On February 22, 2013, the United States Environmental Protection Agency (EPA) issued a sweeping proposal regarding the treatment of excess emissions in state rules from sources during periods of startup, shutdown, and malfunction (SSM). The proposal responds to a petition for rulemaking filed in 2011 by the Sierra Club, and promises to fundamentally alter the way most states, including Colorado and North Dakota, treat SSM events in their State Implementation Plans (SIP). Comments on EPA’s proposal are currently due March 25, 2013.

Once finalized, the 36 affected states will be required to overhaul certain SIP provisions that address exemptions or affirmative defenses for SSM events. This state rulemaking process is known as a "SIP call." Under the Clean Air Act (CAA), states will have 18 months from finalization of the EPA rule to submit to EPA the required changes to their SIPs. The SIP call process in Colorado, and other states in the region, promises to be a controversial rulemaking with the potential to significantly affect regulated sources across all industries, including oil and gas.

Since the inception of the CAA in 1970, industry and regulators have struggled to balance the practical reality that control technologies are fallible with the overall purpose of the CAA to protect air quality and public health. Striking this balance has been particularly difficult with respect to SSM events. For any number of reasons, nearly every affected facility, from time to time, experiences unexpected malfunctions, and must startup and shutdown operations. These events can affect emissions, and can cause excess emissions. Through a complex patchwork of EPA guidance, SIP provisions, and court decisions, flexibility has been woven into the system. This flexibility has generally allowed operators to reduce their liability exposure associated with excess emissions from SSM events.

At its core, EPA’s proposed rule substantially narrows this flexibility by reducing the circumstances under which operators may reduce their liability exposure for excess emissions during SSM events. Up to now, many SIPs, including Colorado’s, permitted a source to assert an affirmative defense for excess emissions that occur during planned and unplanned SSM events. Other SIPs provided even broader exemptions for excess emissions resulting from any SSM event. The new proposal dramatically changes this landscape.

With respect to SSM "exemptions," EPA has determined that automatic and other exemptions (like the discretionary and technologically feasible exemptions in North Dakota’s SIP) that excuse excess emissions which violate applicable emissions limits would be "substantially inadequate because [such provisions are] inconsistent with the fundamental requirements of the CAA." Any such SIP "exemption," therefore, would be unlawful. As a result, the proposal leaves affirmative defenses as the only mechanism by which an operator may reduce the consequences of excess emissions; but it narrows the scope of the defense.

Specifically, the proposed rule draws a critical distinction between excess emissions during planned startup and shutdown and excess emissions during malfunctions. Under the proposal, the former are per se "inappropriate" because EPA believes that "SIP provisions should encourage compliance during events that are within the sources’ control." Thus, to the extent a SIP contains affirmative defenses applicable to excess emissions during startup or shutdown, the state must revise its SIP during the SIP call. Colorado and North Dakota fall within this category.

With respect to excess emissions during malfunctions, the proposed rule would retain the affirmative defense mechanism as applied to excess emissions during malfunctions. Nonetheless, EPA notes that "[m]any of the specific SIP provisions identified in [Sierra Club’s] Petition may have been intended to operate as affirmative defenses [for malfunctions], but nevertheless have significant deficiencies." The most notable deficiency is an affirmative defense that excuses a violation. EPA now advances the position that "the affirmative defense does not excuse a source from injunctive relief, i.e., from being required to take further steps to prevent future upsets or malfunctions that cause harm to the public health." Rather, an appropriately drawn malfunction affirmative defense "simply provides for a defense to monetary penalties for violations that are proven to be beyond the control of the source." Thus, even where a SIP provides for an affirmative defense for excess emissions during malfunctions, the SIP will require amendment if it excuses the violation or is otherwise deemed insufficient. Critically, operators under any circumstance, including malfunction events, will remain subject to injunctive remedies (e.g., the installation of additional controls or enhanced monitoring), even where affirmative defense criteria are met.

The implications of the proposed rule are potentially sweeping. If the rule is finalized as proposed, regulated sources will have no means of reducing penalties or liability exposure for excess emissions that occur during startup or shutdown. In essence, all non-malfunction related excess emissions, must, and will, be considered not only under each state’s SIP, but also during permitting, compliance, and enforcement.

Perhaps more importantly, the rule has the potential to result in more stringent emission standards for individual sources or sectors, potentially forcing new technology or additional controls. As EPA states, during the SIP call "affected states may choose to consider reassessing particular emission limitations." New emissions limits, in turn, may cause regulated sources to change or add equipment, change or increase monitoring or detection systems, or increase the durability of components in order to continuously comply even during periods of startup and shutdown.

In sum, the newly proposed SSM rule marks a significant shift in the regulation of air emissions, both at the state and federal level that will affect a variety of industries. In Colorado and other western states where ozone non-attainment (or the imminent threat thereof) has been particularly troublesome, regulated sources like those in the oil and gas industry can expect potentially more stringent emissions standards and/or additional control requirements. These same sources can likely also expect worse outcomes in compliance and enforcement matters. Given the breadth of this proposed rule, and the already intense scrutiny of air emissions across the oil and gas sector, it will be import for the industry to participate in the EPA rulemaking and the resulting SIP call process.