ATTACHMENT J

317

- 1 SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT

SUPPLEMENTAL STAFF REPORT

PROPOSED AMENDED RULE 317

– CLEAN AIR ACT NON

- ATTAINMENT
FEES

April 2010

Deputy Executive Officer Planning, Rule Development, and Area Sources Elaine Chang, DrPH

Assistant Deput y Executive Officer Planning, Rule Development, and Area Sources Laki Tisopulos, Ph.D., P.E.

Author: Robert Pease, P.E. Program Supervisor

Henry Pourzand Air Quality Specialist Reviewed by: Barbara Baird District Counsel

Contributors: John Olvera Principal Deputy District Counsel

Sue Lieu Program Supervisor, Socioeconomic Analysis Greg Hunter Air Quality Specialist, Socioeconomic Analysis
Barbara Radlein Air Quality Specialist, CEQA- 2

-

Executive Summary

This supplemental staff reports incorporates b y reference and builds upon the Final Staff Report on Proposed Rule 317

– Clean Air Act Non

- Attainment Fees dated June 2009. Subsequent to the June 2009 staff report, several publications have been issued which have clarified the scope of and helped define the limitations of the proposed rule. Prior relevant publications are also included for reference. Those publications include the following (which are included as appendices to this supplemental staff report) :
December 11, 2009 letter from Acting US EPA Regional Administrator to Governor Schwarzenegger on the fai lure of California to submit a S ection 185 SIP (Appendix A)

, January 5, 2010 memo from US EPA on Section 185 guidance (Appendix B)

, January 5, 2010 Federal Register notice on the failure of the S CAQMD to submit a
Section 185 SIP (Appendix C)

, January 13, 2010 Federal Register notice on partial approval/disapproval of San Joaquin Valley Unified Air Pollution Control District Rule 3170 for Section 185
fees (Appendix D)

, San Joaquin Valley Unified Ai r Pollution Control District Rule 3170 (Appendix E)

, January 25, 2010 letter from US EPA Region VI to the Texas Commission on Environmental Quality regarding TCEQ Proposed Rule 1204 (impleme nting Section 185 requirements) Appendix F

, TCEQ Proposed Rule 12 04 (Appendix G)

,
Sacram ento APCD Rule 370 (Appendix H), and

Assembly Bill No. 118

– Nunez, Alternative fuels and vehicle technologies : funding programs (Appendix I)

.

The proposed amended rule was developed consistent with these latest developments on
Sec tion 185 fees.

Section 185 of the 1990 clean air act amendments requires major stationary sources in
severe and extreme areas that do not attain the one

- hour ozone standard by the requisite date to either reduce emissions by 20% or pay a fee. The fee pay ment is based on actual emissions in the post

- attainment year compared to attainment year (or baseline emissions). Baseline year emissions are a key part in determining each source’s fee obligation. Proposed Amended R ule (PAR) 317 provides a hybrid desig ned structured to comport with Section 185 requirements while utilizing Section 172(e) elements to
minimiz e the economic impact to the regulated community. PAR 317 provides for- 3

-

flexibility in determining baseline through optional provisions for a recessio nary adjustment; an adjustment for sources with de minimus attainment year emissions; and aggregation of emissions. Once the baseline is established, the fees paid can be credited against the source’s annual operating and emissions fees. Staff has also i ncluded a fee equivalency component that reduces the fee burden for all sources. This alternative provision was developed using S ection 172(e) of the Clean A ir A ct and would require CARB and US EPA approval. The flexibilities and crediting mechanism incl uded in PAR 317 will greatly minimize the Clean Air Act non

- attainment fee burden imposed on the already well controlled major stationary sources in the South Coast District.

Background

Section 185 was included in the 1990 amendments to the clean air act as a backstop provision for those areas that did not attain the one hour standard for ozone by the attainment date. Section 185 requires that major stationary sources for VOC or NOx in
those non

- attainment areas to either reduce their emissions by 20% fro m a baseline amount or pay a fee. The South C oast air basin and the Salton S ea air basin both failed to attain the one hour ozone standard by the attainment date and are subject to Section 185 fees (although the one

- hour ozone standard was superseded by t he eight

- hour standard, Section 185 has been held by court decision to remain in effect

.

The only ozone non

- attainment area to have an adopted and federally approved rule is Sacramento Metropolitan APCD. Their rule 307 was adopted in September 2002 and
was modeled on a strict construct of Section 185. Rule 307 has a fixed baseline of the attainment year and there was no provision for alternative or equivalent programs. As discussed below, other agencies that have proposed or adopted rules incorporatin g additional flexibility including clean unit exemptions or alternative baselines have either had those portions disapproved or notified by US EPA of deficiencies regarding those provisions. Staff has heeded the precedent established by these agencies in the development of Rule 317.

