BOARD MEETING DATE: July 20, 2001 AGENDA NO. 41

On May 11, 2001, the Board adopted amendments to Regulation XX – Regional Clean Air Incentives Market (RECLAIM). This amendment was designed to stabilize NOx RECLAIM Trading Credit (RTC) prices and address California energy issues relating to continued electrical power generation. The amendments were designed to expedite installation of emissions control equipment at power plants, while reducing the impacts of the California electricity crisis on the RECLAIM market and facilitating the development of reliable statewide electricity supply. Part of the May 11 amendment included establishing a temporary, limited, pilot RECLAIM Air Quality Investment Program (AQIP) for new power plants and structural buyers, allowing access to mobile and area source NOx credits at $7.50 per pound. The program lasts through compliance year 2004.

Structural Buyers, as currently defined, are RECLAIM facilities that can participate in the RECLAIM AQIP and meet the criteria listed below. These facilities must purchase credits because they are new facilities that did not get allocations assigned at the beginning of the program or facilities that are unable to further reduce NOx emissions. Facilities in this category include:

New power plants are also able to request AQIP use. Two new power plants are scheduled to begin operation in the near future and will be emitting between 10 and 60 tons per year of NOx each. Some of the emissions may be covered by the State Emission Reduction Credit Bank.

At the May 11, 2001 Board meeting, Western Independent Refiners Association (WIRA) requested that small refiners have access to the RECLAIM AQIP. Small refiners are independent companies that compete against major petroleum refining corporations. Small refining facilities are facilities with a crude oil capacity of no more than 55,000 barrels per stream day, whereas major refiners in this Basin have a typical capacity of 70,000 to 260,000 barrels per stream day. Special consideration has been given to small refiners in other regulatory programs because small refineries contribute to stabilizing fuel prices and supply and contribute to competitiveness within the industry. Staff has developed a proposal for the Board’s consideration to respond to industry’s request. Allowing access to the RECLAIM AQIP over the program’s lifetime (through the 2004 compliance year) will provide these facilities with an additional compliance option over the next few years. Such rule amendments would be designed to facilitate the production activities at small refineries to meet the regional gasoline and diesel demand.

At this time there are three facilities in the South Coast Air Basin that would meet the proposed criteria for a small refiner:

Only CENCO is anticipated to have a need to participate in the RECLAIM AQIP. CENCO has a crude oil capacity of approximately 50,000 barrels per stream day (approximately 5 percent of the crude oil refining capacity in the Basin from about a dozen facilities). CENCO purchased the refinery from Powerine, not including its RTC allocation which has already been sold. Powerine reported 216 tons of NOx emissions in 1995, the last year of operation. Because the RTC allocation was not purchased along with the facility, CENCO would have to purchase RTCs from the RECLAIM market to mitigate their emissions. Paramount’s RTC needs are believed to be met at this time and Edgington is anticipated to be a net seller to the RECLAIM market.

As requested by the Board, set forth below is a proposal that stems from a WIRA request to allow its members access to RTCs through the RECLAIM AQIP in Rule 2020 – RECLAIM Reserve. Proposed amended Rule 2000 would expand the definition of Structural Buyer to include certain small refineries provided: (1) all equipment at the facility requiring permit is equipped with Best Available Retrofit Technology (BARCT), or is under an enforceable order to achieve BARCT emission limits by specific dates; (2) the facility is limited in the amount of credits obtained from the RECLAIM AQIP to 50 percent of the facility’s annual emissions in the last reported full year of operation prior to compliance year 2000, but not to exceed 108 tons per year; and (3) the facility installs emission controls that would result in a NOx concentration of 45 ppm or less (corrected to 3 percent oxygen on a dry basis) from the exhaust stack serving the fluid catalytic cracking unit (FCCU) and CO boiler. The third requirement is intended to obtain emission reductions under an expeditious schedule from the FCCU, which is generally the single largest source of NOx emissions at these facilities at an earlier time than BARCT can be installed. Relative to CENCO, under a federal enforceable order, BARCT on the FCCU (i.e., selective catalytic reduction) is required by the first facility turnaround following start-up, which is currently scheduled for 2006.

