BOARD MEETING DATE: June 6, 2008
AGENDA NO. 40

RECOMMENDED ACTION:

Adopt the attached resolution:

1. Certifying the Notice of Exemption for Proposed Rule 314 – Fees for Architectural Coatings; and
2. Adopting Rule 314 – Fees for Architectural Coatings.

 

Barry R. Wallerstein, D.Env.
Executive Officer

Background

The AQMD’s fee system has evolved over the years. In 1990, KPMG Peat Marwick performed a Fee Assessment Study which determined, among other things, that permit processing fees did not fully cover the costs of performing this program and recommended a flat emissions fee for low emitters, which was ultimately adopted a number of years later. In 1995, KPMG Peat Marwick completed a second Fee Assessment Study which again recommended increasing permit processing fees, but also recommended an “emissions based operating fee” which would be based on potential to emit rather than actual emissions. Industry generally opposed this concept and it was not adopted. In 1999, the AQMD retained Thompson, Cobb, Bazilio & Associates, P.C., Certified Public Accountants and Management Consultants, to conduct an independent analysis of the stationary source fee structure. The AQMD also established a Fee Structure Advisory Committee, composed of representatives from industry, including small businesses, environmental groups, and AQMD staff. The report recognized that area source non-permitted VOC emissions, such as architectural coatings, were the bulk of stationary emissions and should be the target for AQMD control and revenue generation efforts. However, the potential number of sources was beyond the number manageable through a traditional permitting program. The most significant problem that control of area sources posed was enforcement of regulations. Obtaining the cooperation of a large population of consumers and collecting information on sources and emissions would be an overwhelming task. A successful program would have to be focused on a smaller population, such as manufacturers or distributors of the regulated products. At the same time the program would have to collect fees to fund program operations.

During Fiscal Year 2000-2001 the Governing Board directed staff to establish a special Revenue Committee to assist the AQMD in developing revisions to its fee rules to stabilize revenue. The major focus of this committee’s effort was the identification and assessment of several short- and long-term potential funding sources in support of AQMD programs as well as the costs. The Revenue Committee made several important recommendations that were included in the rule amendments approved by the Governing Board in May 2001. One of the recommendations was a fee on area sources. The Committee also recommended a manufacturers’ fee for area sources. In June 2004, the Governing Board, in response to this recommendation, adopted fees to recover the costs associated with notification and tracking of emissions from decontamination of soil projects; recovery of costs associated with laboratory analysis of non-compliant samples taken in the field for compliance verification; recovery of Plan audits, verification, evaluation, inspection and tracking costs for area source rules such as open burning and old vehicle scrapping; and fees for enforcement inspections for statewide registered portable equipment, which are all considered area sources.

At the Board’s direction to assess fees on area sources, staff is proposing Rule 314 to recover the cost of regulating the architectural coatings program, one of the largest controlled emitters of VOC emissions in the AQMD, and include that program’s fair share of AQMD costs that are apportioned among all AQMD programs such as personnel and payroll, as well as a fair share of emissions fee supported programs, such as air monitoring, the Multiple Air Toxics Study, etc. The proposed rule will also provide staff with architectural coating quantity and emissions information for planning, compliance, and rule development. The cost of the Proposed Rule 1113 Program, which includes the strengthening of the enforcement and laboratory efforts dedicated to the program, is projected to be approximately $4.2 million, which equates to approximately 7.1¢ per gallon, based on estimated quantity of coatings, and is anticipated to be passed on to the end-user by the manufacturers. Staff estimates the proposed rule will impact approximately 200 architectural coatings manufacturers.

With an estimated 15,000 sources including registered contractors and architectural coating retail stores (does not include architects, specifiers, non-registered contractors, active painting sites and the do-it-yourself market) regulated by Rule 1113, the proposed program should result in approximately 3,000 inspections per year with 750 to 800 samples of architectural coatings collected for laboratory VOC analysis to determine compliance, which is considered to be statistically significant to assess a supportable compliance rate.
 

Proposal

Proposed Rule 314 requires Architectural Coatings Manufacturers, which distribute or sell their manufactured architectural coatings into or within the AQMD for use in the AQMD and are subject to Rule 1113 - Architectural Coatings, to submit an Annual Quantity and Emissions Report beginning in 2009 and each subsequent calendar year for the previous calendar year. The proposed fees, when fully implemented, will be 3.6 cents per gallon and $246 per ton of VOC emissions. Fees will be phased-in over three years with the fee rate set in 2009 to recover approximately one-half the cost of the Rule 1113 Program, three-fourths of the cost in 2010 and the full cost of the Program recovered in subsequent years. The fee will be determined based on the quantity of coatings as well as the cumulative emissions from the quantity of coatings distributed or sold for use in the AQMD.

