UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
REGION IX AIR DIVISION

Technical Support Document

for

EPA’s Rulemaking for the California State Implementation Plan as submitted by the California Air Resources Board

Regarding

South Coast Air Quality Management District

Rule 317, “Clean Air Act Non

- Attainment Fees”

Prepared by: Lily Wong

January 4 , 20122 TABLE OF CONTENTS

1. Rule Identification

2. Background

a. Clean Air Act Section 185 Fees

b. South Coast 1

- Hour Ozone Nonattainment Status

c. Legal Rationale For Alternative Programs

3. Rule Summary

a. Section 172(e) Fee Equivalency Account

b. Calculation of CAA Non

- Attainment (Section 185) Fee Obligation

c. Annual Demonstration of Equivalency

d. Annual Preliminary Determination of Equivalency

e. Reporting to CARB and EPA

f. Backstop Provision For Failure To Achieve Equivalency

4. EPA Review Criteria

a. Enforceability

b. Rule Relaxation

c. Section 185 of the Clean Air Act

5. EPA Evaluation

a. Enforceability

b. Rule Relaxation

c. Section 185 of the Clean Air Act

6. EPA Action

7. Attachments3

1. R ULE IDENTIFICATION

Agency: South Coast Air Quality Management District (SCAQMD)

Subject of this TSD: Rule 3 1 7 “ Clean Air Act Non

- A ttainment Fee s ” Adopted: February 4, 2011
Submitted: April 22, 2011 1

Current SIP

- Approved

Rule: None 2

2. BACKGROUND:

a. Clean Air Act Section 185 Fees

Under Sections 182(d)(3), (e), (f) and 185 of the 1990 Clean Air Act Amendments (CAA or the Act), States with ozone nonattainment areas classified as S evere or E xtreme are required

to submit a SIP revision that requires major stationary sources of volatile organic compounds (VOC) or oxides of nitrogen (NO

x ) emissions to pay a fee

. Under CAA section 185(a), the required SIP revision must provide for payment of the fees, 3 computed in accordance with section 185(b), if the severe or extreme nonattainment area in which such sources are located has

failed to attain the 1

- hour ozone standard by the applicable attainment date

, for each calendar year beginning after the attainment date.

Although EPA revoked the 1

- hour ozone standard (effective June 15, 2005), EPA required, during the transition fro m the 1

- hour ozone to the 8

- hour ozone standard, that 1

- hour nonattainment areas remain subject to certain requirements pertaining to the area’s previous 1

- hour classification, as ozone anti

- backsliding requirements, for continued progress toward the

1997 ozone standards. Initially, our rules to address the transition from the 1

- hour to the 8

- hour

ozone standard did not include the section 185 fee penalty requirement as one of the measures necessary to meet CAA anti

- backsliding requirements. 4 O n Decembe r 23, 2006, however, the United States Court of Appeals for the District of Columbia Circuit upheld the revocation of the

1

- hour standard but determined that EPA should not have removed from its anti

- backsliding requirements the application of the section 185 fee provision for s evere and e xtreme
nonattainment areas that failed to attain the 1

- hour ozone standard by their attainment date. South Coast Air Quality Management District v. EPA

, 472 F.3d 882 (D.C. Cir. 2006). Consequently, on January 5, 2010, EP A determined that California failed to submit SIP revisions

1 On December 21, 2011, SCAQMD pr ovided supplemental information (see Attachment I to this Technical Support Document (TSD)). The supplemental information will be referred to in this TSD as SCAQMD’s “December 2011
letter.”

2 There are no previous versions of Rule 317 in the SIP. Although the SCAQMD adopted an earlier version of Rule 317 on December 5, 2008, that rule was never submitted to EPA f or approval as a SIP revision

. 3 The fee rate is $5,000 per ton in 1990 dollars, which must be adjusted for inflation based on the Consumer Price

Index . An estimate of the fee rate in 2011 is $8,967.33 (see Attachment II of this TSD).

4 Final Rule to Implement the 8

- hour Ozone National Ambient Air Quality Standard

– Phase 1, 69 FR 23951 (April 30, 2004).4

for several air agencies, including the SCAQMD, to meet the section 185 requirements for the 1

- hour ozone standard (75 FR 232).

b. South Coast 1

- Hour Ozone Nonattainment Status

On November 6, 1991, EPA designated the Los Angeles

- South Coast Air Basin Area (South Coast Air Basin) as “ E xtreme” nonattainment for the one

- hour ozone standard, with an attainment date no later than November 15, 2010 (56 FR 56694). 5 With the exception o f Indian country, the South Coast Air Basin lies within the jurisdiction of the South Coast Air Quality Management District (SCAQMD). 6 EPA also designated the Southeast Desert Modified Air Quality Maintenance Area (Southeast Desert Modified AQMA) as “ S eve re

- 17” nonattainment

for the one

- hour ozone standard, with an attainment date no later than November 15, 2007. 7
Excluding Indian country, the Riverside County portion 8 of the Southeast Desert Modified AQMA lies within the SCAQMD ; the Los Angeles County an d the San Bernardino County portion s of the Southeast Desert Modified AQMA lie within the Antelope Valley Air Quality Management District (AVAQMD), and the Mojave Desert Air Quality Management District (MDAQMD), respectively

