District’s Response to Comments on the 3/8/2011 ver sion of Proposed Draft Rule 3170

May 19, 2011

1 The District received the following comments based on the March 8 version of

Rule 3170:

1. Federal Environmental Protection Agency (EPA) 2. An industry coalition made up of the following a ssociations:

African American Farmers of California

California Citrus Mutual

California Cotton Ginners Association

California Cotton Growers Association California Dairy Campaign

California Floral Council California Grape and Tree Fruit League Citizen’s Advisory Group of Industries

Cross Creek Flood Control District Fresno County Farm Bureau Independent Oil Producers Agency Kings County Farm Bureau Madera County Farm Bureau Manufacturers Council of the Central Valley National Hmong American Farmers, Inc. Nisei Farmers League Raisin Bargaining Association Tulare County Farm Bureau Tulare Lake Basin Water Storage District Tulare Lake Drainage District

Tulare Lake Resource Conservation District

Vector Environmental Western Agricultural Processors Association 3. Verallia (Saint Gobain) 4. Turlock Irrigation District

5. Chevron USA

6. Coalition for Clean Air

The comments (which may be captured in paraphrase f orm) and the District’s responses are found in the following:

EPA Comment #1 In Section 1.0, we recommend the following revision s: “... by utilizing an alternative fee-equivalency program consistent with the principles of section 172(e) of the CAA.”District’s Response to Comments on the 3/8/2011 ver sion of Proposed Draft Rule 3170

May 19, 2011

2 District Response: The District has made the change.

EPA Comment #2: In Section 2.0, we recommend the following revision s: “... For the purposes of this rule, the San Joaquin V alley Air Basin shall have met the revoked federal one-hour ambient air q uality standard for ozone upon EPA’s determination through notice-and-c omment rulemaking on’s concurrence of a demonstration by the APCO and the California Air

Resources Control Board...”

Also, add to the end of the second paragraph, “... ac cording to the procedures found in 40 CFR Part 50 Appendix H, and show that the improvement in air quality is due to permanent and enforceable emissions

reductions.”

EPA has informed us that these changes are necessar y to make the APCO’s demonstration consistent with EPA’s process of redesignation.

District Response: The District has made the changes.

EPA Comment #3: In Section 6.0, add a reference to the appropriate rule or provisions which governs the reporting of actual emissions.

District Response: We have added several provisions to define more cle arly the reporting requirements that are necessary to assess baseline period, annual emissions, and clean emissions unit claims.

EPA comment #4: (Verbal comment) The fee-equivalent program must b e made federally enforceable via EPA’s approval of the program into the State Implementation Plan. Therefore, the rule must cont ain all the components necessary to demonstrate that the total fees collec ted are equivalent to

those that would be collected under a section 185 c lean air act fee program, as identified in EPA’s January 2010 guidan ce memo. To that end, we believe that the rule should include an ann ual equivalency demonstration and a backstop to recover any shortfa ll in fees collected for any particular year.District’s Response to Comments on the 3/8/2011 ver sion of Proposed Draft Rule 3170

May 19, 2011

3 District Response: Section 7.2, “Annual Fee Equivalency Report,” and s ection 7.3, “Remedy for Fee Collection Shortfall,” have been added to t he rule.

The following subsequent comments address sections 7.2 and 7.3, which were added per EPA’s verbal comment #4.

EPA Comment #5: The rule should include the provisions for calculat ing the fee obligation based on a direct implementation of CAA Section 185 . If these calculation procedures rely on the requirements in Section 5.0 (Fee Requirements), include the appropriate cross references.

District Response: The rule now includes the requested cross reference in section 7.2.1.3, including a requirement that, for the purposes of c alculating the comparison fee obligation under a direct implementa tion of Section 185, the baseline period of 2010 be used, regardless of any alternative baseline used to calculate the major source’s fee o bligation under this rule. This maintains the sources’ ability to use a properly justified alternative baseline period, and clearly specifies the methodology and bases of demonstrating fee-equivalency.

EPA Comment #6: The draft rule uses two terms (“literal application ” and “direct implementation”) and we recommend consistently usin g the term “direct implementation” (see 7.1, 7.2, 7.2.2).

District Response: We have changed all instances to the term, “direct implementation.”

EPA Comment #7: We recommend adding a provision (e.g., Section 7.2. 1.3) which requires the report to document the fee obligation under a d irect implementation of

CAA Section 185.