The proposed rule noticed for public hearing on June 6, 2008, has been amended to include a requirement for architectural coatings manufacturers to provide a list to the AQMD of all their distributors located in the U.S.; an exemption for fees for any coatings containing 5 or less grams of VOC per liter of material to further incentivize the development, marketing and use of lower-VOC coatings; and other language clarifying the intent of the proposal including clarifications from comments received at the May 21, 2008 Public Consultation Meeting. Staff has revised the provisions for AQMD registered manufacturers acquiring other AQMD registered manufacturers to preclude the successor manufacturer from obtaining a new manufacturers ID number. Requirements for reporting VOC have been separated to include information on coatings as supplied and as thinned for solvent based coatings. Provisions for late payment surcharge have been revised to apply only to fees that are past due. The confidentiality provision of the rule has been clarified to establish that detailed justification for a claim of confidentiality is required only in the event of a public records request.

Key Issues

During the rulemaking process, staff has resolved numerous issues presented by industry, including withdrawing the pre-registration requirements and special labeling requirements, developing a simplified fee structure, and proposing a phased-in fee over three years. Industry’s key concerns, are summarized below, along with staff’s response:

Issue: 
More time is need for rulemaking.

Response: 
Staff extended the rulemaking scheduling by postponing the public hearing from February to June 2008 in order to meet with NPCA and other industry members to resolve concerns pertaining to rule language, fee structure, and the reporting form and have made significant progress. Although some issues remain, a further delay in the rulemaking may not result in further significant progress in resolving those issues. Further delay would also compress the initial implementation schedule. Sufficient time for companies to adjust to this fee program has been one of the concerns expressed by the industry that we have attempted to address as the proposed rule has evolved. An example is the proposed three year phase-in.

Issue: 
An enhanced compliance program is unnecessary.

Response: 
Currently, there is only one inspector FTE allocated to Rule 1113 – Architectural Coatings enforcement, even though this area source continues to be one of the largest emitters of VOCs (23 tons per day in 2010) within our regulatory authority and non-compliance could result in significant excess emissions. The current level of enforcement results in so few inspections and coating samples for analysis that they are considered to be statistically insignificant to ascertain a compliance rate. As with any other program, enforcement of the rule is the key to safeguarding emission reductions. Staff has discussed the need for the proposed enhanced compliance program with the industry, and has a detailed assessment justifying the need for more compliance presence in the staff report. Further, in the adopting resolution, staff has committed to a review and report on the implementation of the program enhancement.

Issue: 
CARB Fees are duplicative for the same emissions

Response: 
Although CARB is involved with certain aspects of an Architectural Coatings program, particularly assisting smaller air districts, their activities are not the same as those the AQMD is mandated to do for air quality, including the implementation of an adequate regulatory program for architectural coatings. Staff believes the most equitable way to assess fees to recover our costs for the architectural coatings program is to apply them to the coating manufacturers based on quantity sold and emissions. CARB also assesses fees to recover their costs to coating manufacturers based on emissions, but these fees cover CARBs costs only.

Issue: 
The proposed rule does not provide incentive to lower emissions.

Response:
The emission fee component is designed to provide an incentive to lower emissions. Further, the revised staff proposal includes an exemption for fees for any coatings with 5 or less grams of VOC per liter of material to further incentivize the development, marketing and use of lower-VOC coatings.

Issue: 
Manufacturers have expressed concerns about paying fees that will be used to support enforcement efforts directed at end users.

Response: 
Staff has revised the proposal so that one FTE to be devoted to end-user enforcement will be supported by other AQMD revenues, and has reduced the anticipated revenues and fee rate for the quantity-based fee accordingly.

Issue: 
Subsequent to the set hearing for Proposed Rule 314, the National Paint and Coatings Association (NPCA) wrote to the AQMD that the proposed rule is unfair because it only applies to manufacturers who distribute or sell their manufactured architectural coatings into or within the AQMD, excluding those distributors that ship coatings into the AQMD from warehouses located outside the AQMD, which NPCA stated may account for 10% to 15% of the volume sold in the AQMD. However, in a follow-up letter, NPCA estimated that amount may be larger since architectural coatings sold through mass merchant or “big box” stores are 30% of total sales on a national basis.

