BOARD MEETING DATE: September 8, 2006
AGENDA NO. 39

Amend Rule 1309.1 – Priority Reserve

SYNOPSIS:

Proposed amendments to Rule 1309.1 will allow qualifying electric generating facilities to access the Priority Reserve for the purpose of procuring offset credits.  Amendments also include adjustment of the offset credit price schedule and offset ratio for such credits and approval of an inter-district transfer of VOC credits from the Priority Reserve to Inland Energy.

COMMITTEE:

Stationary Source, July 28, 2006, Reviewed

RECOMMENDED ACTION:

Adopt the attached resolution:

1. Certifying the Notice of Exemption (NOE) for Proposed Amended Rule 1309.1 – Priority Reserve
2. Amending Rule 1309.1 – Priority Reserve; and
3. Approving Inland Energy’s inter-district transfer request of up to 5000 lbs/day of VOC offsets from the Priority Reserve for siting two electrical generating facilities in the Antelope Valley Air Pollution Control District and Mojave Desert Air Pollution Control District.

Barry R. Wallerstein, D.Env.
Executive Officer

Background

Rule 1309.1 - Priority Reserve allows qualifying facilities, such as essential public services, access to a pool of emission reduction credits when these credits are not available in the open market.  The source of the credits is from the District’s NSR offset account and Rule 1309.1 prescribes how credits are periodically transferred from the District’s NSR account.  One potentially problematic area for power projects in the South Coast Air Basin has been and continues to be obtaining adequate offsets. 

In April 2001, Rule 1309.1 was amended to allow Electrical Generating Facilities (EGFs) temporary access to the Priority Reserve to obtain SO₂, CO and PM-10 credits.  California had been experiencing a shortage of electricity for over a year with some Stage 3 shortages (power reserves of less than 1.5%) and rolling blackouts occurring in 2001, and the demand for offsets in the open market exceeded the available supply.  To accommodate EGFs access to the Priority Reserve while maintaining reasonable reserves for other than EGF categories, particularly essential public services, credits were transferred into the Priority Reserve from the District’s NSR account exclusively for EGF use.  Access by EGFs was subject to certain criteria, including paying a non-refundable mitigation fee.  These provisions regarding the transfer and availability of credits to the Priority Reserve for use exclusively by EGFs are only applicable to EGFs submitting a permit application prior to December 31, 2003. 

While new electrical generating facilities (EGFs) have steadily been coming on-line since 2001, the prospect of electrical power shortages in Southern California and the South Coast Air Basin (Basin) in particular continues.  Siting of approximately 2,500 megawatts (MW) of new electrical power generation has been proposed in the Basin and in downwind air basins.  These proposed projects will require emissions offsets.  At the same time there continues to be a shortage of emission reduction credits (ERCs), specifically SOx, PM-10 and CO in the open market.

The staff proposal that the public hearing was set with would have allowed qualified EGFs and Energy Projects of Regional Significance (EPRS) temporary access to the Priority Reserve.  It would also have allowed biosolids processing facilities permanent access to the Priority Reserve.  At the conclusion of the comment period for the Draft EA and during the public notice period after the public hearing was set, substantive comments were received on the Draft EA.  One set of comments contended that the EA evaluation had not adequately analyzed the environmental impacts of projects which might use credits made available under the amended rule.  Staff will consider these comments further and may potentially revise the environmental analysis to address these comments with respect to projects that are not included in the statutory exemption discussed below.  One commenter whose EGF project is scheduled for meeting summer 2008 energy demands noted that CEQA provided a statutory exemption for EGF projects.  District Counsel has researched this statutory exemption provided in Public Resource Code 21080(b)(6) and concluded that the exemption is applicable to EGFs.  Specifically, that statute and CEQA Guidelines §15271(a) – Early Activities Related to Thermal Power Plants states that CEQA does not apply to actions undertaken by a public agency relating to thermal power plant sites and related facilities that will be the subject of an EIR or Negative Declaration or other document or documents prepared pursuant to a regulatory program certified pursuant to Public Resources Code §21080.5 by the State Energy Resources Conservation and Development Commission (California Energy Commission or CEC).  Because, the statutory exemption reflects the state legislature’s intent to defer environmental review of an EGF until the CEC approves the project, staff believes that it is appropriate to move forward with only that portion of PAR 1309.1 relating to EGFs in order to ensure future power needs are timely met.  Since this is a subset of the noticed proposal, staff believes this would not significantly change the meaning of the noticed proposal within the meaning of Health and Safety Code section 40726.  Further, since the amendments proposed are applicable only to the subject of a statutory exemption from CEQA, a Notice of Exemption (NOE) is the appropriate document and has been prepared for this amendment.

After staff fully reevaluates the environmental comments raised as to the remainder of PAR 1309.1, staff will decide whether to continue the rule development process to address energy projects of regional significance and biosolids processing facilities, and if so, prepare the appropriate CEQA documentation and return with the appropriate recommendation at a later date.  Staff is also withdrawing and deferring its proposal to amend Rule 1302 – Definitions to a later date since the revised staff proposal does not rely on the definitions originally included in Proposed Amended Rule 1302.

The Final Staff Report included as an attachment to this Board letter addresses all the amendments of the originally noticed proposal, which include all the other priority sources other than EGFs.  For the purposes of this amendment, only the portion of the staff report that relates to EGFs, is applicable.

