Alabama Power Company v. Douglas M. Costle, as Administrator, Environmental Protection Agency, Sierra Club, Intervenors.

Opinions for the Court filed by Circuit Judges LEVENTHAL, ROBINSON and WILKEY.

Because of the great number of complex issues, the court’s opinion appears in three parts, each written for the court by a member of the panel. Today’s opinions supersede the per curiam opinion in this case, issued June 18, 1979. We have entertained narrowly focused petitions for reconsideration, all of which are disposed of by our holdings here.

A table of contents for the three opinions appears at the start of Judge Leventhal’s opinion.

LEVENTHAL, Circuit Judge:

This is one of three opinions issued today considering challenges to the validity of final regulations 1 promulgated by the Environmental Protection Agency (EPA) on June 19, 1978 generally embracing the prevention of significant deterioration of air quality in the nation’s “clean air areas.” 2 These “PSD” regulations interpreted and began the implementation of various provisions of the Clean Air Act Amendments of 1977. 3 Pertinent provisions are gathered in title I, part C of the Clean Air Act as *344 amended (hereafter sometimes referred to as the “PSD part” or the “PSD provisions”).

Before us are consolidated petitions for review filed in this court, as provided by statute, within 60 days of the date of promulgation. 4 A special procedure was employed by the Chief Staff Counsel of the Circuit to coordinate the efforts of counsel and facilitate the presentation of this extraordinarily complex case. 5 Significant preliminary issues raised by these petitions were argued on October 10, 1978, and our ruling on those questions issued March 27, 1979. 6 The remaining issues raised by the petitions, involving primarily interpretative questions of comprehensive importance, 7 came to be argued on April 19 and 20, 1979.

The judicial review provisions as well as other features of the Clean Air Act Amendments set a tone for expedition of the administrative process that effectuates the congressional purpose to protect and enhance an invaluable national resource, our clean air. Motivated by such concerns, after careful and complete consideration of the case, we issued on June 18, 1979, a per curiam opinion 8 summarizing our rulings on the questions presented. The expedited judgment and per curiam opinion served two additional purposes: (1) it enabled the EPA to commence rulemaking or other proceedings necessary to promulgate those re-visions in the PSD regulations required by our rulings, and to take other prudent action to effectuate congressional policies; 9 and (2) it allowed the court to entertain, prior to the issuance of this opinion, narrowly focused petitions for reconsideration directed to the panel by the parties. 10

The three opinions issued today are in part an incorporation, with some enlargement of analysis, of the rulings in our per curiam opinion of June 18, 1979, together with modifications that the court has deemed appropriate in light of the petitions for reconsideration that have been filed. In view of the large number of questions raised, the members of the panel divided responsibility for preparation of discrete parts.

*345 TABLE OF CONTENTS

Opinion for the Court by Judge Leventhal Page

I. BACKGROUND OF PSD PROGRAM AND REGULATIONS UNDER REVIEW............ 346

II. POTENTIAL TO EMIT .............................. 352

III. EXEMPTION OF 50 TPA CONTROLLED SOURCES .......................................................... 355

IV. PROTECTION OF THE INCREMENTS.... 361

V. APPLICATION OF PSD PERMITS TO SOURCES IN NONATTAINMENT AREAS .............................................................. 364

