BOARD MEETING DATE: July 8, 2005 AGENDA NO. 30

Lockheed Martin operates a facility in Palmdale, California and has requested an inter-district transfer of 124 pounds per day of VOC ERCs and five pounds per day of NOx ERCs from the SCAQMD to the AVAQMD. These ERCs were generated at Lockheed Martin’s Burbank facility, which is no longer in operation. The VOC ERCs were generated by equipment removals that occurred in 1990 and the NOx ERCs resulted from conversion of negative emission balances in 1991 pursuant to the 1990 amendments to SCAQMD Regulation XIII – New Source Review. Lockheed Martin has indicated that they wish to transfer these ERCs from SCAQMD to AVAQMD for offsetting pending emission increases from their Palmdale facility. Lockheed Martin had requested the transfer of the same NOx ERCs along with some PM10 and CO ERCs, all of which also resulted from the 1991 negative emission balance conversions, from SCAQMD to AVAQMD in 2000. After considering this request the SCAQMD Governing Board disapproved this inter-district ERC transfer in November 2000. Lockheed Martin’s most recent request is for the transfer of only the previous NOx ERCs in addition to 124 pounds per day of VOC ERCs. Lockheed Martin’s current 2005 request originally also included the previously-requested three pounds per day of PM10 ERCs, and one pound per day of CO ERCs. In consideration of this request, however, staff had recommended disapproval of the transfer of the PM10 ERCs and the CO ERCs due to concerns regarding the compliance of this portion of the request with the provisions of state law (see below, under the "Regulatory Framework" heading). In their most recent request, however, Lockheed Martin has withdrawn the portion of its request pertaining to inter-district transfer of PM10 ERCs and CO ERCs.

The AVAQMD’s jurisdiction consists of the Los Angeles County portion of the Mojave Desert Air Basin. Palmdale was previously part of the SCAQMD, but on July 1, 1997 became part of the newly-formed Antelope Valley Air Pollution Control District (AVAPCD, now AVAQMD). Upon creation of the AVAPCD, any ERCs generated within SCAQMD in the area that became the AVAPCD and which remained active and in the possession of the generating facilities as of July 1, 1997 were automatically transferred to AVAPCD.

Since the late 1990s, SCAQMD has received a number of requests for inter-district transfer of ERCs from SCAQMD to Mojave Desert Air Quality Management District (MDAQMD) and AVAQMD. In 1999, High Desert Power Project (HDPP) requested inter-district transfer of 1,620 pounds per day of VOC ERCs from SCAQMD to MDAQMD. HDPP wanted the VOC ERCs for use as offsets for both VOC and NOx emissions (through inter-pollutant trading of VOCs for NOx) from a new 700 megawatt (MW) power plant to be located at the former George Air Force Base in San Bernardino County. The SCAQMD Governing Board approved this request for the transfer of 1,620 pounds per day of VOC ERCs from SCAQMD to MDAQMD in May 1999. Also in 1999, Northrup Grumman requested a transfer of 72 pounds per day of NOx ERCs from SCAQMD to AVAQMD. However, due to the scarcity of NOx ERCs in the SCAQMD and the possibility that the SCAQMD Governing Board would disapprove this request, Northrop Grumman revised their request and resubmitted it in 2000 for inter-district transfer of VOC ERCs instead of NOx ERCs from SCAQMD to AVAQMD. The SCAQMD Governing Board approved this request for the transfer of 150 pounds per day of VOC ERCs from SCAQMD to AVAQMD in November 2000.

In 2000, SCAQMD received two additional requests for inter-district transfer of ERCs, one each to MDAQMD and to AVAQMD. Blythe Energy Project (BEP) requested inter-district transfer of 1,771 pounds per day of VOC ERCs from SCAQMD to MDAQMD. BEP wanted the ERCs to offset NOx emissions in MDAQMD (through inter-pollutant trading of VOCs for NOx) for a new 520 MW power plant near Blythe in San Bernardino County. The SCAQMD Governing Board approved this request for the transfer of 1,771 pounds per day of VOC ERCs from SCAQMD to MDAQMD in November 2000.

Additionally, Lockheed Martin requested an inter-district transfer of 148 pounds per day of VOC ERCs, and the same five pounds per day of NOx ERCs, along with three pounds per day of PM10 ERCs and one pound per day of CO ERCs that were the subject of their original 2005 request from SCAQMD to AVAQMD (the CO and PM10 portion of Lockheed Martin’s original 2005 request has since been withdrawn, as discussed above). The SCAQMD Governing Board approved the transfer of 148 pounds per day of VOC ERCs and disapproved the transfer of NOx, PM10, and CO ERCs in November 2000. Lockheed Martin’s present request includes the transfer of only the five pounds per day of NOx ERCs and an additional 124 pounds per day of VOC ERCs.

