KurtR.Wiese,GeneralCounselBarbaraBaird,DistrictCounselLaurenNevitt,DeputyDistrictCounselSouthCoastAirQualityManagementDistrict21865CopleyDriveDiamondBar,CA91765Telephone:•(909)396-3202Fax:(909)396-2961bbairdagmd.govSTATEOFCALIFORNIAENERGYRESOURCESCONSERVATIONANDDEVELOPMENT-COMMISSIONIntheMatterof:))ApplicationforCertificationforthe)DocketNo.07-AFC-03CPVSENTINELENERGYPROJECT)LegalArgumentofSouthCoastAirByCPVSentinel,LLC)QualityManagementDistrictin)ResponseTointervenors’)Testimony)I/IIII-I/I--.IIIIIIIIIIIII’ll”‘S4—4TABLEOFCONTENTSINTRODUCTION1BACKGROUD1A.ApplicableNewSourceReviewRequirements1B.OffsetsBeingProvidedtoCPVSentinelbytheDistrict3C.TheProposedCPVSentinelSIPRevision4D.ThisCommission’sDecisionRelativetoOffsets5II.ARGUMENT6A.SummaryofArgument6B.TheOffsetstobeProvidedtoCPVSentinelAreCurrentlyFederallyEnforceable7C.EPAAllowsIssuanceofNewSourceReviewPermitsBeforeEPAApprovaloftheSIPAmendmentAssociatedwithTransferoftheOfftetstoCPVSentinel8D.ThereisNoRequirementThattheOffsetsBeReducedtoLevelsEquivalenttoCurrent“BestAvailableControlTechnology”9E.ThereisNoLegalBasisforDiscardingOffsetsGeneratedFromtheLawfulOperationsofaSourceThatatTimesExceededItsPermittedLevels10IlLCONCLUSION11iNTRODUCTIONIntervenorCaliforniaCommunitiesAgainstToxics(CCAT)hasfiledtheproposedtestimonyofMichaelHarrisinthismatter.TheSouthCoastAirQualityManagementDistrict(District)hasmovedtoexcludeMr.Harris’testimonyonthegroundthattherulesoflegalprofessionalresponsibilityprecludehimfromtestifyingbyreasonofhispriorattorney-clientrelationshipwiththeDistrict.TheDistrictalsomovedtoexcludehistestimonyonthefurthergroundthathispurportedexperttestimonyisnothingofthesortand,instead,ismerelylegalargumentonwhichexperttestimonyisnotproper.TheCommissionshouldexcludetheHarristestimonyforbothofthesereasons.Nevertheless,theDistrictanticipatesCCATwillmakethesesameargumentsinitslegalbrief.Inaddition,thetestimonyofJuliaMayfiledonbehalfofCommunitiesforaBetterEnvironment(CBE)issusceptibletothesameobjectionregardingimpermissiblelegalargument.TheDistrictherebyobjectsto.thelegalconclusionscontainedintheMaytestimony,namelythattheoffsetsinissueneedtobediscountedtoBestAvailableControlTechnology(BACT),andthatoffsetsarenotavailablefromasourcethathasexceededitspermitlimit.Asaresult,theDistrictaddresseswhytheargumentsmadebyMr.HarrisandMs.Mayaremistakenasamatteroflaw.Inaddition,theDistrictsetsforthbelowabackgroundsectionwhichexplainstheessentialrequirementsfornewsourcereviewundertheCleanAirActanddescribestheoffsetsbeingprovidedtoCPVSentinelbytheDistrictpursuanttoAB1318.ThissectionalsodescribestherevisiontotheStateImplementationPlan(SIP)currentlybeingprocessed,andsetsforthhowthatSIPrevisionrelatestothisCommission’sdecision.Asdetailedbelow,eveniftheCommissionweretoconsidertheimproperlegalopinionsofMr.HarrisandMs.May’stestimony,whichitshouldnot,theCommissionshouldnonethelessconcludethatAB1318properlyauthorizesthetransferoftheemissionoffsetstotheSentinelprojectandthattheseoffsetsmeettheCommission’slegalrequirementsforissuanceofthecertification.Contrarytotheirtestimony,thecreditsarefullyenforceableandthereneednotbeanyamendmenttotheSIPforthemtobefullyenforceable.Similarly,regardlessofwhetheraSIPamendmentmaybeneededinthefuture,thisCommissionisfreetocertifytheCPVSentinelproject,andshoulddoso.I.BACKGROUNDA.ApplicableNewSourceReviówRequirementsThefederalCleanAirAct(CAA),42U.S.C. §7401etseq.,requiresEPAtoestablish“nationalambientairqualitystandards”forairpollutantsthatderivefromdiverseandnumeroussources;thestandardsmustbesetatlevels“requisitetoprotectthepublichealth,”and“allowinganadequatemarginofsafety.”42U.S.C. §7409(b).Statesare•requiredtoadopt“stateimplementationplans”(SIPs)toachieveandmaintainthenationalambientairqualitystandards.42U.S.C. §7410.IntheSouthCoastAirBasin,•responsibilityforthestationarysourceportionsoftheSIPrestswiththeDistrict.Cal.Health&SafetyCode §40460(c).ASIPprovisionbecomes“federallyenforceable”1afteritisapprovedbytheUnitedStatesEnvironmentalProtectionAgency(EPA).SafeAirforEveryonev.US.EPA,488F.3d1088,109697(9thCir.2007).TheCAAalsoincludes“newsourcereview”(NSR)requirementsfornewandmodifiedmajorsourcesofpollutantsforwhichanareahasnotyetattainedthenationalambientairqualitystandards,andtheprecursorstosuchpollutants.Atissueintheseproceedingsistherequirementforsuchnewandmodifiedsourcesto“offset”theiremissionsincreaseswithreductionsfromwithinthesamesource.orfromanothersource.ThisrequirementderivesfromCAA §173(42U.S.C. §7503(a)(1)),whichprovidesinpertinentpartthat“bythetimethesourceistocommenceoperation,sufficientoffsettingemissionreductionshavebeenobtained...soastorepresent(whenconsideredtogetherwiththeplanprovisionsrequiredundersection7502ofthistitle)reasonablefurtherprogress....”Anoffsetisanaccountingofareductioninapollutantthatmustbeequaltoorgreaterthantheemissionsincreaseofthatpollutantfromthenewormodifiedsource.Offsetsaregenerallycreatedwhenacompanyshutsdownequipmentorinstallscontrolequipmenttoreduceemissionswherethatreductionisnototherwiserequired.EmissionreductionsmaynotgenerateoffsetsiftheyareotherwiserequiredbyanyprovisionoftheCleanAirAct,includingstateandlocalrulesimplementingtheSIP.42U.S.C.

