SJVUAPCD Governing Board

ADOPT PROPOSED AMENDMENTS TO RU LE 3170 (FEDERALLY MANDATED OZONE NONATTAINMENT FEE) May 19, 2011

2 emissions by 20% compared to their emissi ons during the attainment deadline year, they can escape paying the nonattain ment fee in future years.

Unfortunately, these penalty fees will not have the intended impact in the San Joaquin Valley. With the mature air pollution contro l programs that are in place in the Valley, most businesses have already made signific ant investments and installed the most advanced air pollution controls available for thei r facilities. These facilities would not be able to reduce their emissions to escape the Section 185 fees, since they were already controlled with the best air pollution control equi pment available. The result is that facilities that cleaned up their emissions ear ly would be penalized by Section 185 fee assessments, while facilities that have not installed the best control equipment could make relatively modest investments in ai r pollution controls after the attainment deadline, and escape the fees entirely. We do not believe that Congress envisioned areas in which major sources were largel y and significantly controlled would have difficulty in coming into attainment, and we do not believe that they intended or anticipated these unfair consequences.

The Governing Board origina lly adopted Rule 3170 on May 16, 2002, to implement the Section 185 clean air act fee penalties. In response to the unintended consequences noted above, the Board included special pr ovisions to exempt well-controlled businesses ("clean emissions units") from the penalties, and provided for multi-year averaging of baseline period em issions to extend credit to businesses that invested in early reductions in emissions and to account for fluctuations in production rates due to

market conditions.

In January 2010, the U.S. En vironmental Protection Agen cy (EPA) disapproved these special provisions of Rule 3170, as t hey were not consistent with the direct implementation of a Section 185 fee progr am. EPA’s “limited approval and limited disapproval” of Rule 3170 required the Distric t to implement the ru le, but to fix the unapproved portions within 18 months.

However, EPA also recognized t he inappropriate outcomes of a direct implementation of the Section 185 fees, and addresse d the need for furt her flexibility by issuing, also in January 2010, a guidance memorandum that allows for th e development of alternative equivalent approaches to sati sfy the CAA fee requirements, bu t only if such alternatives are no less stringent th en a direct implementa tion of Section 185.

The revisions to Rule 3170 discussed in this report are designed to implement such an alternative, specifically a program designed to demonstrate that total existi ng fees collected from multiple sour ces are equivalent to the f ees collected by a direct implementation of Section 185, but which avoids the unfair consequen ces of a direct Section 185 nonattainment fee program.SJVUAPCD Governing Board

ADOPT PROPOSED AMENDMENTS TO RU LE 3170 (FEDERALLY MANDATED OZONE NONATTAINMENT FEE) May 19, 2011

3 DISCUSSION :

The Valley’s extreme nonattainment status for the federal one-hour ozone ambient air quality standard resulted in an a ttainment deadline of Novem ber 2010. While significant progress has been made in reducing t he number of 1-hour ozone standard exceedances (reduced from 50 days over the standard in 1990 to a low of only three days of exceedances in 2009), the Valley did experience seven days of exceedances in 2010, thus triggering the Secti on 185 fees. We must theref ore implement a Section 185 fee program, and EPA’s partial approval of our existing 2002 version of Rule 3170

means that we will have to im plement the existing rule, unless we make revisions to it and EPA approves those revisions.

There would be multiple ramifications if we were to implement the existing Rule 3170 without modifying it as proposed here. Fo r instance, because EPA has found our rule to be deficient in some areas, they are now required to implement sanctions against the

District if we do not address the deficienc ies and receive EPA approval of the rule before August 2011. These sanctions wil l result in a de facto ban on new and expanding major business in the Valley, and the loss of feder al highway funds throughout the region. Additionally, EPA woul d collect the Section 185 fees directly from Valley businesses and the funds would be transferred to the federal treasury, rather than being spent in the San Joaquin Valley.

