[Federal Register: October 3, 2005 (Volume 70, Number 190)]
[Notices]
[Page 57634-57635]
[DOCID:fr03oc05-151]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52510; File No. SR-Amex-2005-094]

Self-Regulatory Organizations; American Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Adopt Options Licensing Fees for Certain PowerShares ETF Options

September 26, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder, \2\ notice is hereby given
that on September 19, 2005, the American Stock Exchange, Inc. (``Amex''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by Amex. Amex submitted
the proposed rule change under Section 19(b)(3)(A) of the Act \3\ and
Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal effective
upon filing with the Commission. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to modify its Options Fee Schedule by
adopting a per-contract side licensing fee for the orders of
specialists, registered options traders (``ROTs''), firms, non-member
market makers, and broker-dealers in connection with transactions in
certain PowerShares exchange-traded funds (``ETFs'').
    The text of the proposed rule change is available on Amex's Web
site http://www.amex.com, at Amex's principal office, and at the

Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Amex included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. Amex has prepared summaries, set forth in Sections A, B,
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange has entered into numerous license agreements with
issuers and owners of indexes for the purpose of trading options on
certain ETFs and securities indexes. The requirement to pay an index
licensing fee to third parties is a condition to the listing and
trading of these ETF and index options. In many cases, the Exchange is
required to pay a significant licensing fee to issuers or index owners
that may not be reimbursed. In an effort to recoup the costs associated
with certain index licenses, the Exchange has established a per-
contract side licensing fee for the orders of specialists, ROTs, firms,
non-member market makers, and broker-dealers collected on every
transaction in certain designated products in which such market
participant is a party.\5\
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    \5\ See File No. SR-Amex-2005-087 (became immediately effective
on August 31, 2005).
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    The purpose of the proposal is to charge per-contract side
licensing fees in connection with options on the following three (3)
ETFs (``PowerShares ETFs''):
    (1) PowerShares Dividend Achievers Portfolio (symbol: PFM);
    (2) PowerShares High Growth Rate Dividend Achievers Portfolio
(symbol: PHJ); and
    (3) PowerShares International Dividend Achievers Portfolio (symbol:
PID)
    Specifically, Amex seeks to charge options licensing fees of $0.05,
$0.10, and $0.10 per contract side, in connection with options on PFM,
PHJ, and PID, respectively, for specialist, ROT, firm, non-member
market maker, and broker-dealer orders executed on the Exchange. In all
cases, the fees set forth in the Options Fee Schedule are charged only
to Exchange members through whom the orders are placed.
    The proposed options licensing fees will allow the Exchange to
recoup its costs in connection with index licensing fees for the
trading of PowerShares ETF options. The fees will be collected on every
PowerShares ETF option order of a specialist, ROT, firm, non-member
market maker, and broker-dealer executed on the Exchange. The Exchange
believes that collection of per-contract side licensing fees in
connection with PFM, PHJ, and PID options orders placed by those market
participants that are the beneficiaries of the Exchange's index license
agreements is justified and consistent with the rules of the Exchange.
    The Exchange notes that Amex in recent years has revised a number
of fees to better align Exchange fees with the actual cost of
delivering services and to reduce Exchange subsidies of such
services.\6\ Implementation of this proposal is consistent with the
reduction and/or elimination of these subsidies. Amex believes that
these fees will help to allocate to those market participants offering
PowerShares ETF options a fair share of the related costs of offering
such options.
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    \6\ See Securities Exchange Act Release Nos. 45360 (January 29,
2002), 67 FR 5626 (February 6, 2002) and 44286 (May 9, 2001), 66 FR
27187 (May 16, 2001).
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    In connection with the adoption of an options licensing fee for
PowerShares ETF options, the Exchange notes that the proposal will
better align its licensing fees with its competitors. The Exchange also
maintains that charging an options licensing fee, where applicable, for
all market participant orders executed on the Exchange except for
customer orders is reasonable given the competitive pressures in the
industry. Accordingly, the Exchange seeks, through this proposal, to
better align its charges with the cost of providing these products and
maintaining the trading floor and systems.
2. Statutory Basis
    The Exchange believes that its proposed rule change is consistent
with Section 6(b) of the Act,\7\ in general, and furthers the
objectives of Section 6(b)(4) of the Act,\8\ in particular, regarding
the equitable allocation of reasonable dues, fees, and other charges
among exchange members and other persons using exchange facilities.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(4).

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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received comments on the
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    The proposed rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act \9\ and subparagraph (f)(2) of Rule 19b-4
thereunder,\10\ because it establishes or changes a due, fee, or other
charge imposed by Amex. At any time within 60 days of the filing of the
proposed rule change, the Commission may summarily abrogate such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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    \9\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \10\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number SR-Amex-2005-094 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Amex-2005-094. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,

all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of the
filing also will be available for inspection and copying at the
principal offices of Amex. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make available publicly. All submissions should refer to File Number
SR-Amex-2005-094 and should be submitted on or before October 24, 2005.