. On December 30 , 2011, we publi shed a find ing that the South Coast Air Basin and the Southeast Desert Modified AQMA failed to attain the 1

- hour ozone standard by their applicable attainment dates (76 FR 82133 )

. 9

As explained above, although the D.C. Circuit Court upheld EPA’s decision to revoke the

1

- hour standard, it also ruled that the requirements of CAA section 185 continue to apply to areas that failed to meet the standard. Therefore, given the Court’s decision and South Coast Air

Basin ’s classification as an “ E xtreme” 1

- hour ozon e nonattainment area and the Southeast Desert Modified AQMA ’s classification as a “ S evere” 1

- hour ozone nonattainment area, the State of California was required to submit a SIP providing for a section 185 fee program in South Coast

Air Basin and the portio n of the Southeast Desert Modified AQMA under SCAQMD jurisdiction.

5 The South Coast Air Basin includes Orange County, the southwestern two

- thirds of Los Angeles County, southwestern San Bernardino County, and western Riverside County (see 40 CFR section 81.305).

6 Indian country as defined at 18 U.S.C. 1151 refers to: (a) all land within the limits of any Indian reserva tion under the jurisdiction of the United States Government, notwithstanding the issuance of any patent, and, including rights

of

- way running through the reservation, (b) all dependent Indian communities within the borders of the United

States whether with in the original or subsequently acquired territory thereof, and whether within or without the limits of a state, and (c) all Indian allotments, the Indian titles to which have not been extinguished, including rights

of

- way running through the same.

7 The S outheast Desert Modified AQMA covers the Victor Valley/Barstow region in San Bernardino County, the Coachella Valley region in Riverside County, and the Antelope Valley portion of Los Angeles County (see 40 CFR section 81.305).

8 The Riverside County porti on of the Southeast Desert AQMA, which is in SCAQMD, has also been referred to as

“ the portion of the Southeast Desert Modified AQMA that is located in SCAQMD ,” “ the Coachella Valley portion of the Southeast Desert Modified AQMA ,” and “ the Riverside C ounty portion of the Salton Sea Air Basin .” These are names for the same geographic area. Rule 317 uses the terminology “Riverside County portion of the Salton Sea
Air Basin”

. 9 On April 30, 2004, EPA promulgated ozone area designations for the 1997 8

- hour oz one standard, and revoked the

1

- hour standard, effective, as noted above, June 15, 2005. See 69 FR 23951. The South Coast Air Basin is
classified as an “ E xtreme” area under the 1997 8

- hour ozone national ambient air quality standard (NAAQS) . T he
Coachel la Valley portion of the former Southeast Desert Modified AQMA (which does not exist for purposes of the

1997 8

- hour ozone NAAQS) is classified as a S evere

- 17 area under the 1997 8

- hour ozone NAAQS.5

c. Legal Rationale For Alternative Program

EPA is proposing that states can meet the section 185 obligation arising from the revoked

1

- hour ozone NAAQS through a SIP revision containing either the fee program prescribed in section 185 of the Act, or an equivalent alternative program. As further exp lained below, EPA is proposing that an alternative program may be acceptable if EPA determines, through notice

- and

comment rulemaking, that it is consistent with the principles of section 172(e) of the CAA and is not less stringent than a program prescribe d by section 185. 10

Section 172(e) is an anti

- backsliding provision of the CAA that requires EPA to develop regulations to ensure that controls in a nonattainment area are “not less stringent” than those that applied to the area before EPA revised a NAAQ S to make it less stringent. In the Phase 1 Ozone Implementation Rule for the 1997 ozone NAAQS published on April 30, 2004 (69 FR 23951), EPA determined that although section 172(e) does not directly apply where EPA has strengthened the NAAQS, as it did i n 1997, it was reasonable to apply to the transition from the

1

- hour NAAQS to the more stringent 1997 8

- hour NAAQS, the same anti

- backsliding principle that would apply to the relaxation of a standard. Thus, as part of applying the principles in

section 1 72(e) for purposes of the transition from the 1

- hour standard to the 1997 8

- hour standard, EPA can either require states to retain programs that applied for purposes of the 1

- hour standard, or can allow states to adopt equivalent alternative programs, but only if such alternatives are determined through notice

- and

- comment rulemaking to be “not less stringent” than the mandated program. EPA has previously identified three types of alternative programs that could satisfy the section 185 requirement: (i) tho se that achieve the same emissions reductions; (ii) those that raise the same amount of revenue and establish a process where the funds would be used to pay for emission reductions that will further improve ozone air quality; and (iii) those that would be equivalent through a combination of both emission reductions and

revenues. 11

We are proposing today to determine through notice

- and

- comment rulemaking that States can demonstrate an alternative program’s equivalency by comparing expected fees and/or

emiss ions reductions directly attributable to application of section 185 to the expected fees, pollution control project funding, and/or emissions reductions from the proposed alternative