In recognition of these issues, your Boar d has taken two separate actions that are aimed at satisfying the applicable federal mandates while minimizing economic impacts on Valley residents and businesses:

 In February 2010, your Board directed st aff to develop revisions to Rule 3170

that make use of the flex ibility provided by EPA’s January 5, 2010, Section 185 guidance memorandum and develop an e quivalent program that better addresses the Valley’s unique circumstances. Concepts in the original version of Rule 3170, such as the clean emissions unit exemption, that were intended to facilitate an equitable distri bution of responsibility and reward facilities that had invested in clean air technology, should be retained, and alternative sources of fees should be explored.

 In October 2010, as provided in EPA’s 185 guidance and to provide for equitable assignment of responsibility to mobile and stationary sources commensurate to

their relative emissions and contributions to nonattainment, your Board took the first steps towards implementing a fee-equi valent program and approved a motor vehicle fee of $12 per vehi cle. These funds will be reinvested in San Joaquin Valley communities to achieve surplus emissions reductions to remediate air pollution problems caused by motor vehicl es, and are to sunset upon attainment

of the one-hour ozone standard.SJVUAPCD Governing Board

ADOPT PROPOSED AMENDMENTS TO RU LE 3170 (FEDERALLY MANDATED OZONE NONATTAINMENT FEE) May 19, 2011

4 Adoption of the proposed Draft Rule 3170, and submittal to EPA, completes the necessary administrative processes required for a program that can be found to be equivalent to direct implementation of a Section 185 nonattainment penalty fee

program.

Rule Components:

The rule contains the following major components:

 Processes for determining Section 185 nona ttainment penalty fees to be paid by major stationary sources of ozone precurso rs. Major sources of NOx or VOC will be required to pay $5000 per ton of NOx and VOC emissions that exceed 80% of their emissions during a basel ine period defined by the rule. The fee is specified by federal law, in 1990 dollars, and grows with the federal Consumer Price Index, and is currently about $8300 per ton. The fee only applies to pollutants (NOx or VOC) for which a facility exceeds t he major source emissions threshold.

 An exemption from such fees for any “Clean Emissions Unit ” so that sources which installed high efficiency emissi ons reduction technology do not get penalized for their remaining emissions.

 A new commitment to a specific proce ss for identifying when the fee collection authorized by the rule should cease, coincident with EPA’s approval of a

demonstration that the District has met t he one-hour ozone attainment standard.

 A new tracking and reporting system to demonstrate that the major stationary source fees collected, plus the motor v ehicle fees collected by the DMV to be spent by the District in programs desig ned to reduce NOx and VOC emissions, are at least equal to the fees that would have been collected under the direct implementation of a Se ction 185 fee program.

 A new backstop provision identifying steps the District will take if there is a

shortfall in overall fees co llected, i.e., the tracking syst em shows that we did not collect total fees equivalent to a direct Section 185 program.

Incorporating EPA’s Guidance on a Section 185 Fee-equivalent Program:

EPA’s Section 185 guidance me morandum allows for an al ternative 185 fee program that is ‘not less stringent’, consistent with t he principles of Secti on 172(e) of the act, but the memo does not provide a template or provide a pre-approved alternative program model for utilizing these federal CAA’s equiv alency principles. In fact, EPA makes it clear that a case-by-case approval will be a part of EPA’s review, as will a formal public notice-and-comment federal rulemaking process.

In addition, environmental groups at the national level have taken legal action against EPA challenging the legality of these alternatives. Therefore, it is critical to carefully consider relevant issues and questions, and design a program t hat would be legally defensible and would have optimum chance for EPA approval. We have worked closelySJVUAPCD Governing Board

ADOPT PROPOSED AMENDMENTS TO RU LE 3170 (FEDERALLY MANDATED OZONE NONATTAINMENT FEE) May 19, 2011

5 with EPA since the March 8 workshop of the proposed rule, and have incorporated the tracking, reporting, and backstop provisions into the rule specifically to improve the rule’s adherence to EPA’s guidance and to ensure the rule’s legal defensibility.

