BOARD MEETING DATE: September 3, 2004
AGENDA NO. 30

Amend Rule 1121 - Control of Nitrogen Oxides from Residential Type, Natural Gas-Fired Water Heaters

SYNOPSIS:

Rule 1121 was amended in December 1999 to lower the emission limits for water heaters. Manufacturers submitted an interim report relative to their progress in meeting the final emission limit and staff provided a summary of this information and recommendations at the January 9, 2004 Board Meeting. In order for equipment manufacturers to address other national regulatory requirements and technical and manufacturing issues, staff is proposing to delay implementation of the final rule limit one to three years depending upon the size and type of the water heater and to modify the mitigation fee program. This item also serves as a notice of intent to make infeasibility findings, as required in the settlement agreement for the 1999 AQMP amendment.

COMMITTEE:

Stationary Source, July 23, 2004, Reviewed

RECOMMENDED ACTION:

Adopt the attached resolution:

1. Certifying the Final Subsequent Environmental Assessment (SEA) for Proposed Amended Rule 1121 – Control of Nitrogen Oxides from Residential Type, Natural Gas-Fired Water Heaters;
    
2. Adopting the Statement of Findings and Statement of Overriding Considerations;
    
3. Making a finding of infeasibility regarding the January 1, 2005 compliance date for the Rule 1121 final rule limit; and
    
4. Amending Rule 1121 – Control of Nitrogen Oxides from Residential Type, Natural Gas-Fired Water Heaters.

Barry R. Wallerstein, D. Env.
Executive Officer

Background

Rule 1121 – Control of Nitrogen Oxides from Residential Type, Natural Gas-Fired Water Heaters, was amended in December 1999 to lower the nitrogen oxide (NO_x) emission limits in the rule. The amendment reduced the NO_x limit in two steps from 40 ng/J to 20 ng/J on July 1, 2002 and 10 ng/J on January 1, 2005. All four manufacturers used an option in the rule to pay a mitigation fee in lieu of meeting the July 1, 2002 interim limit.

The rule also required manufacturers to provide a report by July 1, 2003 on their progress toward meeting the final emission limit in the rule. Staff presented a summary of these reports at the January 2004 Governing Board meeting and the Governing Board directed staff to proceed with rule development. Since that time, staff has met with representatives of water heater manufacturers and the Gas Appliances Manufacturers Association (GAMA). Industry requested a delay in the compliance date for the final rule limit, a change in the mitigation fee program, and an exemption for some types of water heaters.

Affected Facilities

Gas-fired storage water heaters are used by most residences and commercial enterprises in the South Coast Basin (Basin). There are over four million gas-fired water heaters in the Basin. There are four water heater manufacturers who provide 99% of all the different types of water heaters purchased in the Basin. The manufacturers of gas-fired storage water heaters are all located outside of the state.

Proposed Rule

Staff is proposing to extend the compliance date for the final rule limit and continue the mitigation fee as a compliance option for the interim rule limit of 20 ng/J. Manufacturers would have to meet the final emission limit in the rule by January 1, 2006, for conventional water heaters of 50 gallon capacity or less and by January 1, 2007, for conventional water heaters greater than 50 gallon capacity. Staff is proposing a three year delay, until January 1, 2008, for direct-vent, power-vent, and power direct-vent water heaters.

Staff proposes to set the mitigation fee at $3.00 per unit to reflect current control costs. Staff also proposes to allow the Executive Officer to recover administrative costs of up to 5% for administering emission reduction projects and for the mitigation fee program.

The proposed rule language also includes minor changes to address the transition from the existing mitigation fee program to the new proposed fee program on date of adoption. The proposed rule also allows new units meeting the existing standard and manufactured before the compliance date for the new standard to be sold to customers for up to six months after the compliance date. Staff is not proposing any exemption from the final rule limit.

Public Process

During the rulemaking process, staff conducted a Public Workshop and CEQA scoping session on June 17, 2004 to present the proposed rule. Staff has also met a number of times with manufacturers and GAMA to discuss technology development and industry's request for a delay of the final rule emission limit.