VI. FUGITIVE DUST SOURCES, RULEMAK-ING, AND EXEMPTION AUTHORITY.... 368

VII. MONITORING ..................................................371

Opinion for the Court by Judge Robinson

I. BASELINE DATE ..........................................374

II. BASELINE AND VOLUNTARY FUEL SWITCHES........................................................376

III. MODELING ......................................................381

IV. STACK HEIGHT ............................................388

Opinion for the Court by Judge Wilkey

I. SOURCE DEFINITION..................................394

II. MAJOR MODIFICATION/BUBBLE ..........399

III. POLLUTANTS SUBJECT TO PSD REGULATION AND THE “MAJOR EMITTING FACILITY” THRESHOLD ............................403

IV. DEFINITION OF BACT TO INCLUDE A VISIBLE EMISSION STANDARD ..............407

V. “COMMENCED CONSTRUCTION” FOR PHASED CONSTRUCTION PROJECTS .... 409

*346 I. BACKGROUND OF PSD PROGRAM

AND REGULATIONS UNDER REVIEW 11

A. Clean Air Amendments of 1970

Responding to the growing perception of air pollution as a serious national problem, Congress enacted the Clean Air Amendments of 1970, 12 which restructured the Clean Air Act and established a rigorous program for the regulation of existing and new sources of air pollution. At the heart of the program were federally promulgated national ambient air quality standards (NAAQS) and state-adopted plans to implement those standards.

Section 109 of the Act 13 directed the Administrator of EPA to promulgate primary and secondary NAAQS establishing the maximum permissible concentrations of air pollutants. Primary standards were defined as those whose attainment and maintenance were necessary “to protect the public health,” with “an adequate margin of safety.” Secondary standards were to specify the level of air quality necessary to “protect the public welfare from any known or anticipated adverse effects” of a pollutant. Pursuant to this authority, the Administrator in 1971 promulgated NAAQS for six pollutants, including sulfur dioxide and particulate matter, two pollutants of primary concern to this litigation. 14

The Act contemplated application of the NAAQS to individual sources of pollution through state enforcement. Section 110 of the Act 15 required each state to hold hearings on, adopt, and submit to the Administrator a State Implementation Plan (SIP) for each “air quality control region” within the state. The SIP was to provide (1) for the attainment of primary NAAQS “as expeditiously as practicable but . in no case later than three years from the date of approval of the plan,” and (2) for the attainment of the secondary standards within “a reasonable time.” Section 110 required that each plan include “emission limitations, schedules, and timetables for compliance with such limitations, and such other measures as may be necessary to insure attainment and maintenance” of the ambient air quality standards. Once a state plan was submitted, the Administrator was to approve it if it was consistent with the statutory requirements. If the plan was inadequate, or if no plan was submitted, the Administrator was required to propose and promulgate a plan for the state.

The provisions for the attainment and maintenance of NAAQS were to operate primarily through controls on existing sources of pollution. In addition, the Act contemplated that major new sources of pollution would be subject to controls more stringent than those needed to meet primary and secondary NAAQS. Section 111 of the Act 16 required the Administrator to adopt technology-based new source performance standards (NSPS) limiting the emissions from any new or modified facilities in certain industrial categories that “contributed significantly to air pollution.” Section 111(e) made it unlawful for a new source in such a category to operate in violation of any applicable NSPS regardless of whether its emissions caused ambient standards to be exceeded. Section 110 also provided that state implementation plans contain a preconstruction review procedure to assure that major new sources would not interfere with the attainment and maintenance of ambient standards.

B. The PSD Program Prior to the 1977 Amendments

1) Genesis of PSD Program. Section 110 of the Act contained no explicit provision addressing potential deterioration of ambient air quality in those areas where am *347 bient pollutant levels were lower than those mandated by primary and secondary NAAQS. EPA did not impose on the states any requirement to control new sources of pollution that posed no threat to ambient standards.

In 1972, the Sierra Club brought suit alleging that the Act required state plans to include measures to prevent the “significant deterioration” of air quality in those parts of the country where the ambient standards were being met. The District Court for the District of Columbia held that the Act’s statement of purpose, contained in section 101(b)(1), imposed such an obligation. 17 On June 12,1972, it issued a preliminary injunction directing the Administrator to disapprove state plans and to promulgate regulations where the plan failed to take the measures necessary to prevent such deterioration. This court affirmed. On June 11, 1973, the Supreme Court affirmed by an equally divided court. In response to the injunction, EPA disapproved all state plans in November, 1972, and in 1973, following the Supreme Court’s action, the agency initiated rulemaking to incorporate PSD requirements into each state plan.

