PCA-88-002-BC

2-2200-1702-1

STATE OF MINNESOTA

OFFICE OF ADMINISTRATIVE HEARINGS

FOR THE MINNESOTA POLLUTION CONTROL AGENCY

In the Matter of Proposed

Amendments to Rules Governing REPORT OF THE

Air Quality Permit Fees, ADMINISTRATIVE LAW JUDGE

Minn. Rules part 7002.0100.

The above-entitled Patter came on for hearing before Bruce It Campbell ,

Administrative Law Judge, at 9:30 A.M. on September 1 , 1987, in the Board Room

of the Minnesota Pollution Control Agency at 520 Lafayette Road, St. Paul,

Minnesota.

This Report is part of a rulemaking proceeding held pursuant to Minn.

Stat. 14.01 through 14.28 (1986), to determine whether the proposed

amendments governing air quality permit fees should be adopted by the

Minnesota Pollution Control Agency (PCA or Agency).

The Agency was represented by Beverly Conerton, Special Assistant Attorney

General, Suite 200, 520 Lafayette Road, St. Paul, Minnesota 55155. Members of

the Agency panel appearing at the hearing were Elizabeth Henderson, J. Michael

Valentine and Ahto Niemioja, Division of Air Quality, Minnesota Pollution

Control Agency, 520 Lafayette Avenue North, St. Paul, Minnesota 55155.

The hearing register was signed by 11 persons. Four members of the public

provided oral testimony at the hearing. All persons desiring to testify were

given an opportunity to do so. The record remained open through September 21,

1987, for the submission of initial written comments. At the hearing herein,

the Agency offered PCA Ex. 1-15 as jurisdictional documents. Public Exhibits

16-25 were also received during the hearing. During the initial comment

period, which expired on September 21, 1987, the Administrative Law Judge

received the following timely-filed comments:

Pub. Ex. 26 Outdoors Committee, September 21 , 1 987

Pub. Ex. 27 Pickands Mather, September 21, 1987;

PCA Ex. 28 Minnesota Pollution Control Agency,

September 21, 1987;

Pub. Ex . 30 J.L. Shiely Company, September 21, 1987.

As authorized by Minn. Stat. 14.15, subd. 1 (1986), three business days

were allowed for the filing of responsive comments. During the period for

reply comments, the following submissions were made:

Pub. Ex. 29 Outdoors Committee, September 23, 1987;

Pub. Ex. 31 J.L. Shiely Company, September 24, 1987;

PCA Ex. 32 Minnesota Pollution Control Agency,

September 24, 1987.

On September 24, 1987, the record of this rulemaking proceeding finally

closed for all purposes.

The Board must wait at least five working days before taking any final

action on the rules; during that period, this Report must be made available to

all interested persons upon request.

Pursuant to the provisions of Minn. Stat. 14.15, subd. 3 and 4 this

Report has been submitted to the Chief Administrative Law Judge for his

approval. If the Chief Administrative Law Judge approves the adverse findings

of this Report, he will advise the Board of actions which will correct the

defects and the Board may not adopt the rule until the Chief Administrative

Law Judge determines that the defects have been corrected. However, in those

instances where the Chief Administrative Law Judge identifies defects which

relate to the issues of need or reasonableness, the Board may either adopt the

Chief Administrative Law Judge's suggested actions to cure the defects or, in

the alternative, if the Board does not elect to adopt the suggested actions,

it may submit the proposed rule to the Legislative Commission to Review

Administrative Rules for the Commission's advice and comment.

If the Board elects to adopt the suggested actions of the Chief

Administrative Law Judge and makes no other changes and the Chief

Administrative Law Judge determines that the defects have been corrected, then

the Board may proceed to adopt the rule and submit it to the Revisor of

Statutes for a review of the form. If the Board makes changes in the rule

other than those suggested by the Administrative Law Judge and the Chief

Administrative Law Judge, then it shall submit the rule, with the complete

record, to the Chief Administrative Law Judge for a review of -the changes

before adopting it and submitting it to the Revisor of Statutes.

When the Board files the rule with the Secretary of State, it shall give

notice on the day of filing to all persons who requested that they be informed

of the filing.

Based upon all the testimony, exhibits, and written comments, the

Administrative Law Judge makes the following:

FINDINGS OF FACT

Procedural_Requirements.

1. On July 10, 1987, the Agency filed the following documents with the

Administrative Law Judge:

(a) A copy of the prcposed rules, with the certification of approval as

to form by the Revisor of Statutes.

(b) A draft Order for Hearing.

(d) A Statement of the number of persons expected to attend

the hearing and estimated length of the Agency's presentation.

(e) A copy of the Statement of Need and Reasonableness (SONAR).

(f) A Certificate of the Agency's Authorizing Resolution, executed

on behalf of the Executive Director of the Agency,

Thomas J. Kalitowski, by Barbara Lindsey Sims.

2. On July 2 7 , 1987, a Notice of Hearing and copy of the proposed

amendments to the existing rule were published at 12 State Register 136-138.

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3 . On July 23, 1 987 , the Agency mailed the Notice of Hearing to all

persons and associations who had registered their names with the Agency for

the purpose of receiving such notice. in addition, a copy of the Notice was

mailed by the Agency to all persons or entities currently holding an air

quality permit under the existing rule.

4. On July 31, 1987, the Agency filed the following documents with the

Administrative Law Judge:

(a) The Notice of Hearing as mailed.

(b) A photocopy of the pages of the State Register on which the Notice of

Hearing and the proposed rule amendments were published.

Stat. 14.14, subd. la (1986) which was used for the mailing of the

Notice was accurate and complete.

(d) The Affidavit of Mailing of the Notice to all persons on the Agency's

mailing list and the mailing list. This mailing list contains a list

of all persons currently holding an air quality permit from the

Agency. That mailing constitutes additional discretionary notice

given pursuant to Minn. Stat. 14.14, subd. la (1986).