Key Issues

Rule 1121 interim progress reports required manufacturers of water heaters to provide specific information, which included a description of technology, emission test results, identification of technical and productions issues and an estimated manufacturing date. The information in the progress reports submitted by manufacturers was consistent. Manufacturers reported that progress had been made towards meeting the final rule limit; however more time is needed because a number of national safety, energy and environmental standards were delayed and must now be met concurrent with the Rule 1121 final limit.

Issues raised by the manufacturers and GAMA focus on the need to meet the District final rule limit and standards for flammable vapor ignition resistance (FVIR) and energy efficiency at the same time. Implementation of these other standards has been delayed from the original proposed dates and now must be met at about the same time as Rule 1121's final emission limit. The implementation dates for the Rule 1121 emission standards were set in part based on the expectation of earlier implementation dates for the FVIR and energy efficiency standards. The FVIR standard was phased-in starting in July 2003 with non-vented atmospheric units 50 gallons or less. Larger units and non-conventional units have later compliance dates. The new federal energy efficiency standard had to be met by January 2004.

Manufacturers need more time than anticipated to develop technologies that will both meet the final rule limit and the above-mentioned standards. A wide variety of burners have been evaluated. In addition, it is more difficult to meet the final rule emission limit with the addition of a lint, dust, and oil test to the FVIR standard. Radiant burners are more easily impacted by an accumulation of lint, dust or oil.

Manufacturers have indicated that they can meet the final limit for conventional water heaters with a one to two year delay. They have requested a one year delay for conventional units that are 50 gallons or less and a two year delay for conventional units greater than 50 gallons. The additional year delay for larger units is requested because these units have larger burners and they are still being redesigned to meet new safety and energy standards during the next year.

Manufacturers have also requested an exemption from both the final and interim emission limits for direct-vent and power-vented water heaters. Manufacturers have spent most of their developmental efforts on smaller conventional water heaters. This type is the most common type of gas-fired water heater sold for residential applications in Southern California. Other types of units include direct-vent units and those with fans to ensure combustion exhaust if vented to the outside of a building. Direct-vent units draw air from outside the space where the water heater is installed, typically through a combination (coaxial) exhaust and ventilation duct to the outside of the building. Power vented units have longer exhaust ducts and draw air into the combustion chamber by use of an auxiliary exhaust fan. Water heater manufacturers have not provided information on testing of low NOx burners in direct-vent or power-vented units. Additional time is needed to evaluate low NOx burners in these types of water heaters.

When the District submitted Rule 1121 for the state implementation plan (SIP), no credit was taken for water heaters produced to meet the interim standard of 20 ng/J. Manufacturers have proposed to extend the mitigation fee program and change the fee structure to one based on the number of water heaters sold in the Basin. They proposed a fee of $2.50 per water heater. Staff has proposed a mitigation fee of $3.00 per water heater. The current fee is equivalent to about $1.80 per water heater. The fee of $3.00 per water heater is necessary to obtain sufficient and timely emission reductions to offset the reductions forgone by manufacturers choosing to pay the mitigation fee instead of meeting the interim limit.

At the time of the SIP submittal, it was not known which companies would produce water heaters meeting this standard and which would pay mitigation fees to offset emissions. All four manufacturers have elected not to produce water heaters that meet the interim standard and all are using the mitigation fee program to offset their emissions. Mitigation Fee projects funded by this program were approved by the Governing Board in June 2004. These projects will reduce NOx emissions by approximately 0.14 tons per day for at least 10-15 years of project life that, in total, will produce sufficient reductions to offset the emissions. However, in order to generate sufficient reductions in a timelier manner, i.e., within 2 years of project life, to offset the reductions that would have been achieved by water heaters meeting the interim standard, an increase in the mitigation fee is needed. Increasing the mitigation fee can provide additional and timelier emission reductions which cannot be quantified at this time.