10 EPA has previously set forth this reasoning in a memora ndum from Stephen D. Page, Director, Office of Air Quality Planning and Standards, to Air Division Directors, “Guidance on Developing Fee Programs Required by

Clean Air Act Section 185 for the 1

- hour Ozone NAAQS,” January 5, 2010 (“Section 185 Guidance Mem o”). On July 1, 2011, the D.C. Circuit Court of Appeals vacated this guidance, on the ground that it was final agency action

for which notice

- and

- comment rulemaking procedures were required. NRDC v. EPA, No. 10

- 1056, 2011 WL 2601560, C.A.D.C. 2011. EPA subsequently set forth this reasoning in a rulemaking action concerning an equivalent alternative 185 program submitted as a SIP revision to EPA by the State of California on behalf of the San Joaquin Valley Unified Air Pollution Control District (“S JVUAPCD”). 76 FR 45213 (July 28, 2011). In so doing, we were applying the court’s directive to follow the rulemaking requirements set forth in the Administrative Procedures Act to inform consideration of section 185 and equivalent alternative programs. In this action regarding SCAQMD Rule 317, we are again applying the court’s directive to follow rulemaking requirements with respect to section 185 and equivalent alternative programs.

11 These types of programs were identified in our rulemaking action co ncerning SJVUAPCD’s alternative 185 fee program 76 FR 45213 (July 28, 2011).6

program. Under an alternative program, states might opt to shift the fee burden from a specific set of major stationary sources to non

- major sources, such as owners of mobile sources that also contribute to ozone formation. EPA also believes that alternative programs, if approved as “not less stringent” than the section 185 fe e program, would encourage one

- hour ozone NAAQS nonattainment areas to reach attainment as effectively and expeditiously as a section 185 fee program, if not more so, and therefore satisfy the CAA’s goal of attainment and maintenance of the NAAQS.

While section 185 focuses most directly on assessing emissions fees, we believe it is useful to interpret anti

- backsliding requirements for section 185 within the context of the CAA’s ozone implementation provisions of subpart 2 (which includes section 185). T he subpart 2 provisions are designed to promote reductions of ozone

- forming pollutant emissions to levels that achieve attainment of the ozone NAAQS. In this context, to satisfy the anti

- backsliding requirements for section 185 associated with the 1

- hour NAAQS we believe it is appropriate for states to implement equivalent alternative programs that maintain a focus on achieving further emission reductions, whether that occurs through the incentives created by fees levied on pollution sources or other fundi ng of pollution control projects, or some combination of both. For any alternative program adopted by a state, the state’s demonstration that the program is not less stringent should consist of comparing expected fees and/or emission reductions directly

a ttributable to application of section 185 to the expected fees, pollution control project funding, and/or emissions reductions from the proposed alternative program. For a valid demonstration to ensure equivalency, the state’s submissions should not under estimate the expected fees and/or emission reductions from the section 185 fee program, nor overestimate the expected fees, pollution control project funding, and/or emission reductions associated with the proposed alternative program.

We also note that the structure established in Subparts 1 and 2 of the CAA recognizes that successful achievement of clean air goals depends in great part on the development by states of clean air plans that that are specifically tailored to the nature of the air pollution sources in each state. The Act recognizes that states are best suited to design plans that will be most effective. Allowing states to put forward an equivalent program under the circumstances that pertain here, and under the authority of 172(e), is consi stent with this principle of the Act.

In sum, in order for EPA to approve an alternative program as satisfying the 1

- hour ozone section 185 fee program SIP revision requirement, the state must demonstrate that the alternative program is not less stringent than the otherwise applicable section 185 fee program by collecting fees from owner/operators of pollution sources, providing funding for emissions reduction projects, and/or providing direct emissions reductions equal to or exceeding the expected results of the otherwise applicable section 185 fee program. We are inviting public comment on whether it is appropriate for EPA to consider equivalent alternative programs, and, if so, whether
Rule 317 would constitute an approvable equivalent alternative progr am.7

3. RULE SUMMARY

This section summarizes the key provisions of Rule 317. EPA’s evaluation of these provisions is found in TSD section 5, “EPA Evaluation.”

The purpose of Rule 317 is to satisfy the requirements of section s 182 and 185 of the Act by utilizing a fee equivalency approach consistent with the principles of 172(e) of the Act. Under Rule 317, SCAQMD will track, calculate, analyze, and report to demonstrate that the requirements of section 185 of the Act have been met. R ule 317 includes: c alculation of CAA

non

- a ttainment (Section 185) f ee o bligation (section (c)(2)), establishment of a Section 172(e) fee equivalency account (section (c)(1)); an annual demonstration of equivalency (section (c)(3)); an annual preliminary d etermination of equivalency (section (c)(4)); reporting to CARB and EPA (section (c)(5)); and a b ackstop p rovision for f ailure to a chieve e quivalency (section (c)(6)). In addition, by letter dated December 21 , 2011 (see TSD Attachment I), SCAQMD

clarifie d that it intend s to separately track and evaluate the annual demonstration of equivalency and the annual preliminary determination of equivalency by non

- attainment areas.

a. Calculation of CAA Non

- Attainment (Section 185) Fee Obligation

Beginning August 1, 2012 and continuing annually thereafter, SCAQMD will calculate the total amount of major stationary source fees that would have been assessed in the prior calendar year under a direct implementation of section 185 of the Act (sections (c)(2) and (b) of the rule). A fee is calculated for each major stationary source whose actual emissions of VOC or

NO

x exceed 80% of its baseline emissions (section (b)(4)). The fee rate is $5,000 per ton in 1990 dollars, which must be adjusted for inflation based on the Consumer Price Index (CPI) (section (b)(5)).