Proposed Amendments

The currently proposed version of Proposed Rule 1309.1 is included as Attachment E of this Board letter with proposed amendments indicated in the underline and strikeout format.  The proposal as it existed at the time of public notice is not included in this package but is available from AQMD.  The following summarizes these proposed amendments.

Staff proposes that Rule 1309.1 be amended to provide a limited time window for qualifying electrical generating facilities to utilize credits from the Priority Reserve, provided they demonstrate that the required offsets are not reasonably available in the open market.  These projects would pay a mitigation fee and adhere to certain other requirements of the rule, including a 1.2 to 1.0 offset ratio, in order to have access to offsets from the Priority Reserve. 

Electrical generating projects in downwind basins would also be provided an opportunity to purchase VOC credits for use in siting these facilities.  VOC credits obtained from the Priority Reserve for downwind basin projects, subject to certain conditions, may be utilized to offset other criteria pollutant emissions by use of the inter-pollutant credit trading mechanism.  Existing state law provides for the inter-basin transfer of credits and Proposed Amended Rule 1309.1 would incorporate state law requirements into this inter-basin use of Priority Reserve credits.

An in-Basin EGF that filed a complete Initial Application for Certification to the CEC or a complete permit application with the AQMD in Calendar years 2005, 2006, 2007 or 2008 will pay mitigation fees of $50,417, $15,083 and $12,000 per pound per day of PM-10, SOx and CO respectively.  The mitigation fee for an EGF in a downwind air basin is $1,410 per pound per day of VOC.  The proposed mitigation fees for PM-10 and SOx are based on the weighted average cost of ERC transactions.  The weighted average was then adjusted by an additional 5 percent to recover the internal cost of additional administrative efforts.  Because of the scarcity of CO credits, staff recommends maintaining the initial mitigation fee for CO at $12,000 per pound per day as the most representative for all qualifying years.  Furthermore, all the mitigation fee rates will be adjusted each year on July 1, by an amount equivalent to the change in the California Consumer Price Index for the previous calendar year, beginning in July 2007. 

If an in-Basin EGF project must be canceled due to reasons beyond the applicant’s control, a refund of 80 percent of mitigation fees up to a maximum non-refundable amount of two million dollars ($2,000,000) per project may be obtained subject to certain terms and conditions. The applicant must have filed a complete permit application for which credits were sought in 2005, 2006, 2007 or 2008.  A refund is not authorized for EGFs that filed permit applications in 2000, 2001, 2002 or 2003 and EGFs in a downwind air basin.  A refund is also not authorized for the purchase of excess Priority Reserve credits. The non-refundable portion of the mitigation fee is designed to provide, primarily, a disincentive to adversely impacting the availability of credits to legitimate projects by applying with projects that are not genuine.  Furthermore, the non-refundable fee portion is required to discourage a cancellation of offsets reserved and to ensure that air quality improvement projects can be identified and developed prior to or as close as practicable to the operation of the EGF.  By not assessing this fee, an unacceptable level of uncertainty is imposed that would inhibit these monies from being spent and thereby delay air quality improvement.

Staff recommends that the Governing Board approve, pursuant to Health and Safety Code section 40709.6(d), Inland Energy’s request for the inter-district transfer of up to 5,000 lbs per day of Priority Reserve VOC offsets from the South Coast Air Basin to the Antelope Valley Air Quality Management District and the Mojave Desert Air Pollution Control District to facilitate the siting of two power plants.  Each facility is requesting up to 2,500 lbs per day of VOC offsets. 

Public Process

The rule development process commenced in August 2005 and public workshops were held in September 2005 and June 2006.  An Initial Study (IS) was prepared and along with the Notice of Preparation was circulated for a 30-day public review period from February 16, 2006 through March 17, 2006.  Subsequently, a Draft Environmental Assessment (EA) was prepared and circulated for a 45-day public review and comment period from June 30, 2006 to August 15, 2006.  In response to CEQA comments relative to projects that may receive credits pursuant to PAR 1309.1 staff has determined that further review may be warranted.  Therefore, staff proposes to proceed at the September Board meeting with only those portions of the rule which are statutorily exempt form CEQA.

CEQA Analysis

Pursuant to CEQA, the SCAQMD is the Lead Agency and has reviewed the proposed project pursuant to CEQA Guidelines §15002(k)(1).  Because the proposed project, as amended considering public comments received applies only to thermal power plants and related facilities subject to Public Resources Code Section 21080(b)(6) and the environmental assessment of the State Energy Resources and Conservation and Development Commission, it is statutorily exempt from CEQA pursuant to CEQA Guidelines §15271(a) – Early Activities Related to Thermal Power Plants.  A Notice of Exemption has been prepared pursuant to CEQA Guidelines §15062 – Notice of Exemption.  The Notice of Exemption will be filed with the County Clerks of Los Angeles, Orange, Riverside and San Bernardino Counties immediately following adoption of the proposed project.

The Notice of Exemption is attached to the Board letter.

Socioeconomic Impacts

District staff has conducted a socioeconomic impact analysis (Attachment H) which concluded that the staff proposal will not result in any adverse socioeconomic impacts.

AQMP and Legal Mandates

The California Health and Safety Code requires the AQMD to adopt an Air Quality Management Plan to meet state and federal ambient air quality standards in the South Coast Air Basin.  In addition, the California Health and Safety Code requires that the AQMD adopt rules and regulations that carry out the objectives of the AQMP.  While Proposed Amended Rule 1309.1 is not a control measure included in the AQMP, its requirements are consistent with the AQMP objectives.

Resource Impacts

No resource impacts are expected.

Attachments (EXE 408kb)