DALLAS, Texas -- After simmering behind closed doors for more than 15 years, a disagreement between U.S. EPA and Texas environmental officials over air pollution permits has boiled over in a big way.

Al Armendariz, the administrator of EPA's Region 6 office, has threatened to take over state programs, revoking three major permits and ordering the state's second-largest refinery to apply directly to EPA officials. Texas Gov. Rick Perry (R), never shy about challenging the federal government, has blamed the feud on the Obama administration, saying EPA would prefer a "less effective Washington-based, bureaucratic-led, command and control mandate."

But while the feud has made national headlines thanks to Armendariz and Perry, air experts and former agency officials say the conflict, at its core, is the result of a long-dysfunctional relationship between the world's two largest environmental agencies -- EPA and the Texas Commission on Environmental Quality (TCEQ).

During the George W. Bush and Clinton administrations, EPA routinely missed its 18-month deadline for making decisions on Texas' permitting programs. Meanwhile, experts say, TCEQ kept issuing permits without federal approval and Texas businesses kept applying for them, assuming that no complaints from EPA meant that everything was fine.

To this day, there are about 30 Texas permitting programs in legal limbo, many of them more than a decade old. With EPA required by a court settlement to make yes-or-no decisions on all of them by 2012, experts say the current dispute could be just the beginning of a protracted legal battle to determine where state authority ends and federal oversight begins.

"If EPA had just timely ruled on TCEQ's permits, or even objected to them 15 years ago, then we wouldn't have 130 or so major permits that are being called into question," said Larry Soward, a Perry appointee who headed TCEQ from 2003 until 2009.

Hoping to stave off litigation, EPA and Texas officials are staging negotiations. So are industry and environmental groups. They are all trying to devise a standard way to unravel the permits for some of the nation's largest refineries, power plants and factories, stitching them back together in a way that would be acceptable to federal officials.

Perry and Texas officials argue EPA should back off because the state's programs have succeeded in cleaning the air. Airborne ozone levels fell 22 percent over the past decade, while industrial emissions of nitrogen oxide (NOx) dropped by 46 percent, beating national averages.

Public health groups and environmentalists argue that EPA rules, not state programs, are the reason. Texas still ranks last nationwide in many air quality categories, they say, and in some industrialized parts of the state, TCEQ air programs have not achieved compliance even with outdated federal air quality standards.

Just yesterday, EPA proposed to determine that the Dallas-Fort Worth region has missed its deadline to comply with 1997 eight-hour ozone standards. The area's nonattainment status under the decade-old rules would be upgraded from "moderate" to "serious," and still tougher standards are expected to be finalized by the end of the month.

During an interview last week in his Dallas office, on a day when the TCEQ had issued an air quality warning for the area, Armendariz said he is optimistic that the agencies will reach an agreement and allow Texas to continue running its own permitting programs. But he challenged the idea that EPA is exceeding its legal authority, describing as "completely misguided" the claims that EPA is upsetting the balance between state and federal control.

"We have not even begun to use the strongest tools available under the Clean Air Act," Armendariz said.

Pointing to those types of statements by Armendariz, critics say EPA is undermining the style of cooperative federalism that has been used to oversee permitting programs since the passage of the Clean Air Act.

Earlier this year, EPA announced its final rejection of one major Texas permitting program on the same day that the state offered a new compromise, TCEQ Chairman Bryan Shaw said in an interview. It seemed to him as if federal officials had not even looked at Texas' proposal.

Since that time, about two months ago, Shaw and Armendariz have had little face time. When there have been meetings between TCEQ and EPA, federal officials have focused on replacing Texas programs entirely rather than tweaking them to ease federal concerns, Shaw said.

"It's not a real solution working forward," he said. "I'm hopeful that we can come back to the table and have meaningful discussions about those issues."

Environmental and public health groups want the state permitting programs reworked to make the process more transparent. In the worst-case scenario, those groups claim, Texas facilities are not making the necessary emissions reductions. And in the best case, they say, it is difficult or impossible to tell.

Soward shared their worries while running TCEQ, but because EPA had not formally opposed the state's programs, he had to keep cranking out permits as if nothing was wrong, he said.

"There were times when major permits would come up in front of us, and I would be concerned that the emissions limits in them seemed to be extremely high, or the modeling requirements seemed to be too lax. But we had rules in place, so we were obligated to review permits in light of our rules," Soward said. "I may have raised some concerns about the permits when they came through, but in the end, there was not much that could be done, really."

Soward stepped down last year at the end of his six-year term ("I probably wasn't going to get reappointed anyway," he said) and started consulting for environmental advocacy groups. He has been sitting at the table during negotiations between industry and environmentalists, trying to convince the groups to drop the political rhetoric that has taken over the EPA-TCEQ battle.

