BOARD MEETING DATE: February 2, 2007
AGENDA NO. 37

Status Report on Regulation XIII – New Source Review

SYNOPSIS:

This report presents federal final determinations of equivalency for August 2002 through July 2003 and August 2003 through July 2004, and a preliminary determination of equivalency for August 2004 through December 2005.  As such, it provides information regarding the status of Regulation XIII – New Source Review (NSR) in meeting federal NSR requirements and shows that AQMD’s NSR program is in final compliance with applicable federal requirements from August 2002 through July 2004 and in preliminary compliance from August 2004 through December 2005.  This report satisfies the reporting requirements of subdivision (b) of Rule 1310 – Analysis and Reporting and of subdivisions (d) and (e) of Rule 1315 – Federal New Source Review Tracking System.

COMMITTEE:

Stationary Source, January 26, 2007, Reviewed

RECOMMENDED ACTION:

Receive and file the attached report.

Barry R. Wallerstein, D.Env.
Executive Officer

SUMMARY

AQMD’s NSR Rules and Regulations are designed to support efforts to attain and maintain compliance with the federal and state air quality standards and to ensure that emission increases from new and modified sources do not interfere with such efforts, while maintaining economic growth in the South Coast region.  Regulation XIII - New Source Review regulates emissions increases and accounts for all emission changes (both increases and decreases) from the permitting of new, modified, and relocated sources within AQMD with the exception of NOx and SOx sources subject to Regulation XX – Regional Clean Air Incentives Market (RECLAIM)[1].

The annual reports on the status of Regulation XIII include final determinations of equivalency (FDE) and preliminary determinations of equivalency (PDE) which cover NSR activities for twelve-month periods (with the one-time exception of August 2004 through December 2005).  The last FDE submitted to the Board on April 2, 2004 covered the period from August 2001 through July 2002 for both federal and state NSR requirements.  Provisional final determinations of federal equivalency for August 2002 through July 2003 and August 2003 through July 2004 were also submitted to the Board along with the staff report for Rule 1315 – Federal New Source Review Tracking System which was adopted by the Board on September 8, 2006.  This report presents FDEs covering the same two reporting periods.  The PDE presented in this report covers the period August 2004 through December 2005.  These reports demonstrate compliance with federal NSR requirements by establishing aggregate equivalence with federal offset requirements for sources which obtained their offsets from AQMD.  A final compliance determination for August 2004 through December 2005 will be completed by the end of June 2007.

The FDE for the August 2002 through July 2003 and August 2003 through July 2004 timeframes are summarized below in Tables 1 and 2, respectively.  Additionally, the projections of AQMD’s offset account balances for the August 2004 through December 2005, the January 2006 through December 2006, and January 2007 through December 2007 timeframes are presented in Table 3.  These results demonstrate that there were, and project that there will be, adequate offsets available to mitigate all emission increases during these reporting periods.  This report, therefore, demonstrates that AQMD’s NSR program continues to meet federal offset requirements and is equivalent to those requirements on an aggregate basis[2].

Table 1
FDE for August 2002 through July 2003

*          The revised 2002 running balances as shown in the Rule 1315 staff report, Table 5 and Table I-1 of its Appendix I.
**       Refer to page 10 of this report (consistent with Rule 1315(b) and its staff report) for an explanation of the sources of credits and debits.  Credits are shown as positive and Debits as negative, while sum of Credits/Debits and Net Activity are shown as positive or negative, as appropriate.
***     Surplus at the time of use discount pursuant to Rule 1315(b)(4).
****   ”Ending Balance” equals the “Starting Balance” plus the sum of credits and debits and plus any surplus adjustments.