To help states develop programs to implement the Section 185 requirements, US EPA issued guidance in March 2008 on determining baseline emissions. That memo provided
that an alternative baseline could be used if a “source’s e missions are irregular, cyclical, or vary significantly from year to year”. A 24 consecutive month period within the last 10 years could be used as the alternative baseline subject to adjusting the emissions for regulatory effects. Unfortunately, US EPA did not provide guidance on how to determine if a source’s emissions are irregular, cyclical, or vary significantly. Staff developed a metric (the Student’s t

- test) to be used to determine if a source was cyclical. A draft rule incorporating that concept was crafted, work

- shopped, and proposed for adoption. That- 4

-

rule was considered at the April 2009 Board Meeting and was criticized by many stakeholders as overly complex (that rule is included as Attachment D . Rule 317 was subsequently continued and that Student’s t

- test metric was dropped.

The Rule was continued through the remainder of 2009. The continuance was done, in part, so that EPA could finalize a memo providing further guidance on Section 185 fees. US EPA had been working with the Clean Air A ct Advisory Committee on issues relating to the Section 185 program. Several stakeholders in the Los Angeles B asin participated in that process.

The December 11, 2009 letter to Governor Schwarzenegger effectively gave California
notice that a sanctions clock would be started by the failure to adopt a rule for Section 185. The 18 month sanctions clock officially started with the publication of the January 5 Federal Register notice regarding the South Coast Air Basin. Should the District fail to timely adopt a Section 185 rule, sanctions including higher offset ratios and loss of highway funding could occur. Moreover, US EPA would be required to adopt a federal plan to implement Section 185 and would collect the fee money directly.

The Federal Register notice of January 13, 2010 and the US EPA Guidance memo of January 5, 2010 on Section 185 fees clarified the scope of and limitation on rules developed by states to implement the Section 185 program. San Joaquin Valley Unified
Air Pollution Control Distr ict adopted their Rule 3170 in July 2003 to implement the Section 185 program. That rule contained a clean unit exemption, exempted new units constructed after the attainment date, and provided for executive officer discretion on
baseline emissions which included both the attainment and preceding year. The Federal Register notice identified that all of these provisions were unapprovable under Section
185.

The letter of January 25, 2010 on Texas’ Rule 1204 reinforced the requirement that new units subsequ ent to the attainment year are required to be included in the Section 185 fee program. Also reinforced was the requirement for alternative baselines for cyclical or irregular sources to be adjusted for regulatory requirements.

US EPA’s guidance memo of J anuary 5, 2010 on Section 185 identified that other alternative baselines may be included in a Section 185 program. Those other baselines include the aggregation of NOx and VOC at a single site and the aggregation of multi

facility operations providing th e operations comport with the federal definition of major stationary source. Equivalent alternative programs may also be approvable.- 5

-

Staff’s opinion is there is some further flexibility on baseline determination. Staff has developed a basin

- wide appro ach that calculates the recessionary impact on the emissions of our local industries by NAICS code. That approach utilizes the REMI model to compare projected economic activity to actual economic activity. The ratio of those values give a macro

- economic recessionary adjustment for sources in the District.

The January 2010 memo also noted that Section 172 (e) of the act allows for programs that are “not less stringent” than the mandated program. Fee equivalent and emissions equivalent programs were iden tified as possible approaches under a Section 172 (e) construct. Fee equivalency may be approvable under the 172 (e) concept if the program “clearly raises at least as much revenue as otherwise required S ection 185 fee program if the proceeds are spent to pay for emissions reductions that will further improve ozone air quality.”

To utilize the 172 (e) provisions, staff researched what state programs are available and could be used for Section 185 fees. One highly promising program is AB 118. AB 118,

N unez, California Alternative and Renewable Fuel, Vehicle Technology, Clean Air, and
Carbon Reduction Act of 2007 was adopted in October 2007. This bill imposes a fee on certain mobile sources with the monies to be used for projects that improve environmen tal quality, increase efficiency, develop and deploy innovative technologies, and support energy conservation and activities. Staff’s opinion is that the AB 118 program is surplus to the SIP and can be included as a fee equivalent program under the Sectio n 172 (e) rubric for Section 185 fees. Staff’s preliminary estimate is that approximately 10 million dollars in funding may be available under this program and can be used on a dollar for dollar basis to reduce the fee requirement. Staff is also research ing other funding mechanisms that could be used under Section 172 (e). Provided the crediting of AB 118 funds is approved by CARB and US EPA, it could potentially redu ce the major stationary
source S ection 185 fee obligation by one

- third.