While CAA section 185 requires baseline emissions to be based on the source’s actual emissions during the attainment year, it also allows the use of alternative baselines, consistent with EPA guidance. Rule 317 specifies that baseline emissions of an existing source in the South
Coast Air Basin will be based on an average of the source’s actual emissions during fiscal years

2005

- 06 and 2006

- 07 (which are not to exceed allowable emissions), and would be programmatically adjusted by SCAQMD to take into account the effects of new requirements or regulations from 2006 to 2010. In the Salton Sea Air Basin, an existing source’s baseline emissions are its reported emissions during 2007, the attainment year for the Southeast Desert Modified AQMA (section (b)(2)A)).

Rule 317 specifies that, for sources that become subject to the rule after the attainment year, baseline emissions are based on allowable limits in the applicable implementation plan or potential to emit, or holdings of RECLAIM Trading Credits (RTC) (secti on (b)(2)(B)).

b. Section 172(e) Fee Equivalency Account

Under Rule 317, SCAQMD will establish a “Section 172(e) fee equivalency account” that will be credited with expenditures from qualified programs that meet the criteria in section (c)(1)(A) of the ru le: (i) surplus to the 1

- hour ozone SIP and approved by the District, CARB,8

and EPA as being surplus to the SIP; (ii) designed to result in direct VOC or NO

x reductions in SCAQMD, or to facilitate future VOC or NO

x reductions in SCAQMD through vehicle/eng ine fueling infrastructure or advanced technology development efforts for implementation within the next 10 years, or for other uses approved by EPA; (iii) expenditures occurring only in calendar years subsequent to 2008 from eligible projects; 12 and (iv) o nly monies actually expended from qualified programs during a calendar year shall be credited. Section (c)(1)(D) of the rule provides that the equivalency account may be pre

- funded with expenditures from the programs

listed in Attachment A of the rule. 13

Rule 317 provides that eligible expenditures do not need to be held or disbursed directly by SCAQMD provided the underlying program has been approved by CARB and EPA (section (c)(1)(B)). Funds will be accounted for on a dollar for dollar basis, will not be discounted due to the passage of time, and may accumulate from year to year if a surplus exists in any given year (section (c)(1)(C)).

c. Annual Demonstration of Equivalency

Beginning August 1, 2012 and continuing annually thereafter, SCAQMD will

demons trate that the funds in the Section 172(e) fee equivalency account for the prior year are equal to or greater than the CAA non

- attainment (Section 185) fee obligation that would have been assessed for the prior year in accordance with the equation in secti on (c)(3) of the rule.

d. A nnual P reliminary D etermination of E quivalency

Beginning July 1, 2012 and continuing annually thereafter, SCAQMD will also project whether adequate funding is expected to be available in the Section 172(e) fee equivalency account in the current year in accordance with the equation in section (c)(4) of the rule. This preliminary determination of equivalency requires the projection to show that the amount of funds in the fee equivalency account are at least 110% of the previous year’s fee obligation, which serves as a surrogate for the current year’s fee obligation.

e. R eporting to CARB and EPA

Beginning September 3, 2012 and continuing annually thereafter, SCAQMD will provide a report to CARB and EPA on the results of the demonstration of equivalency and preliminary determination of equivalency, as well as information on facilities’ fee obligations, programs and expenditures included in the fee equivalency account, and any surplus funding carried over to the subsequent calendar year (section (c)(5)).

12 In the SCAQMD December 2011 letter , SCAQMD clarified that for the South Coast Air Basin equivalency demonstration, SCAQMD intends to only include expenditures that occurred in calendar years 2010 and forward

. The equivalency demonstration for the Southeast Desert Modified AQMA in SCAQMD will include expenditures that occurred in calendar year 2008 and forward.

13 Attachment A of Rule 317 identifies potential sources of funds for the Section 172(e) Fee Equivalency Account. These potential funding mechanisms include: fees from motor vehicles pursuant to AB 118 and AB 2766 and federal grants to fund retrofitting of school buses and trucks.9

f. Backstop Provision For Failure To Achieve Equivalenc y

If the annual demonstrat ion of equivalency fails to show sufficient funds in the Section 172(e) fee equivalency account for the prior year, or the preliminary determination of equivalency shows that adequate funding may not be available in the current year, then Rule 317 requires the SCAQMD Executive Officer (EO) to submit to the Governing Board within 90 days of the finding a back

- stop rule that would require the EO to collect and/or track adequate fees for any shortfall. The Governing Board is requir ed to act on the backstop rule within 120 days of the funding inadequacy finding (section (c)(6)).

