Merck & Co., Inc.

MERCK & CO., INC.
STONEWALL PLANT

PROJECT XL

FINAL PROJECT AGREEMENT
EXECUTIVE SUMMARY

The Merck Stonewall Plant, a pharmaceutical manufacturer near Elkton, Virginia, was one of the first facilities selected to participate in the Environmental Protection Agency's (EPA) Project XL program. Project XL (eXcellence and Leadership) is a key part of the President's Reinventing Environmental Regulation initiative. The goal of Project XL is to provide regulatory flexibility for selected sites where doing so will both reduce the burden on regulated entities and result in environmental performance that is superior to what would be achieved through compliance with the existing regulatory system. This Final Project Agreement (FPA) is the document that memorializes the intentions of the Project Signatories concerning Project XL for the Merck Stonewall Plant.

In developing this XL project, Merck has worked closely with the EPA, Virginia Department of Environmental Quality, the National Park Service and community representatives, including regional public interest groups. All of these parties have participated in developing the details of this XL project.

Under Project XL, Merck is expected to achieve superior environmental performance and, through a new system of environmental protection, will be able to operate in a more flexible, cost-effective manner. The Merck XL Project will create a site-wide emissions cap for criteria pollutants which will give Merck flexibility to make process changes without prior permitting approval while creating incentives to minimize actual emissions. The project is expected to deliver significant environmental benefits by reducing pollutant emissions near the Shenandoah National Park. In addition to stating the intentions of the project signatories, this FPA provides an overview of the Merck XL project and explains how the project addresses the criteria of the XL program.


MERCK STONEWALL PLANT
PROJECT XL
FINAL PROJECT AGREEMENT I. INTRODUCTION
A. Project Signatories
The project signatories to this Final Project Agreement (FPA) are the U.S. Environmental Protection Agency (EPA), the U.S. Department of the Interior Federal Land Manager (FLM), Merck & Co., Inc. (Merck), the Rockingham County Board of Supervisors (Rockingham County), and the Virginia Department of Environmental Quality (VADEQ), collectively referred to hereinafter as the Project Signatories.

B. Purpose of the XL Program

This FPA states the intention of the Project Signatories to carry out a pilot project as part of EPA's "Project XL" program which tests innovative approaches to environmental protection. Project XL is an EPA initiative to test the extent to which regulatory flexibility, and other innovative environmental approaches, can be implemented to achieve both superior environmental performance and reduced economic and administrative burdens. (See 60 Fed. Reg. 27282).

C. Purpose of this FPA

This FPA is a joint statement of the Project Signatories' plans and intentions with regard to the Merck XL Project. It states the plans of the various participants and represents the firm commitment of each participant to support the XL process, the site-specific rulemaking and variance, and the Prevention of Significant Deterioration (PSD) permit as drafted, and to carry out this XL project. The FPA is not, however, intended to create legal rights or obligations and is not a contract, a final agency action or a regulatory action such as a permit or rule. As described below, EPA and VADEQ have undertaken certain regulatory actions designed to implement the Merck XL Project. This FPA does not give anyone a right to sue the Project Signatories for any alleged failure to implement its terms, either to compel implementation or to recover damages. Any rules promulgated or permits issued to implement the Merck XL Project will be enforceable as provided therein and to the same extent as under applicable law.

The FPA does not waive, change or substitute for public participation requirements applicable to rules and permits. A public meeting was held in Elkton on 12/17/96 to review the project. As described in Section III, EPA promulgated a final site-specific rulemaking in the Federal Register on October 8, 1997 (See 62 Fed. Reg. 52622) as the legal mechanism to implement this XL project. EPA provided a minimum of thirty (30) days for public comment on the proposed site-specific rulemaking and a public hearing. In addition, VADEQ provided for a one hundred twenty-two (122) day comment period and a public hearing on a proposed variance also necessary to implement the project and the proposed permit. The variance was approved by the State Air Pollution Control Board at its meeting on September 11, 1997.