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5347 Filed 9-30-05; 8:45 am]

BILLING CODE 8010-01-P


Transportation Conformity Rule Amendments for the New PM2.5 National Ambient Air Quality Standard: PM2.5 Precursors Response to Comments Document Docket ID No. OAR 2003 0049 April 29, 2005 1The speciation trends network consists of over 50 monitoring sites in urban areas and provides nationally consistent data on PM2.5 constituents by type ( i. e., " speciated") including nitrates, elemental carbon, organic carbon and sulfates.

Page 2 Required Precursors Comment: Two comments received on the November 5, 2003, proposed conformity rulemaking ( 68 FR 62690) indicated support for identifying NOx, VOCs, SOx and ammonia as potential transportation related PM2.5 precursors.

Response: EPA agrees with these comments. Based on data collected from monitoring sites in the national speciation trends network, 1 secondary particles from precursors commonly account for over half of the total fine particle mass from all emissions sources measured at these sites. Therefore, we expect that areas may need to address on road emissions of relevant precursors ( i. e., NOx, VOC, SOx and ammonia) in their SIPs and in conformity.

Comment: EPA received a number of comments on the proposed options for addressing precursors during the period before PM2.5 SIPs are submitted and emissions budgets are found adequate or approved. The majority of commenters supported option 2 included in the November 5, 2003 conformity proposal. Option 2 would have required significance findings for any of the four precursors ( i. e., NOx, VOC, SOx and ammonia) to be analyzed in conformity determinations prior to EPA finding emissions budgets in a PM2.5 SIP adequate or EPA's approval of that SIP. Some commenters that supported option 2 believed that limited resources would be best used by determining which precursors contribute significantly to an area's air quality problem before conformity for those precursors was required. A number of commenters also supported the proposed option 1. Option 1 would have required NOx and VOCs to be analyzed in conformity determinations prior to the submission of PM2.5 SIPs unless one or both precursors was determined to be insignificant. This option also would not have required SOx or ammonia to be analyzed for conformity prior to a submitted SIP unless one or both precursors was found significant. Two supporters of option 1 believed sufficient air quality data exists for their areas to support requiring analysis of NOx and VOCs in conformity determinations prior to the Page 3 submission of a PM2.5 SIP. One commenter recommended that to properly implement the Clean Air Act in all PM2.5 areas, conformity determinations should be required for all four precursors prior to the submission of a PM2.5 SIP unless a precursor was found to be insignificant. This commenter believed that it would be unreasonable to allow an area to opt out of conducting an analysis by default for a precursor that could be responsible for a large portion of PM2.5. Additionally, two commenters indicated that SOx should be addressed in conformity determinations prior to submission of a PM2.5 SIP unless it is found to be insignificant. One commenter stated that ammonia should be included in conformity determinations as soon as modeling and analysis tools are available. Another commenter opined that the only pollutant that should require a significance finding prior to the submission of a PM2.5 SIP is ammonia.

Response: The final rule allows for the consideration of the four precursors in conformity prior to PM2.5 SIPs when such precursors are significant: NOx is considered significant in the absence of a finding; VOCs, SOx and ammonia must be found significant to be included. In finalizing this rule EPA attempted to strike a balance between: 1) expeditiously addressing transportation related emissions that could exacerbate the PM2.5 air quality problem before a SIP is established, and 2) targeting conformity requirements in PM2.5 areas in an efficient and reasonable manner. EPA based its decision on a number of factors. For example, EPA considered the environmentally conservative nature of requiring conformity determinations for all four precursors prior to the submission of a SIP unless a finding is made that on road emissions of a precursor or precursors is insignificant, rather than only for NOx. Requiring that all four precursors be addressed in conformity prior to the submission of a SIP may be a more environmentally protective approach to meeting the Clean Air Act's conformity requirements because any significant precursors would automatically be addressed without the need for a significance finding to be made by the state air agency or the EPA regional office. On the other hand, requiring significance findings for the precursors VOCs, SOx and ammonia better accounts for regional variability in air quality and better targets resources to the precursors that are most important in an individual area. Also, requiring significance findings for these three precursors could help areas avoid adopting on road control measures to address a particular precursor before a SIP is submitted that ultimately prove to be unnecessary after a SIP is developed, if emissions of the targeted precursor are ultimately found to be insignificant. In addition, EPA also considered with 2In addition, California has adopted its own rule which addresses the sulfur content of gasoline in that state. California's regulation is similar in stringency to the federal regulation.

3EPA 420 R 00 020, October 2002, " Procedures for Developing Base Year and Future Year Mass and Modeling Inventories for the Heavy Duty Engine and Vehicle Standards and Highway Diesel Fuel ( HDD) Rulemaking."