2) 1974 PSD Regulations. In December, 1974, the Administrator promulgated final regulations amending each state plan to include a PSD requirement. 18 The new PSD program implemented through preconstruction reviews of new or modified sources of sulfur dioxide and particulate matter. 19 “Significant deterioration” was defined in terms of allowable numerical increases in the concentration of sulfur dioxide and particulate matter in areas where ambient pollution levels were presumed by the regulations to be lower than those mandated by primary and secondary NAAQS. 20 These regulated areas came to be referred to as “clean air areas,” although, as will become clear from our subsequent discussion, the term encompasses areas that in fact need not possess air quality better than the applicable NAAQS. These allowable increases, or “increments,” determined whether air quality deterioration associated with a new facility was permissible. Increment consumption, or “use,” was calculated by reference to a “baseline” level of air quality. Under the 1974 regulations this baseline was defined as the representative air quality during 1974 plus the projected emissions from sources that had received permits to construct before January 1,1975, but were not in operation by that date. 21

The 1974 regulations established a program under which the amount of new growth allowed — the size of increment— would depend upon the amount of growth desired for the area. Areas subject to PSD regulations were divided into three groups. Initially, all such areas were designated Class II, for which increments were set permitting moderate growth. Areas could be redesignated Class I, for which much smaller increments applied, allowing virtually no growth, or Class III, for which increases in pollution were allowed up to the national ambient standards. Procedures *348 were established for redesignations by the state (or, with respect to areas within their jurisdiction, by Federal Land Managers and Indian Governing Bodies). 22

Small industrial facilities, surface mining, forestry and similar operations were not subject to PSD review. Rather, the regulations covered 19 categories of typical large industrial (or, in the case of incinerators, municipal) facilities. Each source on the list had significant process emissions of particulates or sulfur dioxide which, EPA estimated, accounted for “essentially all of [the sulfur dioxide and particulate matter] emitted in clean areas.” 23 New sources and modifications of existing sources on the list of 19 were subject to preconstruction review. The term “modification,” which triggered preconstruction review, was generally defined as a change in operation or design that increased emissions at a source, but it was further defined so as to be inapplicable to certain changes, including the use of a more polluting fuel, if the source was designed to use the alternate fuel prior to the December, 1974, promulgation of the PSD regulations. 24 A PSD permit was required for new or modified sources on the list if construction was commenced after June 1, 1975.

In order to obtain a PSD permit, sources were required to demonstrate that their emissions would not violate the increments in any area encompassed by the regulations. Under the PSD program, after January 1, 1975, all emission increases were counted against the increments unless emitted from a source that had received its permit but was not in operation by that date. 25 In other words, emission increases from new small sources, from fuel switches and from large sources commencing construction between January 1, 1975, and June 1, 1975, were not subject to PSD review but could consume the increment. Therefore, the 1974 PSD regulations “would permit” unregulated sources of increased emissions “to ‘use up’ the entire available deterioration increment, and in some cases exceed the increment. . . . ” 26 Since major sources subject to PSD were required to “consider the impact” of emission increases from unregulated sources, the PSD program assured that, if the increments were exceeded, PSD permitting of major industrial sources would cease unless the area were “reclassified” to make a larger increment applicable to it. 27

Under the PSD program, determination of a source’s impact on the applicable increments was based upon “diffusion models”— mathematical techniques for simulating the diffusion into the atmosphere of a new source’s emissions under various meteorological conditions and operating levels. 28 The purpose of such models is to predict pollutant concentrations at any point in the neighborhood of the source. While EPA recognized that diffusion modeling could not be expected to predict exactly actual increment consumption, the “normal variability of air quality data,” 29 in EPA’s view, made it impractical to use monitoring data (i. e., actually measured data) to determine increment consumption. Therefore, since models were a more “consistent” method fo'r calculating consumption, they were “used to keep track of available (or unused) *349 increments as sources and emission[s] are increased or decreased.” 30

“Accounting” by modeling was an on-going process, and modeling techniques or assumptions might require adjustments in previous estimates of increment consumption. These changes would affect only future PSD applicants, however. As EPA emphasized in its Background Document, “significant deterioration is defined in terms of air quality increments rather than absolute air quality levels.” Therefore, because the PSD program did not establish “absolute air quality levels” that could not be exceeded, new sources receiving PSD permits were not subject to further controls to meet the increment if it were later discovered that the “EPA or State approved model was inaccurate.” 31