Section 185 and subsequent guidance issued by US EPA provides local air districts and states complete flexibility in terms of how to utilize accrued fees. In t hat spirit, in an in
an effort t o minimize the financi al burden imposed by such fees o n the already very well

c ontrolled major stationary sources in the District, as part of a companion amendment to Regulation III

– Fees, staff is proposing that S ection 185 fees be credited towards facilities’ emission fee and annual oper ating permit fee obligations or invested in emission reduction projects at facilities. Such crediting is projected to offset more than seventy five percent o f the Section 185 fee obligation. Staff’s current proposal on Section 185 fees was crafted consistent with this body of publicly available gu idance and
information.- 6

-

Proposed amendments

Applicability

PAR 317 becomes effective for the SOCAB when the Administrator of the United States Environmental Protection Agency (US EPA) or the Executive Officer, makes a finding
that a Basin is not in attainm ent with the federal one

- hour standard for ozone and the deadline for compliance as specified in the 1990 amendments to the Clean Air Act has passed. Rule 317 is currently in effect for the SSAB, the attainment year for the SOCAB is calendar year 2010. T he rule becomes inoperative (for both basins) at such time as the
US EPA determines that the 1

- hour ozone standard has been attained due to permanent and enforceable measures, approves an equivalent program submitted by the District, or Congress amends the Clean Air Act such that Section 185 fees, or an equivalent program, are no longer required.

Major Stationary Source and Baseline Determination

Under the current mandatory federal requirements as specified in Sections 182(d), 182(e), 182(f) and 185 of the 1990 amendments to the federal Clean Air Act (CAA), major stationary sources of NOx, VOC or both are required to reduce and maintain emissions of these pollutants by at least 20% from their Baseline emissions (the amount emitted in the applicable attainme nt year) for each and every subsequent non

- attainment year. Under the federal definition and for the purposes of this rule a major stationary source is
defined

, in PAR 317 sub paragraph (c) (5)

, based on its allowable or permitted emissions potential (know as the potential to emit or PTE) in subdivision (c) of the rule as follows:

Major STATIONARY Source shall, for the purposes of this rule:

(A) For a non

- RECLAIM source have the same meaning as in Sections 181(b)(4)(B) and 182(d) of the CAA, if applicable, o r a Major Polluting Facility as defined in Rule 1302(s)

– Definition of Terms.
(B) For a RECLAIM source have the same meaning as in paragraph (b)(2) of Rule 3001

- Applicability where the potential to emit for a RECLAIM facility is the higher of:
(i) the sta rting allocation plus nontradeable credits; o r (ii) RECLAIM Trading Credits (RTCs) held in the allocation account after trading. RTC’s held in the certificate account are not part of the allocation.

Based on this definition, sources in the South Coast Air Basin with a PTE of 10 or more tons per year of either NOx or VOC are defined as major stationary sources for the purposes of this rule. The S al ton Sea Air Basin region of the AQMD is classified as- 7

-

"severe non

- attainment" and the threshold PTE for sources in t his air basin is 25 tons per

year.
For sources in the South Coast Air Basin the attainment year for the purposes of this rule is calendar year 2010. Baseline emissions for a major stationary source are defined in
PAR 317 sub paragraph (c) (2) of the rule as follows:

BASELI NE EMISSIONS for a major stationary source, are calculated for each air contaminant, VOC and NOx (including major stationary source fugitive and unpermitted emissions) separately, using source information as reported to or amended by the D istrict, through the District’s Annual
Emissions Report (AER) program, as follows:
(A) For an existing major stationary source prior to the attainment year, the baseline emissions shall be the amount of the actual emissions, including fugitives and unpermitted , during the attainment year (permitted emissions not to exceed permitted
allowables).
(B) For sources that become subject to this rule during or after the
attainment year:
(i) For a non

- RECLAIM major stationary source the baseline

emissions shall be the amoun t of emissions allowed under the applicable implementation plan or the potential to emit (annual emissions including fugitives and emissions from unpermitted equipment).
(ii) For an existing RECLAIM source that subsequently qualifies
as a major stationar

y source for the purposes of this rule the baseline emissions shall be the higher of the RTC holdings at the beginning of the year available for use during the same calendar year or actual emissions during the calendar year the source becomes a major stati onary source that do not exceed the RTC holdings at the end of the reconciliation period.
(iii) For a new RECLAIM source that qualifies as a major stationary source for the purposes of this rule the baseline emissions shall be the higher of RTC holdings pu rchased at the beginning of the attainment year or the initial calendar year of operation, as applicable, or actual emissions during the calendar year, not to exceed RTC holdings at the end of the reconciliation period.- 8

- If a major stationary source is oper ational for a period of less than one calendar year , the allowable emissions based on clause (c)(2)(B)(i through iii) as applicable, in the attainment year or initial year of operation, shall be extrapolated over one full calendar year.

