September 9, 1988 Applicability of Prevention of Significant Deterioration (PSD) and New Source Performance Standards (NSPS) Requirements to the Wisconsin Electric Power Company (WEPCO) Port Washington Life Extension Project 4.37

4.37

MEMORANDUM

DATE: September 9, 1988

SUBJECT: Applicability of Prevention of Significant Deterioration (PSD) and New Source Performance Standards (NSPS) Requirements to the Wisconsin Electric Power Company (WEPCO) Port Washington Life Extension Project

FROM: Don R. Clay, Acting Assistant Administrator for Air and Radiation (ANR-443)

TO: David A. Kee, Director
Air and Radiation Division, Region V

This is in further response to your March 25, 1988 memorandum requesting guidance on PSD applicability regarding the proposed renovation of the Port Washington Power Plant by the WEPCO. I have also addressed the question whether the renovations proposed for this facility would subject the individual units to Subpart Da of the NSPS.

Based on the information presented in your memorandum, subsequent written information received from WEPCO, information provided by the State of Wisconsin, and other information contained in the Environmental Protection Agency's (EPA's) files on this matter, I have concluded that, as proposed, this renovation project would not come within the PSD and NSPS exclusions for routine maintenance, repair, and replacement, nor the exclusions for increases in production rate or hours of operation. It also appears that the project would increase emissions within the meaning of these two programs. Thus, the renovation project likely would be subject to PSD review as a major modification of an existing stationary source and that the renovations proposed for units 1-5 at this facility probably would subject the individual units to Subpart Da of the NSPS as a modification. However, WEPCO has not yet requested EPA to make an applicability determination. In any case, it would not be possible to make final applicability determinations at this point, for three basic reasons.

First, EPA must be supplied sufficient data regarding the various pollutants emitted by the Port Washington facilities to determine, on a pollutant-specific basis, how the proposed renovations would affect emissions levels. Second, WEPCO might avoid both PSD and NSPS applicability by adding or enhancing pollution control equipment, or in the case of PSD, restricting

operations below maximum potential such that the emissions increases necessary to trigger applicability would not occur. The WEPCO should discuss its plans in this regard with EPA. Third, regarding NSPS applicability to unit 1, additional information is necessary to determine whether a physical or operational change would occur.

Thus, although this memorandum will serve to answer many of the questions necessary to reaching final determinations, you should advise WEPCO that ultimately applicability depends upon changes in emissions after the renovations and whether the company decides to take the steps which would enable it to lawfully avoid coverage. Also, NSPS coverage of unit 1 can only be determined after an evaluation of the additional information regarding the work to be performed. In addition, as to NSPS, WEPCO should be advised to submit a formal request pursuant to 40 CFR 60.5 if it desires a final applicability determination.

As the need for further factual development here suggests, determinations of PSD and NSPS applicability are fact-specific, and must be made on a case-by-case basis. This memorandum provides a framework for analyzing the proposed changes at Port Washington and gives EPA's views on relevant issues of legal interpretation. It should also be useful in assessing other so-called "life extension" projects in the future. However, any such project would need to be reviewed in light of all the facts and circumstances particular to it. Thus, a final decision regarding PSD and NSPS applicability here would not necessarily be determinative of coverage as to other life extension projects.

If you have any further questions regarding the discussion or conclusions in this memorandum, please have your staff contact David Solomon of the New Source Review Section at FTS 629-5375.

I. Background

As mentioned in your March 25 request, the five coal-fired units at Port Washington began operation in 1935, 1943, 1948, 1949, and 1950, respectively. Each unit was initially rated at 80 megawatts electrical output capacity. In recent years, however, the performance of the units began to deteriorate due to age- related degradation of the physical plant. In particular, inspections performed by a WEPCO consultant in 1984 revealed extensive cracks originating from the internal surfaces of the rear steam drums and boiler bank boreholes in units 2, 3, 4, and 5, creating significant safety concerns. Because of these safety concerns and other age-related problems, in 1985 the operating levels of units 2, 3, and 4 were reduced, and unit 5 was removed from service. As a result of the plant's deteriorating condition, the maximum rated physical capacities of units 1, 2, 3, and 4 at this time are 45, 65, 75, and 55 megawatts, respectively.

