achieving emission reductions.

This flexible mechanism (similar to that already used in some states such as Texas and New Jersey) should be available as a voluntary alternative to an improved version of the current NSR program. The plant-wide applicability limit option included in the Marathon Ashland settlement is one example of this approach, but others should be considered and made available. At the same time, the current program must be reformed to clearly indicate when it is applicable and to minimize differing interpretations between EPA and state/local agencies.

Unfair Enforcement Actions Should Cease

It is time to end the environment of uncertainty and recrimination that currently surrounds the NSR program. The way to do this is by reforming the current program and by including a flexible compliance option, as suggested above. It is also necessary to bring to an end the massive investigation of this and other industries for alleged noncompliance with the existing NSR program. The decision criteria for many NSR issues are so opaque, and have changed so many times that, in our view, it is neither fair, nor just, nor sound public policy to make them the excuse for an aggressive enforcement program. We believe that this unjustified enforcement activity should cease.

NPRA's suggested approach for the program going forward could be used as a template to offer to resolve all NSR-related controversies. This option should also be offered to the four companies who have already settled with EPA, so as not to place them at a competitive disadvantage.

NPRA believes that an appropriate program must be based upon a consensus between the regulators and the regulated parties as to its objectives and operation. A strengthened program resulting from such a consensus can better achieve the nation's important public policy objectives: increased energy supplies, economic growth, and continued environmental progress. And it can do so in an atmosphere of greater trust.

NPRA's members look forward to the end of this period of NSR gridlock and will work together with EPA to achieve the improvements in this program that we have outlined.