Based on the defi nition of baseline, a source that begins operations sometime after the beginning, but prior to the end of the attainment year is classified as an existing source. Since the Baseline for an existing source is determined based on the actual source

emissions of NOx and VOC during the attainment year, an existing source that begins operations sometime after the beginning of the year may have an artificially low baseline,

since had it operated for a full year it s emissions of NOx, VOC or both pollutants might

h ave been higher. In order to address this issue an existing source that begins operations sometime after the beginning of the attainment year is allowed to extrapolate its emissions to calculate a more representative baseline that would have resulted had the facility operated for a full year. The same principl e applies at a RECLAIM source. The RECLAIM credits or holdings needed for the partial year emissions would be extrapolated over one full calendar year.

Importantly then while the determination of w hether a source is a major stationary source for the purposes of this rule is dependent on the allowable or permitted level of source emissions of either NOx, VOC or both, the major stationary source baseline is determined by the actual emissions of NOX, V OC or both in the attainment year. Furthermore, once the baseline is established it cannot be changed. For any given post

- attainment or assessment year a major stationary source is required to reduce emissions by at least 20%

from the established static baseline emissions amount. The static baseline number is based on source Annual Emissions Report submissions.

Fees in Lieu of Emissions Reductions

Alternatively, if a major stationary source does not reduce emissions by at least 20% of it s
baseline in an y given assessment year then pursuant to Section 185 (a) and (b) of the Clean Air Act it must pay a fee in lieu of the emissions reduction assessed on the amount of the shortfall. For example, for a major stationary source that has a baseline of 20 tons, and actual emissions of 18 tons in a subsequent assessment year would pay a fee for that assessment year on a shortfall in reductions of 2 tons. Based on the US EPA guidance memo dated January 5, 2010, by Stephen D. Page, Director, Office of Air Quality- 9

-

P lanning and Standards, the fee paid must either be in an amount that achieves an equivalent emissions reduction(s) from some other source or computed in accordance
with Section 185 (b) of the CAA based on the amount of the emissions as follows:

Annual CAA Non

- Attainment Fee = $5,000 x CPIF x [ A

– ( 0.8 x B ) ]

Since a source may be a major stationary source for either VOC, NOx or both it can be subject to a fee for excess Rule 317 emissions for either VOC, NOx or both, for any given assessment year, where:

A = Total amount of emissions actually emitted during the applicable fee

assessment year for pollutants included in B, in tons. If A is less than or equal to 80% of B; then there shall be no annual CAA non

- attainment fee assessed for the subject year

. B = Baseline emissions, of VOC, NOx or both for which a source qualifies as

a major stationary source as defined in this rule, in tons.

CPIF = The annual Consumer Price Index (CPI) adjustment factor which is

equivalent to the cumulative increase in the CP I beginning with the 1989 change in the index up to and including the change in the year prior to the year for which the fees are due. For any calendar year the CPI is the average of the CPI for all

- urban consumers published by the Department
of Labor, as of the close of the 12

- month period ending on August 31 of each calendar year or the revision of the CPI which is most consistent with the CPI for calendar year 1989 in accordance with Sections
502(b)(3)(B)(v) and 185(b)(3) of the CAA.

Source and Emissio ns Aggregation

Based on Attachment C of the US EPA guidance memo dated January 5, 2010, by Stephen D. Page, Director, Office of Air Quality Planning and Standards, aggregation of

NOx and VOC emissions at a major stationary sources may be allowable. Aggreg ation of sources under common ownership (multi source aggregation) may also be allowable if the sources comport with the federal definition of major stationary source . With respect to single site aggregation the guidance stipulates that: “provided that th e aggregation is not used to avoid a major source applicability finding”. PAR 317 provides that a major stationary source or sources under common ownership may optionally aggregate their emissions for the purposes of computing both the baseline and emissi ons in subsequent assessment years as follows:- 10

-

Individual VOC and NOx emissions from a major stationary source; or

The aggregate of both the VOC emissions and NOx emissions at a single source; or

The aggregate of both the VOC emissions and NOx emissions at a single source which is a major stationary source for one of the pollutants; or

The aggregate of both VOC or NOx emissions or both pursuant to multisite aggregation.