The life extension project includes extensive capital improvements to the common facilities and each of the individual units, including replacement of the rear steam drum in units 2, 3, 4, and 5. The renovation work will restore the physical and operational capability of each unit to its original 80 megawatt nameplate capacity, and extend the useful life of the units well beyond the planned retirement dates that would otherwise apply. Upon completion of the project, WEPCO intends to substantially increase the actual operations at the Port Washington plant.

II. PSD Applicability

The life extension project at Port Washington is subject to preconstruction review and permitting under the Act's PSD provisions if it is a "major modification" within the meaning of the Act and EPA's regulations. The PSD regulations at 40 CFR 52.21 govern this determination because Wisconsin has been delegated PSD permitting authority under the provisions of 52.21(u). The definition of "major modification" in 52.21(b)(2)(i) requires an analysis of several factors. These factors may be grouped under two general questions. Will the work entail a "physical change in or change in the method of operation of a major stationary source"? If so, will the change "result in a significant net emissions increase of any pollutant subject to regulation under the Act" [see 52.21(b)(2)(i)]? The Port Washington facility is an existing major stationary source because it emits well in excess of the PSD threshold amount for several pollutants.

A. Physical Change or Change in the Method of Operation

This requirement of a major modification is satisfied if either a physical or operational change would occur.

1. Physical Change

The renovation work called for under the proposed life extension project at Port Washington would constitute a "physical change" at a major stationary source. The clear intent of the PSD regulations is to construe the term "physical change" very broadly, to cover virtually any significant alteration to an existing plant. This wide reach is demonstrated by the very narrow exclusion provided in the regulations: other than certain uses of alternate fuels not relevant here, only "routine maintenance, repair and replacement" is excluded from the definition of physical change [see 52.21(b)(2)(iii)(a)].

In determining whether proposed work at an existing facilityis "routine," EPA makes a case-by-case determination by weighing the nature, extent, purpose, frequency, and cost of the work, as well as other relevant factors, to arrive at a common-sense finding. In this case, all of these factors suggest that the work required under WEPCO's life extension project appears not to be "routine." The available information indicates that the work proposed at Port Washington is far from being a regular, customary, or standard undertaking for the purpose

of maintaining the plant in its present condition. Rather, this is a highly unusual, if not unprecedented, and costly project. Its purpose is to completely rehabilitate aging power generating units whose capacity has significantly deteriorated over a period of years, thereby restoring their original capacity and substantially extending the period of their utilization as an alternative to retiring them as they approach the end of their useful physical and economic life. The most important factors that would support these conclusions are outlined below.

a. The project would involve the replacement of numerous major components. The information submitted by WEPCO shows that the company intends to replace several components that are essential to the operation of the Port Washington plant. In particular, as noted above, WEPCO would replace the rear steam drums on the boilers at units 2, 3, 4, and 5. According to WEPCO, these steam drums are a type of "header" for the collection and distribution of steam and/or water within the boilers. They measure 60 feet long, 50.5 inches in diameter, and 5.25 inches thick, and their replacement is necessary to continue operation of the units in a safe condition. In addition, at each of the emissions units, WEPCO plans to repair or replace several other integral components, including replacement of the air heaters at units 1, 2, 3, and 4. The WEPCO also plans to renovate major mechanical and electrical auxiliary systems and common plant support facilities. The WEPCO intends to perform the work over a 4-year period, utilizing successive 9-month outages at each unit.

In its July 8, 1987 application for authority to renovate tothe Public Service Commission of Wisconsin (PSC), WEPCO described the life extension project and explained its purpose and necessity. The WEPCO took care to distinguish the proposed renovation work from routine maintenance that did not require PSC approval, explaining that:

. . . [work items] falling into the category of repetitive maintenance that are normally performed during scheduled equipment outages do not require specific commission approval and, accordingly, are not included in this application.

b. The purpose of the project is to significantly enhance the present efficiency and capacity of the plant and substantially extend its useful economic life. In its application to the PSC, WEPCO pointed out that due to age-related deterioration, total plant capability had declined by 40 percent. The company noted that the currently planned retirement dates for the Port Washington units, as set forth in its Advance Plan filed with the State, ranged from 1992 to 1999. However, WEPCO asserted that "extensive renovation of the five units and the plant common facilities is needed if operation of the plant is to be continued." In any event, WEPCO stated that the renovation work would allow the Port Washington plant to generate power at its designed capacity until the year 2010, and thus "represents a life extension of the units."