(e) Copies of the pages of the State Register on which a Notice of Intent

to Solicit Outside Opinion was published. No comments were received

from members of the public following publication of the Notice.

(f) The names of the Agency personnel who would represent the Agency at

the hearing.

These documents were available for inspection at the office of Administrative

Hearings from the date of filing to the date of the hearing.

5. The period for submission of written comments remained open -through

September 21, 1987, the period having been extended by Order of the

Administrative Law Judge to 20 calendar days following the close of the

hearing. Pursuant to Minn. Stat. 14.15, subd. I (1986), an additional three

business days were allowed for the filing of responsive comments. The record

therefore closed on September 24, 1987.

Nature_of Proposed Amendments.

6. The proposed amendments modify Minn. Rule 7002.0100, Air Quality

Permit Fee Schedule, by increasing each stated fee a uniform proportional

percentage. No change other than that proportional increase in fees is

contained in the proposed amendments. The amount of the proportional increase

is approximately 60%. All of the oral testimony at the hearing and subsequent

written comments would apply equally to all changes in the fee schedule, and

none is directed towards an individual change in that schedule.

Notification_to_legislative Committees.

7. Minn. Stat. 16A.128, subd. 2a., which was adopted by laws 1986,

C. 436, 2 and which became effective on July 1, 1987, provides:

Procedure. Other fees not fixed by law must be fixed by

rule according to chapter 14. Before an agency submits

notice to the state register of intent to adopt rules that

establish or adjust fees, the agency must send a copy of

the notice and the proposed rules to the chairs of the

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house appropriations committee and senate finance

committee.

8. The Agency submitted its Notice of and Order for Hearing herein to the

State Register sometime subsequent to July 1, 1987 and before the publication

of the Notice of Hearing in the State Register on July 27, 1987. The Agency

did not send a copy of the Notice and a copy of the proposed amendment to the

Chairperson, of either the House Appropriations Committee or Senate Finance

Committee as required by Minn. Stat. 16A.128, subd. 2a. (1986). The record

does riot indicate that the Senate Finance Committee or the House

Appropriations Committee has ever received a copy of the Notice and the

proposed rule amendments.

9. The Outdoors Committee, in Pub. Ex. 26 and 29, argues that the failure

to provide the Notice and a copy of the proposed amendment is an incurable

procedural defect, requiring a re-noticing of the hearing. The Agency argues

that the receipt by the two Legislative committees of a copy of PCA Ex. 3,

dated June 11, 1987, is substantial compliance with the statutory

requirement. PCA Ex. 32. In the alternative, the Agency suggests that the

defect be corrected by allowing the Legislative Committees to supplement the

existing rulemaking record with comments. PCA Ex. 32.

10. It is not clear that Minnesota has adopted a substantial compliance

exception to statutory rulemaking requirements. Johnson Bros. Wholesale

Liquor v. NovaK, 295 N.W.2d 238, 242 (Minn. 1980); Handle With Care Inc. v.

Department of Human Services, 393 N.W.2d 421, 424-425 (Minn.App. 1986),

reversed on other grounds Handle with Care v. Department of Human Services

406 N.W.2d 518 (Minn. 1987). Even if that doctrine were available, however,

the document upon which the Agency relies, PCA Ex. 3, does not establish

substantial compliance with Minn. Stat. 16A.128, subd. 2a. (1986). PCA Ex.

3 is a memorandum from the Commissioner of Finance to the Executive Director

of the Minnesota Pollution Control Agency regarding methods of calculating fee

revisions to provide direction to the Agency in formulating a proposal . PCA

E x . 3, at most, apprised the Legislative Committees that the Agency was

considering a revision to its permit schedule. It does not indicate the stage

of development of the revision or, even, that the Agency will finally commence

a rulemaking to accomplish a revision. Under such circumstances, at most, it

alerted the Committees and their staffs, that the matter was being considered

by the Agency. Unless the Administrative Law Judge were to place some

undefined duty of inquiry upon the Committees, PCA Ex. 3 would not substitute

for the filing required by Minn. Stat. 16A.128, subd. 2a. (1986). A number

of agencies consider revisions to fees and, presumably, do so without that

consideration resulting in proposed rule amendments. Placing such a duty upon

the Legislative committees is neither reasonable, nor in accordance with the

literal language of the statute. Undeniably, one purpose of the statute was

to avoid such diverse investigation by the Committees. Hence, the

Administrative Law Judge finds that the Agency has not substantially complied

with the statute, either prior to the hearing or subsequently. The failure to

comply with Minn. Stat. 16A.128, subd . 2a. (1986), is a unremedied

procedural irregularity.

11. Having determined that the failure to comply with Minn. Stat.

16A.128, subd. 2a. (1986), constitutes a procedural irregularity, it must

be determined whether that irregularity is subject to correction or whether it

is jurisdictional, requiring a re-noticing of the hearing. The Agency

suggests that the Administrative Law Judge allow an additional comment period

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during which members of the Committees may file additional comments,

presumably, for review by the Administrative Law Judge. PCA Ex. 32, pn 2.

The record of a rulemaking proceeding, however, closes after the comment

periods authorized by Minn. Stat. 14.15, subd. I (1986) See, Minn. Stat.

14.14, subd . 2a.; 14.15, subd . 1, 2 ; 14.45 (1986). Hence, the

Administrative Law Judge is without statutory authority to accept additional

substantive comments upon which he may rely in determining compliance with

statutory requirements and need and reasonableness.

12. The Agency's request for an opportunity to obtain Legislative

comments could be construed as a request that it be directed to obtain a

written statement from the Chairpersons of each of the two Committees that the

Legislature had no interest in participating in this rulemaking and, hence,

any failure to follow statutory procedure was harmless error.