Table 2
FDE for August 2003 through July 2004

*          Same as “Ending Balance” from Table 1.
**       Refer to page 10 of this report (consistent with Rule 1315(b) and its staff report) for an explanation of the sources of credits and debits.  Credits are shown as positive and Debits as negative, while sum of Credits/Debits and Net Activity are shown as positive or negative, as appropriate.
***     Surplus at the time of use discount pursuant to Rule 1315(b)(4).
****   ”Ending Balance” equals the “Starting Balance” plus the sum of credits and debits and plus any surplus adjustments.

Table 3
Projections of AQMD’s Federal Offset account Balances for
August 2004 through December 2005, January 2006 through
December 2006, and January 2007 through December 2007
(Tons per Day)

*          Same as “Ending Balance” in Table 2.
**       Projected pursuant to Rule 1315(d).

BACKGROUND

AQMD originally adopted its NSR program in 1976.  U.S. EPA approved AQMD’s NSR program into California’s State Implementation Plan (SIP) initially on January 21, 1981 (46FR5965) and again on December 4, 1996 (61FR64291).  Most recently, EPA approved AQMD’s May 3, 2002 Rule1309.1 amendments into the SIP on June 19, 2006.  The original program has evolved into the current version of the Regulation XIII rules in response to federal and state legal requirements and the changing needs of the local environment and economy.  Specific amendments to the NSR rules were adopted by AQMD’s Governing Board on December 6, 2002 to facilitate and provide additional options for credit generation and use.  Most recently, Rule 1315 was adopted and Rule 1309.1 was amended on September 8, 2006.  The most notable changes from the post-2000 amendments to Regulation XIII are summarized below:

• Short Term Credits (STC)
  Rules 1303 – Requirements and 1309 – Emission Reduction Credits and Short Term Credits now provide for the generation and use of short term offsets for stationary sources.  These credits can be generated by stationary sources (Emission Reduction Credits or ERCs), mobile sources (MSERCs), and area sources (ASERCs).
• Extended ERC Filing Deadline
  Rule 1309 – Emission Reduction Credits and Short Term Credits’ deadline to apply to bank an ERC was extended from 90 days after to 180 days after the occurrence of the emission reduction.
• Priority Reserve
  Rule 1309.1 – Priority Reserve was amended in response to the California’s electricity crisis and lack of emission offsets, to allow new cleaner and more efficient electric generating facilities (EGFs) access to AQMD’s offset bank, under certain circumstances, for purchase of emission credits to offset their emission increases.  The mitigation fees collected for EGFs’ access to the Priority Reserve are then used by AQMD for funding additional emission reduction projects in the impacted areas.
• Offset Budget
  Rule 1309.2 – Offset Budget creates a “bank of last resort” to provide offsets for sources that are unable to otherwise obtain needed offsets.  This rule will not be implemented until it is approved into the SIP.
• NSR Tracking System
  The purpose of Rule 1315 – Federal New Source Review Tracking System is to formalize procedures to be followed by the Executive Officer to make annual determinations of equivalency of AQMD’s NSR program with federal NSR requirements.

AQMD’s NSR program is designed, amongst other things, to offset emission increases in a manner at least equivalent to federal and state statutory NSR requirements.  To this end, AQMD’s NSR program implements the federal and state statutory requirements for NSR and ensures that construction and operation of new and modified sources does not interfere with progress towards attainment of the National and State Ambient Air Quality Standards.  AQMD’s computerized emission tracking system is utilized to demonstrate equivalence with federal and state offset requirements on an aggregate basis.  Specific NSR requirements of federal law are presented below.