A one year delay, until January 1, 2006, for the less than or equal to 50 gallon units, an additional year delay until January 1, 2007 for greater than 50 gallon units, and a three year delay for direct-vent, power-vent and power direct-vent units will result in less emission reductions than projected for the original rule until 2014. When emission reductions due to the new U.S. Department of Energy (DOE) efficiency requirement for water heaters and the mitigation projects are incorporated into the calculation, the delay of the final limit results in about 0.4 tons per day more of nitrogen oxide emissions in 2006 and more than 0.1 tons per day in 2010 compared with the original rule.

AQMP and Legal Mandates

Rule 1121 is included in the Settlement Agreement for the 1999 AQMP amendment. A provision was included in the agreement for findings of infeasibility in the event technology forcing rules are not able to be met. An infeasibility finding can be made if the proposed control technology is not reasonably likely to be available by the implementation date. As described in the staff report, it is infeasible for manufacturers to meet the final rule limit by January 1, 2005. The Settlement Agreement allows extension of the implementation date by one year. Although the staff proposal includes a small portion of water heaters that would have their compliance date extended by up to three years, the reduction commitment of 7.6 tons per day could still be achieved by 2010 by the water heaters that will be in compliance by January 2006 when the state and federal energy efficiency standards are considered.

The 2003 AQMP attainment demonstration and State Implementation Plan (SIP) commitment will not be compromised because the 2003 AQMP included a three ton set aside to account for delays in implementation when technical assessments for rules indicate that technology did not develop as anticipated. A portion of those emissions will be used to offset reductions that would have occurred if the technology was available.

California Environmental Quality Act (CEQA) Analysis

Pursuant to the California Environmental Quality Act (CEQA) and AQMD Rule 110, the AQMD has prepared environmental documentation evaluating potential significant adverse environmental impacts associated with implementing the proposed amendments to Rule 1121. A draft Subsequent Environmental Assessment (SEA) was prepared and released for a 45-day public review and comment period from June 4, 2004 to July 20, 2004. A Final SEA is included as a part of the attached package for the public hearing on the proposed rule.

Socioeconomic Analysis

The socioeconomic analysis of the proposed amendments examined the amounts of mitigation fee payments up to the final compliance dates by assuming that the four manufacturers will continue their payments and using their submitted data on water heaters as of 2003. Relative to the existing rule, the mitigation fee payment under the proposed amendments will increase by $1.2 million by the end of 2007. However, extending the compliance dates under PAR 1121 provides additional time for the manufacturers to meet the final emission limit of 10 ng/J. Under PAR 1121, if a manufacturer directly complies with the applicable interim or final emission limit, it would not pay a mitigation fee.

Conclusion and Staff Recommendation

To mass produce water heaters at a lower NO_x limit, there are several steps. New burners and water heater designs must meet DOE efficiency standards, pass lint, dust and oil tests, as well as other safety measures. Changes to one component of the water heater often affect the design of other components. Once a satisfactory design is developed and tested, there are mandatory safety and reliability tests that must be done. Additional time is needed to change production lines in order to mass produce water heaters.

It is infeasible for the January 1, 2005 date to be met due to the amount of technical work still needed. The remaining time is not sufficient to develop, test and produce water heaters. Staff has worked with the manufacturers and is recommending a one-year delay for conventional water heaters 50 gallon capacity and less, two years for conventional water heaters greater than 50 gallon capacity, and three years for direct-vent, power-vent, and power direct-vent water heaters. Staff is not recommending a full exemption from the interim and final rule limits for direct-vent and power-vented water heaters because technology is available to meet these limits and the proposed amended rule provides additional time to develop and test technology for these types of water heaters. A final progress report from water heater manufacturers will be required to show progress made toward meeting the final rule limit from direct-vent, power-vent, and power direct-vent water heaters.

As described in the staff report, it is infeasible for manufacturers to meet the final rule limit by January 1, 2005. Staff recommends the Board make a finding of infeasibility regarding the January 1, 2005 compliance date for the final rule limit.

Attachments

1. Summary of Proposal
2. Key Issues and Responses
3. Rule Development Process
4. Key Contacts List
5. Resolution
6. Proposed Amended Rule
7. Final Staff Report with Socioeconomic Impact Assessment
8. Final Subsequent Environmental Assessment

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