§7503(c)(2).Thisisgenerallyreferredtoasarequirementthattheemissionreductionsrepresentedbyanoffsetmustbe“surplus.”EPAhasadoptedregulationsgoverningstatenewsourcereviewprograms,whichrequirethatoffsetsbe“surplus,permanent,quantifiable,andfederallyenforceable.”40C.F.R.51.165(a)(3)(ii)(C)(l Xii).AssetforthintheMarch2,2010“AddendumtotheDeterminationofCompliance”fortheSentinelproject,AppendixN,theprojectisprovidingnecessaryoffsetsofvolatileorganiccompounds(VOCs)intheformofemissionreductipncreditsobtainedfromtheopenmarket.Itisobtainingnitrogenoxide(NOx)RTCs(RECLAIMTradingCredits)foritsNOxemissions.Itisnotrequiredtoobtainoffsetsforparticulatematterlessthan2.5micronsindiameter(PM2.5)becausetheareaoftheSaltonSeaAirBasInwhereitistobelocatedisnotclassifiedas“nonattainment”forPM2.5.AppendixN,p.3.ItisobtainingoffsetsforPMIOanditsprecursorsulfuroxides(SOx)fromtheDistrictasrequiredbyAB1318.TheCPVSentinelprojectisnotafederalmajorsourceforPM10,andthusdoesnotrequireoffsetsforparticulatemattersmallerthan10micronsindiameter(PM10)oritsprecursorsunderfederallaw.AppendixN,page4.However,CPVSentinelandtheDistrictareprovidingoffsetsforPM10,anonattainmentpollutantanditsprecursorSOx,pursuanttoAB1318.Moreover,bothfederallawandDistrictrulesonlyrequireoffsetsforpollutantsforwhichanareaisinnonattainment.WhiletheCoachellaValley(locationoftheproposedSentinelplant)portionoftheSaltonSeaAirBasiniscurrentlystilldesignatedasnonattainmentforPM1O,theDistrictandtheCaliforniaAirResourcesBoardhavealreadysubmittedtoEPA.arequestthattheareaberedesignatedas“attainment,”basedontherequiredshowingofmonitoringdatameetingthenationalcleanairstandards.AppendixN,p.4.Iftheareaisredesignatedas“attainment”by2Y- 4 EPA, offsets would no longer be required for any source (major or non-major) located in

this area. However, it is anticipated that the facility will want to receive itscertification

from this Commission before EPA decides on the redesignation request.