If SCAQMD adopts a backstop rule applicable to major stationary sources, Rule 317 states that the backstop rule would include provisions that allow sources to request an alternate baseline period and multi

- site aggregation of baseline and emissions (sections (c)(6)(A) and (B)). Rule 317 also states that stationary sources paying such fees in the backstop rule shall receive a credit for annual operati ng fees and annual operating emission fees paid to SCAQMD (section (c)(6)(C)).

4. EPA REVIEW CRITERIA

EPA considered the criteria described and set forth in the following sections of the CAA and guidance documents to evaluate this rule:

a. Enforceabil ity

- Section 110(a) of the Clean Air Act requires enforceable SIP requirements. Several EPA guidance documents are used to evaluate rule enforceability, including the “Bluebook” ( Issues Relating to VOC Regulation Cutpoints, Deficiencies, and Clarificatio n to Appendix D) , November 24, 1978, 52 FR 45044), “the Little Bluebook” (Guidance Document for Correcting Common VOC & Other Rule Deficiencies ), EPA Region 9, August 21, 2001, and “ Review of State Implementation Plans and Revisions for Enforceability and Legal Sufficiency; Section 110: State Implementation Plans,” EPA, September 23, 1987

Memorandum

.

b. Rule Relaxation

- EPA must evaluate whether this SIP revision would interfere with any applicable requirement concerning attainment and reasonable further progress (RFP) or any requirement of the Act (CAA 110(l)) or modify, in a nonattainment area, any SIP

- approved control requirement in effect before November 15, 1990 (CAA 193).

c. Section 182(d)(3) of the Clean Air Act requires states with severe or extreme 1

- hour ozone nonattainment areas to submit a SIP which includes the provisions required under section 185. CAA section 185 requires such SIPs to provide that, if the area has failed to attain the

1

- hour ozone NAAQS by the applicable attainment date, each major stationary source of VOCs must pay a fee, computed in accordance with se ction 185 (b) , for each calendar year beginning after the attainment date. Under s ection 185(b)(1), t he state’s SIP revision must require each major stationary s ource to pay a fee for each ton of VOC emitted in excess of
80% of baseline emissions. A source’s baseline emissions are its actual emissions during the required attainment year. Section 185(b)(2) allows use of an alternative baseline, as provided10

in EPA guidance. Section 182(f) extends the requirements of section 185 to major stationary

sources of NO

x .

A n alternative program equivalent to section 185 may be acceptable if EPA determines, through notice

- and

- comment rulemaking, that it is consistent with the principles of section 172(e) of the CAA

. Section 172(e) is an anti

- backsliding provision of the CAA

. As part of applying the principles in section 172(e) for purposes of the transition from the 1

- hour
standard to the 1997 8

- hour standard, EPA can either require states to retain programs that applied for purposes of the 1

- hour standard, or alternatively can allow sta tes to adopt equivalent alternative programs, but only if such alternatives are determined through notice

and

- comment rulemaking to be “no t less stringent” than the mandated program.

d. Memorandum from William Harnett, Director of the Air Quality Policy Division to the Regional Air Division Directors, entitled, “Guidance on Establishing Emissions Baselines under Section 185 of the Clean Air Act (CAA) for Severe and Extreme Ozone Nonattainment

Areas that Fail to Attain the 1

- hour Ozone NAAQS by their Attai nment Date,” March 21,

2008. This guidance can be found on the Internet at: http://www.epa.gov/ttn/oarpg/t1/memoranda/20080321_harnett_emissions_basline.pdf

5. EPA EVALUATION

Rule 317 complies with the evaluation criteria as discussed below.

a. Enforceability

– The rule is generally clear and consistent with the Bluebook and the Little Bluebook and other relevant EPA guidance regarding enforceability. The SCAQMD is required to follow the procedures in the rule to make the equivalency demonstration and to adop t a backstop rule to make up any shortfall if equivalency is not initially demonstrated. These provisions, if approved into the SIP, would be enforceable against SCAQMD.

b. Rule Relaxation

– EPA believes that this SIP revision would comply with CAA sect ions 110(l) and 193, because it would not interfere with the on

- going process for ensuring that requirements for RFP and attainment of the NAAQS are met.

c. Sections 182 and 185 of the CAA

– SCAQMD submitted Rule 317 to meet the requirements of sections 182 and 185, by utilizing a fee equivalency approach consistent with the principles of 172(e) of the Act. Under Rule 317, SCAQMD will annually demonstrate that their alternative fee program in Rule 317 is not less stringent than what is required by section

185 of the CAA.