In contrast, in its July 29, 1988 letter to EPA headquarters (pages 9-13), WEPCO characterized the renovation work as the timely, routine correction of equipment problems--principally, the steam drum cracks. However, the information presented leads to the conclusion that this is not the case. While replacement of the steam drums is necessary to restore lost generating capacity, that is not the only work proposed to be done. Based upon maximum capacity figures for past years, it appears that the units had experienced deterioration in physical generating capacity even prior to the discovery of the steam drum cracks in 1984. Thus, WEPCO proposes a wide-ranging project encompassing a broad array of tasks that would not only correct the steam drum problem, but correct other age-related deterioration that is essentially independent of the steam drums. Such other work (e.g., replacement of air handlers) apparently is also necessary as a practical matter to restore original nameplate capacity. Thus, it appears that even if WEPCO had undertaken this renovation work immediately following discovery of the steam drum cracks, it would have been proper to characterize the proposed work as a nonroutine life extension project.

c. The work called for under the project is rarely, if ever, performed. The WEPCO's application to the PSC asserted that the work to be performed under the life extension project was not frequently done:

Generally, the renovation work items included in this application are those that would normally occur only once or twice during a unit's expected life cycle.

The EPA asked WEPCO to submit information regarding the frequency of replacement of steam drums, the largest category of

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1It is important to note in this regard that not all renovation, repair, or "life extension" projects would properly be characterized as modifications potentially subject to PSD and NSPS. For example, nonroutine repairs to correct unexpected equipment outages, even of major components such as steam drums, would not be subject to NSPS if they did not increase the maximum capacity of the affected facility as it existed prior to the outage. Conversely, undertaking a program of repair and maintenance properly characterized as routine would not subject a facility to the Act's requirements.

work item called for under the project. WEPCO reported that to date, no steam drums have ever been replaced at any of its coal-fired electrical generating facilities. WEPCO did point out that it had replaced other "headers" comparable in design pressure and function. However, the largest of these was 16 inches in diameter, and EPA does not believe that they are comparable in diameter, wall thickness, function, or importance to the rear steam drums at Port Washington.2

d. The work called for under the project is costly, both in relative and absolute terms. The latest information supplied by WEPCO is that the renovation work at Port Washington will cost $87.5 million, of which at least $45.6 million is designated as capital costs.3 The WEPCO reports that, in terms of annualized costs, the renovation project will cost $7.8 million, as compared to $51.6 million for a new 400 megawatt plant. Thus, renovation costs represent approximately 15 percent of replacements costs.

2. Change in the Method of Operation

The renovation work at Port Washington would not constitute a "change in the method of operation" within the meaning of the PSD regulations. However, it is clear that the "physical change" and "operational change" components of the "major modification" ____________________

2The WEPCO's July 29, l988 letter to EPA stated (on page l3) that after further investigation, the company "learned of several examples" of steam drum failure and replacement. However, WEPCO provides no further details, other than noting that in one instance, the drum failed during initial testing and was replaced. Replacement of a failed component at a new facility presumably would not increase emissions from the facility, and probably would be viewed as routine if the alternative was to forego operation of that new facility. Under such circumstances, it is unlikely that the replacement would trigger the Act's requirements. 3The WEPCO's July 8, 1987 application to the PSC included a project cost estimate of $83.9 million, of which $45.6 million was designated as capital costs. A more recent cost estimate provided to EPA by WEPCO indicates that several work items are now deemed unnecessary, such that the cost of the original project is now estimated at $70.5 million. However, all but $89,000 of these reductions are designated as "maintenance" items. The recent submission also relates that the scope of the original project has now been expanded to include flue gas conditioning equipment and associated air heater work costing approximately $17 million. Although WEPCO has not broken down these additional costs into capital and maintenance (or "expense") expenditures, it would appear that most, if not all, of this additional work would be classified as capital costs. Thus, it is highly likely that actual capital costs would be significantly higher than $45.6 million.

definition are discrete and independent. Thus, as explained below, PSD still applies if there is a physical change that will significantly increase net emissions.