II. DESCRIPTION OF THE PROJECT

A. Overview

Merck & Co., Inc. is a worldwide research-intensive health products company that discovers, develops, manufactures, and markets human and animal health products. Merck's Stonewall Plant ("site" or "facility"), near Elkton, Virginia, was established in 1941. Currently, the plant employs about 900 people in a range of pharmaceutical manufacturing (batch processing) activities such as fermentation, solvent extraction, organic chemical synthesis, and finishing operations. The facility's products include broad spectrum antibiotics, anti-parasitic drugs for human and animal health, a cholesterol lowering drug, a drug for the treatment of Parkinson's disease, and a new drug for the treatment of human immunodeficiency virus (HIV).

The Stonewall Plant is located within 2 kilometers of the Shenandoah National Park, a Federal Class I area. The facility's proximity to this important natural resource highlights the need for serious consideration of opportunities for better protection of the environment.

Air quality is of special concern in Shenandoah National Park, where numerous overlooks offer distant views and valley vistas. Under the Clean Air Act (CAA), as amended in August 1977, Shenandoah was classified as a mandatory Class I air quality area. Under the program of prevention of significant deterioration (PSD), Class I designation allows very little additional deterioration of the air quality from established baseline concentrations of certain pollutants, and none of the national ambient air quality standards (NAAQS) are to be exceeded. The Federal Land Manager (at the Department of the Interior, the Assistant Secretary for Fish and Wildlife and Parks) and the federal official charged with direct responsibility for management of such lands are charged with an affirmative responsibility to protect the air quality related values (AQRVs) of Class I areas. Any AQRV assessment triggered by the PSD permit will be performed in accordance with the established NPS procedures in place at the time of the assessment.

Visibility is impaired by natural causes (clouds, fog, or haze) and anthropogenic (human influenced) causes. Over the years, increasing levels of human-caused pollutants have reduced visibility and are damaging forest vegetation and soils and affecting the quality of water in park streams. Special provisions in the CAA are included for protecting visibility and remedying existing visibility impairment attributable to man-made pollution. Since 1990, the FLM for Shenandoah National Park has notified the public that visibility is seriously degraded, that sensitive streams and watersheds are being acidified, and that ozone and sulfur dioxide levels are causing injury to park vegetation. A technical support compilation document and various supplemental materials were published to support this notification. Because of this project's potential to improve visibility and deposition effects, the FLM for Shenandoah National Park has played a major role in the development of this FPA.

Existing air permitting regulations that govern operations at the facility -- specifically the PSD permit regulations and the minor New Source Review (NSR) regulations -- require that most changes to a manufacturing process be reviewed and approved by the VADEQ prior to being implemented. The complexity of the regulations also requires a considerable effort by the facility as well as the regulators to prepare and review permit applications for many process modifications.

Merck's XL project will seek to replace this complex system with a simpler and more environmentally protective system of compliance with criteria pollutant emission regulations. The facility's total emissions of criteria pollutants (the cap includes all criteria pollutants except lead) (footnote one: The facility has low emissions of lead, primarily from burning coal in the powerhouse. Lead emissions will be virtually eliminated by converting from coal to natural gas. Merck will comply directly with any applicable requirements for the control of lead emissions.) will be capped below the level representative of recent plant operations. The criteria pollutants included in the site-wide cap are sulfur dioxide (SO2), nitrogen oxides (NOx), carbon monoxide (CO), ozone (using volatile organic compounds as a surrogate), and particulate matter with aerodynamic diameter less than 10 microns (PM-10). The facility also will be subject to pollutant-specific caps (subcaps) for SO2, NOx and PM-10. When new criteria pollutant regulations applicable to the facility's operations become effective, Merck will comply by either implementing the regulations as written or adjusting the site-wide total or pollutant-specific emissions cap(s) as appropriate to reflect the reduction in actual emissions which would otherwise result from such implementation.

