Co-location Plans Impact Air Permit
Given the state of the economy and the high price of corn, many ethanol producers are exploring cost-reduction strategies, including partnering and co-locating with innovative noncorn feedstock producers and grain storage facilities. These strategies may create excellent opportunities for consolidation and new growth, however, they may also have significant permitting implications pursuant to the federal Clean Air Act and state-implemented air permit programs.
For stationary sources that emit pollutants above certain thresholds, including most ethanol production facilities, the CAA requires permits be issued prior to construction and operation. Such permits are typically issued to an individual facility owner or operator and dictate very specific operational, pollution control and recordkeeping requirements. In the CAA, if certain factual criteria are met, two different stationary sources may be considered a single stationary source and regulated as such, requiring each to account for the others’ emissions, construction projects, modifications and compliance determinations.
The test for determining if two facilities should be considered a single stationary source is well-defined in federal and state-delegated statutes and rules. For two facilities to be considered a single stationary source, they must: 1) be on contiguous or adjacent property, 2) belong to a single major industrial grouping, and 3) be under common control by the same entity. (CAA 40 C.F.R. § 52.21(b)(6). In other words, two facilities must satisfy all three criteria before an agency can regulate them as a single stationary source.
The first criteria is not always a straightforward analysis. If two facilities are physically located on contiguous or adjacent properties, then this criteria is satisfied. U.S. EPA guidance has broadened this concept, however, such that two facilities that are physically separated by several miles can nonetheless be considered a single source, if the two are functionally related. Courts have added uncertainty by challenging EPA on this broadened interpretation. Therefore, a source may want to consult with an attorney if two projects are to be separated by less than 20 miles.
The second criteria, belonging to a single major industrial grouping, may appear straightforward, but as with most elements of the CAA, this analysis is complicated by EPA guidance. The Standard Industrial Classification code system classifies facilities to determine applicable federal and state regulatory programs. There are 10 divisions of SIC codes, each representing an industry sector, and within each division are multiple subsets called “Major Groups.” (See www.osha.gov/pls/imis/sic_manual.html for more information on the SIC code system.) A plain reading of the second criteria indicates that if two facilities operate under the same SIC code, the second criteria is satisfied; and if under different SIC codes, it is not. EPA has issued guidance, however, suggesting that the regulator can completely disregard the SIC codes, even if different, and require an additional “support facility” analysis based on various criteria developed by EPA. Importantly, the “support facility” analysis and criteria have never been promulgated as a rule by EPA; rather, the concept is discussed in a preamble that has never been promulgated as a rule.
The third criteria, common control, requires a more fact-intensive evaluation. To determine if two facilities would be considered under common control, EPA generally relies upon the Securities and Exchange Commission definition, which is “the possession, direct or indirect, of the power to direct or cause the direction of management and polices of a person, whether through the ownership or voting shares, by contract, or otherwise.” This criteria has been the subject of numerous administrative interpretations and judicial decisions, resulting in significant case precedent and EPA guidance. Because this criteria is highly fact-specific, facilities must carefully consider available guidance and should consult with an attorney prior to determining whether two facilities satisfy this criteria.
In summary, ethanol producers considering new partnerships and co-locations must be aware of potential air permitting implications, and resulting operational and management complications that can arise.
Authors: Todd Palmer
Partner, Michael Best & Friedrich
Associate, Michael Best & Friedrich