B. Offsets Being Provided to CPV Sentinei by the District

As discussed above, a facility eligible to obtain emission reduction credits (ERCs) as a

result of equipment shutdown or overcontrol may create offsets which it may sell on the

open market to new or modified facilities.needing offsets. In the District, this is done by

following District Rule 1309 and Rule 1306. In addition, the District maintains an

“internal account” of offsets for each pollutant which it obtains from equipment

shutdowns or overcontrol where the facility is either ineligible for ERCs (because it

originally obtained its offsets from the District) or fails to claim ERCs in a timely

manner. The District refers to these offsets as “orphan shutdowns” or “orphan

reductions.” District Rule I 303(b)(2) provides that “unless exempt from offsets

requirements pursuant to Rule 1304, emission increases shall be offset by either Emission

Reduction Credits approved pursuant to Rule 1309, or by allocations from the Priority

Reserve in accordance with the provisions of Rule 1309.1.” The District has used its

internal accounts to provide offsets for federal major sources that are exempt under Rule

1304 or eligible for Priority Reserve offsets under Rule 1309.1 (principally essential

public services).

Due to the electricity shortfall in southern California projected by state agencies and the

scarcity and high price ofoffsets, particularly PM 10, the District decided in 2006 to

amend its Priority Reserve Rule to allow power plants for a limited period of time to

obtain offsets from the Priority Reserve. Unlike essential public services, power plants

were required to pay substantial mitigation fees to the District to use the offsets; the

District was to spend the money to reduce emissions in areas impacted by the power

plants. At the same time, the District codified its tracking system for internal offsets,

including making improvements to the system, in Rule 1315. The Natural Resources

Defense Council (NRDC) and others brought state-court litigation challenging these

actions, which resulted in a ruling that the District had not adequately complied with the

• California Environmental Quality Act (CEQA) in adopting and amending the rules. As a

result, the District could not supply offsets from its internal accounts for power plants orV any other sources receiving offsets from the internal accounts. As a result, the District

• declared a permit moratorium.VV In 2009 the legislature responded by adopting two bills, SB 827 and AB 13 18. The first

bill allowed the District to issue permits pursuant to Rule 1304 and Rule 1309:1 as itV

existed before the most recent powerplantamendment. The second bill, AB 1318,

• specifically required the District to “credit to [its] internal emission credit accounts and

transfer from [its] internal emission reduction accounts to eligible electrical generating

faàilities emission credits in the full amounts needed to issue permits for eligible

electrical generating facilities to meet requirements for sulfur oxides (SOx) and

particulate matter (PM2.5 and PM 10) emissions.” Health & Safety Code § 40440.14(a).

3Sentinel is the only known eligible facility under this bill. AB 1318 created a CEQA

exemption for the crediting and transfer of the offsets it requires to be provided. Pub.

Res. Code 21080(b)(16).

The AB 1318 Tracking System submitted as Appendix N to the March 2, 2010

Addendum to the Determination of Compliance relies on specific offsets from the

District’s internal accounts and quantifies the amount of offsets being provided by each

shutdown source. “The amounts of emission offsets are based on actual PM1O and SOx

emissions reported to AQMD under AQMD’s Annual Emissions Reporting Program. In

addition, for each source of credit, the equipment has bean shutdown and the permits

have been inactivated by AQMD.” Appendix N,

p. 7. Further, “[t]hese offsets are all

[the] result of emission reductions from permitted equipment that permanently ceased

operation in AQMD and the AQMD has not issued any ERCs to the companies who

operated the equipment as a result of the reductions. These PM1O and SOx offsets have

beenremoved from the AQMD’s internal offset accounts and have not been used by any

other source permitted by AQMD.” Appendix N,

pp. 6-7. A point that will be relevant

in the discussion below is that these credits are not subject to the same legal requirements

as emission reduction credits purchased and sold in the open markets.’