This proposal differs from current rule requirements because small refiners are greater than 6 tons per year and they would not have BARCT on all equipment before being allowed access to the RECLAIM AQIP. Staff had proposed as part of the Set Hearing package that the facility comply with BARCT for all equipment at the facility requiring an operating permit. However, after further discussions with industry representatives, the proposed amended rule language was revised. The only anticipated user under the small refiner provisions (CENCO) is under a Consent Decree to achieve NOx emission levels that would, on an overall basis, be more stringent than BARCT on a federally enforceable schedule.

The following table illustrates the potential supply and demand on the RECLAIM AQIP that would result from small refiner access to the program.

	2001	2002	2003	2004
Existing Demand	215	210	350	360
Small Refiner Demand	0	71*	108**	108**
Supply from Known Projects	100	200	200	200

* Projected actual emissions including additional controls before start-up.
**Amount of emissions qualified to use AQIP.

Should the Board grant access to the RECLAIM AQIP to small refiners, staff recommends the Board consider allocating up to $1.62 million to provide additional prefunding to the RECLAIM AQIP. This will minimize potential impacts on other potential users that were intended when the Board previously approved $2 million in prefunding. The $1.62 million in suggested additional prefunding is equivalent to the 108 tons NOx per year per facility times the RECLAIM AQIP fee of $7.50 per pound.

During the rule development process, staff conducted a Public Consultation meeting on June 6, 2001, which was attended by approximately 15 individuals. Staff also held extensive meetings with representatives of the small refiners.

There may be increased competition for emission reductions available through the RECLAIM AQIP due to the increased demand by small refiners. Since emission reductions under the AQIP are distributed on a first-come/first-served basis, there is the potential that small refiners may reduce the amount of low-cost credits available under the RECLAIM AQIP that would have previously been available to the other Structural Buyers. As a result, this could cause these potential AQIP users, including new power plants as well as those facilities that emit less than 6 tons per year NOx and have installed BARCT, to purchase credits from the RECLAIM market in greater amounts than previously anticipated, at potentially higher costs.

The environmental community has expressed strong objections regarding the proposed amendments, whereas WIRA continues to request access to the AQIP for its members.

Pursuant to the California Environmental Quality Act (CEQA) and the AQMD’s Certified Regulatory Program (Rule 110), staff has prepared an Addendum to the May 11, 2001 certified Final Environmental Assessment for Proposed New and Amended Rules, Regulation XX – Regional Clean Air Incentive Market (RECLAIM), and Credit Generation Rules. An addendum is the appropriate CEQA document because the proposed project constitutes a change to the previously approved project and the change does not trigger any conditions identified in CEQA Guidelines §15162.

Copies of the Certified Final Environmental Assessment provided to Board members only, copies may be obtained from the AQMD Public Information Center.

Proposed Amended Regulation XX – RECLAIM

The definition of Structural Buyer is proposed for amendment to include small refiners meeting the following criteria:

owns or operates a facility in California that produces material from the processing of crude oil; and
has and at all times had since January 1, 1978, a crude oil capacity of not more than 55,000 barrels per stream day; and
has not been at any time since September 1, 1988, owned or controlled by any refiner that at the same time owned or controlled refineries in California with a total combined crude oil capacity of more than 55,000 barrels per stream day; and
has not been at any time since September 1, 1988, owned or controlled by refineries in the United States with a total combined crude oil capacity of more than 137,500 barrels per stream day; and
equipment requiring a permit at the facility is equipped with a minimum of BARCT as defined in Rule 2000, paragraph (c)(8), or has an enforceable order to achieve BARCT emission limits by specific dates; and
the emission reductions requested through RECLAIM AQIP do not exceed 50 percent of the facility’s annual emissions in the last reported full year of operations prior to compliance year 2000, but not to exceed 108 tons of NOx per year; and
installs NOx emission controls that would reduce the concentration to 45 ppm or less (corrected to 3 percent oxygen on a dry basis) from the exhaust stack serving the fluid catalytic cracking unit (FCCU) and CO boiler.