Page 4 respect to each precursor the chemistry of secondary particle formation, the results of speciated air quality monitoring and on road emissions inventory data. In addition to the information provided below, the November 2003 notice of proposed rulemaking contains a more detailed discussion of speciated air quality data and on road emissions data ( 68 FR 62706 through 62708). Please refer to the notice of proposed rulemaking for additional details. Sulfur dioxide. While speciated air quality data show that sulfate is a relatively significant component ( e. g. ranging from nine to 40 percent) of PM2.5 mass in all regions of the country, emissions inventory data and projections show that on road emissions of SOx constitute a " de minimis" ( i. e., extremely small) portion of total SOx emissions. Emissions inventory data for 1999 for the 372 potential PM2.5 nonattainment counties for PM2.5 ( based on 1999 2001 air quality data) show that on road sources were responsible for only two percent of total SOx emissions. By comparison, fuel combustion sources ( e. g., electric utility and industrial combustion of coal and oil) contributed approximately 88 percent of the SOx emissions in 1999 in these same counties. Furthermore, EPA has already adopted two regulations that will greatly reduce emissions of SOx from on road sources by the time such regulations are both in full effect in 2009. First, in 2004 the low sulfur gasoline program began to be phased in and will be fully effective in 2007 ( February 10, 2000, 65 FR 6697). This regulation will reduce the sulfur content of gasoline by approximately 90 percent when fully effective. 2 Second, in 2006 the low sulfur diesel program will begin to be phased in and will be fully effective by 2009 ( January 18, 2001, 66 FR 5001). This regulation will reduce the sulfur content of diesel fuel by approximately 97 percent nationally when fully effective. Projections of on road emissions of SO2 in 2020 indicate that on road sources will be responsible for less than one percent of the total SO2 emissions in 2020 in the 372 potential PM2.5 nonattainment counties ( based on 1999 2001 air quality data). 3 These projections confirm that the implementation of the fuel regulations discussed above will ensure that as a general Page 5 matter SO2 emissions from on road sources remain at insignificant levels in all areas. Therefore, states are not required to include SOx in conformity determinations prior to submission of a SIP unless the state air agency or EPA regional office makes a finding that on road emissions of SOx are a significant contributor to an area's PM2.5 problem. If a state determines through its SIP development process that on road emissions of SOx are significant and the SIP includes an adequate or approved emissions budget for SOx, then future conformity determinations will be required to include a regional emissions analysis for SOx. Nitrogen oxides. Based on a review of speciated monitoring data analyses, nitrate concentrations vary significantly across the country. For example, in some southeastern locations, annual average nitrate levels range from six to eight percent of total PM2.5 mass, whereas nitrate comprises 40 percent or more of PM2.5 mass in certain California locations. Nitrate formation is favored by the availability of ammonia, low temperatures, and high relative humidity. Nitrate formation also depends upon the amount of nearby SO2 emissions because ammonia reacts preferentially with SO2 over NOx ( i. e., ammonia first reacts to form ammonium sulfate and then reacts to form ammonium nitrate). The sources of NOx are numerous and widespread, including motor vehicles, power plants, and many other combustion activities. We believe these source categories and the potential for significant impacts on air quality exist in many nonattainment areas. The analysis of speciated air quality data and the discussion of emission inventory data in the November 2003 transportation conformity notice of proposed rulemaking provide an appropriate basis for deciding that states must include NOx in conformity determinations made before SIPs are submitted and emissions budgets are found adequate or approved, unless the state air agency and the EPA regional office find that on road emissions of NOx are not a significant contributor to the area's PM2.5 problem. EPA believes that requiring both the state air agency and the EPA regional office make an insignificance finding for NOx is warranted because in this rulemaking EPA has initially determined that NOx is a significant precursor for all PM2.5 nonattainment areas. Additionally, all other insignificance findings require both state air agency and EPA regional office action because they are made through either a motor vehicle emission budget adequacy finding or a SIP approval as required by § 93.109( k) of the conformity regulation. Therefore, EPA believes that it is necessary that both the state air agency and the EPA regional office make a finding that on road emissions of NOx are an insignificant contributor to an area's PM2.5 air quality problem prior to the submission of a SIP. A finding made by both Page 6 agencies provides assurance that on road emissions of NOx are in fact insignificant contributors to an area's PM2.5 air quality problem and therefore may be omitted from conformity determinations prior to the submission of a SIP for the area. After a PM2.5 SIP is submitted, conformity determinations will be required for on road emissions of NOx if the SIP includes emissions budgets that are found adequate or are approved. Volatile Organic Compounds. In 2003, EPA estimates that onroad motor vehicles accounted for 28 percent of total VOCs nationwide. Carbonaceous particles, which result, in part, from reactions involving VOCs, account for 25 70% of constructed fine particle mass measured at specific Speciation Trends Network sites. The highest percentages of carbonaceous particles tend to be in the western United States, while the lowest percentages tend to be in the eastern United States. Although research clearly indicates that VOCs can contribute to the formation of carbonaceous secondary PM2.5 compounds, the current science is still incomplete in its understanding of the fraction of particulate organic compounds that began as VOCs. A major reason for this existing deficiency is the varying degrees of volatility of organic compounds, as well as our inability to model collectively the reactivity of these different groups of compounds. For example, there are highly reactive volatile compounds with six or fewer carbon atoms that indirectly contribute to PM formation through reaction with oxidizing compounds such as the hydroxyl radical and ozone. There are also semi volatile compounds with between seven and 24 carbon atoms that can exist in particle form and can readily be oxidized to form other low volatility compounds. Finally, high molecular weight organic compounds ( with 25 carbon atoms or more and low vapor pressure) are emitted directly as primary organic particles and exist primarily in the condensed phase at ambient temperatures. For this reason, these high molecular weight organic compounds are generally considered to be primary particles and not VOCs. The relative importance of each of these groups of organic compounds in the formation of organic particles varies from area to area. In addition, the contribution of onroad source emissions to each of these three groups of organic compounds may also vary from area to area. Current scientific and technical information clearly shows that carbonaceous material is a significant fraction of total PM2.5 mass in most areas, and that certain aromatic VOC emissions such as toluene, xylene, and trimethyl benzene are precursors to the formation of secondary PM2.5 ( secondary organic aerosols). However, while significant progress has been made in understanding the role of gaseous organic material in the formation of organic PM, this relationship is complex and requires further research and technical tools to determine the 4McMurry, P., Shepherd, M., Vickery, J. ( ed.) Particulate Matter Science for Policy Makers  A NARSTO Assessment. Cambridge: Cambridge University Press, 2004.

