BOARD MEETING DATE: September 7, 2007
AGENDA NO. 38

REPORT:

Status Report on Regulation XIII – New Source Review

SYNOPSIS:

This report presents federal final determinations 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 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, July 27, 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 economic growth in the South Coast region is not unnecessarily impeded. 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 annual report submitted to the Board on February 2, 2007 presented the FDEs for August 2002 through July 2003 and August 2003 through July 2004, and a PDE for August 2004 through December 2005. This report presents the FDE covering the period from August 2004 through December 2005, and demonstrates compliance with federal NSR requirements by establishing aggregate equivalence with federal offset requirements for sources which obtained their offsets from AQMD. Additionally, this report also presents projections of AQMD’s offset account balances for calendar years (CY) 2006 and 2007.

The FDE for the August 2004 through December 2005 timeframe is summarized below in Table 1. The projections of AQMD’s offset account balances for the January 2006 through December 2006 and January 2007 through December 2007 timeframes are presented in Table 2. These results demonstrate that there were, and project that there will be, adequate offsets available to mitigate all applicable 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 basis².

Table 1

FDE for August 2004 through December 2005

*       The “Starting Balance” for August 2004 is the same as the “Ending Balance” for the period August 2003 through July 2004, as reported in the most recent Status Report on Regulation XIII presented to the Governing Board, dated February 2, 2007 (Table 2).

**      Refer to pages 8 and 9 of this report for an explanation of the sources of credits and debits which is also consistent with Rule 1315(c) and its staff report. 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(c)(4).

****    Removed as per voluntary agreement between AQMD and U.S. EPA.

*****  “Ending Balance” equals the “Starting Balance” plus the sum of credits and debits, and plus any surplus adjustments and removal of remaining pre-1990 balances.

Table 2

Projections of AQMD’s Federal Offset Account Balances for
January 2006 through December 2006 and
January 2007 through December 2007
(tons per day)

*  Same as “Ending Balance” in Table 1.

** Projected pursuant to Rule 1315(e).

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, U.S. EPA approved AQMD’s May 3, 2002 Rule 1309.1 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. 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 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 sources³. 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, 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 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 sources⁴.

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. Effective June 11, 2007, U.S. EPA designated the SOCAB as attainment with federal CO standards. However, SOCAB was still considered as non-attainment for CO during this reporting period. Both SOCAB and SSAB are considered attainment for SO₂ and NO_2; however, SOx and NOx are precursors to pollutants for which both SOCAB and SSAB are designated as non-attainment⁵. 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 the NOx, 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 important 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 (for this reporting period 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 source⁶. 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 they were credited. 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 date⁷, 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 non-attainment 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 U.S. 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 DETERMINATION OF EQUIVALENCY WITH FEDERAL OFFSET REQUIREMENTS

Table 3 presents the final total emission increases debited from AQMD’s offset accounts from August 2004 through December 2005. Final credits to AQMD’s offset accounts during the same period are summarized in Table 4. The sums of final debit and credit activity are displayed in Table 5. Tables 3 through 5 present the results of the federal FDE for the 2004-2005 reporting period.

Table 3

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

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

Table 4

Final Credits to AQMD’s Federal Offset Accounts
(August 2004 through December 2005)

*    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)(A)(v) and Rule 1306(c).

Table 5

Sum of Final Credits/Debits Activity in AQMD’s Federal Offset Accounts
(August 2004 through December 2005)

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

The sum of final 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 final 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 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 Reserve⁸. Subsequently, the November 2001 and May 2002 amendments to Rule 1309.1 expanded EGF access to Priority Reserve offsets to include SOx and CO⁹. Table 6 summarizes the total Priority Reserve offsets provided to all EGFs (both major and minor sources) during the August 2004 through December 2005 reporting period. The priority reserve debits provided to major EGF sources are included in (not in addition to) the debits summarized in Table 3.

Table 6

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

*  Includes 503 lbs/day of offsets provided to major EGF sources and 3 lbs/day of offsets provided to minor EGF sources.

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 the reporting period (August 2004 through December 2005), and the two-year projection (January 2006 through December 2007), as shown in Tables 1 and 2, respectively, remained positive or are projected to remain positive for all pollutants. The sum of credits to and debits from AQMD’s offset accounts during the August 2004 through December 2005 reporting period was positive. However, because of a voluntary agreement between AQMD and EPA, AQMD has removed all of the remaining pre-1990 balances of the federal offset accounts for VOC, NOx, and SOx resulting in a decrease for the August 2004 through December 2005 reporting period of 21.52, 4.52, and 7.42 tons per day, respectively (no pre-1990 CO or PM10 balances were removed because all of the pre-1990 CO and PM10 were depleted by 1997). In addition, the federal NOx and SOx offset accounts experienced an additional decrease of 1.59 and 1.68 tons per day, respectively. These net decreases occurred because the amounts of the NOx and SOx surpluses at the time of use discount pursuant to Rule 1315(c)(4) for this reporting period (-2.42 tons NOx per day and -1.88 tons SOx per day) were larger than the increases due to the sum of credits and debits (0.83 tons NOx per day and 0.20 tons SOx per day) for the reporting period.

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 Although effective June 15, 2005 SOCAB was classified as “Severe-17” non-attainment for the new 8-hr Ozone National Ambient Air Quality Standards, AQMD staff has indicated that it might request a bump-up to “Extreme Ozone Non-Attainment” status. Even though during part of 2005 (i.e. June 16, 2005 through December 31, 2005) the major source definition had changed to 25 tons per year for VOCs and NOx, as a conservative measure AQMD has accounted for all debits for sources greater than 10 tons per year for all of Calendar Year 2005. Therefore, the major source thresholds for this reporting period are as summarized below: 

⁴ 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. 

⁵ SOx is a precursor to PM10 and NOx is a precursor to both PM10 and ozone. 

⁶ Refer to the Rule 1315 staff report for a more complete description of federal debit accounting. 

⁷ Refer to Rule 1309(b) for a complete explanation of eligibility requirements. 

⁸ Refer to rule paragraph (a)(4) of these revisions of Rule 1309.1 for eligibility requirements. 

⁹ 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 and July 2007, re-establishing Priority Reserve access to EGFs which submit CEC or AQMD applications in 2005 through 2008. However, no Priority Reserve access was granted to EGFs pursuant to the September 2006 or any subsequent amendments during the reporting period covered by this report.