Response: 
During the rule development process, staff’s initial proposal required manufacturers to account for all the volume of coatings they manufacture, supply, sell, offer for sale or solicit for sale for use in the AQMD. Some manufacturers said that it would be too burdensome to track their manufactured coatings once they were released to a second or third party distributor and they were not sure the distributors would provide them with an accurate volume count. NPCA said the unaccounted architectural coatings volume was believed to be small (NPCA did not provide the requested volume) and probably a wash considering that some coatings were shipped into the AQMD and then later shipped out of the AQMD without being subtracted from the total volume. NPCA said this is the same agreement manufacturers have with CARB to report architectural coatings for CARB Surveys and related fees. However, in response to NPCA’s recent comments, dated April 21, 2008, which are contradictory to their earlier written and oral comments requesting to exclude the volume of coatings distributed outside the AQMD, staff has amended the proposed rule to require manufacturers to provide the AQMD with a list of all of their U.S. distributors on an annual basis. Staff is then committed to working with distributors to try and determine the extent of architectural coatings that may not be accounted for in the proposed required annual quantity and emissions reports. Staff is also committing to return to the Board within 120 days with amendments to the rule incorporating distributors to the extent appropriate. Staff has contacted several major manufacturers that sell architectural coatings to “big box” stores and those manufacturers have stated that they track sales into the AQMD particularly for compliance purposes, considering that AQMD Rule 1113 – Architectural Coatings has more stringent VOC limits than other parts of California and the U.S. Since these manufacturers are able to track detailed volume distributed to these “big box” stores, staff believes the majority of the coatings distributed to these stores will be reported.

Issue: 
One manufacturer requested that the exemption for less than 5 g/l of VOC coatings be limited to coatings that do not use acetone or other “highly flammable” exempt solvents.

Response: 
Staff does not believe this revision is needed because acetone is in the same range for flammability as existing solvents used in higher VOC coatings, so any incentive for use of acetone will not increase fire risks beyond existing levels. Also, approximately 1.7% of the volume of less than 5 g/l coatings use exempt solvents which may include acetone, and staff believes the use of acetone is unlikely to increase substantially as it is not compatible with the formulations for very low VOC coatings. This issue has been extensively analyzed and addressed in staff reports developed for Rule 1113. A concern has also been raised regarding the use of flammable cleanup solvents. However, staff does not have any evidence to support a claim that a trend toward zero or very low VOC paints would result in greater use of flammable solvents.

Issue: 
Staff should consider a reactivity based approach.

Response: 
The AQMD continues to support the concept of reactivity. The AQMD recently (Sep 07) organized a Reactivity Roundtable to discuss the state of science, the need to assess PM2.5 contribution, and most importantly toxicity for this approach. The conclusion, supported by USEPA, was that additional work needs to done in this area before a reactivity-based approach can be utilized. USEPA is currently working on the National AIM rule and is not planning to incorporate reactivity, as they have for the Aerosol Coating rule. The AQMD will continue to participate in the national and state programs, as well as potentially participate in funding additional reactivity related research. Until AQMD determines that reactivity is an appropriate basis for regulation, staff would not support basing fees on reactivity since it cannot be assumed that pollution will be reduced.

Issue: 
One commenter suggested that increased use of acetone, incentivized by the less-than 5 g/l VOC exemption, presents a CEQA issue.

Response: 
As set forth above, staff does not believe the exemption will result in any increased risk. Moreover, the adoption of a fee schedule, which is subject to a statutory exemption from CEQA, remains exempt even if there may be adverse environmental impacts, as no further analysis is required beyond determining that a statutory exemption applies. Remy & Thomas “Guide to CEQA”, (2007) p112, 115, CEQA Guidelines §15061.

Issue: 
It was suggested that recycled coatings be exempt from fees, since the recycled portion would have already been subject to fees in its initial formulation.

Response: 
Staff would not oppose such an exemption if it were limited to the post-consumer paint portion of recycled coatings.

Issue:
At the Public Consultation Meeting on May 21, 2008, it was suggested that manufacturers should not have to pay for inspections occurring at retail outlets (other than those the manufacturers are associated with).

Response: 
When AQMD staff discovers a coating that does not comply with Rule 1113 on sale at a retail outlet, staff investigates whether the manufacturer as well as the retailer is responsible for the violation. The fact that in some cases the manufacturer does not turn out to be responsible does not mean that the inspection is unrelated to manufacturer compliance. The situation is similar to industrial inspections, which are still related to the industry even if a particular inspection does not result in any violations. Moreover, if paint is found at a retail outlet which has VOC exceeding allowable levels, although according to the label the paint is compliant, then the manufacturer is responsible.

Issue: 
Some commenter’s state they would be willing to pay for the existing architectural coatings program, but believe there is insufficient justification for the proposed enhanced program.

Response: 
The architectural coatings fee rule has been structured to be phased-in over three years, with one-half of the final amount to be recovered in the first year. The first years projected revenues (approximately $2.1 million) are somewhat less than the costs of the existing program including a fair share of emissions fee supported costs, so if the Board were to choose to adopt only the first year, this comment would be satisfied.

Issue:
NPCA’s request for information made on October 23, 2007, was not formally answered.