PCA Ex. 32, p. 2. Presumably, under that suggestion, any comment other than

an expression of disinterest in participating would result in the finding of a

jurisdictional defect and a re-noticing of the hearing.

13. There is general language in several decisions of the Minnesota court

suggesting that the absence of demonstrated prejudice to persons entitled to

participate in a governmental proceeding is material in judging compliance

with procedural requirements. See, city of Minneapolis v. Wurtele, 291 N.W.2d

386, 391 (Minn. 1980). See also, Handle With Care ,._Department of Human

Services, 406 N.W.2d 518 (Minn. 1987). The elements of that test have been

articulated by several commentators. Auerbach, Administrative Rulemaking in

Minnesota, 63 Minn. L. Rev. 151, 21 5 (1979), quoting, Bonfield, The Iowa

Administrative Procedure_Act;; Background,__Construction.-Applicability,_Public

Access to _Agency Law the Rulemakinq Process, 60 Iowa L. Rev. 781, 834

(1975). As previously indicated, however, the Minnesota court has not clearly

recognized the doctrine of substantial compliance in a rulemaking context.

Wurtele , supra, involved a governmental action where substantial compliance

was a recognized tenant of the applicable law. Handle With Care supra,

merely holds that the Legislature did not intend the requirement of a study to

be a precondition to rulemaking; it did not involve an issue of substantial

compliance.

Moreover, even adopting lack of prejudice as the test of whether a

procedural defect is correctable, does not support the Agency position. The

statute provides that the required information be made available at a

particular time, in a particular way to two identified committees of the

Legislature. Reasonably, that filing would be available not only to the two

individual Committee Chairpersons, but to their staff, other members of the

two Committees arid, even, other members of the Legislature who might wish to

be apprised of developments in agency fee rulemaking. Rationally, Legislative

interest in fee-related rulemaking could vary significantly with the fee

involved. The Agency has not relied on any portion of the legislative history

of Minn. Stat. 16A.128, subd. 2a. (1986), which would justify a conclusion

that the Chairpersons of the two Committees were the intended sole

beneficiaries of the statute. Given the plain language of the provision, the

Administrative Law Judge must conclude that affording the two Chairpersons an

opportunity to express a retroactive disinterest in this proceeding would not

affirmatively establish the absence of prejudice.

Nor is it clear, if this solution were adopted, &at each Chairperson

would enter into the record. The possibilities range from a lack of a

personal interest to an expression of a lack of interest on the part of anyone

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to participate who may have been the beneficiary of such notice. It is

inconceivable how the identified individuals could speak for other members of

their Committees, unidentified members of the Legislature or members of the

public .

It should also be noted that the amendments herein raise existing fees by

60%, that the initial fee schedule was legally adopted without a public

hearing and has been the subject of controversy since its adoption, and the

Agency contends that questions relating to need and reasonableness cannot be

examined in this rulemaking proceeding. See Findings 25 - 28 , infra. Under

such circumstances, fashioning in extra-record substitute for a statutorily

required notice is doubly objectionable.

It could be argued that, since the statute provides no express penalty for

a failure to accomplish the required filing, it is only informational and not

a jurisdictional prerequisite to rulemaking. See generally Handle with care

v. _Department of Human Services, 406 N.W.2d 518 (Minn. 1987). In that case,

however, the requirement of performing an administrative study was not

expressly lied to the Agency's rulemaking authority and specific legislative

history stated a contrary Legislative intent. In this proceeding no such

specific Legislative intent has been demonstrated and the purpose of the

filing is to facilitate participation in the rulemaking. the timing of the

required notice, prior to the submission of rules to the State Register,

indicates an intent to provide interested legislators, at least, with an

opportunity to contact the Agency prior to the commencement of the proceedings

and participate in the hearing process, if noticed. Nor, can the filing be

characterized as only informational. When the Legislature has intended that a

filing with Legislative Committees be for informational purposes only in the

context of rulemaking, it has clearly so provided. see, Laws of 1977 C. 453,

16.

The Administrative Law Judge equates the procedural defect with a failure

to provide adequate notice. At least in situations where the beneficiary of

such notice is unidentifiable, a failure to give the required notice is

jurisdictional. In re Wilmarth Line of C.U. Project, 299 N.W.2d 731 (Minn.

1980), appeal after remand., 380 N.W.2d 127 (1986). The Administrative Law

Judge finds, therefore, that the failure to make the filing with the

Chairpersons of the House Appropriations Committee and Senate Finance

Comm ittee requ i red by M inn . St at . 1 6 A . 1 2 8, su bd . 2 a . ( 1 9 8 6 i s a pro cedura I

defect which is jurisdictional, that is, not subject to remedy. The

rulemaking proceeding must be recommenced.

15. Since the finding of a jurisdictional defect by the Administrative

Law Judge is reviewable at both the administrative level and in the courts,

the Administrative Law Judge will make Findings regarding the other issues

raised in this proceeding. Any further Findings however, presume an integral

existing record. They will have no effect unle s s a reviewing authority

determines that the procedural defect is curable art the remedy required is

strictly implemented.

Small Business Considerations.

16. Minn. Stat. 14.115, subd . 2 (1986), requires the Agency, when

proposing rules which affect small businesses, to consider methods for

reducing the resulting impact on them. Since some of the entities required to

pay air quality permit fees are small businesses, as statutorily defined, an

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increase in the permit fee wi II have a f inanci a I impact upon them. Several

members of the public stated that the Agency has given insufficient

consideration to the impact o f both the initial rule and the proposed

amendment on small businesses. Pub. Ex. 26, p. 4; Pub. Ex. 29, p. 2. The

Outdoors Committee argues that the level of fee imposed by the rule depends

upon the annual potential emissions of two pollutants - particulates, and

S02 - and there is no necessary correlation between the size of a business

and the annual level of the specified pollutants emitted. Pub. Ex. 26, p. 2.

Small businesses might be major emission sources and a large company may emit

few, if any, of the specified air pollutants.

