BOARD MEETING DATE: November 17, 2000 AGENDA NO. 12

Due to the limited number of emission sources in the MDAQMD and in the AVAPCD, certain ERCs, such as NOx ERCs, are almost non-existent in these districts. The increase in electricity demand and the current limited capacity of electricity generation in California has caused an electricity supply shortage during peak demand periods. As a result, several new power plants are proposed to be built in California. One of these power plants is proposed to be constructed near Blythe, California, located in the MDAQMD. The proposed power plant is known as the Blythe Energy project (BEP). BEP has requested the inter-district transfer of 1,771 pounds per day of VOC ERCs from the SCAQMD to the MDAQMD to offset NOx emission increases from the plant. Also, two companies, Northrop Grumman and Lockheed Martin, operate facilities in Palmdale, California which used to be part of the SCAQMD, but is now part of the AVAPCD. Northrop Grumman has requested an inter-district transfer of 150 pounds per day of VOC ERCs from the SCAQMD to the AVAPCD, and Lockheed Martin has requested an inter-district transfer of 148 pounds per day of VOC ERCs, five pounds per day of NOx ERCs, three pounds per day of PM-10 ERCs, and one pound per day of CO ERCs from the SCAQMD to the AVAPCD. Both Northrop Grumman and Lockheed Martin cite the need for their inter-district ERC transfer request on offsetting future emission increases from their facilities.

Wisvest Corporation proposes to construct and operate BEP, a 520-megawatt electricity generating facility in east San Bernardino County approximately five miles west of the City of Blythe, California. BEP's proposed location is within the MDAQMD.

BEP's proposed facility will employ natural gas fired combined-cycle gas combustion turbine trains to generate electricity. This proposed project is a merchant plant and is intending to sell electricity to the electrical grid for use by both local and other consumers. Construction is scheduled to commence in 2000, with commercial operation scheduled to commence in 2002.

The MDAQMD has determined BEP requires both NOx and PM-10 offsets and that such offsets be secured prior to permitting. The MDAQMD has calculated NOx offsets to be 202 tons/year. However, due to the limited amount of NOx ERCs available in the MDAQMD, BEP proposes to use inter-district and inter-pollutant ERCs to offset NOx emissions and proposes using ERCs originating in the SCAQMD.

An inter-district transfer of ERCs between the SCAQMD and another air district requires Governing Board approval from both air districts. To this end, the MDAQMD Governing Board has adopted a resolution approving the inter-district transfer of ERCs from the SCAQMD. Additionally, the MDAQMD has determined the VOC to NOx inter-pollutant ratio to be 1.6 to 1.

Therefore, a 202 ton per year NOx offset will require 323 tons per year of VOC ERCs (or 1,771 pounds per day of VOC ERCs). Currently, BEP holds 1,417 pounds per day of VOC ERCs in the SCAQMD and intends securing the remaining 354 pounds per day from SCAQMD issued ERCs. BEP requests SCAQMD Governing Board approval to transfer 1,771 pounds per day of VOC ERCs from the SCAQMD to the MDAQMD and use these ERCs to offset the emission increases of NOx from the proposed project.

Northrop Grumman and Lockheed Martin operate facilities in both the SCAQMD and in the AVAPCD. The AVAPCD is responsible for the Los Angeles County portion of the Mojave Desert Air Basin only. Both companies hold ERCs in the SCAQMD and have requested transfer of these ERCs to their respective facilities located in Palmdale, California. Palmdale was previously part of the SCAQMD, but in 1997 became part of the newly formed AVAPCD. In 1999, Northrop Grumman requested an inter-district transfer of 72 pounds of NOx ERCs. However, due to the scarcity of NOx ERCs in the SCAQMD and the SCAQMD's probability of disapproving such a transfer, Northrop revised its proposal. Therefore, Northrop Grumman now requests an inter-district transfer of 150 pounds per day of VOC ERCs.