Optional Alternative Baseline Adjustment Factor

The US EPA gu idance memo dated March 21 , 2008 , by William T. Harnett, Director, Air Quality Policy division, supports language in Section 185(b)(2) of the CAA for an alternative baseline based on averaging emissions over a number of years “if that s ource’s emissions are irregular , cyclical, or otherwise vary significantly from year to year.”
Socio

- economic staff has developed a model that determines the recessionary effect that has resulted in irregular emissions for various industry sectors based on the North
American Industrial Classification System (NAICS). The model was developed analyzing economic data for the past several years to determine the difference between prior year emissions and projected emissions anticipated with a regular business cycle. The model provides a factor by which t he attainment year baseline can be adjusted to correct for the recessionary effect on the baseline computed solely as the emissions on the attainment year. Example 1 below demonstrates the application of an alternative baseline
factor:

Example 2 : Applic ation of Optional Baseline Adjustment Factor A major stationary source with a NAICS number of 33120 would use PAR 317

- Table A (Adjustment Factors by NAICS Industry Category) to determine the applicable optional adjustment factor. The NAICS column provid es the 3 digit reference (based on the first three digits of the NAICS number) as 333. The source then may optionally (though if selected the baseline is fixed for all future assessment years) adjust the baseline as follows: NOx Attainment year baseline ( unadjusted) 18.5 00 tons NOx VOC Attainment year baseline (unadjusted) 6.799 tons VOC NAICS Industry Category (PAR 317 Table A) Adj. Factor 1.218 Adjusted NOx baseline 22.533 tons NOx Adjusted VOC baseline 8.281 tons VOC- 11

- Extraordinary Attainment Year Basel ine Emissions

PAR 317 also provides that any major source with actual emissions in the attainment year that are not more than ten percent (10%) of their immediately preceding year emissions, may request a more representative twenty four (24) month consecut ive actual emission period (averaged to annual emissions) during the five (5) year period immediately preceding the attainment year. Such extraordinary attainment year baseline emissions are considered to be irregular for a source that previously had such higher annual emissions of PAR 317 pollutants. The source must adjust emissions in the selected averaged time period for regulatory effects, on the baseline and submit for such an alternative baseline in writing to the Executive Officer with the request subject to review and approval

. The Executive Officer shall determine whether or not the emissions and regulatory adjustment factor(s) were properly determined and applied

.

172(e) Program Funds Applied to PAR 317 Aggregate Fees

US EPA’s memo of January 5, 2010 provided for the use of “alter native programs to satisfy the S ection 185 fee program SIP provision requirement” provided it c omports with the principles of S ection 172 (e) of the act. Section 172 (e) is an anti

- backsliding provision that requires EPA to develop regulations to ensure that controls are “not less stringent” than the mandated program. One alternative specifically identified by US EPA was a fee equivalent program. Such a program “that clearly raises at least as much

rev enue as the ot herwise required S ection 185 fee program if the proceeds are spent to pay for emissions reductions of ozone

- forming pollutants (NOx and/or VOC ) in the same geographic area subject to the S ection 185 program” may be approvable. Two steps are required unde r this equivalency concept

– fees from 185 sources and the process to spend and pay for emission reductions.

Key to utilization of this alternative provision is a program that spends money for emissions reductions of ozone precursors. Staff’s opinion is that AB 118 Nunez

- Alternative fuels and vehicle technologies: funding programs (adopted October 2007) is one such program that can be used for this purpose. AB 118 increases vehicle registration fees to fund an alternative and renewable energy fund unde r the auspices of the California Energy Commission. The fund is used to develop technologies to develop and deploy innovative technologies that transform California’s fuel and vehicle types to help attain the state’s climate change policies. Part of the AB 118 monies are channeled to the District for use in administering program requirements in the basin. Staff’s preliminary conclusion is that AB 118 monies are surplus to the SIP and are used to pay for emissions reductions projects in the effected geogr aphic area, squarely comporting with US EPA requirements. Staff is actively working to identify other programs that can
be used under t he fee equivalency umbrella of S ection 172 (e). Staff’s filter on such- 12

-

programs is that they are surplus to the SIP and the program revenues are used to reduce

ozone precursors.

Staff has incorporated this alternative equivalent approach for fees into the framework for proposed amended Rule 317 using the required two steps. To ensure fee equivalency, the rule first agg regates the fees from all sources subject to Rule 317. This aggregated total is then compared to the amount available from the fee equivalent program (AB 118 or others). The 317 total is then reduced on a dollar for dollar basis by the amount of
monies a vailable from the fee equivalent programs. The remaining 317 balance is then prorated back to the 317 universe which remit the balance to the District. The second step is the spending and tracking of the equivalent program monies on projects to reduce

oz one precursors. The District’s Technology Advancement Office will administer and track the fee equivalent programs.- 13

-

Step 1

- Source baseline is determined and optional alternative baseline factor may

be applied. Step 2

– Any available 17 2(e) program monies are credited in aggregate to all

sources to the extent of their fee obligation only. Step 3

- The remaining aggregate balance is prorated to each source based on their

PAR 317 emissions fee obligation. Step 4

- Prorated credits appl ied to individually established source escrow

accounts. Step 5

- Escrow accounts available for first use for emissions reductions projects

at sources.

