BOARD MEETING DATE: April 2, 2004
AGENDA NO. 25

Status Report on Regulation XIII – New Source Review

SYNOPSIS:

This report, submitted to the Board pursuant to subdivision (b) of Rule 1310 – Analysis and Reporting, provides information on the status of Regulation XIII – New Source Review (NSR) in meeting federal and state NSR requirements. This report, which presents data for August 2001 through July 2002, shows that AQMD’s NSR program was in compliance with applicable federal and state requirements during the period covered.

COMMITTEE:

Stationary Source, March 26, 2004, Reviewed

RECOMMENDED ACTION:

Receive and file the attached report.

Barry R. Wallerstein, D.Env.
Executive Officer

SUMMARY

The AQMD’s New Source Review (NSR) Rules and Regulations are designed to support efforts to attain and maintain compliance with the federal and state air quality standards and to ensure that emissions increases from new and modified sources do not interfere with such efforts, while maintaining economic growth in the South Coast region. Regulation XIII - New Source Review regulates emissions increases and accounts for all emission changes (both increases and decreases) from the permitting of new, modified, and relocated sources within AQMD with the exception of NOx and SOx sources subject to Regulation XX – Regional Clean Air Incentives Market (RECLAIM)¹. Rule 1310 - Analysis and Reporting requires the submittal of an annual report to the Board on the status of Regulation XIII in meeting federal and state NSR requirements.

¹While the RECLAIM program is different than command and control rules for NOx and SOx and it provides greater regulatory flexibility to businesses, its NSR requirements, as specified in Rule 2005, are designed to com-ply with the governing principles of NSR contained in the federal Clean Air Act (CAA) and the California State Health and Safety Codes.
 

The annual reports on the status of Regulation XIII cover NSR activities for a twelve-month period and the last report submitted to the Board on August 2, 2002 covered the period from August 2000 through July 2001 for both federal and state NSR requirements. This annual report covers the period August 2001 through July 2002 and demonstrates compliance with federal and state NSR requirements by establishing aggregate equivalence with federal and state offset requirements.

The results of the analysis for the August 2001 through July 2002 timeframe for federal and state offset accounts are summarized below in Tables 1 and 2, respectively. These results demonstrate that there were adequate offsets available to mitigate all emission increases during this period, resulting in no "net" emission increase. The report, therefore, demonstrates that AQMD’s NSR program continues to meet federal and state offset requirements and is equivalent to those requirements on an aggregate basis².

² AQMD’s NSR program is deemed to be equivalent to federal and state offset requirements because AQMD’s ending account balances remained positive, indicating there were adequate offsets during this period.
 

In 2001 and 2002 AQMD amended portions of Regulation XIII – NSR related to emission reduction credits. U.S. EPA has not yet approved the December 2002 amendments to Regulation XIII. In addition, U.S. EPA recently adopted revisions to the federal NSR regulations (i.e., NSR Reforms) which mainly change the applicability determinations for modifications subject to the federal NSR program. As a result of discussions with U.S. EPA on SIP approval of AQMD’s 2001 and 2002 NSR amendments and U.S. EPA’s NSR Reforms, the result of our analysis may change, at which time AQMD staff will provide an updated status of our analysis.

Table 1
Net Activity, Starting Balances, and Ending Balances for AQMD’s Federal Offset Accounts (August 2001 through July 2002)
 

DESCRIPTION	VOC	NOx	SOx	CO	PM10
Starting Balance (ton/day)	104.90	21.21	18.64	26.43	40.80
Total Credits* (lb/day)	7,454	2,394	230	1,379	1,038
Total Debits* (lb/day)	-1,946	-1,622	0	-6,066	-157
Sum of Credits/Debits* (lb/day)	5,508	772	230	-4,687	881
Sum of Credits/Debits* (ton/day)	2.75	0.39	0.12	-2.34	0.44
Ending Balance** (ton/day)	107.65	21.60	18.76	24.09	41.24

* Refer to Appendix A for an explanation of the sources of credits and debits. Credits are shown as positive and Debits as negative, while sum of Credits/Debits, Refinements, and     Net Activity are shown as positive or negative, as appropriate.
** "Ending Balance" equals the "Starting Balance" plus the "Net Activity."