The facility will then modify its existing coal-burning powerhouse to burn natural gas, a cleaner burning fuel that generates substantially fewer emissions than coal. This multi-million dollar project is not otherwise required by regulations and the boilers do not need to be replaced for operational reasons. Upon completion of the conversion, the total criteria pollutant emission cap will be reduced by 20%, representing a minimum 300 ton per year (TPY) permanent "retirement" of total criteria pollutant emissions. In addition, the SO2 cap will be reduced by 25%, and the NOx cap by 10%.

Merck's XL Project will be implemented through a facility-wide PSD permit, issued pursuant to the site-specific rulemaking promulgated by EPA. The proposed PSD permit is attached (Attachment 1). Under the new permit the facility will be required to maintain its emissions below the site-wide emission caps for as long as the permit is in effect. Changes or additions to facility operations that result in emission increases would no longer need prior approval under State or federal NSR regulations, since the facility will have site-wide enforceable emission limits for SO2, NOx and PM-10. It would be permissible for VOC and CO emissions to increase from the baseline levels under the project, however the statutory PSD requirements for these increases would be satisfied pursuant to the site-specific rule and permit. So long as the facility does not reach the site-wide emissions caps, it will have the flexibility to operate in a manner that supports Merck's objective to deliver high quality products quickly and efficiently to improve human and animal health.

As an alternative to the current PSD permitting system, this XL project will be a test of a new approach to environmental permitting -- where incentives are provided for Merck to find ongoing emission reductions at the facility and to quickly implement those reductions. The permit also provides that the monitoring, recordkeeping and reporting requirements increase as the facility's actual emissions approach the cap.

B. Project XL Criteria

1. Environmental Results

The Merck XL Project is designed to deliver superior environmental protection while allowing flexible operations at the facility. This simplified air permit will provide significant benefits to the environment by reducing overall pollutant emissions near the Shenandoah National Park.

Criteria pollutants have been demonstrated to have a significant effect on the environmental quality of the Shenandoah National Park and the surrounding area. SO2 contributes to visibility problems in the region, and NOx combines with other chemicals in the atmosphere to form ozone, which causes vegetation damage. SO2 and NOx also are associated with formation of acid rain. Once the powerhouse conversion is complete, there will be an upfront reduction of these pollutants by an estimated 900 tons per year. Besides the significant reduction in criteria pollutants resulting from the project, the conversion to natural gas also will result in about 47 tons per year reduction in hydrogen chloride and hydrogen fluoride -- two hazardous air pollutants (HAPs) that are generated by burning coal, and are associated with acid rain. Reducing emissions of these chemicals also will contribute to efforts to improve air quality in surrounding communities and the Shenandoah National Park.

By establishing the site-wide criteria pollutant cap at a level 20% less than recent actual emissions, Merck is permanently retiring 300 tons per year of emissions. (See Table 1.1 of the proposed permit, Attachment 1). The operational flexibility that will be provided under the permit is appropriately justified by the environmental benefits resulting from the permanent retirement of these emissions, the requirement to convert the powerhouse to natural gas, the built-in incentives to minimize actual emissions, and the five-year periodic reviews. The permit requires that the facility must not increase emissions above the caps. The facility will have the flexibility to increase emissions under the total criteria pollutant cap, with the constraints of the individual pollutant caps for SO2, NOx, and PM-10.

The alternate regulatory system that will be established under the permit addresses criteria pollutants (except lead) only. Merck will fully comply with all requirements for the control of HAPs, including the forthcoming Maximum Achievable Control Technology (MACT) standards for the pharmaceutical industry, the HAP pre-construction review program under section 112(g) of the Clean Air Act, the risk management plan requirements of section 112(r), and future residual risk regulations under Section 112(f). Merck will continue to submit reports under the Emergency Planning and Community Right-To-Know Act (EPCRA) on hazardous substance inventories and releases and transfers of listed toxic chemicals. Merck also will continue to be subject to the requirement to report accidental releases of hazardous substances as mandated by the EPCRA and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Merck also will continue to comply with all other environmental requirements not specifically waived or substituted pursuant to EPA's site specific rule for this project and Virginia's variance.