Additional Source Credits Offsetting PAR 317 Source Fee Obligation

In addition, the following language i s being proposed as PAR 301 (i) to a llow for the use of PAR 317 funds remitted to the AQMD to be used to offset any annual operating renewal and annual operating emissions fees (exclusive of Rule 317 emissions):- 14

-

Any fees remitted to the District pursuant t o Rule 317

– Clean Air Act

Non

- attainment Fees shall be held in escrow accounts unique to each source. Fees accrued in such escrow accounts may be used for either of the following at the discretion of the source’s owner or operator.

(1) Creditable up to the amount of fees due by the same source during the calendar year or subsequent calendar(s) year for annual emissions fees due pursuant to Rule 301(e)(2), (4), (6), (7) and (11) and annual operating permit renewal fees due pursuant
to Rule 301(d)(1), (2) and (4). In no case shall the credit be greater than the fees paid; or

(2) Use by the owner or operator for VOC and NOx reduction programs at their source. Up to five percent of funds can be used by the South Coast Air Quality Management District for

ad ministrative support.

Neither the CAA nor US EPA guidance restricts how PAR 317 funds may be used. Since the goal of CAA non

- attainment fee expenditures is to bring the air basin(s) in to attainment with the ozone standard any residual PAR 317 fees paid b y major stationary sources, after any and all source credits have been applied, may be used to fund stationary and/or mobile source VOC and NOx emission reduction programs.

Fee Payment

Owners/operators of ma jor stationary sources must be g in payment of CA A non

attainment fees commencing with the second year after the attainment year and thereafter until a determination has been made by the Administrator of the US EPA that the Basin is
in attainment of the federal one

- hour standard for ozone, both the VOC a nd NOx annual CAA fees shall be remitted in accordance with the annual emissions fee billing requirements as established in paragraphs (e)(2) and (e)(10) of Rule 301

– Permit Fees. A major stationary source that does not pay any or all of the required CAA fees, by the specified due date, shall be subject to the late payment surcharge and permit revocation provisions of subdivision (e) of Rule 301 and is also in violation of this rule and subject to the civil and criminal penalties as provided for in Health and Safety Code 42400 et seq.

While staff appreciates the recessionary times that all businesses are operating in, should the AQMD fail to either adopt or enforce the a rule that carries out the intent of S ection
185 of the CAA and the Administrator of t he US EPA finds that the fee provisions of this rule do not meet the fee requirements of Section 185, or the SCAQMD is not administering and enforcing the fee as required, unpaid fees required plus interest- 15

-

required under Section 185 as specified in 26 Uni ted States Code §6621(a)(2) may be collected by the Administrator.

PAR 317 includes a provision such that if any provision of the rule is held by USEPA or CARB finding or decision to be invalid, such finding or decision (including any court decision) wil l not affect the validity of the remainder of the rule and major stationary sources shall be subject to and must comply with the provisions contained in the reminder
of the rule.

California Environmental Quality Act

SCAQMD staff has reviewed the proposed p roject pursuant to CEQA Guidelines §15002 (k)(1), the first step of a three

- step process for deciding which document to prepare for a project subject to CEQA. The SCAQMD has also determined that the proposed project is exempt since it can be seen with cer tainty that there is no possibility that the proposed project in question has the potential to have a significant adverse effect on the
environment. Therefore, the SCAQMD has determined that the proposed project is exempt from CEQA pursuant to CEQA Guidel ines §15061 (b)(3)

- Review for Exemption (General Rule Exemption )

. If approved, a Notice of Exemption, prepared pursuant to CEQA Guidelines §15062

- Notice of Exemption, will be sent to the county clerks for each county in the district for filing.

Socio

- Economic Analysis

The preliminary initial staff projections on the total fees paid pursuant to 317 was about $32 million. This figure was based on 2006 emissions data and using very conservative assumptions. Staff ’s more recent projections are that the f ees paid using more representative assumptions is on the order of $19 million ( See Appendix J Graph

-

“ Comparison of Annual Operating and Emissions Fee s with PAR 317 Fees (Projected)”)

. Staff’s projection is that, on aggregate, 75% of the Rule 317 fee bur den will be offset through crediting such fees based on the facilities annual emissions and permit renewal obligations pursuant to Rule 301. Crediting of AB 118 and other similar state program funds should they become available will further reduce the fee burden

.

The Socio

- Economic Analysis prepared in May 2009 is still applicable and is incorporated by reference and included as an attachment.