District Response:

We have done so in Section 7.2.1.3.

EPA Comment #8: Two comments relative to section 7.3, Remedy for Fe e Collection

Shortfall:District’s Response to Comments on the 3/8/2011 ver sion of Proposed Draft Rule 3170

May 19, 2011

4 a. The rule should define “invoiced” and include a deadline for collecting the shortfall.

b. We recommend adding a provision on reporting to EPA following the implementation of this provision.

District Response: We believe the term “invoiced” to be self-explanato ry and consistent with the plain English dictionary definition – it means “billed.” We have added the word “assess”, changed the tense of the sentenc e, and added a deadline for payment. We believe the requirement t o be clear and unambiguous:

... the District shall assess and invoice, within 90 d ays following the
demonstration of the shortfall, sufficient fees to recover the entire amount

of the shortfall.

We have also added a reporting requirement in secti on 7.3.1.4.

EPA Comment #9:

We understand the District intends to use the fees for reductions of ozone forming pollutants. These expenditures should be re ferred to in the rule.

District Response:

Discussions with EPA related to this comment have c larified that the fee equivalency program must, according EPA’s guidance memo, contain confirmation that the fees gathered from sources ot her than major sources of VOC and NOx will be spent on reductions in NOx a nd VOC. Of course, this is the intent of our program, since the vehicl e code fees have been specified by the District, as required by SB 2522, to mitigate air quality problems caused by motor vehicles, and that means t he fees will be spent on reducing VOC and NOx emissions.

However, EPA insists that this confirmation be made federally enforceable by placing it in the SIP, and the mechanism for doi ng this is by including it

in the rule. The District has therefore added a de finition of the vehicle code fees that are being used to make up any fees n ot collected from stationary sources under this rule. The definition specifies the source of the fees and the programs that will be involved in their expenditure, and a confirmation that these programs will reduce VOC an d NOx emissions:

California Vehicle Code Fees: those fees collected by the California Department of Motor Vehicles to be forwarded to the District as required

under Vehicle Code section 9250.17 and Health and S afety Code section 40610-40613, which fees are required by Health and Safety Code sectionDistrict’s Response to Comments on the 3/8/2011 ver sion of Proposed Draft Rule 3170

May 19, 2011

5 40612 to be expended on establishing and implementi ng incentive-based programs, such as the District’s Emissions Reductio ns Incentive Program, to achieve surplus emissions reductions to remediate a ir pollution harms created by motor vehicles and that are intended to achieve and maintain state and federal ambient air quality standards. These f ees shall therefore be used in programs designed to reduce NOx and VOC emission s in the San Joaquin Valley.

Industry Association Consortium Comments: In the latest draft of the proposed revisions to Ru le 3170, the District has proposed to maintain an exemption for those units t hat have installed “clean unit technology”. The Associations continue to support that
concept.

For those sources that have installed clean unit te chnology, it is simply not appropriate to continue to be assessed expensive fe es that were intended to “penalize” those sources that had not installed clean unit technology. The District’s proposed alternative to the non-atta inment fee for those sources that have installed clean unit technology i s a necessary and fair proposal. It is a recognition that there are facil ities doing all they can to

reduce air emissions.

The Associations support the proposed revisions to Rule 3170, and support the use of combined revenue streams from Ru le 3170 and the motor vehicle fees as equivalent to the revenue tha t would have resulted from a straightforward application of section 185.

District Response: The District appreciates the support, and notes tha t other written and verbal comments have been provided that illustrate the unfair and nonsensical outcome of directly implementing Sectio n 185. For instance, one glass manufacturing facility recently and signi ficantly reduced NOx emissions (and other pollutants) from their glass-m elting furnace. This was done voluntarily, prior to rules being in place that required these reductions. However, the facility is still major f or NOx emissions, and because they made these reductions before the basel ine period they will still be subject to Section 185 fees. What’s more, they will not be able to reduce emissions further, because they have already controlled them with BACT. This means that they would be paying these S ection 185 fees until the District reaches attainment, unless the Distric t incorporates some fairness provisions, like the clean emissions unit exemption, into Rule

3170.District’s Response to Comments on the 3/8/2011 ver sion of Proposed Draft Rule 3170

May 19, 2011

6 On the other hand, if this facility had waited unti l 2011 to make these same clean-up modifications, they would have avoide d all Section 185 fees, because they would have reduced their emissio ns by well over 20%

after the baseline date. Under those circumstances , the facility would have polluted far more every year, for a number of additional years. Clearly this can not be the intent of the Section 1 85 fee requirement, and

so the District remains committed to the clean emis sions unit exemption.