If the agencies and interest groups cannot work out their differences, Soward said, "a couple years of work is going to stretch into a couple decades of lawsuits."

And if that happens, he added, everyone loses.

Too flexible?

EPA has focused its criticism on Texas' "flexible" permitting program, a 16-year-old regime used to design permits for about 130 of the state's largest facilities. Permits issued under the program set a single cap for an entire facility rather than every individual source, a system that allows companies to achieve their emissions reductions at a lower cost.

The TCEQ program, which stands in for New Source Review permitting, has failed to provide enough oversight and public notice, EPA claims.

"We look at the letter of the flexible permitting program, and we don't feel it's legal," Armendariz said. "And in addition, when we look at the implementation of the program, we see a mess."

Shaw and flexible permitting supporters have pointed out that EPA accepts flexible permits in theory. The federal government issues its own permits using plantwide applicability limits (PALs), a procedure added to the New Source Review program in 2002.

But upon closer inspection, EPA has told TCEQ, the Texas program has not achieved the same emissions reductions the federal program would. During a meeting last year, federal officials presented TCEQ with data (pdf) showing that under its flexible permit, the Shell Deer Park refinery in Houston was being allowed to release more than twice as much sulfur dioxide (SO2) as it would be under the PALs permit.

At Exxon Mobil Corp.'s Baytown refinery, which is the nation's largest, the annual cap on volatile organic compounds (VOCs) was 6,245 tons -- more than twice the 3,098 tons per year that a federal permit would have allowed.

The Obama administration formally rejected flexible permitting at the end of June. A month later, Texas Attorney General Greg Abbott (R) filed suit to challenge the decision (E&ENews PM, July 26).

The agency's push to reject the program initially stunned Texas officials, who say the flexible permitting program cannot be directly compared to the PALs program. EPA had spent years "kicking the can down the road," Shaw said, and while federal officials had raised concerns in the past, TCEQ did not expect EPA to reject the program altogether.

"Obviously, it wasn't a really strong objection, or they would have raised it early on," Shaw said.

Texas argues that EPA officials want permitting done their way because they do not understand how flexible permits work. It is slightly more difficult to calculate emissions reductions than it is under conventional permits, Shaw said, and that confusion is compounded by the fact that some of the state's largest and most complicated facilities use the program.

After TCEQ officials explained how to check emissions reductions, EPA's position went from "'These are perceived deficiencies with your program' to 'We don't want your program,'" Shaw said. "They planted a flag in the ground and seem to be trying to make a point," he added, "but I've had a hard time figuring out what their objection is and why they want to do away with this program."

Though environmental groups are lining up now to criticize flexible permitting, they previously supported the program as a chance to achieve extra emissions reductions. When the publicly owned Lower Colorado River Authority (LCRA) got a flexible permit for the 1,641-megawatt Fayette Power Project in 2002, they cheered.

Soon after EPA rejected flexible permitting, three advocacy groups -- the Environmental Integrity Project, the Texas Campaign for the Environment, and Environment Texas -- announced plans to sue the coal-fired power plant, which is near La Grange, Texas (Greenwire, July 15).

The plant would have been grandfathered in under federal air permitting requirements, exempting it from emissions reductions. In that sense, the flexible permit was a huge gain, environmentalists say, though they feel more should be done.

"There were some reductions, but we think the reductions in these old plants, which were pretty outrageous emitters of carcinogens, should have been much greater and would have been much greater if they would have come in for New Source Review permits," said Neil Carman, air program director for the Sierra Club's Texas chapter. "They wanted a sweetheart deal and that was the flexible permit program."

Carman, a former Texas environmental regulator, said he expects the plants with flexible permits to end up with New Source Review permits after several years of negotiations and lawsuits. Despite the threats, EPA would never take over the state's permitting program, he said.

"They won't do that," Carman said. "They don't have the resources."

'De facto' permitting

In another ironic twist, EPA's decision to reject the flexible permitting program was prompted by industry groups, which had grown tired of being caught between the dueling agencies.

After the George W. Bush administration raised questions about the legality of the flexible permitting program in 2007, the Business Coalition for Clean Air (BCCA) and two other industry groups sued EPA. They were worried the agency would force companies to make costly emissions control upgrades across the board, even though the businesses had "overcontrolled" certain sources to stay under their overall emissions caps, said Steve Minick, vice president for government affairs at the Texas Association of Business.

Pamela Giblin, an industry attorney at Baker Botts LLP who has worked on Texas air issues since 1970, said the warnings from the Bush administration shocked businesses, many of which had been using flexible permits for more than a decade.