5Cabada J. C., S. N. Pandis, R. Subramanian, A. L. Robinson, A. Polidori, and B. Turpin ( 2004) Estimating the secondary organic aerosol contribution to PM2.5 using the EC tracer method, Aerosol Sci. Technol., 38S, 140 155.

6Millet D. B., N. M. Donahue, S. N. Pandis, A. Polidori, C. O. Stanier, B. J. Turpin, and A. H. Goldstein ( 2005) Atmospheric volatile organic compound measurements during the Pittsburgh Air Quality Study: Results, interpretation, and quantification of primary and secondary contributions, J. Geophys. Res., 110, D07SO7, 10.1029/ 2004JD004601.

7" Sources of carbon in PM2.5 based on 14C and tracer analysis," Edgerton, Eric S., John J. Jansen, Mei Zheng and Benjamin E. Hartsell ( September 2004), 8th International Conference on Carbonaceous Particles in the Atmosphere, Vienna, Austria.

8" Source apportionment of PM2.5 using a three dimensional air quality model and a receptor model," Park, S K, L. Ke, B. Yan, A. G. Russell, M. Zheng ( 2005), Proceedings of an AAAR international specialty conference  Particulate Matter Supersites Program and Related Studies, Atlanta, Georgia.

Page 7 extent of the contribution of specific VOC compounds to organic PM mass, prior to EPA being able to determine the extent of the contribution of VOCs to nonattainment problems in all PM2.5 areas. Additional research is also needed to determine the sources of VOC emissions that contribute most to PM2.5 air quality issues. For example, according to the NARSTO Fine Particle Assessment, 4 secondary sources may contribute up to 50 percent of secondary organic mass, particularly in areas where photochemical transformations of emissions from biogenic sources ( e. g., trees) are significant. In addition, data obtained from the Particulate Matter Supersites Program suggest that biogenic emissions may contribute significantly to secondary organic aerosols during days of peak PM2.5. Analysis of air quality samples collected in Pittsburgh from 2001 through 2002 indicates that as much as half of the organic aerosol during peak periods may be attributable to biogenic sources ( e. g., trees) as opposed to anthropogenic sources ( i. e., man made sources such as power plants and motor vehicles). 5,6 The Supersites Program has also collected data on the contribution of biogenic source emissions in other locations in the U. S., including Atlanta, Georgia. 7,8 However, these Page 8 findings have not yet been published and peer reviewed. The contribution of biogenic emissions to PM2.5 air quality issues is important because biogenic emissions cannot be controlled. EPA acknowledges that analytical tools are evolving to enable areas to adequately model the contribution of VOCs to PM2.5 formation. Researchers in the field anticipate that within the next five years the ability of models to simulate various components of PM2.5 will improve greatly, as will their ability to estimate the effectiveness of various control measures. These model improvements are particularly significant for secondary organic aerosols and biogenic and anthropogenic emissions of VOCs. However, until such model improvements are made and our understanding of VOC secondary particle formation improves, EPA believes it is not appropriate to require regional conformity analyses for VOCs in PM2.5 nonattainment areas prior to the submission of a PM2.5 SIP and emissions budgets for VOCs being found adequate or approved, unless the state air agency or EPA regional office finds that VOCs are a significant contributor to an area's PM2.5 problem. If a state determines through its SIP development process that on road emissions of VOCs are significant and the SIP includes an adequate or approved emissions budget for VOCs, then future conformity determinations will be required to include a regional emissions analysis for VOCs. Ammonia. We believe a case by case approach is also appropriate for ammonia because there is sufficient uncertainty about emissions inventories and about the potential efficacy of control measures from location to location. Reductions of ammonia may be effective primarily in areas where nitric acid is in abundance and ammonia is the limiting factor to ammonium nitrate formation ( ammonium nitrate is a type of particulate matter). Although ammonia reductions may be appropriate in selected locations, in other locations such reductions may lead to increased atmospheric acidity, exacerbating acidic deposition problems. In other words, states should evaluate the benefits of including ammonia in conformity determinations prior to the submission of SIPs and emissions budgets being found adequate or approved. Therefore, states are not required to include ammonia in conformity determinations prior to submission of a SIP unless the state air agency or EPA regional office makes a finding that on road emissions of ammonia are a significant contributor to an area's PM2.5 problem. If a state determines through its SIP development process that on road emissions of ammonia are significant and the SIP includes an adequate or approved emissions budget for ammonia, then future conformity determinations will be required to include a regional emissions analysis for ammonia. Page 9 Comment: Several commenters believed that SIP budgets for one or more of the PM2.5 precursors should be established before conformity is required for those precursors. Specifically, two commenters believed that SOx and ammonia should be evaluated for significance and have SIP budgets before conformity is required. Three other commenters believed that conformity determinations should not be required for any PM2.5 precursors prior to the submission of a SIP and emissions budgets being found adequate or approved. One of these commenters stated that § § 93.102( b)( 2)( iii)( v) and 93.102( b)( 3) should refer to budgets because conformity should only be required if there is an explicit motor vehicle emissions budget that is intended to be a ceiling on future emissions.