The District initially filed with the Conimission a list of offsets to be provided underAB

1318 on March 2, 2010. Appendix N to the Addendum, Tables A & B. On May 12,

20 10, it filed a revised list that replaced the initial list. The primary difference between

Tables A and B in the March 2nd version and the May 12th revised Addendum is that the

revised list makes more conservative assumptions about the offsets associated with the

emission reductions from equipment which have ceased operation. In particular, in the

May 12 th

Revised Addendum the District used the average of the emissions from the last

two years of operation of the equipment, rather than the highest two out of the last five

yóars of operation used in the March 2nd Addendum, to calculate offsets. Because this

more

conservative assumption used in the May 12th Revised Addendum resulted in a

smaller amount of emission offsets from the shutdown sources, it was necessary to

include additional offsets in the AB 1318 Tracking System to ensure there would be•

adequate offsets available to meet CPV Sentinel’s offset needs.

C. The Proposed CPV Sentinel SIP Revision

In order to implement AB 1318, the District has proposed a SIP revision for the CPV

Sentinel

offset. The purpose of the SIP revision is to “provide a mechanism for the

transfer of credits to CPV Sentinel, and [to] establish the AB 1318 tracking system used

1 A repeated misunderstanding in the testimony by Mr. Harris and Ms. May is that they assume that the

rules apIied to Emission Reduction Credits bought and sold in the private market place have application

to the District’s internal accounts. This argument, raised by CBE in yet another lawsuit relating to

emission credits, was soundly rejected. Natural Resources Defense Council, et a!, v. South Coast Air

Qualfty Management Dist., eta!. 2010 U.S. Dist. LEXIS 35865 (Januaiy 7, 2010), p. 14 (District Rules

1309 and 1306 which apply to the creation of private market “emission reduction credits” do not apply to

the District’s internal offsets accounts”). 44 to account for such credits.” (SIP Revision, Attachment A; Preamble, p. 1.) The text of

the SIP revision includes the following: “Notwithstanding District Rule 1303, this SIP

revision provides a federally-enforceable mechanism for transferring offsets from the

AQMD’s internal accounts to the CPV Sentinel Project.” The importance of the

language “notwithstanding District Rule 1303” is two-fold.

First, this language makes clear that the transfer of offsets may occur in spite of language

in Rule 1303(bX2)(A) which says “Unless exempt from offsets requirements pursuant to

Rule 1303, emission increases shall be offset by either Emission Reduction Credits

approved pursuant to Rule 1309, or by allocations from the Priority Reserve in

accordance with the provisions of Rule 1309.1....” The CPV Sentinel project is not

exempt from offsets, it is not providing private market ERCs for PM or SOx, and is not

eligible for Priority Reserve allocations under the version of Rule 1309.1 currently in

effect (i.e., without the latest power plant amendments). Nevertheless, and

“notwithstanding” Rule 1303, the AQMD is directed by AB 1318 to provide offsets from

its internal accounts for the Sentinel project’s SOx and PM requirements. The text of the

SIP revision further provides that the AQMD Executive Officer “shall transfer sulfur

oxides and particulate emission credits from the CPV Sentinel AB 1318 Tracking

System, attached. . . [to] the CPV Sentinel Power Plant. . . in the full amounts needed to

issue permits to construct and to meet requirements for sulfur oxides and particulate

matter emissions” (SIP Revision, Attachment A hereto, pp. 2_3.)2

• Second, Rule 1303 requires that emiSsion offsets be obtained before a Permit to Construct

is issued. (District Rule 1303(b) (2)(A).) However, under federal law, offsets must be

obtained only before the beginning of operation. Section 173(a)(l.)(A) provides that the

permitting agency must assure that “by the time the source is to commence operation,

sufficient offsetting emission reductions have been obtained....”. 42 U.S.C.

7503(a)( I )(A). Therefore, the reference to “Notwithstanding Rule 1303” in the SIP

Revision allows CPV Sentinel to obtain offsets prior to the commencement of operation,

rather than prior to issuance of the permit to construct.

The SIP revision for the CPV Sentinel offsets is scheduled to be heard before the

District’s Governing Board on July 9. Once approved by the District Governing Board,

the SIP revision will be forwarded through the California Air Resources Board (CARB)

to EPA. The CARB Executive Officer is delegated the ability to forward this SIP

revision to EPA for its approval.. Health & Safety Code § 39516.