In addition to the increment impact review, sources under the 1974 PSD program had to apply “best available control technology,” defined in terms of emission limitations on sulfur dioxide and particulates. These BACT limitations were to be established on a case-by-case basis unless the source was subject to new source performance standards under section 111. The regulations provided that where an NSPS was applicable, compliance with the NSPS would constitute compliance with BACT. 32

3) Judicial Review of 1974 Regulations. We sustained the 1974 PSD regulations over challenges by both industry and environmental groups. 33 - The Supreme Court granted industry petitions for certiorari to review our holding that EPA had authority to adopt PSD requirements under section 110 of the Act. On August 27, 1977, Congress passed the Clean Air Act Amendments of 1977 (1977 Amendments). The Supreme Court consequently vacated our decision and remanded for consideration in light of the 1977 Amendments and of possible mootness. We, in turn, remanded the case to EPA for consideration of those issues.

C. Clean Air Act Amendments of 1977

The 1977 Amendments 34 maintain the basic structure of regulation of stationary sources through state plans, but made substantial changes in the requirements governing those plans. The Amendments provide for additional controls on existing sources to ensure protection of the ambient standards and visibility. Further, they establish strict requirements for major new sources to be located in areas where the national standards have not yet been attained (“non-attainment areas”).

The central focus of this case is Part C of title I (sections 160-169) added to the Clean Air Act by the 1977 Amendments. Section 161 of the Act 35 now provides an express directive that state plans include measures to prevent the significant .deterioration of air quality in areas designated by the states under section 107(d)(1)(D) & (E) of the Act as having ambient air quality better than the applicable national primary or secondary ambient air quality standard, or for which there is insufficient data to make a determination of the air quality. An area so designated has commonly been referred to in the legislative history and in the literature that has developed as a “clean air area,” a description often contrasted with the term “non-attainment area,” which is defined by section 171(2) of the Act as an area that has been demonstrated to exceed an NAAQS for a given pollutant. 36 We *350 wish to alert the reader that the phrase “clean air areas” is a generalization that may be confusing when employed in technical usages. A so-called clean air area for a given air pollutant may include an area that for the same pollutant would be classified as a non-attainment area if sufficient data existed. Further, since classification of areas is pollutant-specific, the same area may be a clean air area due to the air quality with respect to one pollutant, yet be a non-attainment area with respect to another pollutant. Finally, the areas of the country subject to regulation under the PSD provisions of the Act include areas other than those commonly referred to as clean air areas. With these caveats, which will be explained in greater detail as they become pertinent to our discussion, we will continue to use the term “clean air areas” as a shorthand expression where we do not feel the context calls for a more technical usage.

Under the provisions of the 1977 Amendments, areas subject to PSD regulation are divided into three classes; 37 increments are set for each class; 38 new major facilities to be located in such areas must meet technology-based emission limitations reflecting BACT; 39 these facilities cannot commence construction if their emissions would cause or contribute to a violation of the applicable increments in a Class I, II or III area; 40 and demonstrations that new facility emissions would not violate the applicable increments are to be based on both monitoring and diffusion modeling. 41 The list of 19 major sources which emit, or have the potential to emit, 100 tons per year or more of any pollutant are subject to PSD review. 42 In addition, any other source having the potential to emit 250 tons per year or more of any pollutant is also covered. As in the 1974 regulations, “modifications” of such major sources are also subject to PSD review. 43 Section 165 of the Act 44 tightens the requirement that must be included in state plans for the PSD preconstruction review and permitting of major new sources to be located in clean air areas. These stricter requirements include: (1) case-by-case determination of BACT rather than automatic application of NSPS; (2) requirements of air quality impact analyses performed in accordance with EPA regulations; (3) requirements for the protection of visibility in Class I areas even though Class I increments are met; and (4) provisions requiring public hearings in all cases instead of mere opportunity for written comment. Other changes in the 1974 regulations effected by the 1977 Amendments include provision for “variances” from Class I increments if stringent criteria are satisfied 45 and modification of the definition of “baseline.” 46 Congress also structured the program to minimize disruption, by exempting existing sources from the permit requirement of section 165 until “modifications” of those facilities increased emis *351 sions, 47 and by phasing sources under construction into the program. 48 In addition, section 166 directs EPA to develop within two years PSD programs for pollutants other than particulates and sulfur dioxide. EPA is not required to follow the “area classification” approach for these other pollutants, but implementation through a permit program is contemplated.