Equivalency Demonstration in Two Non

- Attainment Areas As described in the background section of this TSD, there are two 1

- hour ozone non

attainment areas within the jurisdi ction of the SCAQMD

– the South Coast Air Basin and the Southeast Desert Modified AQMA. In its December 2011 letter, SCAQMD clarified that it intends to provide separate equivalency demonstrations for the two non

- attainment areas. Specifically, the expen ditures in the 172(e) fee equivalency account will be tracked separately for each non

- attainment area. The equivalency analyses will compare fee11

obligations within the non

- attainment area to expenditures in the same non

- attainment area. EPA agrees that t he separate tracking of expenditures and demonstration for each non

attainment area is necessary.

The Benchmark and Baseline Emissions One initial step in the equivalency demonstration is to determine the benchmark for comparison, i.e., the amount of fees that would have been collected in any year under direct implementation of section 185. A fee should be calculated for each major stati onary source whose actual emissions of VOC or NO

x exceed 80% of its baseline emissions. The equation in section (b)(4) of Rule 317 to calculate a source’s fee obligation reflects the method for calculation of the fee set out in section 185(b)(1).

Secti on 185(b)(2) of the Act provides that baseline emissions are the lower of the source’s actual or allowable emissions during the attainment year. Section 185 and EPA’s March 2008 baseline guidance memorandum 14 provide for determining baseline emissions over a longer period that is more representative of normal operations if a source’s emissions are irregular, cyclical, or otherwise vary significantly from year to year. As explained below, SCACMD provided documentation that emissions are irregular and varia ble and that fiscal years 2005/06 and 2006/07 are more representative than the attainment year.

SCAQMD’s staff report for Rule 317 and the December 2011 letter explain that because emissions from major stationary sources are irregular and variable, an alt ernative baseline period as allowed under the CAA and EPA’s 2008 baseline guidance is appropriate. SCAQMD provided data on various indicators such as Gross Domestic Product, regional employment, usage of gaseous fuels, and usage of coatings and solvents t o show the recessionary effects on emissions throughout the area (see Exhibit D of SCAQMD’s December 2011 letter).

SCAQMD also provided source

- specific emissions data for all 234 sources subject to section 185 fees that reported actual emissions in the year 2010 of > 10 tons/year (see Exhibit D, Figure F of SCAQMD’s December 2011 letter). A review of this data shows that each of these sources had variable emissions. In addition, for a subset of these facilities (112 facilities), SCAQMD had 10 consecuti ve years’ of emissions data (see Exhibit D, Figure B of SCAQMD’s December 2011 letter). For this subset, SCAQMD analyzed variability by calculating the “v ariation in e missions (or i rregularity) ” called “V” (see Exhibit D, Figures B of SCAQMD’s December 20 11 letter) where “V” is based on the following equation:

V = Range of Emissions [(highest reported value) minus (lowest reported value)]

Median Emissions Value SCAQMD’s analyses of source emissions variation for the 112 facilities are provided in graph form in Exhibit D, Figure C of the December 2011 letter. SCAQMD’s analyses show that the distribution of variation ranges from 20% to greater than 300% and that 84 of the 112 facilities (e.g., 75% of the facilities) had variation in emi ssions between 40% and 140%.

Because SCAQMD’s analys e s cover all sources that reported actual emissions in 2010 > 10 tons/year, EPA understands that the facilities not represented are those with the potential

- to

-

14 See TSD section 4.d above.12

emit (PTE) > 10 tons/year, but reporting actual emissions below 10 tons in 2010. Thus, the 234 facilities analyzed are the larger sources and represent the facilities that emit most of the emissions. EPA believes that SCAQMD’s analyses focus on the majority of emissions that would be subject to section 185 fees and agrees that South Coast’s reliance on an alternative baseline period for major stationary sources is appropriate.

Rule 317 defines baseline emissions for most existing stationary sources in the South Coast Air Basin as an average of actual emissions from two consecutive years (fiscal years 2005

- 2006, and 2006

- 2007), not to exceed allowable emissions. SCAQMD’s staff report for Rule

317 and December 2011 letter explains that SCAQMD selected this two

- year baseline period

as more represe ntative of typical production and emissions because it occurred before the

economic recession that began in 2008 and that using 2010 actual emissions as the baseline year would lock sources to an atypically low production year.

SCAQMD’s December 2011 le tter states that the selection of fiscal years 2005

- 2006 and

2006

- 2007 as the baseline period 15 for all major stationary sources results in an alternative baseline amount that is conservative. SCAQMD explains that under EPA’s 2008 baseline guidance, source s are allowed to choose any 24

- month consecutive period in the past 10

years , including a period selected by the source. See 40 CFR 52.21(48) SCAQMD’s analyses show that the District’s selected baseline period results in a lower baseline overall compared to a regulatory approach that would allow sources to propose their own baseline period (see SCAQMD’s December 2011 letter, Exhibit D, Response #3) . A lower baseline
amount is conservative because it establish es a lower threshold for calculating the assessment
of section 185 fees

.

