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Merck & Co., Inc.

Summary of FPA Provided by Merck & Co.

Summary of Final Project Agreement (provided by Merck & Co.)

In March 1995, President Clinton announced several new initiatives for reinventing government, including Project XL, an approach to allow companies, communities and government to achieve environmental progress outside the constraints of existing regulations. The Environmental Protection Agency (EPA) selected Merck's proposal as one of eleven pilot projects in the United States for this new initiative. On February 7, 1996, Merck kicked off a project to deliver superior environmental protection while allowing flexible operation at its pharmaceutical manufacturing facility in Elkton, Virginia.

Merck, along with it's stakeholders, developed a simplified air permit for the facility that will cap total air emissions of criteria pollutants at less than recent actual levels and allow the facility to make changes and additions to its manufacturing processes as soon as they are needed without prior approval. The upfront environmental benefit which will enable Merck to operate flexibly under the emissions cap will come from converting the coal burning powerhouse to natural gas. This conversion will significantly reduce the site's actual air emissions.

The EPA and the Virginia Department of Environmental Quality (VADEQ) will adopt the Prevention of Significant Deterioration (PSD) permit through different mechanisms under their respective jurisdictions. The EPA plans to promulgate a site-specific rule making in order to make adjustments to current applicable regulations to allow for the flexible operation of the permit. The Virginia State Air Pollution Control Board will promulgate a variance to make the PSD permit legally enforceable under state laws. Associated with these proposed actions will be a 30 day public comment period for EPA and a 45 day public comment period associated with VADEQ's variance.

Working Cooperatively with the Community

An important element of the Merck XL project is development of the simplified air permit through cooperation and input from the local community, the National Park Service, Virginia Department of Environmental Quality (VADEQ), and the EPA. The Merck XL project team is composed of members of these groups, and all aspects of the final permit were discussed and resolved by the team members. Members of regional environmental organizations were involved in the negotiation process as well. The goal was to ensure that concerns and issues raised by these key players are addressed in the PSD permit. In addition, Merck communicated the project team's progress towards a final agreement to other parties, including employees, surrounding communities and those that expressed interest in the project.

Summary of the Prevention of Significant Deterioration Permit

There are 12 sections in the PSD permit. It is important to realize that the team met weekly for six months to propose, discuss, and negotiate details of the PSD permit. The following is a description of each section addressed in the PSD permit.

Section 1: Site-wide Emissions Cap

It has been agreed by the project stakeholders that a total criteria pollutant emissions cap will be established. The cap will be based on the average of actual total criteria pollutant emissions from the site for the years 1992 and 1993. These years are most representative of current actual emissions of criteria pollutants at the site. The baseline will be established at 1503 tons per year.

The criteria pollutants emitted at the site and included under the cap are ozone (using volatile organic compounds (VOCs) as the surrogate), sulfur dioxide (SO2), particulate matter with aerodynamic diameter less than 10 microns (PM-10), carbon monoxide (CO) and oxides of nitrogen (NOx).

Individual pollutant caps will also be established for SO2, PM-10, and NOx. These caps would be based on the average of the total emissions for each of the individual criteria pollutants from the site for the years 1992 and 1993.

When the powerhouse conversion is complete, there will be an expected total criteria pollutant reduction of approximately 900 tons per year. The total emissions cap will be reduced by a fixed percentage - representing a retirement for the life of the agreement of those emissions below the site's actual emissions prior to the powerhouse conversion. The group decided on a 20% reduction from the baseline.

There is also an alternate mechanism for handling new criteria pollutant regulations. When a new regulation is promulgated or an existing regulation is triggered, the site will have the option of either complying with the rule as written, or lowering the emission cap by the amount that the rule would have reduced the site's emissions. The cap adjustment amount for the regulation will have to be approved by the regulatory agency.

Upon completion of the powerhouse conversion, the individual pollutant cap for SO2 will be reduced by 20% and the cap for NOx will be reduced by 10% of the total actual emissions established in the above section. These reductions similarly will be retired permanently to the environment.

The site's actual emissions of criteria pollutants shall not exceed the total emissions cap. A 12-month rolling total of the site's actual emissions compared to the emission caps will provide the primary compliance mechanism for the project agreement.

Activities resulting in emission increases below the caps are not subject to review or approval. However, the PSD permit creates incentives to install controls to maintain actual emissions well below the emissions caps.

For significant modifications and significant new installations Merck agrees to install emission controls, pollution prevention or other technology that represents good environmental practice in the pharmaceutical or batch industry, based on the emission characteristics of the process unit. The site is also committed to continue operating existing control equipment specified in current permits.

Section 2: Powerhouse Conversion

To establish the initial environmental benefit and the margin of flexibility for operations, the site will convert its powerhouse boilers from coal to natural gas with oil or propane as backup. Except as required in the permit, Merck is under no regulatory obligation to do the conversion, nor would it be necessary for business or production reasons.