D. PSD Regulations Under the 1977 Amendments

Following several notices of proposed rulemaking, comment periods, and public hearings, EPA promulgated two sets of final PSD regulations on June 19, 1978. 49 One set amended 40 C.F.R. Part 51 to provide guidance to the states on the development of revised state implementation plans. The other set amended 40 C.F.R. Part 52 to incorporate the immediately effective changes required by the 1977 Amendments.

The regulations require that each major stationary source and each modification covered by the regulations undergo a detailed preconstruction review and obtain a permit prior to the commencement of construction. The PSD review process contains a number of steps:

1) Control Technology Review. Each new major source must meet all applicable new source performance standards promulgated under section 111 of the Act, all emission standards for hazardous pollutants under section 112 of the Act, and all applicable state implementation plan requirements. 50 In addition, each such source must apply best available control technology (BACT) for sulfur dioxide and particulates unless emissions of that pollutant will be less than 50 tons per year, 1,000 pounds per day and 100 pounds per hour, whichever is most restrictive. 51

2) Air Quality Review. At the time an application for a PSD permit is submitted, the owner or operator of the proposed source must demonstrate that allowable emissions from the source will not cause or contribute to a violation of any NAAQS or the applicable increments. 52 Estimates of ambient concentrations that must be provided in order to determine compliance with these requirements must “be based on the applicable air quality models, data bases, and other requirements” specified in EPA’s modeling guidelines. The models described in these guidelines may be modified, or other models substituted, only after notice and opportunity for comment by the public, and written approval by the Administrator. 53

3) Monitoring Requirements. Two types of monitoring requirements are imposed on sources submitting PSD applications after August 7, 1978. An application must include a full year of continuous monitoring data for any pollutant emitted by the source for which there is an ambient standard. This monitoring data, along with the required modeling results, will form the basis for the permitting authority’s determination of whether the proposed source would cause or contribute to a violation of a primary or secondary NAAQS. The second requirement is for post-construction monitoring, to be used as the state or EPA feels necessary to determine actual impact of the source on primary or secondary ambient standards. 54

4) Source Information. The PSD permit application must include, at a minimum, information on the location, design, and planned operating schedule of the proposed facility, a detailed construction schedule, and a description of the control technology that is proposed as BACT. 55 In addition, *352 the applicant must provide an “analysis of impairment to visibility, soils, and vegetation” in the area, and an analysis of the air quality impacts of the expected growth associated with the proposed source. 56 Meteorological and topographical information on the air quality impacts and nature and extent of any growth in the locale of the proposed facility since August 7, 1977, must also be provided if requested by EPA or the state.

5) Processing Applications. The regulations establish a complex process for handling the permit application. Within 30 days of receipt of the application, EPA must inform the applicant of any additional information required. EPA or the state must make a final determination on the application within one year after the application is complete. During that time, EPA or the state must: (a) make a preliminary determination whether the proposed source will be approved, disapproved, or approved with conditions; (b) give public notice of the preliminary determination, provide opportunity for comment and public hearing and the applicant’s responses, and give the applicant and the public notice of the final determination. 57

The regulations also require that, even after the PSD review process is completed and permit issued, the state plan must be revised — and individual source emissions reduced — if the state or EPA determines that an applicable increment or maximum permissible concentration is being violated. 58