Table 2
Net Activity, Starting Balances, and Ending Balances for AQMD’s State Offset Accounts (August 2001 through July 2002)
 

DESCRIPTION	VOC	NOx	SOx	CO	PM10
Starting Balance (ton/day)	43.45	4.66	18.75	26.50	42.85
Total Credits* (lb/day)	11,893	4,074	192	1,280	1,128
Total Debits* (lb/day)	-9,966	-1,606	-25	-5,769	-340
Sum of Credits/Debits* (lb/day)	1,927	2,468	167	-4,489	788
Sum of Credits/Debits* (ton/day)	0.96	1.23	0.08	-2.24	0.39
Ending Balance** (ton/day)	44.41	5.89	18.83	24.26	43.24

* Refer to Appendix A for an explanation of the sources of credits and debits. Credits are shown as positive and Debits as negative, while sum of Credits/Debits, Refinements, and  Net Activity are shown as positive or negative, as appropriate.
** "Ending Balance" equals the "Starting Balance" plus the "Net Activity."

BACKGROUND

AQMD originally adopted its NSR program in 1976. U.S. EPA approved AQMD’s NSR program into California’s State Implementation Plan initially on January 21, 1981 (46FR5965) and again on December 4, 1996 (61FR64291). The original program has evolved into the current version of the Regulation XIII rules in response to federal and state legal requirements and the changing needs of the local environment and economy. The most recent amendments to the NSR rules were adopted on December 6, 2002 to facilitate and provide additional options for credit generation. The most notable changes in those amendments are summarized below:

• Short Term Credits (STC)
  Rules 1303 – Requirements and 1309 – Emission Reduction Credits and Short Term Credits now provide for the generation and use of short term offsets for stationary sources. These credits can be generated by stationary sources (Emission Reduction Credits or ERCs), mobile sources (MSERCs), and area sources (ASERCs).
• Extended ERC Filing Deadline
  Rule 1309 – Emission Reduction Credits and Short Term Credits’ deadline to apply to bank an ERC was extended from 90 days after to 180 days after the emission reduction occurring.
• Offset Budget
  Rule 1309.2 – Offset Budget creates a "bank of last resort" to provide offsets for sources that are unable to otherwise obtain needed offsets.

Also in April and November 2001, AQMD amended Rule 1309.1 to allow electric generating facilities (EGFs) to be able to access the Priority Reserve to purchase emission credits. All these amendments are pending U.S. EPA Review and approval into the SIP.

AQMD’s NSR program is designed, amongst other things, to, at a minimum, offset emission increases in a manner equivalent to federal and state statutory NSR requirements. To this end, AQMD’s NSR program implements the federal and state statutory requirements for NSR and ensures that construction and operation of new and modified sources does not interfere with progress towards attainment of the National and State Ambient Air Quality Standards. AQMD’s computerized emission tracking system is utilized to demonstrate equivalence with federal offset requirements on an aggregate basis. Specific NSR requirements of federal and state law are presented below.

Federal Law

Federal law requires the use of Lowest Achievable Emission Rate (LAER) and offsets for new, modified, and relocated major stationary sources³ . Effective November 15, 1992, the federal Clean Air Act (CAA) requires a 1.5-to-1 external offset ratio and a 1.3-to-1 internal offset ratio for major stationary sources located in an extreme ozone non-attainment area. The South Coast Air Basin (SOCAB) is the only area in the nation that has been designated as extreme ozone non-attainment. An extreme ozone non-attainment area may qualify for a 1.2-to-1 offset ratio if it requires implementation of federal Best Available Control Technology (BACT), as defined in CAA Section 169(3) for prevention of Significant Deterioration of Air Quality on all major sources [CAA Section 182(e)(1)]. The federal definition of BACT is equivalent to state Best Available Retrofit Control Technology (BARCT), which AQMD implements through its Regulation XI – Source Specific Standards and other AQMD rules and regulations. AQMD meets this criterion and uses a 1.2-to-1 offset ratio. In addition, AQMD not only requires the 1.2-to-1 offset ratio for all federal sources, but also requires the same offset ratio for non-federal sources⁴.