17. The Agency considered the methods suggested in the statute for

reducing impact on small businesses when the initial rules were adopted. PCA

Ex. 28, p. 3. It determined that the initial permit fee structure, which

distinguished between major and non-major sources of air emissions in the

amount of fees required, appropriately considered the impact on small

businesses. PCA Ex. 28, p. 3; PCA Ex. 32, p. 5. Most small businesses are

non-major sources. It s discussed at Findings 25 -- 28, infra, the

Administrative Law Judge may not reexamine that decision in this rulemaking

proceeding.

18. In this proceeding, the Agency has once again examined the impact of

its permit fee schedule on small businesses, as defined in Minn. Stat.

S 14.115 (1986). SONAR, pp. 6-7. It considered the methods for reducing the

impact of its rule amendments on small businesses specified in the statute.

The Agency concluded that it was appropriate to maintain the existing fee

relationship between non-major and major sources with smaller fees or no fees

imposed on non-major sources. PCA Ex. 32, p. 5; SONAR, p. 7. The fee amount

relationship between non-major and major sources will remain substantially the

same under the proposed fee revisions. PCA E x . 32, p. 5. Minn. Stat.

14.115 (1986), does not require that the Agency adopt any particular

solution to minimize the impact of its proposals on small businesses. If

small businesses did not pay a proportionately increased amount for their air

emission permits, that deficit would have to be recovered from other permit

holders. Since the Administrative Law Judge may not reexamine the Agency's

initial decision to distinguish only between non-major and major sources of

specified pollutants to determine the permit fee, uniformly proportional

increases for al I permits are fair to all permittees. Findings 25 - 28,

infra. The Outdoors Committee does not suggest that preferring small

businesses over larger ones is required, or even appropriate, under Minn.

Stat. 14.115, subd. 2 (1986).

19. The Administrative Law Judge, therefore, finds that the Agency has

complied with Minn. Stat. 14.115, subd . 2 (1986), by giving appropriate

consideration to methods for reducing the impact of its amendments on small

businesses. SONAR, pp. 6-7; PCA Ex. 28, p. 3; PCA Ex. 32, p. 5.

Consideration of Economic Factors.

20. The Agency must by give due consideration to economic factors in the

exercise of its authority and the promulgation of rules. Minn. Stat.

116.07, subd. 6 (1986). Pickands Mather suggests that an increase of

approximately 60% is not appropriate given existing economic conditions. Pub.

Ex. 27, p. 1 . That commentator suggests that the Agency must demonstrate its

attempts to reduce costs. Pub. E x . 2 7 , p. 1. The Agency must, however,

recover from its permittees the direct and indirect coots of regulation. See

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F ind ings 29 - 32 , infra . The Agency has no discretion in the total amount to

be recovered from permit holders. The Agency collects fees under Minn. Rules

Part 7001.0011, subp. 5 from approximately 550 air emission facilities each

year. Annual fees wi I 1 amount to approximately 66% or $552,000 of the

$831,383 total special revenue appropriation for the 19871989 state

biennium. The remaining $279,383 for the biennium will come from various

other fees associated with approximately 1400 permit actions to be conducted

over the biennium. SONAR, p. 8. The Agency has a statutory responsibility to

develop, implement and monitor an air quality permit program. It must recover

the direct and indirect costs of that effort from permit holders, except as

limited by statute. The Agency cannot eliminate its oversight

responsibilities or defer collecting the costs of oversight from permit

holders. SONAR, p. 8. The Agency could only reduce the amount to be

collected by eliminating inefficiencies Dr unnecessary costs in its current

air quality permit program. There is no evidence in the record that the

spending on behalf of the Agency for air quality permit oversight is in any

way unnecessary, inefficient or otherwise inappropriate. The Administrative

Law Judge finds that the Agency has given due consideration to available

information as to the economic impacts that would result from the amendments

to its existing rules. Minn. Stat. 116.07, subd. 6 (1986).

Statutory Authority.

21. The Agency's statutory authority to adopt the proposed rule

amendments is contained in Minn. Stat. 116.07, subd. 4d. (1986), which

provides:

The agency may collect permit fees in amounts not greater

than those necessary to cover the reasonable costs of

reviewing and acting upon applications for agency permits

and implementing and enforcing the conditions of permits

pursuant to agency rules. Permit fees shall not include

the costs of litigation. The agency shall adopt rules

under sections 16A.128 establishing the amounts and methods

of collection of any permit fees collected under this

subdivision. Any money collected under -Lb!; subdivision

shall be deposited in the special revenue fund.

2 2 . The Agency adopted Minn. Rules Parts 7002.0010 - 7002.0110 in

accordance with Minn. Stat. 16A.128 (1986), as required by Minn. Stat.

116.07, subd. 4d. (1986). Minn. Stat. 16A.128, subd. la. (1986), requires

fees to be reviewed and, if necessary, adjusted:

These fees must be reviewed each fiscal year. Unless the

commissioner determines that the fee must be lower, fees

must be set or fee adjustments must be made so He total

fees nearly equal the sum of the appropriation for the

accounts plus the agency's general support costs, statewide

indirect costs, and attorney general costs attributable to

the fee function.

23. No member of the public questioned the statutory authority of the

Agency to adopt rules relating to air quality permit fees.

24. As a consequence of Findings 21 - 23, supra, the Agency has statutory

authority to adopt amendments to its air quality permit fee rules.

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Scope of_Review for Need and Reasonableness.