D. This Commission’s Decision Relative to Offsets

Public Resources Code § 25523 applies to the Commission’s written decision on an

application for certification. Relative to air emission offsets, it provides “The

2 As required by AB 1318, CPV Sentinel must pay specified mitigation fees to the Disüict, which is

requiredto use those finds to reduce emissions, with at least 30% used for reductions in areas in close

proximity.to CPV Sentinel and 30% in Environmental Justice Areas as designated in former Rule 1309.1.

Health & Safety Codes § 40440.14(e). 53, commission may not find that the proposed facility conforms with applicable air quality

standards pursuant to paragraph (1) unless the applicable air pollution control district or

air quality management district certifies, prior to the licensing of the project by the

commission, that complete emissions offsets for the proposed facility have been•

identified and will be obtained by the time required by the district’s rules....” Pub. Res.

Code § 25523(d)(2). However, as discussed above, the District rule relative to the timing

of offset requirements is not applicable to this project for PM1O and SOx offsets.

Instead, the project is governed by the federal requirement that offsets be obtained prior

to operation. Section 25523(d)(2) further provides: “The commission shall require as a

condition of certification that the applicant obtain any required emission offsets within

the time required by the.applicable district rules, consistent with any applicable federal

and state laws and regulations, and prior to the commencement of the operation of the

proposed facility.” The PM1O and SOx offsets at. issue here haye all been identified in

the AB 1318 Tracking System filed with this Commission. Therefore, this Commission

may

certi1’ the proposed project on the condition that the project must actually obtain the

offsets prior to commencement of operation.

II. ARGUMENT

A. Summary of Argument

Mr. Harris argues that the District’s Final Determination of Compliance (FDOC) was

“invalid” because the offsets proposed to be provided to the CPV Sentinel project are not

yet federally enforceable. The District’s response is two-fold; first, the offsets are indeed

already federally enforceable, as the permit system which ensures their enforceability has

been SIP approved and nothing about AB 1318 altered that fact. Second, to the extent

Mr. Harris is suggesting the FDOC is not valid until an amendment incorporating the

AB 1318 Tracking System into the SIP is adopted by EPA, if that is even necessary, EPA

guidance makes plain that a permit to construct may be issued prior to the offsets being

made federally enforceable where: 1) the offsets have been identified and quantified; 2)

they have been adopted as a matter of state law; and 3) they have been submitted to EPA

for adoption into the SIP and the administrative process to approve the measure will be

completed by the time the source seeks to commence operation. In such cases, the

construction permit needs to include a federally-enforceable condition that expressly

prohibits the commencement of actual operations until EPA has approved the SIP

measure.

Ms. May contends that the offsets provided to CPV Sentinel need to be adjusted to reflect

today’s BACT. However, there is no federal requirement for offsets to be discounted to

today’s BACT. The BACT adjustment is a feature of the District Rule governing

issuance of ERCs for private parties and is not applicable to credits from the District’s

internal accounts. The federal requirement is to assure that offsets are surplus to

applicable legal requirements. Initially, the District had intended to perform a surplus

adjustment prior to issuing its Title V permit to the CPV Sentinel project. However,

6since this issue has been raised, the District will perform the appropriate surplus

adjustment prior to the evidentiary hearing in this matter.

B. The Offsets to be Provided to CPV Sentinel Are Currently Federally

Enforceable-

Mr. Harris takes the position that the offsets to be transferred to CPV Sentinel are not

federally enforceable because the EPA-approved SIP does not include any provision to

authàrize the use of internal offset accounts for the CPV Sentinel project. (Harris Decl.,

page 3; page 10.) He is wrong. His legal argument completely misses the important

distinction between federal enforceability of offsets and the ability to transfer such

federally-enforceable offsets. As discussed below, the offsets were federally enforceable

both before and since enactment of AB 1318. The absence of a SIP-approved mechanism

to transfer the offsets to CPV Sentinel-- assuming one is necessary at all-- says nothing

about the enforceability of those credits. These are two distinct issues.

As stated in the Addendum to the Determination of Compliance (March 2,2010) for the

CPV Sentinel project, (Appendix N, p.7), “The amounts of emission offsets are based on

actual PM 10 and SOx emissions reported to AQMD under AQMD’s Annual Emissions

Reporting Program. In addition, for each source of credit, the equipment has been shut

down and the permits have been inactivated by AQMD.” Because the permits are

inactivated, no one can operate the equipment. District Rules 201 and 203 prevent the

construction or operation of equipment without a permit from the District. These rules

have been approved into the SIP, 64 Fed. Reg. 25828 (July 12, 1999).