2. Cost Savings and Paperwork Reduction

The simplified permit will result in cost savings by allowing Merck to quickly introduce new products and improve processes for existing products. Merck will be able to respond rapidly to changing market conditions and product demands without having to undergo prior permitting approval. The permit is anticipated to reduce the paperwork currently required under existing regulations. There is expected to be a savings in resource demands at both state and federal regulatory levels from reduced permit review and issuance.

3. Local Stakeholder Involvement and Support

Merck sponsored an ambitious effort to involve local stakeholders in the development of the project. The Project Signatories involved in the Merck XL project stakeholder group included the VADEQ (Headquarters and the Valley Regional Office), EPA (Region III and the Office of Air Quality Planning and Standards), National Park Service, and community representatives. The Merck XL project team is composed of members of these groups, and all aspects of the attached proposed permit were discussed and resolved by the team members. The goal of that effort was to ensure that concerns and issues related to the project raised by these key players were addressed in the proposed permit. Several environmental organizations also offered valuable input during the stakeholder process, including the Southern Environmental Law Center, the Virginia Consortium for Clean Air and the Natural Resources Defense Council. In addition, Merck has communicated the project's progress with other interested parties, including employees, Merck retirees, surrounding communities, local, state and federal government officials, and others that expressed interest in the project.

4. Innovative/Multi-media Pollution Prevention

The site-wide emissions cap is designed to maximize Merck's flexibility to make process changes under the cap without triggering PSD or minor NSR permitting. Merck's compliance with the site-wide cap, together with the creation of incentives to minimize actual emissions under the cap, is intended to provide an innovative way of reducing impacts on the environment over both the short and long term -- improvements which would not otherwise be achieved under the current regulatory program.

Another innovative aspect of the Merck XL project is the ongoing role of stakeholders in the project. Information will be provided to enable stakeholders to evaluate Merck's performance under the site-wide emission caps on an ongoing basis. The stakeholder group will convene every five years to evaluate the project's implementation and mutually agree on whether changes to the project are needed. The evaluation will be based on specific criteria described in the permit. This ongoing process will ensure that local stakeholders are well informed about facility operations and how well the project incentives are working to minimize emissions.

5. Transferability

Although the Merck XL project is specifically designed for and limited to the circumstances and needs of the Merck Stonewall plant, the approach of flexible day-to-day operations under a site-wide cap could be applicable to numerous industries, and could be particularly desirable to industries that conduct batch processing operations. EPA plans in the future to evaluate the merits of the Merck XL project to determine whether certain aspects of the project should be applied more broadly in other situations and to other industries.

6. Feasibility

Merck has the financial and administrative capability to implement the provisions of this project, including the powerhouse conversion. For the installation of emission control technology required by the permit, Merck will select proven technologies which represent good environmental engineering practice.

7. Monitoring, Reporting and Evaluation Methods

The proposed permit incorporates a tiered system of monitoring, recordkeeping and reporting. These requirements would become more stringent as Merck's actual emissions approach the site-wide cap. Section 4 of the permit outlines the specific monitoring, recordkeeping and reporting requirements.

The development of the Merck XL project has sought to enhance the community's involvement in the regulatory development process. The project is intended to enable the community and other stakeholders to evaluate Merck's performance under the cap on an ongoing basis. The community and other stakeholders also will have a voice in deciding whether future changes to the permit are warranted.

The project also is expected to improve the stakeholders' access to information about Merck's operations. All reports required under the PSD permit will be sent to all Signatories. In addition, Merck will submit an annual report to the project stakeholders and other interested parties which summarizes information about the project's implementation, including information that will allow stakeholders to assess how well the built-in incentives to minimize actual emissions are working.