Table 1 below is the summary of all the above-described inter-district ERC transfer requests received by SCAQMD.

Table 1: Summary of Inter-District ERC Transfer
Requests Received by SCAQMD (1999 to present)

California Health & Safety Code Section 40709.6 and SCAQMD Rule 1309(i) allow ERC transfer between air districts provided all 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 nonattainment status than the downwind district pursuant to Chapter 10 of the Health and Safety Code commencing with Section 40910; and, (2) The stationary source at which there are emission increases to be offset is located in a downwind district that is overwhelmingly impacted by emissions transported from the upwind district, as determined by CARB pursuant to Health and Safety Code Section 39610. In addition to the above, each district’s governing board must approve the offset transfer by a resolution after considering the impacts of the transfer on air quality, public health, and regional economy.

a) Districts’ Attainment Statuses
The South Coast Air Basin (SOCAB) is the primary air basin in the SCAQMD and is classified as an extreme ozone nonattainment area. The AVAQMD is located in the Mojave Desert Air Basin (MDAB) and is classified as a severe ozone nonattainment area. These classifications indicate that the SCAQMD is in a worse ozone nonattainment status than is the AVAQMD. Both SOCAB and MDAB are attainment for NO₂ and both are nonattainment for PM10. SOCAB is presently nonattainment-transitional for CO. The MDAB and, therefore, the AVAQMD is currently in attainment for CO. The California Health and Safety Code defines four classifications of nonattainment for ozone (moderate, serious, severe, and extreme) and two classifications of nonattainment for CO (moderate and serious), but does not define any different nonattainment classifications for PM10. Therefore, SCAQMD cannot be considered to have a worse PM10 nonattainment status than does AVAQMD. In addition, pursuant to Health and Safety Code Section 39610, the CARB has identified the AVAQMD as a downwind district that is overwhelmingly impacted by emissions transported from the SCAQMD for ozone for which NOx and VOC are precursors. CARB studies indicate that the majority of ozone exceedences in the AVAQMD can be attributed to transport from the SCAQMD. However, at this time CARB has not identified the AVAQMD as a downwind district that is overwhelmingly impacted by emissions transported from the SCAQMD for CO or PM10.

As a result, the proposed inter-district transfers of NOx and VOC ERCs meet the first two conditions specified above. Conversely, the originally-proposed inter-district transfers of CO and PM10 ERCs did not meet the first two conditions of Health and Safety Code Section 40709.6. Moreover, in order to be eligible for inter-district ERC transfer, both the SCAQMD and the AVAQMD Governing Boards need to approve the transfer by resolution after considering the impacts on air quality, public health, and regional economy. The AVAQMD Governing Board has already approved Lockheed Martin’s requested transfer pursuant to the Health and Safety Code Section 40709.6.

b) Air Quality Impacts
The AVAQMD has determined that any future emission increases offset by the transferred ERCs (if approved) would not interfere with the attainment and maintenance of federal and state ambient air quality standards in their district. Because the AVAQMD is located downwind of the SCAQMD, emissions increases within the AVAQMD associated with the use of transferred ERCs would have no direct impact on air quality in the SOCAB.

c) Public Health Impacts
Since the AVAQMD is located downwind of the SCAQMD, no public health impact resulting from approval of the requested inter-district ERC transfers is expected in the SCAQMD.

d) Regional Economy
In order to evaluate the economic impact of the requested inter-district ERC transfer from SCAQMD, consideration needs to be given to the supply, demand, availability, and price of ERCs in SCAQMD. The existing SCAQMD inventories of VOC and NOx ERCs are shown in Table 2. Tables 3 and 4 present annual ERC use, inventories, and annual average cost for VOC and NOx, respectively, for January 1, 2000 through June 1, 2005.

Table 3: Annual VOC ERC Use, Inventory, and Costs - 2000 through June 1, 2005

(1)

Used and Total Inventory are in pounds per day. The Total Inventory is for October 1^st of the previous year to September 30^th of the identified year.

Table 4: Annual NOx ERC Use, Inventory, and Costs - 2000 through June 1, 2005

(1)	Used and Total Inventory are in pounds per day. The Total Inventory is for October 1^st of the previous year to September 30^th of the identified year.
(2)	These numbers include temporary adjustments due to the State Emissions Mitigation Program for power plant use in 2002.

Tables 2 and 3 demonstrate that SCAQMD presently has a relatively large inventory of VOC ERCs. However, in the last five years, the VOC ERC inventory has been continuously reduced and, as of June 2005, has dropped to a little more than one half of the VOC ERC inventory that existed in 2000 with the price of VOC ERCs increased anywhere between 25% and 50% since 2000. Tables 2 and 4 demonstrate that, based on the past supply, demand, and availability and primarily due to the fact that most large NOx sources are in the RECLAIM program and use RECLAIM Trading Credits (RTCs), there is a limited but stable supply of NOx ERCs both in terms of inventory and price.