Response: EPA disagrees with these commenters. Clean Air Act section 176( c)( 6) requires that conformity apply in new nonattainment areas one year after the effective date of the nonattainment designation, even prior to the submission of SIPs establishing budgets for a particular pollutant or precursor. Clean Air Act section 176( c)( 4) provides EPA with the authority to establish conformity tests that will ensure that transportation plans, TIPs and projects do not result in new violations of an air quality standard, increase the frequency or severity of an existing violation, or delay timely attainment of a standard during the period before a SIP is submitted. While the contribution of mobile sources to PM2.5 nonattainment problems is likely to vary from area to area, on road emissions of at least NOx, and perhaps other precursors, are likely to make a significant contribution to PM2.5 problems in most areas. Therefore, EPA believes it is both required by the Clean Air Act and necessary to protect public health for PM2.5 areas to begin considering the role of on road emissions of PM2.5 precursors in their PM2.5 air quality problems, and to demonstrate conformity for those precursors that make a significant contribution to their air quality problems once conformity applies for PM2.5. Before adequate or approved SIP budgets are established, PM2.5 areas must use one of the interim emissions tests in § 93.119 to fulfill this statutory requirement.

Comment: One commenter opined that requiring conformity for additional precursors results in additional burden. The commenter stated that any additional pollutant or precursor that has to be included in a conformity determination leads to additional modeling runs, additional documentation of results, additional explanation to the public and regional decision makers and an additional opportunity for a conformity lapse. This commenter believed that EPA should not minimize these resource Page 10 requirements or use this argument to support the inclusion of PM2.5 precursors in conformity determinations prior to a SIP submission.

Response: EPA understands the commenter's concerns and has attempted to structure requirements for PM2.5 precursors so that human health and air quality are protected while targeting regional emissions analyses to only those precursors from on road emissions that make a significant contribution to an area's PM2.5 air quality problem. However, EPA continues to believe as stated in the November 2003 proposal that including PM2.5 precursors in PM2.5 regional emissions analyses prior to the submission of a SIP should not result in any additional transportation or emissions modeling because PM2.5 areas will already be producing VMT and emissions estimates for direct PM2.5 ( 68 FR 62706). The same VMT estimates would be used in calculating emissions of any and all precursors. Additionally, emission factors for the relevant precursors would generally be produced in the same model runs as the emission factors for direct PM2.5. EPA recognizes that there would be some small increase in burden in documenting these results and in discussing these precursors with regional decision makers and the public, but we believe this small increase is merited if a precursor is a significant contributor to an area's air quality problem. EPA also recognizes that it is possible that an area could lapse because it may not be able to demonstrate conformity for one or more of the PM2.5 precursors. EPA and DOT always attempt to work with areas that are experiencing problems demonstrating conformity in order to resolve problems before a lapse occurs. However, the Clean Air Act's conformity requirements are intended to ensure that the use of federal transportation funds does not cause new air quality problems, make existing problems worse, or delay meeting a Clean Air Act requirement such as attainment. Therefore, if one or more precursors is a significant contributor to an area's air quality problem, the inability to demonstrate conformity for such precursors would be consistent with the Clean Air Act's intended purpose of the conformity process. In other words, if conformity cannot be demonstrated for a significant precursor, federal transportation funds could not be spent on transportation activities that potentially would cause a new air quality problem, worsen an existing problem, or delay attainment or other emission reduction milestone. The inability to demonstrate conformity would indicate that further action is needed before federal transportation funding and approvals can occur so that ultimately both transportation and air quality goals are achieved. Page 11 Significance Findings Comment: A number of commenters expressed support for significance findings to be made by either the state air agency or the EPA regional office before a PM2.5 SIP is submitted. However, commenters also suggested different options for making significance findings. Thirteen commenters stated that both the state air agency and the EPA regional office should make the finding, while two commenters stated that the finding should be made through an area's interagency consultation process. Another commenter recommended that only the state should have the ability to make significance findings.