8. Avoidance of Shifting Risk Burden

The project is consistent with Executive Order 12898 on Environmental Justice. No unjust or disproportionate shifting of the risk burden will occur. The powerhouse conversion will achieve an immediate reduction of SO2 and NOx emissions -- by an estimated 900 TPY. After the powerhouse conversion, the site-wide cap and subcaps will ensure a continuing, permanent reduction of criteria pollutants of at least 300 TPY. Besides the significant reduction in criteria pollutants resulting from the project, the conversion to natural gas will also result in about 47 TPY reduction in hydrogen chloride and hydrogen fluoride. See also, discussion of environmental benefits.

III. CONTENT OF PROJECT

A. Clean Air Act

1. Environmental Protection Agency

EPA proposed and issued a final site-specific rulemaking, pursuant to Sections 101, 103, 110, 111, 161, 165, 301(a)(1), and 307(d) of the Clean Air Act. This rulemaking is intended to provide the regulatory framework for the issuance of the simplified air permit in Attachment 1. The site-specific rule describes EPA's legal and technical rationale for the proposed Merck PSD permit. The Merck PSD permit contains conditions that will satisfy other requirements of the Clean Air Act. The site-specific rule also sets forth an alternate means of compliance with certain newly applicable SIP rules and New Source Performance Standards (including Subpart Db for industrial boilers and Subpart Kb for volatile organic liquid storage tanks). Under the site-specific rule and permit, Merck will have the option(Footnote 2: Under certain circumstances, EPA would have the ability to require Merck to comply with the rule as written rather than through a cap adjustment.) of either complying with the newly applicable regulation as written or adjusting the site-wide emissions caps by an equivalent amount of emission reduction. Finally, a similar site-specific revision to Virginia's State Implementation Plan will set forth an alternate means of compliance with newly applicable SIP rules.

Currently, the PSD program is implemented in Virginia pursuant to an EPA delegation. See 40 CFR 52.2451. EPA expects that the Merck PSD Permit will be issued by the VADEQ pursuant to an amendment to the delegation agreement between EPA and VADEQ.

2. Virginia Department of Environmental Quality

Pursuant to section 10.1-1307 of the Virginia Air Pollution Control Law, VADEQ recommended that the State Air Pollution Control Board issue a variance to Merck. The Board issued the variance at its meeting on September 11, 1997. The EPA rulemaking and the State Air Pollution Control Board variance will enable VADEQ to issue the Merck PSD Permit which shall constitute compliance with PSD and minor NSR permitting requirements and other regulatory requirements described in the Merck PSD Permit. VADEQ also plans to promulgate a source-specific revision to its SIP, and to submit this source-specific revision to EPA for approval into the SIP.

B. Resource Conservation and Recovery Act (RCRA)

EPA's site-specific rulemaking, pursuant to Section 3004(n) of RCRA, also provides Merck with an alternate method of complying with the regulations pertaining to the control of air emissions from certain hazardous waste units. See 40 CFR Parts 264 and 265, Subparts AA, BB and CC. The proposed Merck PSD Permit contains the requirements that Merck will comply with to satisfy the requirements of the RCRA air emissions standards.

C. Merck

Merck intends to accept, and does not intend to appeal the Merck PSD Permit, provided that the permit that is issued and goes into legal effect is the permit agreed upon by the project stakeholders in Attachment 1. Merck recognizes that the permit in Attachment 1 may be changed after evaluation of any public comments received and reserves its right to reevaluate this commitment in light of those changes.

D. Project Signatories

The Project Signatories agree to carry out their responsibilities as project signatories and stakeholders as described in the PSD permit using sound judgment and in the spirit of cooperation promoted by the XL Program.

