BOARD MEETING DATE: November 9, 2001 AGENDA NO. 35

Governor Davis has proposed that California streamline efforts to bring an additional 20,000 megawatts online by July 2004, starting with 5,000 additional megawatts by July 2001 and 5,000 more megawatts by July 2002.

Staff has identified over 4,800 megawatts of proposed and pending electrical generating facilities (EGFs) in the District. Additional projects beyond those currently identified are likely.

Obtaining emission offsets is one of the biggest challenges in siting new or expanding existing EGFs. Emission offsets are in short supply for Carbon Monoxide (CO), Sulfur Dioxide (SO₂) and PM-10. The pending and proposed EGFs have the potential to significantly deplete or exceed the available supply of Emission Reduction Credits available in the open market. Prices may rise and shortages could occur which may impede the siting of new or expanding businesses in the Basin.

The District maintains an emissions bank called the Priority Reserve to provide offsets for essential public services. As part of the 1990 amendments to new source review (NSR), the District established a NSR account which provides quarterly funding to the Priority Reserve. The NSR account not only funds the Priority Reserve it also provides offsets for small and exempt sources. The NSR account is currently funded by orphan shutdowns, BACT discounts, and excess reductions from offset ratio.

The state of California has recently created an Emission Reduction Credit Bank for natural gas turbine powerplant peaking sources. The bank can be used to provide PM-10 credits on a lease basis for three years. This bank is only for peaking units and the funding amount is limited to only 123 pounds per day of PM-10. This bank is insufficient to meet the needs of the identified and proposed peaking units and does not apply to base-load EGFs.

SB 28, signed into law by Governor Davis on May 22, 2001 added Section 42314.3 to the Health & Safety Code. That section requires air pollution agencies to adopt a mechanism for EGFs to pay a fee in lieu of offsets placing the burden on AQMD to obtain offsets. There are substantial procedural requirements with this process. Alternatively, the Board can suspend the section if it determines that adequate offsets are available at a reasonable price. These amendments will make adequate offsets available at a reasonable price. Therefore, the proposed rule amendments include suspending Section 42314.3.

Staff previously amended Rule 1309.1- Priority Reserve in April 2001 to provide EGFs temporary access to the Priority Reserve for PM-10 credits Subsequent to the April 2001 amendments, however, EGFs indicated that they were experiencing difficulties in obtaining CO and SO₂ credits and that there may be additional demand for PM-10 credits, beyond to what was estimated during the April 2001 amendments

The proposed amendments will provide EGFs temporary access to the Priority Reserve for meeting the offset requirements for SO₂ and CO. 750 pounds per day of SO₂ and 6,000 pounds per day of CO credits will be transferred from the District’s NSR account to the Priority Reserve for exclusive use by EGFs. Up to an additional 1,500 pounds per day of PM-10 may be transferred from the NSR account to the Priority Reserve for use by EGFs. The definition of EGFs will be expanded to include facilities that self-generate electricity provided they are less than 10 Megawatts. Finally, the mandatory power sales contract provision will be modified to allow the Executive Officer to determine if such contracts are available at the time of permitting.

EGFs will still be subject to all other aspects of NSR including modeling, offsets for non-RECLAIM pollutants, RECLAIM, and BACT or LAER. All other applicable SCAQMD rules and regulations such as toxics and prohibitory rules would continue to apply to EGFs.

The following requirements would apply to EGFs receiving credits from the Priority Reserve:

-	Modifying all of the EGF's sources to BARCT for the pollutant(s) obtained (if applicable) not later than 3 years after issuance of the permit for the new source(s), and
-	Paying a non-refundable mitigation fee of $8,900 per pound per day for each pound of SO₂ obtained from the Priority Reserve, and
-	Paying a non-refundable mitigation fee of $12,000 per pound per day for each pound of CO obtained from the Priority Reserve, and
-	Submitting a complete application for a permit during calendar years 2000, 2001, 2002, or 2003 and the EGF becoming fully operational within 3 years after permitting.
-	Making a good faith effort to obtain offsets including ERCs, state emissions bank credits, and credits from SIP approved credit generation programs (limited to rates not to exceed the mitigation fee).

In response to comments received the provision for long term contracts for the sale of electricity to the state of California has been modified. Experience over the past few months has shown that the electricity market is less volatile and the state is not currently entering into long term contracts. However, the revised rule language authorizes the Executive Officer to require such contracts at the time of permitting, should the need arise in the future and provided the state is entering into long-term contracts.

One commentor requested that the non-refundable mitigation fee provision be eliminated so that EGFs could have the opportunity to purchase ERCs generated or acquired subsequent to permitting. The non-refundable mitigation fee is required to ensure that air quality improvement projects can be identified and developed prior to or as close as practicable to the operation of the EGF. By allowing EGFs to opt out of this fee, an unacceptable level of uncertainty is imposed that would prohibit these monies from being spent and thereby delay air quality improvement. Therefore, staff recommends that the mitigation fee remain non-refundable.

There are sufficient offsets available in the District’s NSR account to accommodate the proposed transfer of SO₂, CO and PM-10 without any foreseeable impact, especially on small and exempt sources. Moreover, these credits have already been included in the AQMP for future growth.

District staff has reviewed the proposed Rule 1309.1 pursuant to state CEQA Guidelines Section 15002 (k)(2). A Draft Environmental Assessment (EA) was prepared and circulated for a 45-day public review and comment period, which ended September 24, 2001. No comment letters were received and the Draft EA was prepared as a Final EA for the proposed project.

District staff has also conducted a socioeconomic impact analysis (Attachment H) which concluded that the mitigation fee will be a small part of the total capital costs of the proposed new or modifying EGFs and will not result in any adverse socioeconomic impacts.

The California Health and Safety Code requires the AQMD to adopt an Air Quality Management Plan to meet state and federal ambient air quality standards in the South Coast Air Basin. In addition, the California Health and Safety Code requires that the AQMD adopt rules and regulations that carry out the objectives of the AQMP. While Proposed Amended Rule 1309.1 is not a control measure included in the AQMP, its requirements are consistent with the AQMP objectives.

All known affected sources have been given notice of the proposed amendments. No major implementation problems are anticipated at this time. Additional actions will be taken as needed consistent with the rule requirements.

The proposed amendments are not anticipated to have a significant impact on staff resources.

South Coast Air Quality Management District