In addition, the regulations exclude from the definition of physical or operational change "an increase in the hours of operation or in the production rate" [see 40 CFR 52.21(b)(2)(iii)(f)]. The preamble to the rule [45 FR 52676, 52704 (August 7, 1980)], makes it clear that this exclusion is intended to allow a company to lawfully increase emissions through a simple change in hours or rate of operation up to its potential to emit (unless already subject to any federally enforceable

limit) without having to obtain a PSD permit. Thus, emissions increases at Port Washington associated with increased opera- tions would not, standing alone, subject WEPCO to PSD requirements. However, as discussed in greater detail below, the exclusion for increases in hours of operation or production rate does not take the project beyond the reach of PSD coverage if those increases do not stand alone but rather are associated with non-excluded physical or operational changes.

In its March 17, 1988 letter to Region V and its July 29, l988 letter to EPA Headquarters, WEPCO asserted that the exclusion for increases in operational hours or production rate also would serve to render PSD review not applicable to the renovation work proposed at Port Washington because the project's purpose was to restore the original design capacity of 80 megawatts per unit, but not to exceed that level. However, a plant's original design capacity is irrelevant to a determination of PSD applicability.

B. Significant Net Emissions Increase

Under the PSD regulations, whether the life extension project at Port Washington would result in a "significant net emissions increase" depends on a comparison between the "actual emissions" before and after the physical changes resulting from the renovation work. Where, as here, the source has not yet begun operations following the renovation, "actual emissions" following the renovation are deemed to be the source's "potential to emit" [see 40 CFR 52.21(b)(21)(iv)]. Apparently, there would be a "significant net emissions increase" within the meaning of the PSD regulations as a result of the proposed renovations as currently planned, because potential emissions after the project--reflecting the restoration of 80 megawatt capacity at each unit--would greatly exceed representative actual emissions prior to the physical changes. (The fact that the project is intended to \restore the plant's original design capacity is irrelevant to that calculation)4 If this is so, the project would be a "major modification" subject to PSD review. However, PSD applies on a pollutant-specific basis, and EPA has not been furnished with adequate data regarding the impact of the proposed renovations on the various pollutants to determine whether a significant net emissions increase would indeed occur for any pollutant. Such data must be provided before EPA can make a final determination of PSD applicability.

It is important to note in this regard that WEPCO, at its option, could "net out" of PSD review by accepting federally enforceable restrictions on its potential to emit after the renovation. This could occur through enhancement of existing pollution control equipment, addition of new equipment, acceptance of federally enforceable operational restrictions, or some combination of these measures, limiting potential emissions to a level not significantly greater than representative actual emissions priorto the renovations. Theoretically, WEPCO could minimize the needed restrictions on its potential to emit following the renovations if it could show that some period other than the most recent two years is "more representative of normal source operation" [see 52.21(b)(21)(ii)]. (Obviously, such a showing would be most important with respect to unit 5, because it has been shut down and has had zero emissions since 1985.) Since these matters are within WEPCO's control, you should advise the company to enter discussions with Region V and Wisconsin, as appropriate, if WEPCO desires to "net out" of PSD review. The WEPCO also argued in its July 29, 1988 letter, at pages 33-41, that even if EPA is correct that the Port Washington life extension project would involve physical changes within the meaning of the PSD regulations, any emissions increases would be due to increased production rates or hours of operation rather than higher emissions per unit of production. Therefore, WEPCO contends that these increases should be excluded from consideration in determining whether a net significant emissions

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4The WEPCO also contends (July 29, 1988 letter, page 35) that EPA should instead compare representative actual emissions prior to the change with "projected" actual emissions after the renovations. The PSD regulations provide no support for this view. Where, as here, a source is not currently subject to a PSD permit containing operational limitations, EPA must presume that the source will operate at its maximum capacity and, hence, its maximum potential to emit. However, as discussed below, a source is entitled to reduce its potential to emit by embodying its "projections" of future emissions in federally enforceable restrictions on its operations that may serve to lawfully avoid PSD review.

C. Baseline Date

The November 9, 1987 letter from the Wisconsin Department of Natural Resources to Region V asked whether a complete March 28, 1986 PSD permit application for certain work at Port Washington triggered the PSD baseline date, despite the fact that the permit was never issued. The answer to this question is yes. Baseline dates are triggered by the first complete application and remain in effect regardless of whether the application is revised or withdrawn, or whether the permit is finally issued and the source constructed or modified.