Lockheed Martin is requesting to transfer a total of 148 pounds of VOC, five pounds per day of NOx, three pounds of PM-10, and one pound of CO ERCs. Both Northrop Grumman and Lockheed Martin transfer requests represent future permitting and possible emission increases in the AVAPCD.

California Health & Safety Code Section 40709.6 and SCAQMD NSR Rule 1309(h) allow ERC transfer between air districts provided approval of such transfer has been obtained from both the air district in which the ERC is generated and the air district to which the ERC is transferred, if both of the following requirements are met: (1) The stationary source to which the emission reductions are credited is located in an upwind district that is classified as being in a worse non-attainment status than the downwind district; and, (2) The stationary source where the ERCs will be used is located in a downwind district that is overwhelmingly impacted by emissions transported from the upwind district. In addition to the above, each district’s governing board needs to approve the transfer by a resolution after considering the impacts of the transfer on air quality, public health, and regional economy.

The South Coast Air Basin (SOCAB) is the primary air basin in the SCAQMD and is classified as an extreme ozone non-attainment area. The Mojave Desert Air Basin (MDAB) is the air basin located in the MDAQMD and the AVAPCD and is classified as a severe ozone non-attainment area. The classifications of these two air basins mean the SOCAB air quality is one category more polluted than the MDAB air quality. In addition, pursuant to Health and Safety Code Section 39610, the ARB has identified the AVAPCD and the MDAQMD as a downwind district that is overwhelmingly impacted by emissions transported from the SCAQMD. ARB studies indicate that the majority of ozone exceedences in the AVAPCD and MDAQMD can be attributed to transport from the SCAQMD. The proposed inter-district transfers of ERCs meet the two conditions specified above. However, in order to be eligible for inter-district ERC transfer, both the SCAQMD and the AVAPCD Governing Boards need to approve the transfer by resolution after considering the impacts on air quality, public health, and regional economy. The AVAPCD Governing Board and the MDAQMD Governing Board have already approved the requested transfer pursuant to the Health and Safety Code.

The AVAPCD and the MDAQMD have determined that future emission increases using the proposed ERC transfers will not interfere with the attainment and maintenance of federal and state ambient air quality standards in their districts. Because the AVAPCD and the MDAQMD are located downwind of the SCAQMD, emissions associated with the use of the specified ERCs will have no direct impact on air quality in the SOCAB. However, it will have an indirect, beneficial impact on future air quality in the SCAQMD because the transfer of SCAQMD ERCs will eliminate the potential for such ERCs to be used to offset future emissions increase within the SCAQMD.

Since the AVAPCD and the MDAQMD are determined to be downwind of the SCAQMD, no public health impact is expected in the SCAQMD. However, it will have an indirect, beneficial impact on future public health in the SCAQMD because the transfer of SCAQMD ERCs will eliminate the potential for such ERCs to be used to offset future emissions increase within the SCAQMD.

BEP, Northrop Grumman, and Lockheed Martin request transferring a total of 2,069 pounds per day of VOC ERCs from the SCAQMD to the MDAQMD and AVAPCD. The existing inventories of NOx, PM-10, and CO ERCs are far less than the inventory for VOC ERCs (see Table 1).

Therefore, any further reduction in the inventory of NOx, PM-10, and CO could have a significant impact on both the price and availability of these ERCs. However, the SCAQMD presently has a relatively large supply of VOC ERCs inventory. The impact of the requested transfer on VOC ERC availability and cost in the District is analyzed by comparing the amount of ERCs used, total inventory and average cost information over the last five years (see Table 2).

(¹) Used and Total Inventory are in pounds per day. The Total Inventory is for the end of each year.
(²) Year 2000 information is from January through October 2000.

The economy of the four-county region has been growing since it climbed out of a recession in the early 1990s. For the period of 1997 to 2000, the region's manufacturing sector grew at 2.2 percent a year and the growth of the entire region was 3.96 percent a year. The open market demand for VOC ERCs has not significantly increased since 1996, and has been fairly steady in the last five years despite strong economic activity. Since 1996, the supply of VOC ERCs has remained relatively constant due to a steady flow of ERCs generated.