Verallia Comment #1: Verallia supports the “Alternative Fee-Equivalent P rogram” and appreciates the District’s efforts to revise Rule 3 170 to minimize unfair impacts on Valley businesses.

District Response: The District notes and appreciates the support.

Verallia Comment #2: The District must process and determine “Clean Unit Exemptions” as soon as possible. It is vitally important for sources t o know which units qualify for the clean unit exemption.

District Response: We agree. The District is already working on polic ies and procedures to determine and list BACT determinations for the appr opriate period. We will be working with the affected sources over the second half of 2011 to clearly identify units that can be considered “clea n emissions units” and to determine the baseline emissions for 2010. We hope to have both of these efforts completed by the end of 2011.

Verallia Comment #3: The District should provide a mechanism to defer or refund Rule 3170 fees to facilities that commit to implement NOx and VOC control projects in the near future. If fees must be collected, the y should be returned to facilities to fund emissions reductions projects to achieve the 20% reduction intended by section 185 of the CAA. Such a refund mechanism is within the scope of section 185, as there are no restrictions on the use of the money collected.

District Response: Section 185 is a penalty fee intended to provide an incentive to facilities to reduce their emissions. While we certainly underst and that Rule 3170 may have serious fiscal impacts on facilities, and we remain strongly committed to avoiding the fees altogether for those that have done all that they can to reduce their emissions, through the imp lementation andDistrict’s Response to Comments on the 3/8/2011 ver sion of Proposed Draft Rule 3170

May 19, 2011

7 installation of “clean emissions units,” we also be lieve that maintaining the fees for units that have not been cleaned-up is imp ortant for several reasons. First, while we have strongly defended th e District’s plan to exempt from fees those units that have done all tha t they can to reduce their emissions, providing the incentive to station ary sources that haven’t equipped all their units with advanced pollution co ntrol equipment to reduce emissions as soon as possible remains a key component of the clean air act fee contained in section 185, and of our rule. In addition, charging the non-clean units also provides for the fee-equity between mobile and stationary sources of pollution that we have been attempting to achieve. We currently believe that about 20% of th e fees necessary to demonstrate equivalency with the section 185 requir ements will come from stationary sources with non-clean units, while the remainder will come from the vehicle code fees. This corresponds very well with the approximate 80/20, mobile/stationary mix in emissio ns that are currently contributing to ozone formation in the San Joaquin Valley. Providing additional fee exemptions or deferments to stationa ry sources that haven’t yet equipped their emissions sources with advanced pollution control technology would affect our ability to make that cl aim. Finally, this approach has been the basis for all the District’s public presentations and actions on this issue, to date. We are concerned t hat developing such a fee refund mechanism at this time would negate a gr eat deal of the public support that we have thus far received for our fee- equivalent approach.

TID Comment #1: The “clean emission unit” exemption from the fee re quirements of Rule 3170 should be pollutant specific. For example, a p ermit unit that meets

the definition of “clean emissions unit” for NOx bu t not for VOC should be exempt from the NOx component of the fee.

District: The District agrees and has changed the fee exempti on based on “Clean Emissions Units” to be clearly pollutant specific.

TID Comment #2: A facility that is currently not a major source of either NOx or VOC but is a major source of the other pollutant, is not subject to the existing rule. However, such a facility will be subject to the pro posed rule.

District Response: On the contrary, our existing rule does apply to fa cilities that are only major for one of the two pollutants, as required by section 185 of the Clean Air Act (actually, Section 185 (7511d) addres ses the fee associated with major VOC sources, and 7511a (f) specifies tha t plan requirementsDistrict’s Response to Comments on the 3/8/2011 ver sion of Proposed Draft Rule 3170

May 19, 2011

8 for VOC are also applicable for NOx). However, we did clarify the language in the revised rule to remove any ambiguit y, as suggested by EPA in their January 2010 partial approval/partial disapproval of our rule (see Federal Register, Volume 75, No. 8, page 1720, comment 11).

TID Comment #3: In Section 5.0 (Fee Requirements), the use of the t erm “baseline period” in establishing whether the “average annual emissions” are set to zero (0) is confusing, especially since the “baseline period” i s not fixed. TID requests that the District clarify this language to more cle arly specify how the fee calculation applies to existing units permitted pri or to the baseline period and new units permitted after the baseline period.