Draft Findings

Health and Safety Code Section 40727 requires that prior to adopting, amending or repealing a rule or regulation, the AQMD Governing Board shall make findings of- 16

-

necessity, authority, clarity, consistency, non

- duplication, and reference based on relevant information presented at the hearing. The draft findings are as follows:

Necessity

- The AQMD Gove rning Board has determined that a need exists to adopt Rule
317

– Clean Air Act Non

- Attainment Fees to comply with the requirements of the 1990
amendments to the Federal Clean Air Act.

Authority

- The AQMD Governing Board obtains its authority to adopt, am end, or repeal rules and regulations from Health and Safety Code Sections 39002, 40000, 40001, 40440, 40702, and 41508 and Section 182(d), 182(e), 182(f) and 185 of the 1990 amendments to
the Federal Clean Air Act.

Clarity

- The AQMD Governing Board has de termined that Rule 317

– Clean Air Act

Non

- Attainment Fees is written and displayed so that the meaning can be easily understood by persons directly affected.

Consistency

- The AQMD Governing Board has determined that the adoption of Rule 317

– Clean Air A ct Non

- Attainment Fees is in harmony with, and not in conflict with or contradictory to, existing statutes, court decisions, federal or state regulations.

Non

- Duplication

- The AQMD Governing Board has determined that the adoption of
Rule 317

– Clean Air A ct Non

- Attainment Fees does not impose the same requirement as any existing state or federal regulation, and the proposed amendments are necessary and proper to execute the powers and duties granted to, and imposed upon, the AQMD.

Reference

- In adopting t he Rule, the AQMD Governing Board references the following statutes which the AQMD hereby implements, interprets or makes specific: Health and Safety Code Sections 40001 (rules to achieve ambient air quality standards), 40440(a) (rules to carry out the Air Quality Management Plan), and Sections 181, 182 and 185 of
the 1990 amendments to the Federal Clean Air Act.

Conclusions and Recommendations

The proposed amendments to Rule 317 were developed to comport with federal requirements while minimizing the fisc al impact of the proposed rule on the impacted industry. The hybrid approach crafted by staff initially reduces the fee burden across the universe of sources subject to Rule 317 fees through the application of the AB 118 funds or funds from other state pr ograms that are surplus to the SIP at their use is approved by
CARB and US EPA . The remaining fees that are remitted to the District can be used by the impacted sources to either pay for annual emissions and annual operating fees or to
fund emissions redu ction projects at their so urce . Staff’s projection is that , on aggregate, 75% of the Rule 317 fee burden will be offset through crediting such fees based on the
facilities ’ annual emissions and permit renewal obligations pursuant to Rule 3 0 1

. Crediting o f AB 118 and other similar state program funds should they become available
will further reduce the fee burden

.- 17

-

Staff is recommending the adoption of this proposal.

Comments and Response to Comments

Public Consultation Meetings were held on January 6, J anuary 19, and March 23, 2010. A summary of the c omments received and response s to these comments from those meetings are provided below.

Comment: Staff should include an alternative baseline option consistent with US EPA

guidance of March 2008. Response : An alternative baseline such as the one described in the March 2008

guidance is administratively complex to implement and staff would still be required to develop a metric to determine if a source is cyclical or irregular. Instead, to provide more flexi bility and address the impacts of the economic downturn on the attainment year baseline staff is proposing to include an inflationary adjustment t o the baseline emissions, allow for single and
multi

- site aggreg ation, and allow an exception for extraordinar y baseline year emissions.

Comment: An adjustment for regulatory effects in the alternative baseline as outlined

by US EPA in their March 2008 memo is not required. Response: Staff disagrees. Conversations with US EPA and the comment letter by US

EPA R egion VI of January 25 indicate that a regulatory adjustment is required.

Comment: My agency is proposing a new power plant. We have filed the application

and been issued a facility ID but have not been issued our permit. We are an existing source accor ding to Clause 317 (C)(7)(c) and will purchase RTC prior to operation which is expected during the latter half of 2011. We will be a cycle 1 facility and only purchase sufficient credits for the operation during 2011. What is our baseline? Response: The baseline for an existing source that subsequently becomes a RECLAIM

source is calculated as given in subclause (c)(2)(B)(ii) of proposed amended Rule 317. The baseline will be determined from the higher of the RTC holdings or actual emissions that do not exceed the RTC holdings at the end of the reconciliation period. For a source that is in operation less than one calendar year, the baseline shall be determined based on subclause (c)(2)(B)(ii) extrapolated over one full calendar year as outlined in the l ast paragraph of subparagraph (c)(2).- 18

-

Comment: My facility manufactures foam. Much of our VOC emissions occurs offsite.