25. Minn. Stat. 1 4 .14 , subd . 2 (1 986) , requires the Agency to establish

the need for and reasonableness of the rule amendments. A number of public

witnesses stated, both at the hearing herein and in subsequent written

comments, that the Agency should justify the need for and reasonableness of

not only the fee increases, but also the existing fee structure which is based

on potential Emissions of two pollutants and has only two fee classes. See,

e.g., Pub. Ex. 26 , pp. 2-3 ; Pub. Ex . 29 , p. 1 ; Pub. Ex. 31 , pp. 1 -3, and

attachments; Tr. 45-47; Tr. 54-55. In summary, the argument is that since the

PCA did not hold a public hearing when the initial fee structure was adopted,

the reasonableness of the existing fee structure has never been reviewed

independently. They request the Administrative Law Judge to consider the need

for and reasonableness of the fee structure contained in the original

rulemaking and carried forward in the proposed amendments. Several witnesses

described the confusion and asserted misinformation extant at the time of the

original rulemaking, their inability to determine the number of requests

required to force a public hearing on the initial fee schedule and the

financial disincentives -to perfecting a judicial appeal. Pub. Ex. 26, pp.

2-3; Pub. Ex. 29, p. 1; Pub. Ex. 31, pp. 1-5; Jr. 16-18.

26. The Agency argues that it had no legal obligation, at the time of the

initial adoption of an air quality permit fee schedule, to conduct a public

hearing and, as a consequence, the Administrative Law Judge cannot consider

arguments related to the structure of the existing fee schedule. Rather, he

must confine his review to the need for and reasonableness of the

proportionate increase in fees over all categories of air quality permits

subject to the fee schedule. See, e. g . , PCA Ex . 28 , pp. 1 -2 ; PCA Ex . 32 , pp.

3-4. Moreover, it states that there was a measure of public participation in

the development of the original proposal. PCA Ex. 32, pp. 3-4.

2 7 . Minn. Stat. 14.14, subd. 2 (1986), requires an agency to establish

the need for and reasonableness of the rule amendments. Minn. Stat. 14.131

(1986), requires the agency to prepare a Statement of Need and

Reasonableness. Rules promulgated pursuant to that statute are found at Minn.

Rules 1400, et seg. part 1400.0500 specifies the content and nature of the

Statement of Need and Reasonableness which would comport with the statutory

requirement. Subpart 1, Item C of the rule qua I i f i es the nature of the

agency's burden when it proposes to amend existing rules:

To the extent that an agency is proposing amendments to

existing rules, the agency need not demonstrate the need

for and reasonableness of existing rules not affected by

the proposed amendments.

The Agency has not attempted to modify the original fee structure but has

proposed a uniform proportional increase in amounts. The Agency must only

justify the increased amounts with a presentation of facts establishing need

and reasonableness. Although the Agency might have avoided subsequent

controversy by holding a public hearing prior to adopting its initial rules,

it was not required to do so by law. Minn. Stat. 16A.128, subd . 2a.

(1985). In 1986, the Legislature amended the statute to require the

promulgation of rules under the Administrative Procedures Act. Laws of 1986,

C. 436. The Administrative Law Judge has carefully reviewed the arguments of

members of the public relating to the scope of review for need and

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reasonableness. He f inds that the Agency acted wi thin the statutory framework

existing at that time and there is no basis in this record to depart from the

rule of law previously enunciated when only amendments to existing rules are

proposed. The comments do contain a number of reasons why limiting the scope

of inquiry in this proceeding might be inequitable. Ithe Agency, however,

acted within the then existing law, its fee structure was duly adopted and no

judicial appeal was perfected. Hence, it is appropriate to limit the scope of

review for need and reasonableness in this proceeding to the proportional

increase in the air quality permit fees without considering the reasonableness

of the existing fee structure.

28. The fear is expressed that no practical forum exists for permit

holders to require the Agency to amend the structure of its fee schedule and

the reasonableness of the existing schedule will ever remain unreviewed. It

will not be presumed, however, that the Agency is acting in bad faith and will

not consider comments offered in this proceeding for a future revision of its

air quality permit fee schedule. If necessary, a petition cculd be filed

pursuant to Minn. Stat. 14.09 (1986) to hasten consideration of the issue.

Should the Agency fail to do so, the Legislative Commission to Review

Administrative Rules (LCRAR) null be an inexpensive expedient to require the

Agency to reconsider the structure of the f e e schedule in a rulemaking

proceeding. For a discussion of the authority of the LCRAR see, Beck, Bakken,

and Muck, Minnesota Administrative Procedure, C. 26 (Butterworth, 1987).

Need for the_proposed Rule Amendment;.

29. Minnesota Rules parts 7002.0010 - 7002.0110 became ef fect ive on

January 21, 1986, in response to the legislative requirement that the Agency

collect through permit fees the funds necessary to recover the cost of permit

issuance and enforcement. The rules, as initially adopted, were designed to

result in revenues of approximately $270,000. Minn. Stat. 16A.128, subd.

la. (1986) requires Agency fees to be reviewed annually and to be adjusted if

collections under the current fee schedule will not cover the applicable

appropriation. In 1987, the Legislature increased the total amount that the

Agency is required to collect through permit fees. Most of the increase in

required recovery results from the Legislature's determination that the

indirect costs associated with issuing and monitoring PCA permits must also be

recovered from permit holders. The additional items of recovery mandated by

the Legislature in 1987 include amounts necessary to match the Special Revenue

Appropriation and Salary Supplements hereinafter summarized. In 1987 the

Legislature appropriated $286,400 for each of Fiscal Years 1988 and 1989, or

$572,800, for the 1987-89 biennium in direct salary and fringe benefit costs

from the Special Revenue Fund for Permit Fees to the Agency's Air Pollution

Control Program. SONAR p. 4. The 1987 Legislature also appropriated $533,700

for each of Fiscal Years 1988 and 1989, or $1,067,400 for the 1987-1989

Biennium to the Agency from the Special Revenue Fund for Permit Fees for the

purpose of funding indirect costs. SONAR, p. 4.