The SIP-approved version of Rule 201 provides in pertinent part “A person shall not

build, erect; install, alter or replace any equipment, the use of which may cause the

issuance of air contaminants or the use of which may eliminate, reduce or control the

issuance of air contaminants without first obtaining written authorization for such

construction from the Executive Officer.” (See Attachment B hereto, taken from EPA’s

website listing of SIP rules.) The SIP-approved version of Rule 203 provides in pertinent

part: “A person shall not operate or use any equipment, the use of which may cause the

issuance of air contaminants, or the use of which may reduce or control the issuance of

air contaminants, without first obtaining a written permit to operate from the Executive

Officer....” (See Attachment C hereto, from EPA’s website listing of SIP rules.) 3

Violation of these rules bring with them severe penalties.

3 There is an exception in Rule 203 which is irrelevant here for equipment that already has a permit to

construct. Since SIP approval, both rules have been amended to include agricultural permit units

specifically, which was not the case previously, but again this is irrelevant here.

‘ See, e.g., Health & Safety Code §4240(1.3(a), misdemeanor liability and criminal fine of up to $75,000

per day for knowing violation of any rule or permit pertaining to emission regulations or limitations;

§42402.3; civil penalty of up to $75,000 per day for willfully emitting air contaminants in violation of any

rule. 7These rules assure that the equipment from which the offsets are generated cannot be

operated without a permit, and the permits for all the listed equipment have been

inactivated. Therefore, there is a federally-enforceable (i.e., SIP-approved) rule assuring

that the shutdowns remain in effect. Accordingly, the offsets to be provided to CPV

Sentinel are already federally enforceable.

The situation in the present case is therefore very different from the situation cited in Mr.

Harris’ argument. The Baumán Memo, October 11, 1985, cited by Mr. Harris, deals with

the situation where “neither the operating permit program nor the specific operating

permits, or conditions to the permits in question, have been approved by EPA as part of

the applicable SIPs.” (Bauman Memo,

p. 1, Attachment D hereto.) In the present case,

the permit program has been approved by EPA into the SIP; the permit program

guarantees enforceability, and hence the offsets are federally enforceable. Mr. Harris

further argues, based on the Bauman Memo, that “the federally-enforceable requirement

is not met where enforceability of reduction credits depends on use of state banking

regulations that are not part of the currently-approved SIP.” (Harris Deci.,

p. 10.)

However, in the present case, the federal enforceability of the offsets does NOT depend

on any unapproved banking regulation. Instead, enforceability is already ensured by

Rules 201 and 203.

C. EPA Allows Issuance of New Source Review Permits Before EPA Approval of

the SIP Amendment Associated with Transfer of the Offsets to CPV Sentinel

As discussed above, the offsets are already federally enforceable. Moreover, even if they

were not, EPA has made it clear that offsets need not be made federally enforceable prior

to operation. As a preliminary matter, however, Mr. Harris’ mistaken assertion regarding

federal enforceability is really not about federal enforceability at all. Rather, he attempts

to use the fact that currently there is not a provision in the SIP allowing the offsets to be

transferred to CPV Sentinel as somehow defining enforceability. However, this issue is

distinct from whether the credits are federally enforceable. Moreover, as noted above,

the District is submitting a SIP revision to EPA, which will be heard by the District’s

Governing Board on July 9, 2010, which directly addresses this issue—by providing a

federally-approvable mechanism for transferring the offsets. Thus, to the extent a SIP

amendment is needed, it is underway and the Commission can condition the license for

the Sentinel project on EPA approval of the amendment.

Mr. Harris would appear to disagree with this proposition, but even beyond the above

distinction, his legal arguments with respect to enforceability miss the mark. He relies on

an

EPA memorandum signed by John Seitz (June 14, 1994)(Seitz Memo; Attachment E

hereto)) for the proposition that the requirement for federal enforceability ensures that the

criteria for fully-creditable offsets (quantifiable, surplus, permanent) are addressed.

(Harris DecI.,

p. 10.) However, the Seitz Memo also clearly states that in some cases,

“creditable offsets have been identified, quantified, adopted as a matter of state law, and

submitted to EPA, but the EPA administrative process to approve the measure may not be

completed by the time the source seeks to commence construction.” (Seitz Memo, p.5.)