The timeframe for conversion of the powerhouse is as follows: A contract for the purchase of two natural gas-fired boilers shall be made no later than 12 months after the effective date of the permit. Completion of the powerhouse conversion shall take place no later than 30 months after the effective date of the permit. Merck expects, however, that the conversion will be completed in 18 months.

Merck will notify stakeholders on the completion of the powerhouse conversion, performance of the stack test and an estimate of actual emission reductions achieved from the conversion.

Section 3: Alternate Compliance with State and Federal Regulations and Air Permits Under the PSD permit

The charge of Project XL is to find alternatives to current environmental regulations while achieving superior environmental benefit. Under Project XL operations under the PSD permit will represent alternative compliance to several of the currently applicable regulations. Examples of these include:

Merck will comply with all applicable Hazardous Air Pollutant (HAP) regulations, including the Pharmaceutical MACT, when it becomes applicable, as well as any other regulation not listed in the permit and for which a cap adjustment is not completed.

Section 4: Monitoring, Recordkeeping and Reporting

An innovative three-tiered approach to monitoring, recordkeeping and reporting is a key element of the project. Each tier has specific monitoring, recordkeeping and reporting requirements that come into effect once that tier is triggered. This approach will give Merck added incentive to minimize emissions in order not to trigger higher tiers, which would result in more frequent and comprehensive requirements.

Tier I: Whenever the actual total criteria pollutant emissions for the last 12 months are determined to be greater than 0% and less than 75% of the total emissions cap, compliance with requirements in this tier is required.

Tier II: Whenever the actual total criteria pollutant emissions for the last 12 months are determined to be equal to or greater than 75% and less than 90% of the total emissions cap, compliance with requirements in this tier is required.

Tier III: Whenever the total actual criteria pollutant emissions for the last 12 months are determined to be equal to or greater than 90% of the total emissions cap, compliance with requirements in this tier is required.

Monitoring, recordkeeping and reporting will be performed by Merck according to the reporting tier determined by the current 12-month rolling total. An annual report will be submitted by March 1 of each year summarizing site operations under the PSD permit for the preceding calendar year. More frequent reporting is required when Tier II or Tier III requirements are in effect.

Reports required will be submitted to the project signatories. An annual progress report, including a summary of the site's actual emissions and site-wide emission caps, emissions prevented as a result of the PSD permit and other site operational information, will also be submitted to project stakeholders and other parties.

Section 5: Phase In of PSD Permit Terms

All sections of the permit are effective upon the effective date of this permit with the exception of the site-wide emissions caps, compliance with the alternate compliance provisions for certain regulations and existing permits and the monitoring, recordkeeping and reporting section. These sections will become effective no later than the first day of the month 12 months after completion of the powerhouse conversion project. This section specifies that the operating flexibility afforded under the PSD permit will not be provided until the site commits to operating under the emissions cap.

Section 6: Periodic Review of the PSD permit

Review of the PSD permit and the progress of the project will take place every five years. The project stakeholders will reconvene every five years to review whether modifications are necessary to account for the following circumstances:

Review of the following will occur when certain threshold levels are triggered under the cap. These assure that even though certain emissions will increase, they will not impact AQRVs or result in elevated fenceline concentrations.

Discussions of issues brought by stakeholders relating to the PSD permit may occur as needed at any time between five year reviews. The permit assures that it will be constantly evaluated for necessary changes. Changes to the PSD permit will be subject to applicable regulations governing PSD permit modifications and likely would include public notification.

Section 7: Duration of the PSD permit

The PSD permit will represent an alternative approach to existing regulatory mechanisms to provide environmental protection and operational flexibility. As such, it is intended to be a replacement for the existing regulatory system. The PSD permit will continue to be in effect unless it is terminated as specified in the PSD permit.

Section 8: Termination of the PSD permit

The PSD permit may be terminated for the following reasons:

There will be an exemption from termination if an event arising from causes not reasonably foreseeable and beyond the control of Merck occurs. In the event that an incident such as this occurs, Merck will be required to notify the regulatory agency with an estimated time anticipated for the delay and its correction, its cause and the measures to be taken to correct the problem.

In the event there is a termination to the PSD permit, an approach is specified in the permit to bring Merck back into the existing regulatory system.

Section 9: Inspection and Entry

Site inspection and entry provisions will be similar to those found in Title V operating permits.

Section 10: Reservation of Rights

This section provides for the legal rights of the signatories to the PSD permit. Each project signatory reserves all rights and defenses it may have.

Section 11: Transferability

Merck shall notify stakeholders in the event of any change in ownership or control of the site. For the first 12 months after change over the new owner shall submit report of operations under the permit and within 12 months of the change the permit will be reviewed for affirmative renewal.

Section 12: Definitions for Terms in the PSD permit

This section defines terms that are used in the PSD permit to give more clarity to the meaning of specific words or phrases as they are used in the PSD permit. An example of the terms defined is as follows.

Compliance date: the date upon which the site is required to take action in order to comply with a new regulation or a regulation to which it is newly subject.

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