30. The Agency divided the amount of the additional item of permit

recovery, $1,067,400, among its three divisions. It determined that the

proportional amount of additional recovery for this item required of the Air

Quality Division was $206,000 for the 1987-1989 biennium. SONAR, p. 4. In

response to the open appropriation of the Legislature for a salary supplement,

the Agency determined that average annual salary and fringe benefit increases

have been slightly in excess of 6% over the past four year period. SONAR, p.

5. It therefore apportioned to the Division of Air Quality a total amount for

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salary supplement recovery of $52,583. In determining the level of indirect

costs required to be recovered, the Agency used a factor of 36% of the direct

costs . This rate is the federal indirect cost rate approved by the Department

of Finance for use by the Minnesota Pollution Control Agency. PCA Ex. 28, p.

3. The following table summarizes the appropriations and permit fee

collection requirements for the Division of Air Quality, as determined by the

Agency:

AIR_QUALITY DIVISION FY 1988 FY 1989 BIENNIUM

Direct Appropriation $ 286,400 $ 286,400 $ 572,800

Indirect Appropriation 103,000 103,000 206,000

Salary Supplement 3 5 399 583

TOTAL $ 406,584 424,799 $ 831,383

SONAR, p. 6.

31. The Agency has determined that it will recover from the existing fee

schedule approximately $270,000 during fiscal year 1987. Since the existing

fee schedule wi I I recover significantly I e s s than the amount considered

necessary -Lo meet the legislative requirement of cost recovery, $831 383 for

the biennium, the Agency determined it was necessary to amend its fee

schedule.

32. The Agency is, undoubtedly required by statute to recover from permit

holders through air quality permit fees an amount necessary to recover the

reasonable direct and indirect costs of issuing and monitoring air quality

permits, subject to the limitation of Minn. Stat. 116.07, subd. 4d. (1986) .

If the Agency's calculation of the amount to be recovered is accepted by the

Administrative Law Judge, it has demonstrated a need to adjust existing air

quality permit fee amounts.

33. The Outdoors Committee argues that no determination about the need to

adjust existing fee levels may be made until after the Commissioner of Finance

has performed the annual review of al I agency fees required by law to be set

by rule mandated by Minn. Stat. 16A.128, subd. la. (1986) Pub. Ex. 26, pp.

3-4. The Commissioner (of Finance has, however, reviewed ard approved the

Agency' s proposed fee increase. PCA Ex. 1-3. While it is true that the

Department of Finance is, currently, only in the process of completing a total

fee review for 1986-87, Agency data will be submitted to the Department of

Finance prior to September 30, 1987. PCA Ex. 28, p. 3. For purposes of this

rulemaking, the approval and certification by the Commissioner of Finance,

acting pursuant to Minn. Stat. 16A.128, should. la. (1986), is sufficient.

PCA Ex. 28, p. 3.

34. Both the Outdoors Committee and J.L. Shiely Company, in oral and

written comments, stated that the Agency was including in its totals costs not

authorized by Minn. Stat. 116.07, subd. 4d. (1986). Pub. Ex. 26, pp. 2-3;

Pub . Ex . 31 , p . 7 ; Tr. 76 . Both commentators argue that the statute limits

th e Agency to recove r from fee s th e actua I costs of rev iewing and act ing upon

app 1 i cations f or Agency permits and implement ing and enforc ing the cond it ions

of permits pursuant to Agency rules . The Agency has agreed that it seeks to

recover from permit holders the costs associated with staff members making

determinations about whether a permit is necessary, as well as acting upon

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permit applications and enforcing conditions imposed. Tr. 34. Apparently,

both commentators interpret Minn. Stat. 116.07, subd. 4d. (1986), to limit

recoverable costs to those costs directly resulting from the Agency's action

on actual applications for permits and enforcing their conditions. J.L.

Shiely Company, at the hearing herein, requested that the Agency document the

size of its permit staff, their job duties and the percentage of time spent on

permit administration. Jr. 76.

35. The Agency stated that the Legislature has determined the

reasonableness of its costs through the appropriations process and the Agency

must recover that amount from permit holders. See, Minn. Stat. S l6A.128,

subd. la. (1986); Laws of 1987, C. 404; Pub. Ex. 28, p. 3; Pub. Ex. 32, p. 4.

3b. The Administrative Law Judge does not accept the limited reading of

Minn. Stat. S 116.07, subd. 4d. (1986), suggested by J.L. Shiely Company or

the Outdoors Committee. Rather, the statute should be read to allow the PCA

to recover from permittees the cost of not only issuing and securing

compliance with permits but also determining whether permits are necessary.

Tr. 36-37. That interpretation is consistent with a House of Representatives

staf f determination and the certi fication by the Commissioner of Finance.

Pub. Ex. 26, attachment; PCA Ex. I . Although the Agency did not provide for

the record the detailed staff fiscal data requested, it did document to the

Legislature at the time of the appropriation, the reasonable costs of its air

quality permit program and the Legislature appropriated that amount. F r.

18-19. Moreove r, a I I o f th e sta f f f unded by th e approp r i at i on a re d i rectly

engaged in activities related to permitting and the enforcement of permits.

PCA Ex. 32, p. 4; PCA Ex. 28, p. 3. The Administrative Law Judge has no basis

for substituting his judgment for that of the Legislature expressed in the

appropriations process.

37. Although not questioned at the hearng or in subsequent written

comments, authority for including the amount of a salary supplement in the

amount to be raised through permit fees is contained in Laws of 1987, C. 404,

43, subd. 1, and Laws of 1986, C. 404, 24, subd. 2.

38. The amount appropriated in the Special Revenue Fund for the direct

costs, including salary and fringe benefits, of Agency staff engaged in air

quality permitting activities is $572,800 for Fiscal Years 1988 and 1989

combined. PCA Ex. 4, Journal of the Senate, p. 5190; PCA Ex. 28, p. 3. Hence,

with respect to the direct appropriation for air quality permitting in the

Special Revenue Fund , the Legislature has determined that $572,800 is

appropriate for recovery by the Agency in air quality fees.