"There was the feeling that it was working, and that if EPA had a problem with something, they'd let you know," said Giblin, who represented the BCCA in its lawsuit. "Industry and everybody else got lulled into this sense of de facto."

Fixing up a permit is no easy task when a facility has thousands of individual emissions sources. Because the flexible permitting program was left in place for so long, many people overseeing compliance at facilities have never worked with permits that are not flexible, and many companies do not know how much it would cost to switch to ordinary New Source Review permits.

According to one Texas attorney representing businesses with flexible permits, EPA seemed to believe it could scare business enough to make the companies come in and "de-flex" their permits, as they are calling the process. But while businesses are scared to operate without EPA-approved permits, they are more afraid of being among the first to go through a "rehabilitation" process that could lead to tougher air pollution restrictions and perhaps expose them to lawsuits.

"Companies are saying, 'We don't want to leave this harbor. It's not exactly a safe harbor, but we're not stepping on that rock in the river until we know that's not really an alligator in there,'" said the attorney, who asked not to be identified because speaking openly could harm ongoing negotiations. "'It's going to have to be really bad here before I go there.'"

During a public meeting last week on air pollution regulations for the oil and gas industry, several business leaders raised concerns about EPA's actions, including the decision to revoke the permit for Flint Hills Resources LP's East Corpus Christi refinery. Run by a subsidiary of Koch Industries Inc., the refinery is the second-largest in Texas.

Bill Stevens, executive vice president of the Texas Alliance of Energy Producers, told the panel he was worried that EPA's actions would close down the refineries that process the state's oil.

EPA does not intend to force companies out of business or shrink the nation's refining capacity, Armendariz replied, following with the latest in a series of warning shots to industry.

"At the same time," he said, "the state has issued air quality permits that we feel are illegal. Either the state issues permits that are consistent with federal law, or we will."

The agency has also proposed a program under which companies agree to undergo a third-party audit and make emissions upgrades. In exchange, the companies would receive a pledge from EPA not to seek civil penalties (Greenwire, June 11).

So far, 10 companies, including oil giant ConocoPhillips Co., have come to EPA to talk about the program, Armendariz told Greenwire last week.

"Many of them want to be rid of their flexible permits," he said. "I think they regret the day that they received them."

'Don't mess with Texas'

Armendariz may be challenging Texas more than his predecessors did, but he has an equally aggressive adversary in Perry. Setting himself apart from former Houston Mayor Bill White, the environment-minded Democrat he will face at the polls in November, Perry has blamed the air permitting feud on a power-hungry and ignorant EPA.

"Instead of worrying about cleaner air," Perry said in a statement last month, "the EPA seems intent upon putting the jobs of tens of thousands of hardworking Texans at risk, mainly so the EPA can impose a system it says will be easier for Washington bureaucrats to understand."

During last week's public meeting in Dallas, the permitting feud was the proverbial elephant in the room. The meeting drew a handful of anti-government protesters, who carried signs bearing slogans such as "Don't mess with Texas."

Addressing a panel of EPA officials, state Rep. Jim Keffer (R) said it would be unreasonable for the federal government to take over what has been a successful program. The state has simply done more to reconcile environmental protection with job creation, he said.

"There are those that say that they want to level the playing field between the states, that the only reason Texas has succeeded economically is cheating on our environmental responsibilities," Keffer said. "As you can see ... we have not. In fact, we've gone farther than tons of states have."

Bill Becker, executive director of the National Association of Clean Air Agencies, said EPA's fight with Texas is an "anomaly" that reflects the long-standing tension between that state and the federal government.

"I don't mean to cast aspersions on Texas -- there are some very fine people working there -- but the fact is that Texas historically has tried to act independently of the federal government on many environmental issues," Becker said. Only during the Obama administration has EPA been willing to challenge the state, he said, "perhaps where the Bush administration should have challenged them."

Richard Greene, who oversaw Texas as EPA's Region 6 administrator under Bush, has largely shied away from the permitting dispute. He has tried to refrain from criticizing his successors, following the example of the president who appointed him, he said.

But when asked to comment, he had harsh words for the Obama administration.

During Greene's tenure, state and federal officials would try to meet each other halfway -- sometimes literally, he said. They would often hold their meetings in Waco, the middle point between the TCEQ's office in Austin and the EPA's regional office in Dallas, and work to strike a deal on the state's programs.

That style of collaboration has since broken down, said Greene, a former mayor of Arlington, Texas, who is now an adjunct public affairs professor at the University of Texas, Arlington.

"The current administration believes -- contrary to the founding principles of the nation's environmental laws and the creation of the EPA -- that the business of environmental protection throughout the country is better managed in the hands of the federal government's executive branch in Washington," he wrote in an e-mail. "States that are not paying attention to what is happening in Texas do so at their peril."

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