³ The October 20, 2000 amendments to Rule 1302 – Definitions changed the "major stationary source" thresholds applicable to AQMD’s jurisdiction. The applicable thresholds during the time period covered by this report were as summarized below:
 

Pollutant	SOCAB	SSAB	MDAB
VOC	10 tons per year	25 tons per year	100 tons per year
NOx	10 tons per year	25 tons per year	100 tons per year
SOx	100 tons per year	100 tons per year	100 tons per year
PM10	70 tons per year	70 tons per year	100 tons per year
CO	50 tons per year	100 tons per year	100 tons per year

⁴ Non-federal sources that do not meet any of the exemption criteria of Rule 1304 and that do not qualify to obtain offsets from the Priority Reserve are also required by AQMD to provide offsets (i.e., ERCs) at a ratio of 1.2-to-1.
 

Based on their classification, the SOCAB and Salton Sea Air Basin (SSAB) must comply with the requirements for extreme and severe non-attainment areas, respectively, for ozone precursors (i.e., VOC and NOx). Both the SOCAB and the SSAB must comply with the requirements for serious non-attainment areas for PM10 and its precursors (i.e., VOC, NOx, and SOx). For CO, the SOCAB must comply with the requirements for serious non-attainment areas; however SSAB is considered attainment for CO. SOCAB had one federal CO exceedance in 2002 and none in 2003, and AQMD is in the process of requesting U.S. EPA to redesignate SOCAB as attainment with federal CO standards. Both SOCAB and SSAB are considered attainment for SO₂ and NO₂, however SOx and NOx are precursors to pollutants for which both SOCAB and SSAB are designated as non-attainment⁵. The Mojave Desert Air Basin (MDAB) is currently unclassified for all pollutants. The various attainment statuses for the VOC, NOx, SOx, PM10, and CO in the three air basins result in the major source thresholds presented by pollutant and air basin in footnote 3 on the previous page. This report demonstrates compliance with the federal NSR requirements.

⁵ SOx is a precursor to PM10 and NOx is a precursor to both PM10 and ozone.
 

State Law

State law requires the use of BACT for new and modified sources (Health and Safety Code Sections 40440(b)(1) and 40920.5) and "no net increase in emissions" from certain permitted new or modified sources based on their potential to emit and the non-attainment classification of the area in which they are located. This report demonstrates AQMD’s compliance with the "no net emission increase" requirements of state law for the period from August 2001 through July 2002 by demonstrating compliance with the requirements for extreme ozone non-attainment areas for ozone precursors and with the requirements for serious non-attainment areas for CO, PM10, and precursors to PM10.

OVERVIEW OF ANALYSIS METHODOLOGY

The two major elements of federal and state NSR requirements are LAER/BACT and emission offsetting. AQMD’s BACT requirements are at least as stringent as federal LAER for major sources and state BACT requirements for all sources. Furthermore, the NSR emission offset requirements that AQMD implements through its permitting process ensure that sources provide emission reduction credits (ERCs) to offset their emission increases in compliance with both federal and state requirements. As a result, these sources each comply with federal and state offset requirements by providing their own ERCs. However, certain sources are exempt from AQMD’s offset requirements pursuant to Rule 1304 or qualify for offsets from AQMD’s Community Bank (applications received between October 1, 1990 and February 1, 1996 only) or Priority Reserve, both pursuant to Rule 1309.1. AQMD has determined that providing offset exemptions and the Priority Reserve (as well as the previously-administered Community Bank) is important to the NSR program and the local economy while encouraging installation of control equipment. Therefore, AQMD has assumed the responsibility of providing the necessary offsets for exempt sources, the Priority Reserve, and the Community Bank. This report examines credits to and debits from AQMD’s emission offset accounts and demonstrates programmatic equivalence on an aggregate basis with federal and state emission offset requirements for the sources exempt from providing offsets and the sources that receive offsets from the Priority Reserve or the Community Bank.

AQMD’s Offset and Credit Accounts

Only emission increases originating at major stationary sources are subject to federal offset requirements. However, state offset requirements apply to all increases of VOC or NOx from equipment subject to AQMD’s permitting program and to increases of SOx, CO, and PM10 from facilities that emit 15 or more tons per year. For the purposes of this report, these same thresholds are also used to assign credits generated through emission reductions to the federal and state offset accounts, respectively. Due to the differences in offset ratios and applicability thresholds between federal and state NSR requirements, AQMD tracks two sets of accounts—one for purposes of demonstrating equivalence with federal and one with state offset requirements. In addition, each of the five pollutants subject to offset requirements (VOC, NOx, SOx, CO, and PM10) has its own federal account and its own state account. AQMD’s NSR program is considered to provide equivalent or greater offsets of emissions as required by federal and state requirements for each subject pollutant provided the balance of credits left in AQMD’s accounts for each pollutant stays as a positive number, indicating that there were adequate offsets available.