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 2001 to 2004, the region's manufacturing sector grew at 4.5 percent a year on average and the average growth of the entire region was 3.2 percent a year. The open market demand for ERCs and other factors have, depending on the pollutant, resulted in an overall significant drop in the ERC inventory along with a significant increase in the ERC cost. Since 2000, the present supply of VOC ERCs, although relatively large, has decreased significantly, partly due to the non-VOC adjustment required by Rule 1303(b)(2)(C), in the spring of 2001. The supply of NOx ERCs, however, has remained relatively constant.

From now to the year 2010, the region is expected to grow at 3.1 percent a year and manufacturing is forecast to grow at 3.5 percent yearly. For the most part, excluding the non-VOC adjustment, the previous trends for ERC usage, generation, and price are expected to continue. On the other hand, increasingly more stringent BACT and retrofit rule requirements, and improved air pollution control technologies are lowering emissions from sources and may potentially reduce the need for ERCs.

Examining historical ERC availability, use, and cost alone is not sufficient to gauge future needs or the potential for economic impacts resulting from inter-district transfers. There is the potential for one or more large project(s) to occur at any time for which historical data would not be representative. For example, the California Energy Commission has projected that in Southern California there will be a shortage of electricity depending on temperatures and availability of generating units starting the summers of 2005-2008. Southern California Edison has recently issued a request for offer and is ready to sign contracts for generation of 1,500 MW of new electricity with on-line operations starting with summer of 2006. Therefore, it is very possible that one or more new electricity generating facilities could be constructed within the SCAQMD to help ensure an adequate energy supply. Staff has already been approached by some project proponents regarding permitting of new power plants and has conducted an analysis to determine the quantities of VOC and NOx ERCs that would be required as offsets for 1,500 MW of new power generating capacity utilizing current BACT. The estimated emissions and required offsets for such a project are summarized in Table 5. Also, due to the proposed RECLAIM program 2007 RTC shave (11.7 %, increasing to 22.5 % in 2011), it is possible that RTCs may become more scarce and more expensive in the future in which case there will be a greater market demand need for NOx ERCs in SCAQMD.

The data in Table 5 reveals that the current supply of VOC ERCs may be sufficient to offset a new 1,500 MW power plant. However, there is not a sufficient quantity of NOx ERCs to offset a new 1,500 MW power plant.

Further, a survey of ERC Brokers was conducted to determine the availability of NOx ERCs. All of the brokers contacted described the market for NOx to be fairly tight. They were in agreement that requests for NOx ERCs, around 100 pounds per day, would be possible to fill, but would be difficult and take time. The price range quoted for NOx credits was $11,000 to $25,000 per pound per day. The key reason quoted for limited availability was a shortage of ERC holders that were willing to sell.

The historical data regarding NOx ERC availability, use, and cost support the conclusion that the NOx ERC market is presently stable and sufficient to meet the foreseeable demand. The present available data also does not suggest that the RECLAIM RTC market will not be able to accommodate the additional demands for NOx offsets which would result from installation of additional electricity generation capacity within SCAQMD. Although SCAQMD staff is concerned with the future demand for NOx ERCs due to the projected energy (power and petroleum) project needs and the proposed RECLAIM program 2007 RTC shave, SCAQMD staff believes that, in this specific case, Lockheed Martin’s request for transfer of five pounds per day of NOx ERCs to AVAQMD could be approved without a significant impact on the regional economy. The staff’s findings are based on the following:

The requested inter-district transfer of five pounds per day of NOx ERCs in this special case is not expected to adversely impact the regional economy. However, as stated earlier, SCAQMD staff has concerns about the future demand for NOx ERCs and believes that any potential future requests for inter-district transfer of NOx ERCs could have an adverse impact on the regional economy and Lockheed Martin’s NOx ERC transfer, if approved by the Governing Board, should not set a precedent that future requests for inter-district transfer of NOx ERCs would also be recommended for approval.

The inter-district ERC transfer requests for 124 pounds per day of VOC (certificate AQ003960) and five pounds per day of NOx (certificates AQ000690 and AQ000807) meet the requirements of state law and SCAQMD rules and are not anticipated to pose an adverse impact on the region’s air quality, public health, or economy. Based on the above analysis, staff recommends the approval of Lockheed Martin’s request for inter-district ERC transfer of 124 pounds per day of VOC ERCs and five pounds per day of NOx ERCs to the AVAQMD.

In order to address the shortage of ERCs in AVAQMD and MDAQMD, on June 15, 2001 the SCAQMD Governing Board approved a staff recommendation to request that AVAQMD and MDAQMD consider creating an offset bank within their air quality management plans. The SCAQMD staff is willing to work with AVAQMD and MDAQMD to conduct a joint study in conjunction with CARB to assess the potential for creating new offsets/ERCs in these districts.