District Response: The District appreciates the opportunity to clarify this section. The baseline period is fixed for a source: it is eithe r the calendar year 2010 or it is the average of a period of at least two years during 2006-2010, as defined by the rule. Once it is determined for a s ource, it is fixed for the source, and there is no need, nor opportunity, to r evisit the baseline period. This baseline period will be used for all future fee calculations.

Fees for equipment that existed before the baseline period are therefore based on the emissions from that equipment during t he baseline period, and the required comparison to emissions in subsequ ent years.

Emissions from new units have zero emissions in the baseline period, and therefore would be subject to fees for the full amo unt of their emissions, except that new units at major sources will be equi pped with BACT and will therefore be exempt from fees.

Chevron USA Comment #1: Chevron supports many of the features of the rule, and the alternative feeequivalent program.

District Response: The District notes and appreciates the support.

Chevron USA Comment #2:

The achieved in practice BACT “look-back” period co uld be 2005-2009, rather than 2006-2010, since the attainment deadlin e was in 2010.District’s Response to Comments on the 3/8/2011 ver sion of Proposed Draft Rule 3170

May 19, 2011

9 District Response: We do not agree. The BACT “look-back” period and t he alternative baseline period should be consistent, and the alter nate baseline period must certainly include 2010. Therefore, we will ma intain BACT look-back period of 2006-2010.

Chevron USA Comment #3: The District should add a section that specifically excludes permit-exempt equipment from the fees assessed under Rule 3170.

District Response: We agree and have addressed this by specifying in s ection 5.1 that the fee basis emissions (terms “A” and “D”) must be emi ssions from permitted sources. In addition, we have created a sample fee calculation worksheet (Attachment I to the Final Draft Staff Report) to c larify further the fee calculation process for a facility.

Chevron USA Comment #4: Change the fee deadline to July 1, rather than June 30, to make it consistent with the Rule 4320 AERO fee payment dead line.

District Response: Unfortunately, the July 1 deadline from Rule 4320 h as created some accounting headaches for the District, as July 1 is the first day of a new fiscal year and consequently the July 1 date in Rul e 4320 is likely to be changed to June 30 in the future. We do not propos e to make the suggested change.

Chevron USA Comment #5: Change the emissions reporting deadline from March 1 to April 1, to make the reporting deadline the same as for Rule 4320 AE RO fees.

District Response: We have made this change, but we use March 31, rath er than April 1.

Coalition for Clean Air Comment: (Verbal comment) The District should consider reana lyzing Best Available Control Technology (BACT) on an annual basis, or pe rhaps on some longer frequency, such that units that are consider ed “clean emission units” today may have to upgrade their control equi pment in the future, to maintain the “clean emission unit” exemption from t he nonattainment fees.District’s Response to Comments on the 3/8/2011 ver sion of Proposed Draft Rule 3170

May 19, 2011

10 District Response:

The “clean emission unit” determination timeframe i s intentionally tied to the attainment year, 2010, which is also the standa rd baseline year for determining future emissions-related nonattainment fees.

To understand the rationale for this, consider the inherently unfair nature of the Section 185 requirement that is more thoroug hly discussed above – without this “clean emission unit” exemption, very clean operations that had done all that they could to reduce emissions pr ior to 2010 would not be able to control their emissions by a further 20% to avoid the nonattainment fees. On the other hand, sources tha t had not cleaned up their emissions would have a relatively easy task o f reducing emissions by 20%, and would therefore avoid all future fees.

This unfair situation would persist into the future under the commenter’s suggestion. Those emissions sources that had not c leaned up their emissions prior to 2010 are presumably able to redu ce their emissions by 20% and escape the fee, so the suggestion only impa cts those operations that had done all that they could prior to 2010 to reduce emissions. These clean facilities would, theoretically, be subject t o fees at some future time if their emissions controls were no longer consider ed to be BACT because of evolution in emissions control technologies. On the other hand, the operations that delayed their emissions clean-up un til after 2010 are still escaping any fee requirements, because they reduced their emissions by

20%.

In conclusion, we see any future reevaluation of wh ether a unit remains a “clean emission unit” as a perpetuation of the inhe rent unfairness of the Section 185 fees, and therefore we do not believe t hat it would be appropriate.