Federal Law

Federal law requires the use of Lowest Achievable Emission Rate (LAER) and offsets for new, modified, and relocated major stationary sources[3].  Effective November 15, 1992, the federal Clean Air Act (CAA) requires a 1.5-to-1 external offset ratio for major stationary sources located in an extreme ozone non-attainment area.  For these reporting periods[4], the South Coast Air Basin (SOCAB) is one of only two areas in the nation that has been designated as extreme ozone non-attainment.  An extreme ozone non-attainment area may qualify for a 1.2-to-1 offset ratio if it requires implementation of federal Best Available Control Technology (BACT), as defined in CAA Section 169(3) for prevention of Significant Deterioration of Air Quality on all major sources [CAA Section 182(e)(1)].  The federal definition of BACT is roughly equivalent to state Best Available Retrofit Control Technology (BARCT), which AQMD implements through its Regulation XI – Source Specific Standards and other AQMD rules and regulations.  AQMD meets this criterion and uses a 1.2-to-1 offset ratio.  In addition, AQMD not only requires the 1.2-to-1 offset ratio for all federal sources, but also requires the same offset ratio for non-federal sources[5].

Based on their classification, the SOCAB and Salton Sea Air Basin (SSAB) must comply with the requirements for extreme and severe non-attainment areas, respectively, for ozone precursors (i.e., VOC and NOx).  Both the SOCAB and the SSAB must at this time comply with the requirements for serious non-attainment areas for PM10 and its precursors (i.e., VOC, NOx, and SOx).  For CO, the SOCAB must comply with the requirements for serious non-attainment areas; however SSAB is considered attainment for CO.  SOCAB had one federal CO exceedance in 2002 and has not had any since that time.  AQMD has requested EPA to re-designate SOCAB as attainment with federal CO standards and is waiting for EPA’s action on that request.  Both SOCAB and SSAB are considered attainment for SO₂ and NO₂, however SOx and NOx are precursors to pollutants for which both SOCAB and SSAB are designated as non-attainment[6].  The Mojave Desert Air Basin (MDAB) is currently classified as moderate non-attainment for ozone precursors (i.e., VOC and NOx) and as attainment for NOx, SOx, and CO.  The various attainment statuses for NOx and VOC (as ozone precursors), SOx, PM10, and CO in the three air basins for these reporting periods result in the major source thresholds presented by pollutant and air basin in footnote 3 on the previous page.  This report demonstrates compliance with the federal NSR requirements.

OVERVIEW OF ANALYSIS METHODOLOGY

The two most major elements of federal non-attainment NSR requirements are LAER and emission offsetting. AQMD’s BACT requirements are at least as stringent as federal LAER for major sources. Furthermore, the NSR emission offset requirements that AQMD implements through its permitting process ensure that sources provide emission reduction credits (ERCs) to offset their emission increases in compliance with federal requirements. As a result, these sources each comply with federal offset requirements by providing their own ERCs. However, certain sources are exempt from AQMD’s offset requirements pursuant to Rule 1304 or qualify for offsets from AQMD’s Community Bank (applications received between October 1, 1990 and February 1, 1996 only) or Priority Reserve, both pursuant to Rule 1309.1. AQMD has determined that providing offset exemptions and the Priority Reserve (as well as the previously-administered Community Bank) is important to the NSR program and the local economy while encouraging installation of best available control equipment. Therefore, AQMD has assumed the responsibility of providing the necessary offsets for exempt sources, the Priority Reserve, and the Community Bank. This report examines credits to and debits from AQMD’s emission offset accounts and demonstrates programmatic equivalence on an aggregate basis with federal emission offset requirements for the sources exempt from providing offsets and the sources that receive offsets from the Priority Reserve or the Community Bank.

AQMD’s Offset Accounts

For the purposes of this report, federal debit and credit accounting for AQMD’s offset accounts was conducted pursuant to the procedures delineated in Rule 1315 and described in the staff report to Rule 1315.  Each of the five pollutants subject to offset requirements (VOC, NOx, SOx, CO, and PM10) has its own federal offset account.  AQMD’s NSR program is considered to provide equivalent or greater offsets of emissions as required by federal requirements for each subject pollutant provided the balance of credits left in AQMD’s federal offset account for each pollutant remains positive, indicating that there were adequate offsets available.