Although we pay AER fees on all of the off

- gassing, we are only required to pay 317 fees on the actual emissions at our facility.

Res ponse : Staff disagrees. This issue was discussed with US EPA Region IX staff and

there is no known precedent not to count these emissions. All emissions that a source is responsible for, including foam off

- gassing from its products, are part of Rule 317 emissions for baseline and subsequent years.

Comment: What impact will AB 118 monies have on our Rule 317 fee obligation? Response: AB 118 monies are projected to be on the order of ten million dollars and

317 fees are projected to be about 30 million dol lars. Provided their use as a fee equivalent program under S ection 172(e) is approved by CARB and US EPA, AB 118 monies should reduce the Rule 317 fee burden by about

one

- third.

Comment: Even after the AB 118 monies and the application of my 317 fees tow ard

my annual emissions and annual operating fees, I will still have a net positive balance. These fees will impact my business. Response: The hybrid approach developed by staff will eliminate about 75% of the

aggregate Rule 317 fee burden for of all sour ces , leaving about half of all
Rule 317 sources with no Rule 317 fee balance . For any source that has remaining fees, those fees can be carried forward for the facility’s future

year s ’ payments of annual operating or annual emission fees. Alternatively, a source may use surplus funds to develop emission control projects at their facility. Staff’s projection is that the hybrid approach , if approved by
CARB and US EPA may totally subsume the Rule 317 fee obligation within 3 to 5 years.

Comment: Staff shou ld pursue an alternative approach pursuant to Section 172 (e) to

shift the fee burden to mobile sources which are responsible for the bulk of the ozone precursors. Response: Mobile source fees are the funding source for AB 118 monies that are

proposed to b e credited towards Rule 317 fee obligations from mobile

sources . An additional fee on vehicle registration would be problematic in this current economic and political climate and would require legislative approval. Legislation to e ffect such a fee is hig hly uncertain.

Comment: Staff should pursue additional flexibilities as outlined in the US EPA

guidance memo of January 2010. Response: Staff’s goal in structuring proposed amended Rule 317 was to develop a

rule that would not be administratively complex and minimized the impact- 19

- on the regulatory community. The hybrid approach crafted by staff meets those goals.

Comment: My facility is largely shut down for 2010. My baseline emissions are

artificially low. Can some accommodation be made? Response: Staf

f has added a provision under paragraph 317 (f) Alternative Baseline for Extraordinary Attainment Year Emissions. Sources with calendar year 2010 emissions that are 10% or less than the preceding year emissions may
use an alternative baseline to calculate a more representative attainment year emissions baseline.

Comment: My source is major for VOC and minor for NOx. Can I use single site

aggregation? Response: Yes. Aggregation can be used when a source is major for only one

pollutant. The baseline will be calculated on the major source pollutant. A detailed example of the approach is included in this supplemental staff
report

.

Comment: Section 172 (e) is not applicable for and should not be applied to the

Section 185 program. Response: Staff disagree s. US EPA guidance in their January 5, 2010 memo clearly

allows for alternative equivalent programs.

Comment : We need additional time to review the proposal. Response : Staff is recommending the hearing be continued until the May Board

meeting.

Comment : This rule has been exhaustively discussed. It is time to move forward. Response : Staff is working to bring the rule to a resolution.

Comment : Staff should be seeking congressional action to amend Section 185. Response : Staff has spoken with congressional aides and Congressman Waxman

regarding the Section 185 program. It is problematic to amend the Clean
Air act for a “surgical” correction for Section 185. Once opened for amendment, all aspects of the act could be reconsidered.

Comment : US EPA should be at the table proposing concrete solutions. Response : Staff is in close communication with US EPA staff at Region IX, OAQPS,

and headquarters. US EPA has participated via conference call on the consultation meetings.

Comment : Staff should include aggre gation in the proposed rule.- 20

-

Response : Aggregation for both single sites and multi

- sites (that comport with the

federal definition of a major stationary source) has been included.

Comment : Will the escrow accounts in REG III for 317 sources accrue interes t? What

will happen if the District goes bankrupt? Response : The escrow accounts will not accrue interest and the District will not go

bankrupt.

Comment : The proposed recessionary adjustment does not reflect the reality for

individual small businesses. The model should use 4 digit NAICS codes and have an evaluation of modeled against actual impacts. Response : The REMI model used to develop the recessionary adjustment is a macro

economic tool designed to look on a regional basis. The model cannot predict the effect on a given small business. A more detailed analysis could be conducted but it may have different results than the factors given. Some NAICS code might have a smaller recessionary impact adjustment.

Comment : Are RECLAIM NOx credits surplus to the SIP? Response : The RECLAIM program is part of the SIP and the credits are not surplus to

it.