Proposed Amended Regulation XX – RECLAIM

There were two key issues raised regarding small refiners being allowed access to the RECLAIM AQIP as a Structural Buyer.

There is a concern regarding the potential impact on the supply of emission reductions available through the RECLAIM AQIP due to the increased demand by small refiners.

As specified in the proposed amendments to Rule 2000, small refiners would be allowed access to the RECLAIM AQIP. There are currently three facilities that meet that definition. However, based on current and future anticipated operations at these facilities, only CENCO is expected to access the program. Since emission reductions under the AQIP are distributed on a first-come/first-served basis, there is the potential that small refiners may reduce the amount of low-cost credits available under the RECLAIM AQIP. This may create a potentially greater competition for these credits. If the Board grants access to the RECLAIM AQIP by small refiners, staff is proposing consideration of additional prefunding (up to $1.62 million) to generate additional emission reductions for small refiners to purchase so as to minimize the impacts on other potential AQIP users.

The environmental community has expressed strong objections about the amendments. Specially, that the amendments may facilitate operation at CENCO, which they oppose.

The facility is required to meet all applicable AQMD rules. In addition, the refinery has agreed to a federally enforceable Consent Decree to achieve specified emission limits on certain equipment upon start-up. Limits are also set for certain equipment during the first and second turnarounds of the refinery, which are scheduled at four-year intervals from the start-up of the refinery. This includes installation and use of selective catalytic reduction on the facility’s FCCU as a key component of the first turnaround.

CENCO Refining
CH2MHill on behalf of City of Los Angeles, Department of Airports
Coalition for Clean Air
Communities for a Better Environment
Edgington Oil Company
Latham and Watkins on behalf of CENCO
Natural Resources Defense Council
Paramount Petroleum Corporation
Western Independent Refiners Association (WIRA)

A Resolution of the Governing Board of the South Coast Air Quality Management District (AQMD) certifying the Addendum to the May 2001 Final Environmental Assessment (EA) for Proposed New and Amended Rules, Regulation XX – Regional Clean Air Incentives Market) (certified at the May 11, 2001 Governing Board Public Hearing).

A Resolution of the AQMD Governing Board Amending Rule 2000 – General (Regulation XX).

WHEREAS, the AQMD has had its regulatory program certified pursuant to Public Resources Code Section 21080.5 and has conducted California Environmental Quality Act (CEQA) review and analysis pursuant to such program (Rule 110); and

WHEREAS, the AQMD staff has prepared, pursuant to CEQA Guidelines Section 15164, an Addendum to the May 2001 Final EA for Proposed New and Amended Rules, Regulation XX – Regional Clean Air Incentives Market, to address the proposed amendments to Rule 2000 - General; and

WHEREAS, the AQMD Governing Board has determined that the proposed changes to the definition of structural buyer would not create any new significant adverse environmental impacts or make substantially worse any existing significant adverse environmental impacts generated by the original project. The proposed modifications to the definition of structural buyer will not change the environmental analysis or conclusions in the previously certified Final EA; and

WHEREAS, the AQMD Governing Board has determined that the requirements for a subsequent environmental assessment have not been triggered pursuant to CEQA Guidelines Section 15162 and that an addendum to the previously certified EA for Regulation XX is appropriate; and

WHEREAS, pursuant to CEQA Guidelines Section 15164(c) an addendum need not be circulated for public review; and

WHEREAS, it is necessary that the adequacy of the environmental document be determined by the AQMD Governing Board prior to its certification; and

WHEREAS, the May 2001 Final EA for Proposed New and Amended Rules, Regulation XX – Regional Clean Air Incentives Market, as well as the addendum to this certified Final EA and other supporting documentation, was presented to the AQMD Governing Board who has reviewed and considered the entirety of this information before approving the staff recommendations; and