II. POTENTIAL TO EMIT

At the heart of the PSD provisions lies a definition that is jurisdictional in nature. We refer to the section 169(1) definition of “major emitting facility,” which identifies sources of air pollution that are subject to the preconstruction review and permit requirements of section 165. 59 The definition is not pollutant-specific, but rather identifies sources that emit more than a threshold quantity of any air pollutant. 60 Once a source has been so identified, it may become subject to section 165’s substantial administrative burdens and stringent technological control requirements for each pollutant regulated under the Act, even though the air pollutant, emissions of which caused the source to be classified as a “major emitting facility,” may not be a pollutant for which NAAQS have been promulgated or even one that is otherwise regulated under the Act. As will become apparent *353 from consideration of the ramifications of this definition, Congress’s intention was to identify facilities which, due to their size, are financially able to bear the substantial regulatory costs imposed by the PSD provisions and which, as a group, are primarily responsible for emission of the deleterious pollutants that befoul our nation’s air. Such facilities are defined in section 169(1) as those stationary sources of air pollutants from among 28 listed categories which “emit, or have the potential to emit” 100 tons per year or more of any air pollutant plus any other stationary source with the “potential to emit” 250 tons per year or more of any air pollutant.

EPA has interpreted the phrase “potential to emit” as referring to the measure of a source’s “uncontrolled emissions” — i. e., the projected emissions of a source when operating at full capacity, with the projection increased by hypothesizing the absence of air pollution control equipment designed into the source. 61 Yet, the language and comprehensive scheme of the statute reveal that an emitting facility is “major” within the meaning of section 169(1), only if it either (1) actually emits the specified annual tonnage of any air pollutant, or (2) has the potential, when operating at full design capacity, to emit the statutory amount. The purpose of Congress was to require preconstruction review and a permit before major amounts of emissions were released into the air. When determining a facility’s potential to emit air pollutants, EPA must look to the facility’s “design capacity” — a concept which not only includes a facility’s maximum productive capacity (a criterion employed by EPA) but also takes into account the anticipated functioning of the air pollution control equipment designed into the facility.

We are cognizant that in general a court defers to the interpretation of a new statute by the agency that is charged with putting it into effect, meshing the wheels, and that presumably has some awareness of the approaches of legislators particularly concerned with the legislation. However, we view our analysis of congressional intent, set forth above, as clearly discernible from section 169(1). We identify the following as indicators of legislative intent. Looking at language, we see that the first sentence provides that a major emitting facility (in enumerated categories) must “emit, or have the potential to emit” 100 tons per year of any air pollutant. Plainly, the pollutants that sources “emit” is a reference to some measure of actual emissions. However, under EPA’s interpretation of “potential to emit,” the actual emissions calculation called for by the verb “emit” would lose all significance. When potential emissions are calculated, as EPA provided, by assuming operation at full capacity, without any reduction to take into account the operation of the facility’s air pollution control equipment, then potential emissions will always and inherently exceed actual emissions. Under our construction a meaning is given to the use of “emit” and “or,” as applicable in those instances when for any reason, whether or not there is fault or accident, the “cleansing” equipment has not been operated, or has been operated at variance from design. 62

For a wide angle lens on intent, we turn to the fact that Congress was fully aware that many major new sources of air pollution were already required by law to install and operate air pollution control equipment. The “new source performance standards” of section 111 of the Act, as well as provisions of existing state implementation plans, were the sources of such requirements. In this context one would require strong statu *354 tory evidence that Congress intended to approach the measurement of emissions in ignorance and disregard of the operation of pollution control equipment already required by law to be designed into a facility. All the statutory evidence points the other way.

The coverage of the 100 ton-per-annum threshold of the first sentence of section 169(1) extends to 28 categories of facilities. A look at these categories, and a further look at the legislative history 63 reveal that Congress was concerned with large industrial enterprises — major actual emitters of air pollution. The draftsmen were of the view that certain small industrial facilities within these categories might actually and potentially emit less than the threshold amount. But the submissions of the parties establish that no operational industrial facility that could be described as within the listed categories would have the “potential to emit” less than the threshold amount if the operation of cleansing control equipment is totally discounted.