Response: EPA is making one change with regard to insignificance findings. EPA has determined that insignificance findings for NOx should be made by both the state air agency and the EPA regional office. EPA believes that requiring both the state air agency and the EPA regional office to make an insignificance finding for NOx is appropriate because, as stated above in this rulemaking, EPA has initially determined that NOx is a significant precursor for all PM2.5 nonattainment areas. Additionally, all other insignificance findings made within the transportation conformity and SIP processes require both state air agency and EPA regional office action because they are made through either a motor vehicle emission budget adequacy finding or a SIP approval as required by § 93.109( k) of the conformity regulation. Therefore, EPA believes that it is necessary that both the state air agency and the EPA regional office make a finding that on road emissions of NOx are an insignificant contributor to an area's PM2.5 air quality problem prior to the submission of a SIP. A finding made by both agencies provides assurance that on road emissions of NOx are in fact insignificant contributors to an area's PM2.5 air quality problem and therefore may be omitted from conformity determinations prior to the submission of a SIP for the area. Finally, EPA believes that an insignificance finding for NOx should be made by both the state air agency and the EPA regional office because NOx is the only pollutant/ precursor for which a regional analysis is avoided if a finding is made. That is, the conformity rule allows NOx to be found insignificant before a SIP is submitted and therefore not be included in subsequent conformity determinations. For all other pollutants/ precursors covered by the conformity rule ( i. e., VOCs, SOx and ammonia as PM2.5 precursors; NOx and VOCs as PM10 precursors and road dust as a contributor to PM2.5 air quality problems) either the state air Page 12 agency or the EPA regional office can decide if emissions are significant and therefore should be included in conformity determinations prior to the submission of a SIP and emissions budgets being found adequate or approved. However, a finding for NOx ( in this case, a finding of insignificance) would lead to a less environmentally protective result where NOx would no longer be considered in conformity determinations. In contrast, consistent with the rule's requirements for significance findings for other precursor emissions and the November 5, 2003, proposal, today's action specifies that significance findings for VOCs, SOx and ammonia as PM2.5 precursors can be made by either the state air agency or the EPA regional office. We believe that changes to the procedures for finding VOCs, SOx and ammonia precursor emissions significant in response to comments are unnecessary because such findings would result in the inclusion of one or more precursors in conformity which would be more environmentally protective. Furthermore, allowing significance findings for VOCs, SOx and ammonia to be made by either the state air agency or the EPA regional office acknowledges the state's authority as well as EPA's role in ensuring national consistency in such decisions. The language used in the final rule for these three PM2.5 precursors is consistent with how such findings have been made for PM10 precursors, since the original 1993 conformity rule ( 58 FR 62188). Today's final rule for these three precursors is also consistent with how such findings are to be made for PM2.5 road dust. The road dust requirements were finalized in the July 1, 2004, conformity final rule ( 69 FR 40004). EPA believes that maintaining consistency in cases where precursors are determined to be significant will facilitate implementation of the conformity rules with no adverse impacts, in light of the role interagency consultation will play in such findings as explained in Section III. A. of this final rule.

Comment: One commenter, who favored including all precursors in conformity determinations prior to the submission of a SIP, stated that a precursor could be found to be insignificant if current on road emissions are less than five percent of total PM2.5 and no increases are expected on a percentage basis during the period covered by the SIP or the conformity determination for the area.

Response: EPA disagrees with this suggested approach. Merely using a percentage level as a basis for a significance or insignificance finding ignores many other aspects of an area's nonattainment problem. Rather, EPA believes that a combination of the criteria for insignificance findings contained in Page 13 § 93.109( k) of the conformity rule and the discussion of insignificance and significance findings as they apply to PM2.5 precursors contained in this notice provide the appropriate basis for deciding whether or not a PM2.5 precursor is significant or insignificant in a given area. Discussion of EPA's rationale for establishing criteria for significance and insignificance findings can be found in the preamble to the July 1, 2004, conformity final rule ( 69 FR 40061 through 40063). Therefore, EPA is not adopting the criteria suggested by the commenter.

Comment: One commenter believed that if all precursors were considered in conformity prior to a SIP submission it could be presumed that these precursors will ultimately be included in the SIP for the area. In such a case, the commenter believed it would be difficult to justify not including the precursors in the SIP for the area if the state presumptively includes all of them in the first conformity determination.

Response: Under this final rule any significance finding made prior to EPA's adequacy finding for budgets in a SIP, or EPA's approval of the SIP, should not be viewed as the ultimate determination of the significance of precursor emissions in a given area. State and local agencies may find through the SIP development process that emissions of one or more precursors are significant, even if a precursor had previously been considered insignificant. In such a case, the PM2.5 SIP would establish a motor vehicle emissions budget for that precursor and a regional emissions analysis for that precursor would be included in subsequent conformity determinations. Similarly, state and local agencies may find that a precursor is insignificant when preparing the SIP, even if previously found significant prior to the SIP's preparation.

Comment: One commenter stated that the insignificance policy should be applied to precursor emissions in PM2.5 nonattainment and maintenance areas for a variety of reasons such as the need for additional information on the nature and cause of an area's PM2.5 problem, speciation of PM2.5 and availability of PM2.5 control measures.

Response: EPA agrees with this commenter. This final rule allows nonattainment areas to make findings on the significance of each of the four precursors to their PM2.5 air quality problem during the period before a SIP is submitted and budgets are found adequate. The insignificance policy also generally applies after a SIP is submitted, via the decisions about precursors that are Page 14 determined in the SIP.

