BOARD MEETING DATE: March 3, 2006
AGENDA NO. 33

Annual RECLAIM Audit Report for 2004 Compliance Year

SYNPOSIS:

The annual report on the NOx and SOx RECLAIM program is prepared in accordance with Rule 2015 - Backstop Provisions. The report assesses emission reductions, average annual price and availability of RECLAIM Trading Credits (RTCs), job impacts, compliance issues, and other measures of performance for the eleventh year of this program. A list of facilities unable to reconcile their emissions for the compliance year is included with the report.

COMMITTEE:

Stationary Source, February 24, 2006

RECOMMENDED ACTIONS:

Receive and file the attached report.

Barry R. Wallerstein, D.Env.
Executive Officer

Background

The Board adopted the RECLAIM program on October 15, 1993 to provide a more flexible compliance program for RECLAIM facilities, representing the largest emitters of NOx and SOx. RECLAIM was designed to meet all state and federal requirements for clean air programs and a variety of performance criteria to ensure protection of public health, air quality improvement, effective enforcement, implementation costs, and minimal job impacts.

RECLAIM represents a significant departure from traditional command-and-control regulations. Therefore, the RECLAIM rules provide for annual program audits to verify that the program objectives are being met. Rule 2015 – Backstop Provisions requires AQMD to conduct an annual program audit to assess various aspects of the program to verify that the program objectives are being met. AQMD staff completed the audit of RECLAIM Compliance Year 2004. The audit results showed that the aggregate NOx emissions were again achieving programmatic compliance and were 20 percent less than the aggregate NOx allocations for Compliance Year 2004. SOx emissions continued to be less than SOx allocations, by 17 percent for Compliance Year 2004. Annual average prices for both NOx and SOx RTCs were all below the backstop threshold of $15,000 per ton. During Calendar Year 2005, prices for NOx RTCs valid for Compliance Years 2006 and after, especially for those RTCs traded in multi-year streams, were increasing. When compared to prices for same NOx RTCs traded in Calendar Year 2004, the annual average prices in Calendar Year 2005 were higher for RTCs valid for every Compliance Year except Compliance Years 2004 and 2005.

Audit Findings

The audit of the Compliance Year 2004 RECLAIM program indicates that:

• Aggregate NOx and SOx emissions from RECLAIM facilities were below allocations.
   
• The RECLAIM universe consisted of 324 facilities at the end of the 2003 compliance year. There was a net decrease of thirteen facilities in the RECLAIM universe during the 2004 compliance year. Thus, there were 311 facilities in the RECLAIM universe at the end of the 2004 compliance year.
   
• Thirteen (13) RECLAIM facilities shut down or were reported to be out of business during the 2004 compliance year. These facilities shut down mainly due to economic reasons. Only three of these facilities attributed the closing, in part, to RECLAIM.
   
• The majority of RECLAIM facilities complied with their Allocations during the 2004 compliance year. At the time of preparation of this report, thirteen facilities exceeded their Allocations during the 2004 compliance year. Failure to obtain sufficient RTCs to reconcile with emissions was the leading cause of exceedance.
   
• RECLAIM had minimal impact on employment during the 2004 compliance year, as in previous years. An overall net loss of 1,807 jobs was reported by RECLAIM facilities. Two facilities attributed 31 jobs lost due to RECLAIM. Two others reported a total of four jobs gained due to RECLAIM.
   
• The RTC trading market remained active. A total of $780 million in RTCs have been traded since the adoption of RECLAIM, of which $57.4 million occurred in Calendar Year 2005. The annual average NOx and SOx RTCs prices were all below the backstop prices of $15,000 per ton. Prices for future year NOx RTCs, especially those traded in multi-year streams, increased during Calendar Year 2005. The annual average prices for NOx RTCs valid for Compliance Year 2008 and after were the highest since the start of the program. Annual average prices for NOx RTCs ranged from $9,730 per ton of Compliance Year 2008 NOx RTCs to $10,193 per ton of NOx RTCs for Compliance Years 2010. RTCs valid beyond Compliance Year 2010 were traded at average prices around $9,800 per ton. In addition to individual year RTC trades, RTCs were also traded as a block of RTCs valid for all years after a start year at a single price per pound for the whole block. Average prices for these “infinite-year” RTCs blocks were $10,678 and $6,084 per ton of NOx and SOx, respectively. Annual average prices during 2003, 2004, and 2005 are summarized as follow:
   

• During Calendar Year 2005, mutual funds started to trade RTCs in addition to the traditional RTC traders, such as RECLAIM facilities, brokers, commodity traders and private investors. To date, there have been four mutual funds under one fund manager that have participated in RTC trades. Also, a contingent right to sell RTCs was first reported to the AQMD in Calendar Year 2005. This contingent right allows the owner to sell RTCs at a set price if he or she decides to exercise the option.

Attachment (EXE 1.7kb)
Annual RECLAIM Audit Report for 2004 Compliance Year

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