Response:
 The items requested in NPCA’s letter have been provided where feasible. (a) Alleged overlap between CARB fee and AQMD fee: In responses to comments staff explains the differences between the work performed by CARB staff and AQMD staff relative to architectural coatings. (b) Rates of compliance, including a breakdown between manufacturer and retail compliance: Staff has explained that there have been insufficient inspections to generate a statistically sound compliance rate. However, a large percentage of instances of noncompliance at retail outlets involve manufacturer culpability. In the period March 25, 2008 through May 8, 2008, nine potential manufacturer violations were discovered during inspections of nineteen (19) retail stores. Thirty-two (32) percent of stores were non-compliant , with sixty-eight (68) percent compliant. AQMD does not believe it can disclose to NPCA the product volumes involved in the violations that resulted in 293 excess tons of emissions as requested, since manufacturers typically claim their product volume is a trade secret. (c) Analysis of each of the fee structures under consideration by AQMD, including the structures suggested by stakeholders: AQMD provided an analysis of the fee structures then under consideration at the public workshop on November 8, 2007. AQMD evaluation of the fee structures suggested by stakeholders is found in responses to comments: (d) Structure and amount of fees paid by other area and stationary sources. Much of this information was provided at the Public Workshop on November 8, 2007. The fee structure is found in the AQMD’s fee rules, Regulation III. The amount of fees paid, such as permit processing, emissions, and annual operating fees is included in AQMD’s budget. (e) Analysis of options for addressing various distribution mechanisms: Stakeholders initially suggested coatings distributed through mechanisms where the manufacturer does not know the ultimate destination and should not be included in the rule. Subsequently, in response to NPCA comment, staff revised the proposal to gather information from manufacturers regarding distributors, plus propose rule amendments to include distributors as appropriate. (f) Analysis of the impacts of the rule: Staff has included a socioeconomic analysis in the staff report for the rule.

Issue:
There should be a “cap” placed on fees.

Response:
State law already imposes a cap on AQMD fee revenues under Health & Safety Code §40523. Adjusted for CPI, AQMD fee revenues, even with the proposed architectural coatings fees, are well below the “40523 cap”.
 

Emission Inventory and Emission Reduction

The proposed rule does not explicitly affect air quality or emissions although the proposed fee structure may provide an incentive to a manufacturer to lower total emissions by marketing a larger volume of low VOC coatings. Staff does not plan to claim any emission reductions in the State Implementation Plan (SIP) as a result of this fee program.

CEQA

The AQMD has reviewed the proposed project pursuant to State CEQA Guidelines §15002(k)(1). Proposed fee Rule 314 is exempt pursuant to CEQA Guidelines §15273 (Rates, Tolls, Fares and Charges) and Public Resources Code §21080(b)(8). A Notice of Exemption has been prepared in accordance with state CEQA Guidelines §15062 for the proposed project and will be filed with the county clerks immediately following the adoption of the proposed rule. A copy has been included as an attachment to this Board letter.

Socioeconomic Analysis

The proposed amendments do not directly affect air quality or emissions limitations. Therefore, a socioeconomic assessment is not necessary or required. Nonetheless, staff conducted a socioeconomic analysis to assess the total impacts for all the actors in the four-county economy and it was determined that the cost of this rule would have few impacts on the relative cost of production and delivered price for all the industries in the four-county area. As a result, the proposed rule is not expected to have impacts on competitiveness at the industry level.

Authority to Assess Fees

California Health and Safety Code Section 40522.5 establishes the AQMD’s authority to adopt a schedule of fees to be assessed on areawide or indirect sources of emissions which are regulated, but for which permits are not issued, to recover the costs of programs related to these sources. Under California law, the primary authority for controlling emissions from architectural coatings is vested in the air pollution control districts (APCDs).

Implementations and Resources

The Architectural Coatings Program began in 1977. For the past 10 to 15 years the AQMD has allocated approximately 8 full time equivalent positions to the Architectural Coatings Program at a current cost of $2.44 million which includes the architectural coatings program’s fair share of emissions fee supported program costs such as air monitoring. Staff is proposing to enhance the current Program to a total of 18 full time equivalent positions that upon final implementation over three years will be funded in total by architectural coatings manufacturers at a cost of approximately $4.2 million. One inspector FTE will be funded through other resources and will focus on end-user inspections, including thinning practices and it is anticipated that the share of end-user related laboratory fees that are not paid by the end-users themselves will be supported by other AQMD resources and included in the “one inspector FTE.” The enhanced program is necessary to ensure the SIP committed VOC emission reductions for architectural coatings are real, permanent, quantifiable, and enforceable.

Attachments (exe 481kb)

1. Summary of Proposed Amendments
2. Rule Development Process Flow Chart
3. Key Contacts
4. Resolution
5. Rule Language
6. Final Staff Report
7. Final Staff Report, Appendix A, Table 1
8. CEQA – Notice of Exemption

ATTACHMENT A

ATTACHMENT B

RULE DEVELOPMENT PROCESS

PROPOSED AMENDED RULE 314 – Fees for Architectural Coatings

ATTACHMENT C