Comment: One commenter requested additional guidance on significance and insignificance findings.

Response: EPA does not believe that additional guidance on significance and insignificance findings is necessary at this time. EPA has described the criteria to be considered and the process to be used in making these findings in § 93.109( k) of the conformity rule and in the preamble to this final rule. Additional discussion and details on insignificance findings can be found in the preamble to the July 1, 2004, final rule ( 69 FR 40061 through 40063). Page 15 Precursors in SIPs Comment: One commenter stated that after PM2.5 SIPs are submitted, areas should consider all four precursors in conformity determinations unless the SIP clearly states that one or more precursors are insignificant.

Response: EPA is not making any changes to the conformity rule in response to this comment. EPA does not believe that it is necessary for a SIP to explicitly state that a precursor is insignificant. Instead, EPA believes that states will consider the on road contribution of all four precursors to the PM2.5 problem as they develop their SIPs. If through the SIP process a state concludes that on road emissions of one or more precursors needs to be addressed in order to attain the PM2.5 standard as expeditiously as practicable, then EPA expects that the state will include an emissions budget in the SIP for each of the relevant precursors. A conformity determination will then be required for each precursor for which there is a budget, after the emissions budgets are found adequate or approved. In making a decision about each precursor, states should consider the insignificance criteria contained in § 93.109( k) of the conformity rule and the current state of the science concerning the precursor's role in the formation of PM2.5. Once SIPs are submitted and found adequate or approved the conformity rule requires that conformity be assessed against the budgets in the applicable SIP. Conformity determinations must then address all precursors for which the SIP establishes a budget, and need not address any possible precursor for which the state has not established a budget because the emissions of that precursor are insignificant. EPA notes that, if inventory and modeling analyses demonstrating reasonable further progress, attainment or maintenance indicate a level of emissions of a precursor that must be maintained to demonstrate compliance with the applicable requirement, then that level of emissions should be clearly identified in the SIP as a motor vehicle emissions budget for transportation conformity purposes consistent with § 93.118( e) even if the SIP does not establish particular controls for the given precursor. If the state fails to identify such a level of emissions as a motor vehicle emissions budget, EPA will find the submitted SIP budgets inadequate because the SIP fails to clearly identify the motor vehicle emissions budget as required by conformity rule § 93.118( e)( 4)( iii). Page 16 Comment: Several commenters raised concerns about SIP development and regional emissions analyses in areas that are nonattainment for both 8 hour ozone and PM2.5. One of these commenters asked if NOx and VOC conformity analyses would be the same for both pollutants in these areas. Another commenter asked if NOx and VOC budgets would be the same for 8 hour ozone and PM2.5 SIPs in these areas.

Response: EPA does not expect that either regional emissions analyses or budgets for NOx and VOCs will be the same for 8 hour ozone and PM2.5 standards in areas that are nonattainment for both pollutants, for several reasons. First, it is likely that most areas will have different attainment dates for each of the two pollutants, which means that it is likely that analyses and budgets will be required for different years. Second, it is possible that in many cases the boundaries of the nonattainment area for each pollutant may be different. For example, the 8 hour ozone nonattainment area may contain more counties than the PM2.5 nonattainment area or vice versa. Finally, VOC and NOx regional emissions analyses and budgets for 8 hour ozone and PM2.5 areas will most likely be developed using different meteorological conditions and, in some areas, different travel patterns. For example, because in most areas, ozone is a summertime pollutant, NOx and VOC regional emissions and budgets in 8 hour ozone areas would be calculated using meteorological and travel data for a " typical" summer day. In contrast, NOx and VOC regional emissions and budgets for PM2.5 areas may be established using annual averages for meteorological and traffic conditions, rather than conditions for only a particular season, because most PM2.5 nonattainment areas are violating the annual PM2.5 standard instead of the 24 hour standard.

Comment: One commenter stated that there was an error in the proposed option 1 language in § 93.102( b)( iv) of the November 2003 rulemaking. Specifically, the commenter suggested that the proposed language appeared to require conformity determinations for NOx and VOCs if a submitted SIP does not contain emissions budgets for NOx and VOCs.

Response: EPA disagrees; the language as proposed for NOx and VOCs is correct and we are retaining that language for NOx in this final rule. We believe that the commenter misunderstood the proposal. The language in § 93.102( b)( iv) that is finalized today requires that conformity determinations be made for NOx unless: 1) during the period before a SIP is submitted and budgets are found adequate or approved the state air agency and EPA regional Page 17 office make a finding that on road emissions of NOx are not significant contributors to an area's air quality problem; and/ or 2) the area's SIP does not establish an emissions budget for onroad emissions of NOx. In other words, if the SIP includes an adequate or approved emissions budget for NOx, then NOx must be analyzed in conformity determinations in PM2.5 nonattainment areas. In contrast, if the SIP does not contain a budget for NOx and instead concludes that emissions of NOx could rise to any level without impairing reasonable further progress or attainment, EPA would make an insignificance finding, either through a motor vehicle emissions budget adequacy finding or through a SIP approval, and NOx would not have to be considered for conformity purposes. Page 18 Modeling Concerns Comment: Several commenters expressed concerns about generating estimates for PM2.5 precursors. One commenter stated that few areas have experience using MOBILE6 to evaluate PM2.5 emissions and that unexpected issues and problems will arise from the use of MOBILE6. The commenter believed that difficulties will come from both model shortcomings and inexperience of the users. Another commenter had concerns about relying on a future release of MOBILE6.2 or other future guidance for estimating precursor emissions. A third commenter stated that there is a need for guidance on analysis techniques for ammonia and SOx.