IV. ADMINISTRATION OF THE FPA

A. Evaluation and Withdrawal

Upon completion of the activities described in Sections III.A. and B. above, the parties' obligations under the FPA will be complete. Upon issuance of the Merck PSD Permit, all implementation of the Merck XL Project will take place under the Merck PSD Permit. After the Merck XL Project has been implemented, over a reasonable period of time, EPA intends to evaluate the results to determine which specific elements of the project, if any, should be more broadly applied to other regulated entities to the benefit of both economy and the environment. Prior to that time, because this FPA is not enforceable, no Signatory may be legally compelled to continue with the project against its wishes. However, it is the desire of the Project Signatories for the FPA to remain in effect and be implemented as fully as possible, and it is not their intent to terminate or withdraw from the FPA unless there is a compelling reason to do so.

The Project Signatories agree that appropriate grounds to seek to withdraw from the FPA could include (but not be limited to):

. Substantial failure by another Signatory to implement the terms of the FPA;
. Discovery of failure by another Signatory to disclose relevant facts during development of the project that would have substantially changed the outcome of the FPA or permit;
. Discovery of new information indicating that implementation of the project will present an imminent and substantial endangerment to public health or welfare, or the environment;
. If the terms of the PSD permit are substantially changed as a result of comments submitted during the site-specific rulemaking or variance public comment periods;
. Except as provided in Section IV.C of this FPA, if EPA/VADEQ does not issue the PSD permit within 18 months of the FPA, the Project Signatories may withdraw from this agreement.
Withdrawal from the FPA by any Signatory does not affect the legal status of the site-specific rule described in Section III, the variance issued by the Commonwealth of Virginia, and the Merck PSD permit.

B. Modification of the FPA

This FPA may be modified upon approval of all the Signatories, after consultation with the stakeholders.

C. Delay Caused by Third Parties

If issuance of the PSD permit is delayed beyond 18 months after execution of this agreement because of third party legal actions, EPA or VADEQ may extend the 18 month deadline as agreed to by the Signatories.

D. Public Participation

Public participation will be provided pursuant to the rulemaking, variance and permitting procedures.

E. Means of Giving Notice

All communications between the Project Signatories concerning the activities performed pursuant to the terms and conditions of this FPA, shall be directed to the individuals listed below by controlled or certified mail.

1. EPA Region III
Ms. Robin M. Moran
Environmental Engineer
Air, Radiation and Toxics Division
841 Chestnut Street
Philadelphia, PA 19107

2. Virginia Department of Environmental Quality
Mr. R. Bradley Chewning
Regional Director
Valley Regional Office
Virginia Department of Environmental Quality
4411 Early Road
P.O. Box 1129
Harrisonburg, VA 22801-1129

3. Ms. Christine L. Shaver
Chief, Air Resources Division
National Park Service
P.O. Box 25287 (12795 W. Alameda Parkway)
Denver, CO 80225 (Lakewood, CO 80228)

4. Chairman
Rockingham County Board of Supervisors
P.O. Box 1252
Harrisonburg, VA 22801

5. Merck & Co., Inc.
Mr. Tedd Jett, Manager
Environmental Engineering Department
Merck & Co., Inc.
P.O. Box 7
Elkton, VA 22827-0007

V. Signatures of the Project Signatories

EPA:
Mr. W. Michael McCabe
Regional Administrator
U.S. Environmental Protection Agency, Region III

U.S. Department of the Interior, Federal Land Manager (FLM):
Mr. Donald J. Barry
Federal Land Manager
Acting Assistant Secretary for Fish and Wildlife and Parks
U. S. Department of the Interior

Merck:
Mr. Donald T. Kremer
Plant Manager
Merck Stonewall Site
Merck & Co., Inc.

Rockingham County:
Mr. Joseph Correa
County of Rockingham
Board of Supervisors

Virginia Department of Environmental Quality:
Mr. Thomas L. Hopkins
Director
Virginia Department of Environmental Quality