Congress was presumably also aware of the high rate of effectiveness with which control equipment eliminates pollutants from unprocessed industrial emissions. For example, at the time of the enactment of the PSD provisions, technology in operation was capable of eliminating over 99% of the particulate matter from emissions. Thus, a source with the potential — according to EPA’s “uncontrolled emissions” standard— to emit 100 tons per annum of particulate matter would emit in actuality less than one ton per year. The record illustrates that the heating plant operating in a large high school or in a small community college would become “major” sources under such a test. 64 We have no reason to believe that Congress intended to define such obviously minor sources as “major” for the purposes of the PSD provision.

EPA recognized that its definition placed an intolerable burden on both the agency and minor sources of pollution and sought to cope with it by creating a broad exemption for smaller sources. As we explain in a subsequent section of this opinion, 65 the Act does not give the agency a free hand authority to grant broad exemptions. Though the costs of compliance with section 165 requirements are substantial, they can reasonably be borne by facilities that actually emit, or would actually emit when operating at full capacity, the large tonnage thresholds specified in section 169(1). The numbers of sources that meet these criteria, as we delineate them, are reasonably in line with EPA’s administrative capability.

EPA asserts that its view is supported by the interplay between the section 169(1) definition of major emitting facility and a partial exemption from PSD review requirements specified in section 165(b). 66 It suffices at this juncture to refer to a subsequent part of the Court’s opinion, 67 and say that EPA’s asserted conflict between sections 165(b) and 169(1) is premised on an erroneous interpretation of the application of section 165(b).

We mention the legislative history with some diffidence, for it is extensive, complex, and conflicting in certain instances. But our full review of the materials that have come to our attention reveals that the legislative history in general supports our interpretation of section 169(1).

The critical phrase “emit, or [has] the potential to emit” had its origin in the Senate version of the bill that was to be *355 come the 1977 Amendments to the Clean Air Act. 68 The House version used the equivalent phrase: “directly emits, or has the design capacity to emit.” 69 The Conference Committee adopted the wording of the Senate bill, but its Report reflects an understanding of the equivalence of the House and the Senate versions on this point. We refer to the Report’s interpolation of the House language into the Conference Committee’s paraphrase of the final provision:

The State plan must require permits for: (a) All 28 categories listed in the Senate bill if the source has the potential (design capacity) to emit over 100 tons per year; and (b) any other source with the design capacity to emit more than 250 tons per year of any air pollutant. 70

EPA agrees that the Conference Committee treated the House and Senate versions as having the same meaning but argues that EPA’s “uncontrolled emissions” construction was intended. There is some support for EPA s position in legislative history, particularly on the Senate side, 71 but the overall legislative history does not support EPA’s position. The committee reports and floor debates evidence the understanding that only major sources of actual emissions would be covered by the PSD permit requirements and that some sources within the 28 industrial categories would be too small to satisfy the threshold tonnage specified in section 169(1). 72 These understandings are inconsistent with EPA’s “uncontrolled emissions” approach.

We remand the regulations premised on EPA’s erroneous construction of section 169(1) for appropriate revision by the agency 73

III. GENERAL EXEMPTION FOR STATIONARY SOURCES EMITTING LESS THAN 50 TONS PER YEAR OF ANY AIR POLLUTANT

Having swept in too many facilities, in our view, by its interpretation of “potential *356 to emit,” EPA inserted in its PSD regulations a partial exemption from the preconstruction review and permit requirements of section 165 for all major emitting facilities that emit less than specified amounts, 74 50 tons on a yearly basis, of any air pollutant. The pertinent amount is to reflect operation at maximum capacity and employing the air pollution controls imposed either by the applicable State Implementation Plan (SIP) or by an enforceable permit. 75

Petitioners Sierra Club and the Environmental Defense Fund contend that the Act contains no warrant for the Administratively-created exemption, and that even if statutorily permissible, the action was arbitrary and capricious.