Response: Since the conformity proposal to this final rule was published in November 2003, EPA has released MOBILE6.2. MOBILE6.2 is based on the latest available information concerning vehicle emissions and is therefore the best available tool at this time for calculating on road emissions of PM2.5 precursors ( in all states except California). The Federal Register notice announcing the release of the model was published on May 19, 2004 ( 69 FR 28830). EPA released SIP and conformity policy guidance on the use of MOBILE6.2 on February 24, 2004, entitled, " Policy Guidance on the Use of MOBILE6.2 and the December 2003 AP 42 Method for Re Entrained Road Dust for SIP Development and Transportation Conformity." EPA released technical guidance on the use of the MOBILE6.2 model in August 2004. Information on training in the use of MOBILE6.2, related policy memoranda and the technical guidance in the use of the model are available on EPA's MOBILE website at http:// www. epa. gov/ otaq/ m6. htm. EPA understands the concerns that these commenters have expressed about estimating precursors. However, we believe there is adequate time for new areas to gain MOBILE experience and conduct conformity analyses for the PM2.5 standard before the end of the one year conformity grace period. We believe that the material described above contains sufficient information for the states that use MOBILE to conduct modeling of on road emissions of ammonia and SOx. Therefore, we believe that additional guidance or analytical techniques for estimating these precursors is unnecessary. EPA recognizes, however, that California needs to complete the development of a methodology for estimating onroad emissions of ammonia before ammonia would be included in conformity determinations in California, as discussed further in Section III. A. of this final rule. 9USEPA, 2003. Air Quality Criteria for Particulate Matter ( Fourth External Review Draft). EPA/ 600/ P 99/ 002aD and bD. U. S. Environmental Protection Agency, Office of Research and Development, National Center For Environmental Assessment, Research Triangle Park Office, Research Triangle Park, NC. June 2003. Available electronically at http:// cfpub. epa. gov/ ncea/ cfm/ partmatt. cfm.

10 North American Research Strategy for Tropospheric Ozone ( NARSTO) and Particulate Matter, Particulate Matter Science for Policy Makers   A NARSTO Assessment, Parts 1 and 2. NARSTO Management Office ( Envair), Pasco, Washington. February 2003.

Page 19 State of the Science Comment: Two commenters expressed concern about the current understanding of the formation of secondary particles. One commenter stated that the role of ammonia needs to be evaluated quickly so that states can have all information possible while they plan to attain the PM2.5 standard. The other commenter stated that there is a lack of understanding about the formation of secondary particles. This commenter believed that unnecessary analysis of potential PM2.5 precursors would be time consuming and overly burdensome without producing substantial air quality benefits.

Response: EPA acknowledges that our understanding of the formation of secondary particles is not complete. However, EPA believes that this final rule strikes an appropriate balance between preserving limited state and local resources and environmental protection. Our incomplete understanding of the role of VOCs and ammonia in the formation of secondary particles is one of the reasons that we determined that PM2.5 nonattainment areas should not be required to address those precursors in conformity determinations before SIP budgets are available unless a significance finding is made. On the other hand, EPA believes that there is clear evidence and a substantial understanding of the role of NOx and SOx in the formation of secondary particles. Additional information on the role of each of the precursors can be found in the US EPA Criteria Document, 9 and in the NARSTO Fine Particle Assessment. 10 EPA agrees that further research is needed on the role of ammonia in particle formation and the benefits of ammonia control measures. Ongoing research is expected to greatly improve our understanding of ammonia control measures as well as our Page 20 understanding of the role of ammonia in aerosol formation. However, as states and EPA develop a greater understanding over the coming years about the air quality effects of reducing ammonia emissions in specific nonattainment areas, it may be appropriate for ammonia reduction strategies to be included in future SIPs and it may be appropriate to include ammonia in future conformity determinations. Page 21 Comment Period Comment: One commenter requested an additional comment period for PM2.5 related requirements.

Response: As stated in the July 1, 2004, Federal Register notice, EPA determined that it is not necessary to reopen the comment period on the proposed options for addressing PM2.5 precursors in conformity determinations ( 69 FR 40032). EPA published a supplemental proposal on PM2.5 hot spot analyses on December 13, 2004, providing the public with an opportunity to comment on the proposed options for hot spot analyses ( 69 FR 72140). Additionally, when EPA publishes the proposed PM2.5 implementation strategy the public will have the opportunity to comment on that proposal as well. EPA concludes that the comment periods for these rulemakings has provided the public with adequate time to comment on additional issues related to PM2.5.