Credit Accounting

When emissions from a permitted source are permanently reduced (e.g., installation of control equipment, removal of the source) and the emission reduction is not required by rule or law and is not called for by an AQMP control measure that has been assigned a target implementation date⁶, the permit holder may apply for ERCs for the pollutants reduced. Prior to issuing an ERC, AQMD "discounts" this reduction to the level of reduction that would have been realized if the source had been operating at current BACT levels. The difference between the actual quantified emission reduction and the amount of ERCs issued is credited to AQMD’s account of available offsets. Additionally, if the permit holder for the source generating the emission reduction had previously received offsets from an AQMD account or has a "positive balance" (i.e., pre-1990 net emission increase), the quantity of AQMD credits used or the amount of the positive balance is subtracted from the reduction and "paid back" to AQMD’s accounts prior to issuance of an ERC pursuant to Rule 1306. In other cases, permit holders do not always submit applications to claim ERCs for their equipment shutdowns or other eligible emission reductions. These unclaimed reductions are referred to as "orphan shutdowns" or "surplus reductions" and are credited to AQMD’s accounts.

⁶ Refer to Rule 1309(b) for a complete explanation of eligibility requirements.

Debit Accounting

On the other hand, AQMD also tracks all emission increases that are offset through the Priority Reserve or the Community Bank, as well as all increases that are exempt from offset requirements pursuant to Rule 1304 – Exemptions. These increases are all debited from AQMD’s accounts. As discussed above, AQMD uses an offset ratio of 1.2-to-1 for its federal accounts. That is, 1.2 pounds are deducted from AQMD’s federal accounts for each pound of maximum allowable permitted potential to emit increase at a federal source. Conversely, state offset requirements are based on actual emissions rather than maximum allowable permitted potential to emit. AQMD considers actual emissions as eighty percent of permitted potential to emit⁷. Thus, 0.8 pound is debited from AQMD’s state accounts for each pound of maximum allowable permitted emissions increase. There is another source of debits from AQMD’s offset accounts in addition to the permitted emission increases described above. This debit is very infrequent, but it occurs in a situation in which a permit that was previously inactivated due to nonpayment of fees and deemed an orphan shutdown is reactivated. These special reactivations are debited from AQMD’s federal and state accounts at the same ratios as are the other emissions increases identified above.

The various sources of credits to and debits from the federal and state offset accounts are discussed in greater detail in Appendix A.

⁷ The eighty percent factor is based upon an analysis and demonstration previously conducted in 1998 by AQMD staff in coordination with CARB.

DEMONSTRATION OF EQUIVALENCE WITH FEDERAL OFFSET REQUIREMENTS

Table 3 presents the total emission reductions credited to AQMD’s federal offset accounts from August 2001 through July 2002. Debits from AQMD’s federal accounts incurred during the same period are summarized in Table 4. Finally, the sum of credit/debit activity (credits minus debits) for the federal accounts is displayed in Table 5.

Table 3
Credits to AQMD’s Federal Offset Accounts (August 2001 through July 2002)
 

CREDITS RECEIVED*	VOC	NOx	SOx	CO	PM10
Orphan Shutdown Credits (lb/day)	3,985	2,348	192	865	1,038
Surplus Reduction Credits (lb/day)	240	46	0	157	0
BACT and Other Discount of ERCs (lb/day)	3,229	0	38	357	0
Total Credit to AQMD Account (lb/day)	7,454	2,394	230	1,379	1,038
Total Credit to AQMD Account (ton/day)	3.73	1.20	0.12	0.69	0.52

* For a more detailed description of credits received see Appendix A.
 

Table 4
Debits from AQMD’s Federal Offset Accounts (August 2001 through July 2002)
 

DISTRICT OFFSETS USED	VOC	NOx	SOx	CO	PM10
Priority Reserve (lb/day)	481	536	0	372	68
Community Bank (lb/day)	0	0	0	0	0
Rule 1304 Exemptions/Adjustments (lb/day)	1,141	816	0	4,683	63
Special Permit Reactivations (lb/day)	0	0	0	0	0
Sum Total of AQMD Offsets (lb/day)	1,622	1352	0	5,055	131
120% Offset Ratio (lb/day)	1,946	1,622	0	6,066	157
Total Debit to AQMD Account (lb/day)	1,946	1,622	0	6,066	157
Total Debit to AQMD Account (ton/day)	0.97	0.81	0.00	3.03	0.08

* For a more detailed description of debits from AQMD’s accounts see Appendix A.
 