39. Minn. Stat. 16A.128, subd. la. (1986), requires the Agency to

recover in fees not only the appropriation for the account specifically but

also indirect costs. Indirect costs, as noted in Finding 30, supra, have been

determined by multiplying the direct appropriation in the special account by

36%. That percentage is the factor used by the federal government and has

been uniformly recognized both by the Agency and the Minnesota Department of

Finance as the appropriate factor to determine indirect costs. PCA Ex. 28, p.

3. Use of the 36% factor to determine the proper amount of indirect costs is

reasonable.

40. The amount included in the salary supplement portion of the fee

calculation, $52,583, was derived by multiplying the direct cost,

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approximately $572,000, by an annual factor of 6%, which the Agency determined

was the average annual increase in ssalary and fringe benefits over the past

four years. SONAR, p. 5. Use of the average annual increase over the past

four year period is reasonable.

41. As a consequence of Findings 29 - 40, supra, the Agency has shown a

need to recover in air quality permit fees the following: that portion of the

direct appropriation from the Special Fund in 1987 which represents costs

meeting the requirements of Minn. Stat. 116.07, subd. 4d. (1986), $572.800;

an additional 36% of that amount for recoverable indirect costs; and an

additional 12% of the direct costs for the biennium for a salary supplement.

PCA Ex. 28, p. 3. The Agency, must, therefore, increase revenues from air

quality permit fees from $270,000 annually to $406,854 for Fiscal Year 1988

and $424,799 for Fiscal Year 1989, or $831,383 for the biennium.

Reasonableness of Amendments-to Fees.

42. As previously discussed, each fee is increased a uniform 60% based on

projections that the number of permit holders required to pay fees will not

increase markedly. Multiplying the number of existing permit holders required

to pay fees by the amount of the amended fees, assuming relative stability in

the number of permittees, would result in recovering the amount found

necessary in Finding I", supra. The Agency has calculated that the amended

fee levels will result in the collection of revenue of $831,415 for the

biennium. PCA Ex . 2. Since the Agency must inc rease fees by a s ign i f i cant

amount, a proportionate increase over all classes of fees spreads the burden

of the increase evenly without a disproportionate increase in any single

category of fee. A proportionate 60% increase over all categories of fees to

raise the amount found necessary is reasonable if the Agency's assumptions in

determining the fee levels required to generate the necessary revenue are

accurate.

43. Several commentators argued that the actual number of persons who are

subject to the air quality fee rules substantially exceeds the existing number

of fee-paying permit holders. It is argued that the PCA's asserted failure to

identify all installations required to pay fees results in a

disproportionately higher fee for those owho have been identified. Pub. Ex.

2-7, p . I ; Pub. Ex. 31 , p. 5. The PC.A collects fees from 532 air emission

facilities each year. Pub. Ex. 2 7 , p. 1. This number represents only a

fraction of all air emission facilities in Minnesota.

44. The Outdoors Committee sponsored two public exhibits to demonstrate

that the Agency has not identified all facilities that should pay permit

fees . Pub. Ex. 16 is the first and last page of a ten page computer printout

from the Agency, listing the 532 entities required to pay permit fees, as of

July 8, 1987. The Agency estimates that, for 1988, there will be

approximately 550 fee payers. Tr. 25; SONAR, p. 8.

45. Pub. E x . 17 is a portion of an Agency-generated computer printout

which, in its entirety, includes approximately 2,175 facilities potentially

subject to air emission regulations. Jr. 30. Under the column in Pub. Ex. 17

marked "priority" it was the intention of the Agency to include numbers

ranging from zero, representing no permitting requirement, to a five,

indicating status of facility unknown. A number between I and 4 would

indicate that fees were required. Of the 2,175 facilities listed in Pub. Ex.

17, approximately 811 have a blank space in the priority column. Tr. 2 7 . The

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Outdoors Committee argues that Pub. Ex. 17 shows the Agency has not made a

good faith effort to identify facilities required to pay air quality permit

fees. Tr. 26-31.

46. The blank spaces in the priority code column for facilities listed in

Pub. Ex. 17 should not be interpreted as indicating that they have not been

reviewed for compliance with air emission fee payment requirements. The

Agency began collecting data on air emission facilities for permitting

purposes in approximately 1975, when most air emission permit. requirements

were adopted. Between 1975 and 1985, the facilities have been visited by

permitting staff , who became acquainted with the source's permit

requirements. In 1985, when air emission fees were initially adopted, the PCA

staff , during the months of July, August and September, made determinations as

to wh i ch of the f ac i I iti es on its maste r list wou I d be requ i red to pay a i r

quality permit fees under the new regulations. Those decisions were based on

a large variety of information and included direct contact with the facility

when necessary. Pub. Ex. 21, p. 2. The annual fee list has been updated on a

monthly basis both by adding permits issued during that month and by an

internal annual review prior to actual bil ling. Pub. Ex. 21 , p . 2 . A blank

in the priority column of Pub. Ex. 17 does not indicate that Agency staff have

not made a determination that no permit is required. Eighty to 90% of the 800

facilities with a blank in the priority code column in Pub. Ex. 17 have been

determined by Agency staff not to require a permit. Tr. 34. The blanks in

the priority column indicate, then, only that the staff has not as yet entered

the results of its investigations into the list. Moreover, the Agency is

correcting the apparent oversight that initially excluded sand and gravel

facilities. Although sand and gravel facilities were not included on the

Agency's list when the fee schedule was adopted in 1985, the Agency made a

state-wide survey of such facilities. It identified 225 potential facilities

involved in sand and gravel activities. The staff determined that only 37 of

the facilities were required to obtain a permit. Agency staff is currently

working with the sand and gravel industry to secure compliance with permit

requirements. Pub. Ex. 21, p. 2.