III. NSPS Applicability

The Port Washington renovations are subject to the Act's NSPS if they constitute "modifications" within the meaning of section 111 and 40 CFR Part 60. Under 60.1, the NSPS applies to modifications at an "affected facility." Each unit at Port Washington is properly characterized as an "affected facility" subject to the NSPS at 40 CFR Part 60, Subpart Da, which applies to electric utility steam generating units [see 60.40(a)]. Pursuant to 60.14(a), a modifi- cation for NSPS purposes is defined as "any physical or operational change to an existing facility which results in an increase in the emission rate to the atmosphere of any pollutant to which a standard applies." Increase in emission rate is in turn defined as an increase in kilograms per hour (kg/hr) [see 60.14(b)].

Pursuant to longstanding EPA interpretations, the emission rate before and after a physical or operational change is evaluated at each unit by comparing the hourly potential emissions under current maximum capacity to emissions at maximum capacity after the change. In addition, under the Act's NSPS provisions, only physical limitations on maximum capacity are considered in determining potential emissions at power plants. Thus, any prospective changes in fuel or raw materials accompanying the physical or operational change are not considered in determining maximum capacity. Consequently, 60.l4(b)(2) requires that, in conducting emissions tests before and after a change to determine whether an increase in emission rate has occurred, "operational parameters" which may affect emissions must be held constant. Fuel and raw materials are "operational parameters" for this purpose. Similarly, 60.14(e)(4) provides that use of an alternative fuel or raw material which the existing facility was designed toaccommodate before the change would not be considered a modification. Thus, for example, a physical change which increases the maximum capacity of the facility would have a corresponding increase in the sulfur dioxide emissions if the facility used fuel with the same sulfur content before and after the change. Such a prospective increase cannot be offset by instead using fuel with a lower sulfur content after the change, because, under the regulations, the facility would always have the option of changing back to the higher sulfur-content fuel at a later date without triggering a modification for NSPS purposes. However, any offsetting reductions in emission rate caused by the concurrent addition of pollution control equipment would be considered in determining whether a physical or operational change results in an increase in emission rate.

The WEPCO contends (July 29, l988 letter, at pages 20-27) that baseline capacity for the purpose of determining whether an increase in emission rate occurs for purposes of an NSPS modification is the original design capacity of the facility. This is incorrect. The thrust of the NSPS modification provisions is to compare actual maximum capacity before and after the change in question. Thus, original design capacity is irrelevant. The provision in 40 CFR 60.l4(b)(2) for manual emission tests to determine whether an increase has occurred clearly contemplates that tests will be done just prior to and after the physical or operational change. The original design capacity of a unit, to the extent it differs from actual maximum capacity at the time of the test due to physical deterioration--and, hence, derating--of the facility, is immaterial to this calculation.

A. Physical or Operational Change

As with the Act's PSD provisions, a modification occurs for NSPS purposes, if there is either a physical or operational change [see 40 CFR 60.14(a)].

1. Physical Change

As is the case under the PSD provisions, the proposed renovations at Port Washington would constitute a physical change for NSPS purposes, at least at units 2, 3, 4, and 5. The WEPCO would need to supply more information, if EPA is to make a definitive determination as to unit 1.

The rear steam drums are part of the steam generating unitwhich constitutes the "affected facility" within the meaning of 40 CFR 60.41(a), and the drum replacements at units 2, 3, 4, and 5 are integral to the planned increase in maximum capacity, which is the purpose of the life extension project. With respect to unit 1, other physical changes would increase maximum capacity from 45 to 80 megawatts. However, there is some question whether those changes, in significant part, would occur at the steam generating unit or will be limited to the turbine/generator set, which is not part of the affected facility. We suggest that you pursue this matter with WEPCO to the extent necessary to determine NSPS applicability regarding unit 1.

As with PSD, the NSPS regulations exclude routine maintenance, repair, and replacement [see 60.14(e)(2)]. However, the renovations at the Port Washington steam generating units are not routine for NSPS purposes for the same reasons--detailed above--that they are not routine for PSD purposes.