After SCAQMD determines the baseline emissions for a specific facility based on the Annual Emissions Reporting (AER) Program for the fiscal years 2005/06 and 2006/07, not to exceed allowables, section (b)(2)(A) of Rule 317 requires SCAQMD to programmatically adjust the baseline to account for the effects of regulatory changes between 2006 and 2010. This programmatic adjustment also ensures that SCAQMD’s baseline determination will reflect the lower of actual or allowable emissions, even when the allowable emission limits subsequently became more stringent. For example, under SCAQMD Rule 2002, the NO

x emissions budget in the RECLAIM cap and trade program was reduced starting in 2007

. SCAQMD states that the vast majority of all NO

x sources are RECLAIM sources. Consequently, NO

x baseline emissions for RECLAIM sources will be adjusted to reflect the requirements of SCAQMD Rule 2002 where a source’s holding of RECLAIM Trading

Credits a re reduced (see SCAQMD’s December 2011 letter, Responses #6 & 7).

EPA agrees that the emissions baseline provisions of Rule 317 are appropriate.

Criteria for Expenditures from Qualified Programs Rule 317 requires SCAQMD to establish a Section 172(e) fee equivalency account which will be credited with expenditures from qualified programs that meet the criteria outlined in section (c)(1)(A). One criterion is whether the expenditures, which result in emission

15 If a facility does not have reported emissions during fiscal years 2005/06 and 2006/07, the facility’s baseline emissions will be its 2010 actual emissions, not to exceed allowables (see SCAQMD December 2011 letter), .13

reductions, are surplus to the 1

- hour ozone SIP . The approved 1

- hour ozone SIP in the South Coast Air Basin is the 1997 Air Quality Management Plan, as revised in 1999. 16 The approved 1

- hour ozone SIP in the Southeast Desert Modified AQMA is the 1994 Air Quality Management Plan. 17

EPA views as “surplus” reductions that are not relied upon in the SIP, i.e., reductions that are not required nor assumed by the SIP to provide for RFP or attainment. 18 SCAQMD identified three preliminary lists of qualified programs: (i) Rule 317 Attachment A, “List o f Programs Pre

- funding Section 172(e) Fee Equivalency Account;” (ii) Attachment B in the staff report, “List of Potential Section 172(e) Fee Equivalent Account Funding Programs for

Post

- 2011;” and (iii) Attachment C in the staff report, “List of Potential Future Section 172(e) Fee Equivalent Account (Credit) Programs.” In its December 2011 letter , SCAQMD updated the lists of qualified programs, 19 which are attached to the letter as : (i) Exhibit A “Qualified Programs and Estimated Actual Expenditures for 201 0 and 2011 Pre

- funding the Section 172(e) Fee Equivalency Account

, ” and (ii) Exhibit B “Qualified Programs Providing

On

- Going Funding for Post

- 2010 to Section 172(e) Fee Equivalent Account. ” 20

The Dece mber 201l letter also elaborates on the bases for the conclusion that listed programs are surplus and meet the criteria at Rule 317(c)(1)(A) (see SCAQMD’s December 2011 letter, Questions & Answers #1

- 4) SCAQMD evaluated the base year and future year
baseline emission inventories

.

EPA has reviewed this documentation and agrees with SCAQMD that the programs previously listed in Attachment A of Rule 317 and Attachments B and C of the staff report
and listed as Exhibits A and B to the December 2011 letter are surplus . As documented by

SC AQMD in their December 2011 letter, the grant and funding programs in Exhibits A and B are not relied upon for SIP credit in the 1

- hour ozone attainment demonstration approved based on the South Coast 1997 AQMP and 1999 Revisions (see Tables 2 and 3, 65 FR 6091,
6096

- 6097, February 8, 2000). The South Coast 2003 AQMP did not assign emissions reduction credit to SCAQMD grant or funding programs. ( See Table 2, 73 FR 63408, at 63414, October 24, 2008). This determination, with respect to these pro grams only, addresses section (c)(1)(A)(i) of the rule, which requires EPA’s approval that the qualified programs are surplus to the SIP. Future determinations of “surplus” may be necessary if SCAQMD relies on programs or expenditures other than those identified in Exhibits A and B

of their December 21 , 2011 letter to offset section 185 fee obligations.

16 This SIP was approved by EPA on April 10 , 2000 (see 65 FR 18903 ).

17 This SIP was approved by EPA on January 8, 1997 (see 62 FR 1150).

18 “Surplus” is discussed in EPA’s guidance, “Improving Air Quality with Economic Incentive Programs” published on January 2001 (EPA

- 452/R

- 01

- 001) and available at http://www.epa.gov/ttn/oarpg/t1/memoranda/eipfin.pdf

19 While Section (c)(1)(D) of Rule 317 states, “The Section 172(e) fee equ ivalency account may be pre

- funded according to the projects listed in Attachment A,” SCAQMD was not limited to these projects. Any qualified project must meet the criteria in section (c)(1) of Rule 317. Because SCAQMD had more current information than

w hat was available during rule adoption, they provided updates to the lists of qualified programs.