From now to the year 2010, the region is expected to grow at 2.4 percent a year and manufacturing is forecast to grow at 3.3 percent yearly. For the most part, the previous trends for VOC ERC usage, generation, and price are expected to continue, because increasingly stringent BACT and retrofit rule requirements, and improved air pollution control technologies are lowering the VOC emissions from sources potentially needing ERCs. However, the possible reduction of VOC ERCs inventory due to ERCs derived from non-VOC sources (pending Regulation XIII amendment), the recent surge in demand for ERCs from new, in-basin electricity generating facilities, and potential in-basin inter-pollutant conversions are factors which could contribute to increase the price of VOC ERCs. Table 3 shows the current inventory of VOC ERCs and the expected reductions from this total due to the removal of non-VOC ERCs, inter-district transfers, proposed in-basin power plant projects, and other project uses.

	LBS/DAY (%)
TOTAL UNUSED VOC ERC INVENTORY As of November 1, 2000	27,800
PERC, ACETONE, 1,1,1-TCA ERCs	2,860 (10%)
HIGH DESERT POWER PROJECT INTER-DISTRICT TRANSFER Approved in 1999	1,620
BLYTHE ENERGY PROJECT, NORTHROP GRUMMAN, and LOCKHEED MARTIN INTER-DISTRICT TRANSFERS	2,070
TOTAL INTER DISTRICT ERC TRANSFERS	3,690 (13%)
IN BASIN POWER PLANTS with APPLICATIONS ON FILE¹	620
ESTIMATED ANNUAL VOC ERC USE (NON-POWER PLANTS)	1,000
TOTAL BALANCE OF ERCs REMAINING AFTER REMOVING NON-VOC-ERCs, INTER-DISTRICT TRANSFERS, and IN-BASIN USES	19,630
POTENTIAL FUTURE IN-BASIN POWER PLANTS and INTER-POLLUTANT CONVERSIONS²	2,000

(¹) Without any inter-pollutant ERC Usage.
(²) Estimate depending on status of other proposed projects and inter-pollutrant ratios. The number may vary from less than 1,000 pounds/day to greater than 2,000 pounds/day.

Although the inventory of VOC ERCs may be reduced due to removal of non-VOC ERCs and in-basin power plant use, the amount of VOC ERCs remaining represents approximately 20 years of available credits based on the average demand of one thousand pounds per year. Hence, the VOC ERCs requested by BEP, Northrop Grumman, and Lockheed Martin should not have a significant impact on the availability of VOC ERCs in the SCAQMD, and prices over the long term should remain relatively stable. Therefore, adverse impacts (such as significant increased prices) to the regional economy due to this proposed inter-district transfer of VOC ERCs are not expected. Also, though this Socio-Economic assessment has accounted for the inter-district ERC transfer approved by the SCAQMD Governing Board in May of 1999 for 1,620 pounds of VOCs to the MDAPCD for the High Desert Power Project (HDPP), the HDPP has not yet initiated the formal transfer of title for these ERCs, and as such, the full amount still resides in the SCAQMD's ERC inventory. However, since there are uncertainties associated with the future needs for VOC ERCs for in-basin power plants, it is necessary to prevent any further transfer of VOC ERCs to other districts until the in-basin demand on VOC ERCs is further analyzed.

The ERC transfer requests of VOC meet the requirements of state law and SCAQMD rules, provide an air quality and public health benefit to the SOCAB, and pose no adverse impact on the region’s economy. Therefore, staff recommends the following:

	VOC	NOx	PM-10	CO	SOx
Total Inventory (lbs/day)	27,787	1,599	2,133	6,108	1,610

	1995	1996	1997	1998	1999	2000²
Used (lbs/day)¹	344	763	557	387	1103	910
Total Inventory (lbs/day) ¹	28,973	28,093	28,474	28,710	28,571	27,787
Average Cost ($/lb/day)	$ 693	$ 1,144	$ 748	$ 706	$ 685	$ 897

South Coast Air Quality Management District