Debit Accounting

AQMD tracks all emission increases that are offset through the Priority Reserve or the Community Bank, as well as all increases that are exempt from offset requirements pursuant to Rule 1304 – Exemptions.  These increases are all debited from AQMD’s federal offset accounts when they occur at federal major sources.  For federal equivalency demonstrations only and as specified in Rule 1315, AQMD uses an offset ratio of 1.2-to-1.0 for extreme non-attainment pollutants (currently ozone and ozone precursors, i.e. VOC and NOx) and uses 1.0-to-1.0 for all other non-attainment pollutants (non-ozone precursors, i.e. SOx, CO, and PM10) to offset any such increases.  That is, at this time 1.2 pounds are deducted from AQMD’s offset accounts for each pound of maximum allowable permitted potential to emit VOC or NOx increase at a federal source and 1.0 pound for each pound of maximum allowable permitted potential to emit SOx, CO, or PM10 at a federal source[7].  There is another source of debits from AQMD’s offset accounts in addition to the permitted emission increases described above. This debit is very infrequent, but it occurs in a situation in which a permit that was previously inactivated due to nonpayment of fees and potentially deemed as an orphan shutdown is reactivated pursuant to the provisions of Rule 313 – Authority to Adjust Fees and Due Dates.  If there is such a case, these special reactivations are debited from AQMD’s federal accounts at the same ratios as are the other emissions increases identified above.  All debits are accounted pursuant to Rule 1315(c)(2).  For a more complete description of federal debit accounting, refer to the Rule 1315 staff report.

Credit Accounting

When emissions from a permitted source are permanently reduced (e.g., installation of control equipment, removal of the source) and the emission reduction is not required by rule or law and is not called for by an AQMP control measure that has been assigned a target implementation date[8], the permit holder may apply for ERCs for the pollutants reduced.  If the permit holder for the source generating the emission reduction had previously received offsets from AQMD or has a “positive balance” (i.e., pre-1990 net emission increase), the quantity of AQMD credits used or the amount of the positive balance is subtracted from the reduction and “paid back” to AQMD’s accounts prior to issuance of an ERC pursuant to Rule 1306.  In certain other cases, permit holders do not always submit applications to claim ERCs for their equipment shutdowns or other eligible emission reductions.  These unclaimed reductions are referred to as “orphan shutdowns” or “surplus reductions” and are credited to AQMD’s offset accounts.  ERCs provided as offsets by major sources in excess of the applicable federally-required offset ratio and all ERCs provided as offsets by minor sources are also credited to AQMD’s federal offset accounts.  Refer to Rule 1315(c)(3)(A)—which explicitly identifies the sources of credits to AQMD’s offset accounts—and its staff report for a more complete description of federal credit accounting.  The sources of offset credits are summarized below:

• Orphan shutdowns;
• Orphan reductions;
• ERCs provided as emission offsets for sources located at minor facilities;
• ERCs provided as emission offsets at major facilities for non-extreme nonattainment air contaminants and their precursors at an offset ratio beyond 1.0-to-1.0;
• NSR offset debt payback associated with banking new ERCs; and
• BACT discount of newly-banked ERC in cases where the Executive Officer demonstrates and EPA concurs that the discount amount exceeds the emission reductions that would be required by approved SIP rules and rules scheduled to be approved by the District in the following year’s rule cycle.

FINAL AND PRELIMINARY DETERMINATIONS OF EQUIVALENCY WITH FEDERAL OFFSET REQUIREMENTS

Table 4 presents the total emission increases debited from AQMD’s offset accounts from August 2002 through July 2003.  Credits to AQMD’s offset accounts during the same period are summarized in Table 5.  Finally, the sums of debit and credit activity are displayed in Table 6.  Similarly, Tables 7, 8, and 9 summarize the debits, credits, and net activity, respectively, for August 2003 through July 2004.  The debit activity for August 2004 through December 2005 is displayed in Table 10.  At this time, only the debit data is available for the August 2004 through December 2005 time period.  Therefore, pursuant to Rule 1315(d)(2) and Rule 1315(e), AQMD has made a preliminary compliance determination for the period August 2004 through December 2005, which includes the actual amount of debits and the projected amount of credits for this period.  Tables 4 through 10 present the results of the federal FDEs for the 2002-2003 and 2003-2004 reporting periods and the federal PDE for the 2004-2005 reporting period.