8In such cases, “a construction permit may be issued on the basis of a federallyenforceable commitment that the source may not commence operation until the offsets

are made federally-enforceable by EPA approval of the SIP measure.” (Seitz Memo, pp.

5-6)(emphasis added). Furthermore, the Seitz Memo states: “The EPA recognizes that there may be

circumstances other than SIP measures awaiting EPA approval where sufficient

creditable offsets have been identified and certain administrative obstacles remain to

making the offsets federally enforceable. The EPA believes that it may be appropriate,

on a case-by-case basis, to extend similar treatment to these sources, allowing them to

obtain a construction permit that contains an explicit condition prohibiting operations

until the offsets are made federally enforceable.” (Seitz Memo, p. 6.)

Mr. Harr is ignores these portions of the Seitz Memo, both of which make clear that to the

extent a SIP amendment is required, the Commission has authority to issue a license to

CPV Sentinel even before the AB 1318 Tracking System used to account for the emission

offsets has been adopted into the SIP. In this case that would mean imposing a condition

requiring EPA adoption of the AB 1318 Tracking System before the Sentinel Project

commences operation. District Rule 204 allows such conditions to be imposed on

permits to constructto ensure compliance with applicable requirements. Such conditions

are federally-enforceable because Rule 204 is approved in the SIP. 64 Fed. Reg. 25828.

The CPV Sentinel project could therefore be subject to a condition prohibiting operation

until all of its offsets are federaJly enforceable and obtained by CPV Sentinel.

Accordingly, Mr. Harris’ legal arguments are notwell taken and should be rejected to the

extent his testimony is considered at all.

• D. There is No Requirement That the Offsets Be Reduced to Levels Equivalent to

Current “Best Available Control Technology”

CBE has presented the testimony of Julia May, which devotes a substantial amount of

effort to arguing the offsets to be provided to CPV Sentinel have not been reduced to

levels equivalent to current “BACT. As with the testimony of Mr. Harris, this is legal

argument that is not the proper subject of “expert” testimony and should not be

considered as testimony. in any event, the argument is not well taken because there is no

requirement for such a discount.

There is a requirement for a “BACT discount” when the District issues tradable ERCs to

private individuals for reductions at their facility, but this requirement is not required by

Seitz Memo explains that this policy was originally derived from concerns relative to NOx offsets.

It was not, however, limited to that pollutant and instead allows EPA to apply this policy to any

appropriate permit, on a case-by-case basis. Moreover, it is the District’s understanding that Region [X of

