BOARD MEETING DATE: June 3, 2005 AGENDA NO. 17

Due to the limited amount of emission reductions banked in the AVAQMD, ERCs are not readily available in that district. Lockheed Martin operates a facility in Palmdale, California and has requested an inter-district transfer of 124 pounds per day of VOC ERCs, five pounds per day of NOx ERCs, three pounds per day of PM10 ERCs, and one pound per day of CO 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 others 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, PM10, and CO ERCs 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 has now resubmitted the same request for the transfer of the same NOx, PM10, and CO ERCs in addition to 124 pounds per day of VOC 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, Northrup 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 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, three pounds per day of PM10 ERCs, and one pound per day of CO ERCs that are covered under their present request from SCAQMD to AVAQMD. 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. As explained above, the NOx, PM10, and CO ERCs for which transfer was disapproved by the SCAQMD Governing Board were created in Burbank, which is still a part of SCAQMD and are the subject of the current request. In addition to these NOx, PM10, and CO ERCs, Lockheed Martin is presently requesting the transfer of 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 All Inter-District ERC Transfer
Requests Received by SCAQMD

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 the California Air Resources Board (ARB) 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, AVAQMD cannot be considered to have a worse PM10 nonattainment status than does SCAQMD. In addition, pursuant to Health and Safety Code Section 39610, the ARB 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. ARB studies indicate that the majority of ozone exceedences in the AVAQMD can be attributed to transport from the SCAQMD. However, the ARB 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 proposed inter-district transfers of CO and PM10 ERCs do not meet either of 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 ERC (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, NOx, CO and PM10 ERCs are shown in Table 2. Tables 3 through 6 present annual ERC use, inventories, and annual average cost for VOC, NOx, CO, and PM10, respectively for the years 2000 through 2004.

(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.

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

(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.

(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.

Tables 2 and 3 demonstrate that SCAQMD presently has a relatively large inventory of VOC ERCs compared to the other pollutants’ ERC inventories. However, in the last five years, the VOC ERC inventory has been continuously reduced and at present time has dropped to almost 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 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. Tables 2 and 5 demonstrate that there is a limited and decreasing supply of CO ERCs. In the past five years the CO ERC inventory has continuously decreased and is presently reduced to almost one half of the CO ERC inventory that existed in 2000, with the price of CO ERCs increases anywhere between 500 % and 1000 %. Tables 2 and 6 demonstrate that there is a small and rapidly decreasing supply of PM10 ERCs. In the past five years the PM10 ERC inventory has continuously decreased and is presently less than 40 % of the PM10 ERC inventory that existed in 2000, with the price of PM10 ERCs increased by almost 1000%.

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 resulted in an overall significant drop in the ERC inventory along with a significant increase in the ERC cost. Since 2000, the supply of VOC ERCs 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 has remained relatively constant, whereas the supplies of CO and PM10 ERCs have decreased significantly.

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 their needs 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 the 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 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 by 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, NOx, CO, and PM10 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 7. Also, due to the proposed RECLAIM program 2007 RTC shave, it is anticipated that RTCs may become more scarce and more expensive supporting the market need for NOx ERCs in SCAQMD.

The data in Table 7 reveals that the current supply of VOC ERCs may be sufficient to offset a new 1,500 MW power plant. However, slightly more than half of the available CO ERCs would be consumed and there are not sufficient quantities of NOx and PM10 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. The key reason quoted for limited availability was a shortage of ERC holders that were willing to sell. Similarly, CO and PM10 ERCs that are available for sale have to a large extent already been purchased and used up primarily by new power plants permitted and/or constructed in SCAQMD in the last five years. The most recent PM10 ERCs acquired in SCAQMD were purchased at a price of about $70,000 per pound per day, which is an increase of about 2000 % over the price of PM10 ERCs in 2000.

The inter-district ERC transfer requests for 124 pounds per day of VOC (certificate AQ003960) meets the requirements of state law and SCAQMD rules and is not anticipated to pose an adverse impact on the region’s air quality, public health, or economy.

The inter-district ERC transfer requests for five pounds per day of NOx (certificates AQ000690 and AQ000807), one pound per day of CO (certificate AQ000809), and three pounds per day of PM10 (certificate AQ000810) do not meet the requirements of state law. Specifically, the ARB has not identified the AVAQMD as a downwind district that is overwhelmingly impacted by emissions transported from the SCAQMD for CO or PM10. In addition, SCAQMD is not classified as being in a worse nonattainment status for CO or PM10 than is AVAQMD. Also, the AVAQMD is in both federal and state attainment status for CO. With attainment achieved for CO, offsets or ERCs for CO emissions should not be needed in AVAQMD. Finally, the requested inter-district NOx, CO, and PM10 ERC transfers could adversely impact the local economy by additionally reducing the limited supply of emissions offsets for these pollutants in SCAQMD, limiting construction of new or expansion of existing facilities.

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 plan. The SCAQMD staff is willing to work with AVAQMD and MDAQMD to conduct a joint study in conjunction with ARB to assess the potential for creating new offsets/ERCs in these districts.

Based on the above analysis, staff recommends the following in response to Lockheed Martin’s inter-district ERC transfer request:

1)	Approve the inter-district transfer request of 124 pounds per day of VOC ERCs for Lockheed Martin to the AVAQMD; and,
2)	Disapprove the inter-district transfer request of NOx, CO, and PM10 ERCs for Lockheed Martin to the AVAQMD.