20 When SCAQMD adopted Rule 317, the programs listed in Attachment C were identified as “potential ” programs for inclusion in the 172(e) equivalency account because SCAQMD did not have sufficient time to make a surplus determination. Subsequent to rule adoption, SCAQMD concluded in their December 2011 letter that the programs listed in Attachment C of the staff report are also surplus. Exhibit B of SCAQMD’s December 2011 letter included all programs that were previously included in Attachments B and C of the February 2011 staff report.14

Rule 317 requires that expenditures from qualified programs result in direct reductions or
facilitate future reductions of VOC or NO

x emissions. In contrast, sectio n 185 of the Act requires states to assess fees on stationary sources but does not require that the fees be used for activities beneficial in reducing ozone formation. We believe this requirement in Rule 317 to use the surplus funds for reducing ozone for mation will result in further progress
toward attainment.

Demonstration of Equivalency and Reporting to EPA SCAQMD is required to demonstrate equivalency for the previous year’s fee obligation in accordance with the equation in section (c)(3) of Rule 317 and report the results to CARB and EPA. The equation for demonstrating fee equivalency is correct.

If the annual equivalency demonstration shows that expenditures exceed the amount of the fee obligations, the funds that were not “used” for equivalency are carried forward into the following assessment year. Since the expenditures have been determined to be surplus and there have been no other changes to the SIP for the 1

- hour ozone standard, carrying these funds forward into the following year is accep table because they would remain surplus. Also, if the expenditure occurred in a year prior to its use in an equivalency demonstration, the emission reductions would occur earlier, which is environmentally beneficial.

As an added measure to demonstrate equivalency, Rule 317 also has a forward looking measure to estimate whether equivalency will likely be demonstrated. SCAQMD is required to preliminarily determine if expenditures in the Section 172(e) fee equivalency account are at least 110% of the pre vious year’s fee obligation, which serves as a surrogate for the current year’s fee obligation. If the preliminary determination does not project equivalency in accordance with Rule 317, that would trigger the requirement for SCAQMD to adopt a backstop ru le in advance of the actual equivalency demonstration. We believe this measure provides an additional checkpoint for ensuring equivalency.

Backstop for Failure to Achieve Equivalency If SCAQMD fails to either demonstrate equivalency or the preliminary determination of equivalency does not show expenditures in the account at least equal to 110% of the estimated fee obligation, Rule 317 requires the EO to submit, within 90 days of the

de termination, a backstop measure to the Governing Board and the Governing Board to act on a measure, within 120 days of the determination, to either collect and/or track adequate

fees to address the shortfall.

Rule 317 identifies certain elements that wo uld be included in a major stationary source backstop rule. If the backstop rule requires major stationary sources to pay fees, Rule 317 states that the backstop rule would allow sources to receive a credit for fees paid to SCAQMD for operating fees and a nnual operating emissions fees. Title V regulations at 40 CFR 70 require the assessment of fees sufficient to cover Title V program costs. While EPA has informed SCAQMD that any backstop rule would need to ensure that this fee credit provision would not adversely affect funds needed to cover Title V program costs, this issue ultimately needs to be addressed in the rulemaking process for the backstop rule.15

Conclusion Rule 317 requires SCAQMD to demonstrate on an annual basis that the funds in the S ection 172(e) fee equivalency account are equal to or greater than the Section 185 fee obligation that would have been assessed. Furthermore, the funds in the equivalency account must be surplus to the SIP and used to fund projects that reduce emissions a nd improve air quality in the South Coast Air Basin and the Southeast Desert Modified AQMA. If the annual demonstration of equivalency in August or the annual preliminary demonstration of equivalency in July fails to show sufficient funds in the equivalen cy account, Rule 317 requires SCAQMD to adopt a rule to address the shortfall. We believe that Rule 317 is “not less stringent” than the otherwise applicable section 185 fee program because it provides funding for emission reduction projects that are surp lus to the 1

- hour ozone SIP and are equal to or exceed the expected results of the otherwise applicable section 185 fee program. Once approved into the SIP, the provisions of the rule are enforceable against SCAQMD. We conclude that, i n accordance with t he principles of Section 172(e), Rule 317 is not less stringent than the program required by CAA Section 185. EPA therefore proposes to approve Rule 317 as satisfying the 1

- hour ozone section 185 fee program requirements. If finalized as proposed, this a ction would also permanently terminate all CAA Section 110(c) Federal Implementation Plan (FIP) implications associated with our January 5, 2010 Finding of Failure to Submit a SIP revision to satisfy section 185 requirements for the SCAQMD (75 FR 232).

6. EPA ACTION

EPA staff recommends full approval of Rule 317 because it complies with all relevant Clean Air Act requirements including those regarding enforceability, and it is consistent with CAA sections 172(e) and 185.

7. ATTACHMENTS

I. Letter and attachments from Elaine Chang, SCAQMD addressed to Lily Wong, USEPA dated December 21, 2011. This document will be referred to in this TSD as SCAQMD ’s

“ December 2011 letter.”

II. Memorandum dated November 16, 2011 from Lily Wong to the Administrative Record

for Docket No. EPA

- R09

- OAR

- 2011

- 0876 entitled “ Annualized Section 185 Fee Rate
for 2011.”