WHEREAS, the AQMD is not required to prepare a Statement of Findings, a Statement of Overriding Considerations, or a Mitigation Monitoring Plan because the proposed project is not expected to generate significant adverse environmental impacts; and

WHEREAS, the AQMD is not required to prepare a socioeconomic assessment because the proposed project is not expected to generate significant adverse environmental impacts, and

WHEREAS, the Governing Board has determined that there may be an economic impact relating to limited credit availability due to small refiner accessibility to the RECLAIM AQIP, but that impact cannot be quantified and may potentially occur anyway under the existing structure of the program; and

WHEREAS, the Governing Board has reviewed and considered the staff's findings related to potential impacts, including costs, and hereby finds and determines that costs are not significantly different from that analyzed for the Regulation XX – RECLAIM program amendments adopted on May 11, 2001; and

WHEREAS, the Governing Board obtains its authority to amend/adopt the proposed amendments to Rule 2000 - General, pursuant to California Health and Safety Code Sections 39002, 39616, 39620, 40000, 40001, 40440, 40440.1, 40702, and 40725 through 40728; and

WHEREAS, the Governing Board has determined that a need exists to amend Rule 2000 of Regulation XX to provide an additional compliance option to small refiners; and

WHEREAS, the AQMD specifies the manager of Rule 2000 - General as the custodian of the documents or other materials which constitute the record of proceedings upon which the adoption of this proposed amendment is based, which are located at the South Coast Air Quality Management District, 21865 E. Copley Drive, Diamond Bar, California; and

WHEREAS, the Governing Board has determined that proposed amended Rule 2000 – General is written or displayed so that its meaning can be easily understood by the persons directly affected by it; and

WHEREAS, the Governing Board has determined that proposed amended Rule 2000 – General is in harmony with and not in conflict with or contradictory to, existing statutes, court decisions or state or federal regulations; and

WHEREAS, the Governing Board has determined that proposed amended Rule 2000 - General will not impose the same requirements as any existing state or federal regulations. The amendment is necessary and proper to execute the powers and duties granted to, and imposed upon, AQMD; and

WHEREAS, the Governing Board has determined that by adopting the proposed amended Rule 2000 - General the AQMD Governing Board will be implementing, interpreting and making specific the provisions of the California Health and Safety Code Sections 39002, 39616, 40001, 40440 (a), 40440.1, 40702, and 40725 through 40728.5; and Title 42 U. S. C. Sections 7410, 7502, 7503, 7511a; and

WHEREAS, the Governing Board has determined that the California Health and Safety Code 39616 findings are not altered by these amendments and the Governing Board incorporates, by reference, the findings in the staff report; and

WHEREAS, a public hearing has been properly noticed in accordance with the provisions of Health and Safety Code Section 40725; and

WHEREAS, the Governing Board has held a public hearing in accordance with all provisions of law; and

WHEREAS, the Governing Board finds and determines, taking into consideration the factors in Section (d)(4)(D) of the Governing Board Procedures, that the modifications adopted which have been made to Rule 2000 - General since notice of public hearing was published do not significantly change the meaning of the proposed new and amended rules within the meaning of Health and Safety Code Section 40726 and would not constitute new information pursuant to CEQA;

WHEREAS, the Governing Board has determined that additional prefunding to the RECLAIM AQIP may be necessary to minimize the impacts on other potential RECLAIM AQIP users that may occur due to small refiner accessibility to the AQIP;

NOW, THEREFORE BE IT RESOLVED, that the AQMD Governing Board certifies the Addendum to the May 2001 Final EA for Proposed New and Amended Rules, Regulation XX – Regional Clean Air Incentives Market; and

BE IT FURTHER RESOLVED, that the Governing Board does hereby amend, pursuant to the authority granted by law, proposed amended Rule 2000 – General as set forth in the attached and incorporated herein by reference; and

BE IT FURTHER RESOLVED, that the Governing Board does hereby allocate up to $1.62 million for additional prefunding for the RECLAIM AQIP.