Table 5
Sum of Credits/Debits Activity in AQMD’s Federal Offset Accounts (August 2000 through July 2001)
 

	VOC	NOx	SOx	CO	PM10
Total Credits* (lb/day)	7,454	2,394	230	1,379	1,038
Total Debits* (lb/day)	-1,946	-1,622	0	-6,066	-157
Sum of Credits(+)/Debits(-)* (lb/day)	5,508	772	230	-4,687	881
Sum of Credits(+)/Debits(-)* (ton/day)	2.75	0.39	0.12	-2.34	0.44

* Credits are shown as positive and Debits as negative, while their sum is shown as positive or negative, as appropriate.
 

The sum of credits and debits activity from this analysis (the sum may be positive or negative) is added to the starting federal account balance for each pollutant to determine compliance with federal NSR requirements. Refer to Table 1 for a summary of starting and ending federal account balances for the August 2001 through July 2002 time period.

DEMONSTRATION OF EQUIVALENCE WITH STATE OFFSET REQUIREMENTS

Table 6 presents the total emission reductions credited to AQMD’s state offset accounts from August 2001 through July 2002. Debits from AQMD’s state accounts incurred during the same period are summarized in Table 7. Finally, the sum of credits and debits activity for the state accounts is displayed in Table 8.

Table 6
Credits to AQMD’s State Offset Accounts (August 2001 through July 2002)
 

CREDITS RECEIVED*	VOC	NOx	SOx	CO	PM10
Orphan Shutdown Credits (lb/day)	7,607	3,763	154	710	1106
Surplus Reduction Credits (lb/day)	1,057	311	0	213	22
BACT and Other Discount of ERCs (lb/day)	3,229	0	38	357	0
Total Credit to AQMD Account (lb/day)	11,893	4,074	192	1,280	1,128
Total Credit to AQMD Account (ton/day)	5.95	2.04	0.10	0.64	0.56

* For a more detailed description of credits received see Appendix A.
 

Table 7
Debits from AQMD’s State Offset Accounts (August 2001 through July 2002)
 

DISTRICT OFFSETS USED*	VOC	NOx	SOx	CO	PM10
Small Source Exemption (lb/day)	10,650	84	2	1,386	0
Priority Reserve (lb/day)	537	653	8	704	68
Community Bank (lb/day)	59	0	0	0	0
Other Rule 1304 Exemptions (lb/day)	1,212	1,271	21	5,121	357
Special Permit Reactivations (lb/day)	0	0	0	0	0
Sum Total of AQMD Offsets (lb/day)	12,458	2,008	31	7,211	425
80% Offset Ratio (lb/day)	9,966	1,606	25	5,769	340
Total Debit to AQMD Account (lb/day)	9,966	1,606	25	5,769	340
Total Debit to AQMD Account (ton/day)	4.98	0.80	0.01	2.88	0.17

* For a more detailed description of debits from AQMD’s accounts see Appendix A.
 

Table 8
Sum of Credits/Debits Activity in AQMD’s State Offset Accounts (August 2001 through July 2002)
 

	VOC	NOx	SOx	CO	PM10
Total Credits* (lb/day)	11,893	4,074	192	1,280	1,128
Total Debits* (lb/day)	-9,966	-1,606	-25	-5,769	-340
Sum of Credits(+)/Debits(-)* (lb/day)	1,927	2,468	167	-4,489	788
Sum of Credits(+)/Debits(-)* (ton/day)	0.96	1.23	0.08	-2.24	0.39

* Credits are shown as positive and Debits as negative, while their sum is shown as positive or negative, as appropriate.
 

The sum of credits and debits activity from this analysis (the sum may be positive or negative) is added to the starting state account balance for each pollutant to determine compliance with state NSR requirements. Refer to Table 2 for a summary of starting and ending state account balances for the August 2001 through July 2002 time period.