EPA considers this poLicy applicable to all pollutants. 93federallawanddoesnotapplytooffsetsfromtheDistrict’sinternalaccountsofthesortatissuehere.Thus,theDistrictRulethatrequiresthatwhen“ERCs”areissuedtoaprivatepartyapplicant,theapplicantmustestablishthatthereductionsare“notgreaterthantheequipmentwouldhaveachievedifoperatingwithcurrent‘BestAvailableControlTechnology(BACT).”DistrictRule1309(b)(4)(E))simplydoesnotapplyhere.Similarly,thereferenceinRule1306(c)to“BACTadjustedannualemissions”isnotapplicable.ThispointwasmadeclearbytheU.S.DistrictCourtinlitigationbroughtbyCBEandothers.“[I]ncalculatingtheamountofoffsetstobeissued,emissionreductionsforERCsarediscountedtoBACTlevels,whileemissionreductionsforinternaloffsetsarenotdiscountedtoBACTlevels.”NaturalResourcesDefenseCounciletal.v.SouthCoastAirQualityManagementDistrict,etat.,2010U.S.Dist.LEXIS35865,page13(AttachmentFhereto).Thereis,however,afederalrequirementthatoffsetsbe“surplus.”40C.F.R.§51.165(a)(3)(11XC)(1)(i).EPAinterpretsthisrequirementtomeanthattheoffsetsmustbe“surplusatthetimeofuse,”andgenerallyhasrequiredthatoffsetsbeshowntobe“surplus”atthetimetheyareissuedtothepermitholder.TheDistricthadbeenplanningtodiscounttheoffsetstobeprovidedtoCPVSentinel,ifnecessarytoassuretheyremainsurplus,priortoissuingtheDistrict’sTitleVpermittoSentinel.However,sincetheissuehasbeenraisedhere,theDistrictnowplanstoadjusttheoffsetstoassurethattheyremainsurplusonorbeforethedateoftheDistrictGoverningBoaidadoptionoftheSIPrevisionforCPVSentinel(July9,2010).TheDistrictwilladjusteachoffsettoreflectanycontrolrequirementsthathavebecomeapplicableforthatsourcecategorysincethetimeofshutdown.Thisrequiresareviewofrulesthatwouldhavebecomeapplicabletothatsourcehaditstayedinoperation.(Incontrast,therequirementforBACTappliestonewsources,notexistingsources.Health&SafetyCode§40440(b)(1).)The.Districtstaffhastakenapreliminarylookatthediscountsthatwouldberequired,andisconfidentthatthediscountswillnotresultinreducingtotalavailableoffsetsbelowtheamountsrequiredbyCPVSentinel.E.ThereisNoLegalBasisforDiscardingOffsetsGeneratedFromtheLawfulOperationsofaSourceThatatTimesExceededItsPermittedLevelsMs.Mayfocusesontheemissioncreditsassociatedwithonefacility,KMCWheelCo.,whichallegedlyoperatedataboveitspermittedlevelsfor2001-2002beforeshutting•down.(MayDeel.,para.41.)Basedonthisassertion,Ms.Mayasserts:“RatherthanallowingKMCWheel’spermittedemissionstoretiretocompensateforitslargeexceedances,AQMDisusingitspermittedemissionstoallownewpollutiontobeemitted”(i.e.,toprovideoffsetsforCPVSentinel).Ms.Mayisincorrect.ThereisnoprovisioninlawwhichwouldprohibittheusebytheDistrictofKMC’slawfulemissionstogenerateoffsets.Theonlyanalogousrequirementisthat,asdiscussedabove,offsetsmustbe“surplus.”Theemissionreductionsmustnotbe10requiredbylaw.Inthiscase,theshutdownofKMCWheelwasnotrequiredbylaw.TheDistrictproposestoissueoffsetsforonlythatamountofreductionsthatwerelawfulandauthorizedbythepermit.Reductionsthatexceededthepermitlimitswouldnotbe“surplus,”becausetheireliminationisrequiredbylaw,andasaresulttheDistricthasnotproposedtoissueoffsetsforsuchportionofreductions.TotheextentMs.Mayarguesotherwise,shemisunderstandstheDistrict’sanalysis.Simplyput,theDistrictconducteditsanalysisinaprofessionalandresponsiblemannerconsistentwithitsstateandfederalobligations.6.III.CONCLUSIONTheCommissionshouldexcludeMr.Harris’testimonyandthoseportionsofMs.May’stestimonycontainingimproperlegalopinion.EveniftheCommissionconsiderstheimproperlegalopinionscontainedtherein,theCommissionshouldfindthatAB1318properlyauthorizesthetransferofemissioncreditstotheCPVSentinelprojectandthosecreditsmeettheCommission’slegalrequirementsforcertificationoftheproject.June30,2010Respectfullysubmitted,KurtR.Wiese,GeneralCounselBarbaraBaird,DistrictCounselLaurenNevitt,DeputyDistrictCounselSouthCoastAirQualityManagementDistrict6inherdeclaration,Ms.Mayalsoattemptstocastdoubtontheoffsetsasawholebyclaimingthat“therearemanyinstanceswhereDistrictstaffhadtoestimateorguessaboutmissinginformation...”(MayDccl.,para.10)yetshedoesnotprovideexamplesofalleged“guesses,”andwhereshedoesshesupportstheDistrict’sapproach.Forexample,inthecaseofRRIEnergyEtiwanda,sheexplainsthatDistrictstaff”notedthatthedefaultemissionfactorwas7.6lbs/mmcfforPM10,butthatthefacilityhadusedafactorof6.93.Staffnotedthatitdidnothaveacopyofasourcetestwhichsupportedthelowerfactor.Nevertheless,theDistrictstaffusedtheloweremissionfactor.Mayconcludesthat“theDistrictproperlyusedthelowerinsteadofthehighernumber.”inshort,May’sDeclarationdoesnotcastdoubtonwhethertheoffsetsmeetthefederalrequirements,includingthattheybequantifiable.ItinsteadshowstheconservativemannerinwhichDistrictstaffwentabouttheirwork.‘I