Table 4
Debits from AQMD’s Federal Offset Accounts
(August 2002 through July 2003)

*    Includes electrical generating facilities and other sources accessing the Priority Reserve.

Table 5
Credits to AQMD’s Federal Offset Accounts
(August 2002 through July 2003)

*    Adjustment of orphan shutdown and orphan reduction offset credits deposited in AQMD offset accounts to correct from potential emissions to actual emissions pursuant to Rule 1315(c)(3)(B)(i).
** “Payback” of NSR balance, Community Bank and Priority Reserve allocations, and offset exemptions pursuant to Rule 1315(c)(3)(v) and Rule 1306(c).

Table 6
Sum of Credits/Debits Activity in AQMD’s Federal Offset Accounts
(August 2002 through July 2003)

*    Debits are shown as negative and Credits as positive, while their sum is shown as negative or positive, as appropriate.

Table 7
Debits from AQMD’s Federal Offset Accounts
(August 2003 through July 2004)

*    Includes electrical generating facilities and other sources accessing the Priority Reserve.

Table 8
Credits to AQMD’s Federal Offset Accounts
(August 2003 through July 2004)

*    Adjustment of orphan shutdown and orphan reduction offset credits deposited in AQMD offset accounts to correct from potential emissions to actual emissions pursuant to Rule 1315(c)(3)(B)(i).
** “Payback” of NSR balance, Community Bank and Priority Reserve allocations, and offset exemptions pursuant to Rule 1315(c)(3)(v) and Rule 1306(c).

Table 9
Sum of Credits/Debits Activity in AQMD’s Federal Offset Accounts
(August 2003 through July 2004)

*    Debits are shown as negative and Credits as positive, while their sum is shown as negative or positive, as appropriate.

Table 10
Debits from AQMD’s Federal Offset Accounts
(August 2004 through December 2005)

*    Includes electrical generating facilities and other sources accessing the Priority Reserve.

The sum of credits and debits activity from this analysis (the sum may be positive or negative) is added to the starting offset account balance for each pollutant to calculate the offset account ending balance which is then used to determine compliance with federal NSR requirements for each reporting period.  Refer to Table 1 for a summary of final starting and ending account balances for the August 2002 through July 2003 reporting period and Table 2 for the August 2003 through July 2004 reporting period. Table 3 presents the final starting account balances and the projected ending account balances for the August 2004 through December 2005 reporting period.

ELECTRICAL GENERATING FACILITY ACCESS TO PRIORITY RESERVE

The April 2001 amendments to Rule 1309.1 – Priority Reserve provide EGFs with access to PM10 offsets from the Priority Reserve[9].  Subsequently, the November 2001 and May 2002 amendments to Rule 1309.1 expanded EGF access to Priority Reserve offsets to include SOx and CO[10].  Table 11 summarizes the Priority Reserve offsets provided to EGFs during the August 2002 through July 2003 reporting period, Table 12 summarizes it for the August 2003 through July 2004 reporting period, and Table 13 summarizes it for the August 2004 through December 2005 reporting period.  These priority reserve debits are included in (not in addition to) the debits summarized in Tables 4, 7, and 10.