ELECTRICAL GENERATING FACILITY ACCESS TO PRIORITY RESERVE

The April 2001 amendments to Rule 1303 – Requirements and Rule 1309.1 – Priority Reserve provide EGFs with access to PM10 offsets from the Priority Reserve⁸. Subsequently, the November 2001 and May 2002 amendments to Rule 1309.1 expanded EGF access to Priority Reserve offsets to include SOx and CO. Table 9 summarizes the Priority Reserve offsets provided to EGFs during the August 2001 through July 2002 time period. These priority reserve debits are included in (not in addition to) the debits summarized in Tables 4, 5, 7, and 8.

⁸ Refer to Rule 1309.1(a)(4) for eligibility requirements.
 

Table 9
EGF Access to Priority Reserve Offsets (August 2001 through July 2002)
 

	PM10	SOx	CO
Priority Reserve Offsets Used (lb/day)	98	0	0
Priority Reserve Offsets Used (ton/day)	0.05	0	0

CONCLUSIONS

The analysis presented in this report demonstrates that AQMD’s NSR program provides equivalent offsets to those required by federal and state NSR requirements and is at least equivalent to the federal and state requirements on an aggregate basis. The majority of sources subject to AQMD’s permitting program are not major stationary sources and, therefore, are not subject to federal offset requirements. The sum of credits to and debits from AQMD’s federal and state offset accounts during the August 2001 through July 2002 time period was positive for all pollutants except CO. Both the federal and state CO accounts decreased by approximately two-and-one-third tons during this period.

Staff will continue to track credits to and debits from the federal and state offset accounts and will provide annual reports and equivalency demonstrations to the Board to ensure that AQMD’s NSR program continues to operate in compliance with federal and state NSR requirements.

Attachment

A. Sources of Credits to and Debits from AQMD’s Emission Offset Accounts

APPENDIX A

Sources of Credits to and Debits from AQMD’s Emission Offset Accounts
 

Sources of Credits to and Debits from AQMD’s Emission Offset Accounts

This appendix provides a more detailed description of the sources of Credits to and Debits from AQMD’s federal and state offset accounts.

1. Sources of Emission Reductions Creditable to AQMD Accounts

1. BACT Discount of ERCs
   
   Rule 1309(b)(4)(E) specifies that ERCs issued for an emission reduction not be "greater than the equipment would have achieved if operating with current [BACT]." In other words, ERCs are not issued for total actual emissions reductions but are only issued by AQMD for the portion of the emission reduction beyond what would be achieved by the installation of current BACT on the source providing the reductions. The BACT discount portion of the reduction is available for offsetting emission increases for purposes of demonstrating equivalence with federal and state NSR requirements. Thus, the BACT discount portion of ERC-generating emission reductions are credited to AQMD’s federal and state accounts.
    
2. Other Discounts of ERCs (Prior AQMD Offsets and Positive NSR Balances)
   
   Rule 1306(e)(3) specifies that all of the following be subtracted from an emission reduction after the BACT discount is applied and before ERCs are issued:
    
   • The Positive NSR balance of the facility generating the emission reduction;
   • All Community Bank allocations previously issued to the facility generating the emission reduction;
   • All Priority Reserve allocations previously issued to the facility generating the emission reduction; and
   • All offsets obtained by the facility generating the emission reduction pursuant to the exemption

This provision prevents facilities from generating salable ERCs from offsets originally obtained from AQMD’s accounts. Therefore, these offset discounts are captured back into AQMD’s accounts and are available for demonstration of equivalence with federal and state offset requirements.

3. Orphan Shutdowns
   
   Orphan shutdowns are emission reductions from AQMD-permitted sources that are removed from service and permanently cease emitting activities, have their permits inactivated, and do not result in issuance of ERCs. AQMD tracks these accounts. The calculation of the quantity of offsets to be credited to AQMD’s offset accounts is dependent on the nature of the offsets originally used for the source that has shut down and is generating the emission reduction:

• Orphan shutdowns of equipment formerly exempt from permit requirements pursuant to Rule 219 and, therefore, never subject to NSR, are credited to AQMD’s federal and state accounts at twenty percent of permitted emission level. This also applies to orphan shutdowns of equipment offset by previous permits for equipment formerly exempt from permit requirements pursuant to Rule 219.
• The actual amount of the offset provided (i.e., the potential to emit) is credited to AQMD’s federal accounts and eighty percent of the actual amount of the offset provided is credited to AQMD’s state offset accounts for all other orphan shutdowns.

This provides a conservative approach to ensure that the creditable emission reductions are not overestimated.