4 7 . As a consequence of Finding 46, supra, the Administrative Law Judge

finds that the Agency has reasonably identified the number of entities

required to pay air quality permit fees under its rules.

48. Several commentators suggested that the Agency's fee calculations

were unreasonable because they projected only insignificant growth in the

number of entities required to pay air quality permit fees in 1988, over

198-1. Tr. 24-25; -Fr. 37. The Agency responded that, since it. has already

dentified most entities required to pay permit fees, its projected growth in

air quality permit fee payers from 535 to 550 in 1988 is reasonable.

49. Since the Agency has already identified most of the sources that are

required to pay permit fees, it is reasonable to anticipate only minor growth

in the number of permit holders required to pay fees in 1988.

50. The Agency's activity in identifying new sources is a dynamic

process. It can be expected that new facilities will begin, old facilities

will be discontinued and the emissions at a particular facility may vary with

the specific activities the company wishes to undertake. Tr. 38. Fee payers

are protected from continued under-estimation of the number of entities who

will be remitting f ees . Minn. Stat. 16A.128, subd. la. 986) .

Over-recovery of f ees on a more than sporadic basis would resu It in an

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adjustment to achieve the correct recovery level.

51. Several commentators stated that the classifications contained in the

existing rules were unreasonable and, hence, required existing fee payers to

pay unreasonable amounts. The Outdoors Committee and Pickands Mather argued

that the exemption contained in the rules, which imposes no fee unless

emissions of two specified pollutants are potentially at least 50 tons,

results in an unreasonable fee to the entities who do pay such fees. Pub. Ex.

26 , p- 5 ; Pub . Ex . 27, p. I . Other commentators suggested that the current

fee structure, which bases the existing fee on the amount of only two

pollutants potentially emitted, also results in an unreasonable monetary

burden on existing fee payers. Pub. Ex. 30, pp. 1-3; Pub. Ex. 31, pp. 6-7.

5 2 . The Agency did not respond directly to such comments. Rather it

stated that the pollutants considered and categories established are parts of

the structure of the fee schedule contained in the unamended rule. PCA Ex.

28, rn 2. It contends that the Agency need not establish in this proceeding

the reasonableness of the structure of the original fee schedule, adopted by

rule in 1986 and never judicially challenged. PCA Ex. 32, p. 5; PCA Ex. 28,

p. 2.

53. As a consequence of Findings 25 -- 28, supra, challenges to the

reasonableness of the fee schedule established in the existing rule are beyond

the scope of review in this rulemaking proceeding. Minn. Rule 1400.0500,

subp. 1 (1985).

54. As a consequence of Findings 29 - 53, supra, the Agency has

established that the 60% proportional increase in air quality fee levels is

necessary, as a consequence of legislative requirements, and is reasonable, in

that it will recover the required amount.

Comments on-Existing Rules.

5 5 . Several commentators provided specific suggestions to the Agency for

improvements in the existing air quality permit fee rules. J.L. Shiely

Company offered information about the air quality fee rules in Oregon,

Michigan, wisconsin, California and Colorado. Pub. Ex. 18, 22, 30. It also

offered information regarding the use of other pollutants for structuring air

quality permit fees. Pub. Ex. 31. In addition, many of the comments relating

to the reasonableness of the existing rules were also suggestions for changing

the underlying fee structure. The Agency responded to these comments by

accepting copies of the submissions, but asserting that revisions to the

structure of the existing rules were beyond the scope of this rulemaking

proceeding. PCA Ex. 28, p. 2; PCA Ex. 32, pp. 5-6.

Based upon the foregoing Findings of Fact, the Administrative Law Judge

makes the following:

CONCLUSIONS

1. The Minnesota Pollution Control Agency gave proper notice of the

hearing in this matter.

2. -The Agency has fulfilled the procedural requirements of Minn. Stat.

14.14 (1986), and all other procedural requirements of law or rule, except

as discussed at F in d in g s 7 - 14, supra. As a result of that procedural

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irregularity the Agency may not adopt the proposed rule amendment. Rather, it

must renotice the hearing herein, after complying with Minn. Stat. 16A.128,

subd. 2a. (1986).

3. The Agency has documented its statutory authority to adopt the

proposed rules, and has fulfilled all other substantive requirements of law or

rule within the meaning of Minn. Stat. 14.05, subd. 1, 14.15, subd. 3 and

14.50(i) and (ii) (1986), except as stated in Conclusion 2 hereof.

4. if a reviewing authority determines that the procedural defect stated

n Conclusion 2, supra, is either subject to remedy or not prejudicial, the

Agency has demonstrated the need for and reasonableness of the proposed rules

by an affirmative presentation of facts in the record within the meaning of

Minn. Stat. 14.14, subd. 2 and 14.50(iii) (1986).

5. The defect cited in Conclusion 2, supra, is not subject to correction

and must result in a re-noticing of the hearing herein after compliance with

Minn. Stat. I6A.128, subd. 2a. (1986). .

6. Due to Conclusions 2 and 5, supra, this Report has been submitted to

the Chief Administrative Law Judge for his approval pursuant to Minn. Stat.

14.15, subd. 3 (1986).

7. Any Findings which might properly be termed Conclusions and any

Conclusions which might, properly be termed Findings are hereby adopted as

such.

Based upon the foregoing Conclusions, the Administrative Law Judge makes

the following:

RECOMMENDATION

It is hereby recommended that the Agency re-notice a public hearing for

the proposed amendments to its air quality permit fee schedule, in accordance

with Conclusions 2 and 5 , supra , after compliance with the requirements of

Minn. Stat. S 16A.128, subd . 2a. (1986). It may not proceed to adopt the

proposed rule amendments until that is accomplished.

Dated this 27th day of October, 1987.

BRUCE D. CAMPBELL

Administrative Law Judge

Reported: Court Reported. Kirby A. Kennedy & Associates

(612) 922-1955

1-800-642-7317

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