2. Operational Change

Operational changes include both increases in hours of operation and increases in production rate. Section 60.14(e)(3) provides that an increase in hours of operation is not, by itself, a modification. However, an increase in production rate at an existing facility constitutes a modification, unless it can be accomplished without a capital expenditure on that facility [see 60.14(e)(2)].

It is highly likely that the life extension project at Port Washington constitutes an operational change under this standard, for two reasons. First, restoring nameplate capacity at units 1, 2, 3, and 4 presumably entails, among other things, changes that will allow the units tocombust a larger amount of fuel at maximum capacity through operation at higher working pressures than the units have been able to accommodate in recent years. In the case of unit 5, the renovations presumably involve an increase over zero fuel and pressure. These changes constitute an increase in production rate within the meaning of the regulations. Second, as noted above in the discussion of PSD applicability, this increase in production rate entails substantial investments to improve the capital stock at each affected facility. It appears that these investments are large enough to qualify as "capital expenditures" under the formula specified in 60.2, although WEPCO should be asked to supply actual calculations should this become necessary to determine NSPS applicability.

B. Increase in Emission Rate

It seems clear that, absent some creditable offsetting changes, the increases in maximum generating capacity proposed for each of the Port Washington units would represent an increase in the hourly potential emission rate for each pollutant to which a standard applies over the emission rate prior to the renovation. As noted above, burning cleaner fuels would not be creditable. Similarly, voluntarily restricting the production rate following the renovations also would not be creditable for NSPS purposes, because WEPCO could, at a later date, increase production without triggering NSPS [see 40 CFR 60.14(e)(2)]. Accordingly, to avoid triggering NSPS, WEPCO would need to install additional air pollution control equipment, or upgrade existing equipment, to offset the potential emissions increases, such that no increase would occur at maximum capacity. The information submitted indicates that WEPCO may plan some enhancement of the current control equipment, but it is unclear whether this would be adequate to prevent an increase in emission rates. As with PSD applicability, such steps can lawfully avoid NSPS requirements. Accordingly, you should advise the company that it should address these contingencies if it desires EPA to rule on whether WEPCO can avoid NSPS requirements in this fashion.

C. Reconstruction

Based upon data provided by WEPCO, it seems that the Port Washington renovations would not qualify as a "reconstruction" for NSPS purposes under 40 CFR 60.15, because the capital cost for the upgrades to each of the five units, while substantial, apparently is less than 50 percent of the fixed capital cost of constructing a comparable, entirely new steam generating unit [see 60.15(b)(1)]. However, the modification and reconstruction provisions of NSPS are independent. The former provisions are intended to apply in circumstances where physical or operational changes which increase emissions make NSPS coverage appropriate at levels well below 50 percent of the capital cost of a replacement unit. Conversely, the reconstruction provisions are aimed at changes to an existing unit irrespective of associated emissions

increases, but trigger NSPS requirements only if the higher 50 percent level is reached. Thus, the suggestion made by WEPCO in its July 29, l988 letter (at pages l4-l5) that EPA must undertake rulemaking to amend the reconstruction regulations before NSPS could be applied to the Port Washington project is not well taken.

IV. Conclusion

In adopting the PSD and NSPS programs, Congress sought to focus air pollution control efforts at an efficient and logical point: the making of long-term decisions regarding the creation or renewal of major stationary sources. The Port Washington life extension project, as it has been presented to EPA, would involve a substantial financial investment at pollution-emitting facilities that may significantly increase potential emissions of air pollutants over a period well beyond the current life expectancy of those facilities. If the additional factual information called for in this memorandum shows that emissions increases would indeed result from this project, the project would be subject to PSD and NSPS requirements. Such a result would be in harmony with the broad policy objectives that Congress intended to achieve through these programs.

cc: Gerald Emison, OAQPS
Alan Eckert, OGC

bcc: G. Foote, OGC
L. Wegman, OAR
J. Seitz, SSCD
M. Alushin, AED
Air Branch Chief, Regions I-X
Regional NSR Contacts, Regions I-X
J. Calcagni, OAQPS
J. Farmer, OAQPS
W. Stevenson, OAQPS
E. Lillis, OAQPS
G. McCutchen, OAQPS
Notebook Entries: 23.29