Table 11
EGF Access to Priority Reserve Offsets
(August 2002 through July 2003)

Table 12
EGF Access to Priority Reserve Offsets
(August 2003 through July 2004)

Table 13
EGF Access to Priority Reserve Offsets
(August 2004 through December 2005)

CONCLUSIONS

The analysis presented in this report demonstrates that AQMD’s NSR program provides equivalent offsets to those required by federal NSR requirements and is at least equivalent to the federal requirements on an aggregate basis.  This conclusion is based on the fact that the ending offset account balances for all of the reporting periods covered by this report (August 2002 through July 2003, August 2003 through July 2004, and projected August 2004 through December 2007), as shown in Tables 1, 2, and 3, respectively, remained positive or is projected to remain positive for all pollutants.  The sums of credits to and debits from AQMD’s offset accounts during the August 2002 through July 2003 and August 2003 through July 2004 reporting periods were positive for all pollutants in both years.  However, the federal NOx offset account experienced a net decrease for the August 2003 through July 2004 reporting period of 1.06 tons per day.  This net decrease occurred because the amount of the NOx surplus at the time of use discount pursuant to Rule 1315(c)(4) for this reporting period (-2.21 tons per day) was larger than the increase due to the sum of credits and debits (1.15 tons per day) for the reporting period.

Table 14 below summarizes AQMD’s actual and projected federal offset account balances for the period starting August 2002 and ending December 2007.  As can be seen from this table, it is projected that during this reporting period the offset account balances for VOC, NOx, and SOx will decrease by about 0.25 to less than 8 tons per day, while offset account balances for CO and PM10 will increase by about 4.5 to less than 6.25 tons per day, depending on the pollutant.  The projected debits (January 2006 through December 2007) and projected credits (August 2004 through December 2007) are based on the average total annual debits and average total annual credits for the preceding five years, respectively.  Therefore, the projected debits include average use of Priority Reserve offsets by EGFs during 2002 through 2005 (refer to Tables 11, 12, and 13).

Table 14
Summary of Actual and Projected Changes in AQMD’s Federal Offset Account Balances for August 2002 through December 2007
(tons per day)

*    Net decreases are shown as negative and net increases are shown as positive.

Staff will continue to track credits to and debits from AQMD’s offset accounts and will provide annual reports and equivalency determinations to the Board consistent with Rules 1310 and 1315 to ensure that AQMD’s NSR program continues to operate in compliance with federal NSR requirements.

[1]  While the RECLAIM program is different than command and control rules for NOx and SOx and it provides greater regulatory flexibility to businesses, its NSR requirements, as specified in Rule 2005, are designed to comply with the governing principles of NSR contained in the federal Clean Air Act (CAA) and the California State Health and Safety Code.

[2]   AQMD’s NSR program is deemed to be equivalent to federal offset requirements because AQMD’s ending offset account balances remained positive, indicating there were adequate offsets during these reporting periods.

[3]  The major source thresholds are as summarized below:

[4]  The South Coast Air Basin is currently classified by EPA in severe 17 ozone non-attainment status.  However, this basin was designated as extreme non-attainment during the reporting periods covered by these determinations of equivalency.

[5]   Non-federal sources that do not meet any of the exemption criteria of Rule 1304 and that do not qualify to obtain offsets from the Priority Reserve are also required by AQMD to provide offsets (i.e., ERCs) at a ratio of 1.2-to-1.

[6]   SOx is a precursor to PM10 and NOx is a precursor to both PM10 and ozone.

[7]   Refer to the Rule 1315 staff report for a more complete description of federal debit accounting.

[8]   Refer to Rule 1309(b) for a complete explanation of eligibility requirements.

[9]   Refer to rule paragraph (a)(4) of these revisions of Rule 1309.1 for eligibility requirements.

[10] The EGF access to the Priority Reserve established by these revisions applies exclusively to projects with applications for California Energy Commission (CEC) certification or for permit to construct submitted during 2000, 2001, 2002, or 2003. Rule 1309.1 was again amended in September 2006 re-establishing Priority Reserve access to EGFs which submit CEC or AQMD applications in 2005, 2006, 2007, or 2008.  However, no Priority Reserve access was granted to EGFs pursuant to the September 2006 amendments during the reporting periods covered by this report.