EPA does not argue that its 50 ton per year exemption is consistent with the statutory language of the Clean Air Act. Rather, EPA concedes 76 that its exemption allowing sources and modifications under 50 tons per year to forego BACT and air quality assessment is an “expansion” of the limited exemption provided in section 165(b) of the Act. 77 This “expansion” is defended as reflecting EPA’s judgment that application to such sources of the full preconstruction review and permit process would not be cost-effective and would strain to the limits the agency’s resources. Characterizing its approach as “[fjollowing Congresses] lead,” EPA concluded that the costs to industry and permitting authorities entailed in reviewing an estimated 2,400 PSD applications for sources emitting less than 50 tons would far outweigh the benefit of the “relatively insignificant” reduction in emissions that would result. Consequently, EPA “expanded” the exemption found in section 165(b) to new as well as existing sources, and precluded BACT review as well as air quality review. EPA promised periodic assessments to assure that overall air quality in any pertinent area did not deteriorate beyond the level of any increment. 78

EPA’s “expansion” of the section 165(b) exemption falls well beyond the agency’s exemption authority. Moreover, it is premised on a misconstruction of the meaning and motivation of the section. The court has given close consideration to this provision and has toiled to give a reasonable construction to language that is somewhat awkward and which does not easily disclose the function intended for it by Congress. We conclude that the exemption is applicable to major emitting facilities in Class II areas which existed on August 7, 1977, 79 and which become subject to the permit requirements of section 165 because *357 of an expansion or modification that, after application of BACT, results in a net increase of less than 50 tons a year in the emissions from that facility. Those expansions or modifications that come within the exemption of section 165(b) are permitted to operate so long as they will not cause or contribute to ambient air quality levels in excess of the national secondary ambient air quality standard for two pollutants, sulfur dioxide and particulate matter. Were this exemption not in the statute, major emitting facilities, in order to avoid the permit requirements of section 165, would be encouraged to pursue their plans for industrial expansion by establishing small, independent facilities rather than by the more efficient expansion or modification of existing facilities. 80

We have concluded above that EPA erred in defining “potential to emit” by discounting the beneficial effects of air pollution control equipment designed into a facility. For practical purposes, then, the dispute over the 50-ton exemption has become academic. Since “major emitting facilities” subject to section 165 are only those sources which after controls emit or have the potential to emit at least 100 tons annually, sources emitting 50 tons per year or less would ipso facto be excluded from the PSD requirements. Nevertheless, standard doctrine teaches us that our proper course is to remand this matter for further consideration by EPA.

In view of the possibility that EPA may refashion, rather than terminate, its exemption, we guide our remand by identifying the principles pertinent to an agency’s authority to adopt general exemptions to statutory requirements. This discussion is appropriate because the exemption regulations under discussion reflect a misunderstanding by EPA of these principles and of regulatory exemptions based upon assessment of costs and benefits. These principles may have bearing on EPA’s reconsideration of this exemption on remand and would appear to have bearing on a number of other EPA actions under review.

Exemptions Born of Administrative Necessity. Certain limited grounds for the creation of exemptions are inherent in the administrative process, and their unavailability under a statutory scheme should not be presumed, save in the face of the most unambiguous demonstration of congressional intent to foreclose them. But there exists no general administrative power to create exemptions to statutory requirements based upon the agency’s perceptions of costs and benefits.

We noted at the outset that we are not concerned here with the “equitable” discretion of agencies to afford case-by-case treatment — taking into account circumstances peculiar to individual parties in the application of a general rule to particular cases, or even in appropriate cases to grant dispensation from the rule’s operation. The need for such flexibility in appropriate eases is generally recognized, and enhances the effective operation of the administrative process, 81 though Congress may, of *358 course, restrain the agency by mandating standards from which no variance is permitted. 82 In this case, however, we are-presented with an attempt by an agency to promulgate a blanket exemption from statutory requirements. The EPA’s action reflects no choice to exercise administrative discretion based on circumstances peculiar to the individual case.

Categorical exemptions from the clear commands of a regulatory statute, though sometimes permitted, are not favored. In FPC v. Texaco Inc.,