4. Surplus Reductions
   
   Surplus reductions are creditable emission reductions (excluding orphan shutdowns) associated with permitting activities. There are two basic categories of surplus reductions:

• When permits to construct that received emissions offsets from AQMD’s accounts are cancelled the offsets provided are returned to AQMD’s accounts.
• When a permit is modified in a manner that permanently and enforceably reduces the equipment’s "potential to emit;" the reduction is not required by rule, proposed rule, law, or control measure⁹; and the facility does not receive credit for the reduction, the reduction is credited to AQMD’s accounts. Examples of these types of emission reductions include situations in which facilities install control equipment that is not required for compliance, process modifications that reduce emissions below statutory and rule requirements, and retrofit down to BACT levels for sources pending change of location.

  ---

  ⁹ Refer to Rule 1309(b)(5) for a complete explanation of eligibility requirements.

5. Negative NSR Balances
   
   Prior to the 1990 amendments to Regulation XIII, negative NSR balances represented a facility’s emission reduction balance that had not been issued as ERCs. Negative NSR balances were generated by emission reductions resulting from on-site equipment or facility modifications, over controls, or shutdowns. The 1990 amendments to Regulation XIII specified that all negative NSR balances be reduced by eighty percent and converted to ERCs. The eighty percent portions of the negative balances from all such facilities were used to fund both AQMD’s federal and state offset accounts. This was a one-time source of funding for the federal and state offset accounts and is not ongoing.

2. Sources of Emission Increases Debited from AQMD Accounts

1. Priority Reserve
   
   Pursuant to AQMD Rule 1309.1, essential public services (e.g., sewage treatment facilities, police and fire fighting facilities, schools), innovative technologies that "will result in a significantly lower emission rate from the effected source than…BACT" and "can be expected to serve as a model for emission reduction technology," and certain research operations (refer to Rule 1309.1(a)(2)) are not required to provide emission offsets in the form of ERCs when they receive permits involving emission increases. Instead, AQMD provides their offsets through the Priority Reserve. EGFs are also able to purchase PM10, CO, and SOx emissions offsets from the Priority Reserve. These offsets are deducted from AQMD’s federal (for the case of major stationary sources) and state offset accounts (except CO, PM10, and SOx from facilities whose potential to emit these pollutants is below 15 tons per year).
    
2. Community Bank
   
   For applications deemed complete prior to February 1996, no offsets were required for projects with project emission increases below the following thresholds:

• 30 pounds per day of VOCs;
• 40 pounds per day of NOx;
• 60 pounds per day of SOx;
• 220 pounds per day of CO; and
• 30 pounds per day of PM10.

AQMD provided offsets for these projects from its accounts through what was then termed the "Community Bank." Community Bank offsets provided to major stationary sources are deducted from AQMD’s federal accounts and all Community Bank offsets are deducted from AQMD’s state accounts (except CO, PM10, and SOx provided to facilities whose potential to emit these pollutants is below 15 tons per year).

3. Offset Exemptions
   
   The Community Bank was replaced with offset exemption thresholds for applications received on or after February 1996. Facilities with aggregate potential to emit below these thresholds are eligible to receive emission offsets from AQMD’s offset accounts, up to the levels of the thresholds. The exemption thresholds specified in Rule 1304(d) are as follows:

• 4 tons per year of VOC;
• 4 tons per year of NOx;
• 4 tons per year of SOx;
• 4 tons per year of PM10; and
• 29 tons per year of CO.

Rule 1304 also includes offset exemptions for some other source types such as replacement of ozone-depleting compounds, methyl bromide fumigation, emergency equipment, and certain modifications and process changes implemented to reduce issuance of air contaminants. The majority of these exemptions are intended to incentivize installation of control equipment or facilitate compliance with other regulatory mandates. These offsets are debited from AQMD’s federal and state offset accounts. Note that only offsets provided to sources at major stationary sources are deducted from AQMD’s federal accounts. Similarly, only CO, PM10, and SOx offsets provided to facilities whose potential to emit these pollutants is greater than or equal to 15 tons per year are deducted from AQMD’s state accounts, whereas all NOx and VOC offsets are deducted from the state accounts.

4. Special Permit Reactivations
   
   There have been rare cases where the permits for equipment that was previously considered an orphan shutdown have been reactivated. The orphan shutdown reductions previously credited to AQMD’s federal and state offset accounts for these sources are debited from these accounts when such permits are reactivated.

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