Comments and Responses:

The District received a number of comments on the March 8, 2011 version of the rule,

which resulted in a number of revisions. EPA commented that the rule should include tracking, reporting, and backstop provisions, as discussed above, to ensure the rule is federally approvable. We agreed to add those provisions, and EPA has expressed satisfaction with the rule, based on their preliminary analysis.

District staff has also received comment s from stakeholders ot her than EPA. In general, comments were positive. Commenter s were appreciative of the District’s recognition of the inherent lack of fairness in implem enting a direct Section 185 program, and of your Board’s di rection to staff to craft a more equitable solution within

the confines of the Clean Air Act.

Some commenters felt that the District needed to provide additional information on the rule implementation process and we have done so in the final draft staff report and our response to comments in Appendix H of the final draft staff report.

One commenter felt the District should r eevaluate whether units remain “clean emissions units” at some poi nt in the future, based on an updated analysis of available control equipment. However, the “clean emission unit” determi nation is intentionally tied to the 2010 baseline date for determining f ees, and to change that would perpetuate the

inherent unfairness of the federal Section 185 nonattainme nt fees which the District was trying to address with the “clean emission uni t” exemption, and we are therefore not proposing to modify the rule accordingly. Staff has addressed all of these comments and suggestions in additiona l detail, and provided the District’s responses, in

Attachment H of the Final Draft Staff Report.

The District did not receive any further comments on the rule after the revisions discussed above, during the public hearing notice and comment period which ended on May 2, 2011. In addition, on May 3, 2011, a ll three interest groups within the District’s Citizens’ Advisory Committee, representi ng industries, environmental groups, and Valley cities, voted unanimously to support the Board’s adoption of Rule 3170.

Cost Effectiveness Analysis:

Pursuant to California Health and Safety C ode Section 40728.5, the District is required to analyze the cost effectiveness of new rule s that implement Best Available Retrofit Control Technology (BARCT). The proposed amendments do not add BARCT requirements and therefore are not subject to the cost e ffectiveness analysis mandate.SJVUAPCD Governing Board

ADOPT PROPOSED AMENDMENTS TO RU LE 3170 (FEDERALLY MANDATED OZONE NONATTAINMENT FEE) May 19, 2011

6 Socioeconomic Impact Analysis:

State law requires the District to analyze the socioeconomic impacts of any proposed rule amendment that significantly affect s air quality or strengthens an emission limitation. The draft rule does not significant ly change the impact of the existing rule and does not directly affect air quality nor c hange any existing emissions limit, and is therefore not subject to the socioeconomic analysis mandate.

Rule Consistency Analysis:

Pursuant to CH&SC Section 40727.2 (g) a rule consistency analysis of the draft rule is not required. Regardless, we have changed reporting schedules originally proposed in this rule to be consistent with similar repor ting requirements for Rule 4320. In addition, we are attempting to eliminate any duplicativ e facility reporting requirements by aligning

this rule with future emissions inventory reporting requirements.

Environmental Assessment:

Pursuant to the California Environmental Qua lity Act (CEQA), staff investigated possible environmental impacts on propos ed amendments to Rule 3170. A proposed negative declaration has been issued by the District and made available for public review and comment. This public review period ended on May 3, 2011, and no negative comments

were received.

Since publication of the pr oposed negative declaration on Ap ril 1, 2011, the proposed rule amendments have undergone some revision. Staff concludes that the proposed

revisions do not constitute a "substantial revision" as defined in CEQA Guidelines section 15073.5(b) and recirculation of the Negative Declaration is not required (CCR §15073.5(c). Thus, upon approval of the pr oposed amendments by the District's Governing Board, District staff will file a Noti ce of Determination with each County Clerk

within the boundaries of the District, indicating the District’s determination that the project will not have a significant e ffect on the environment (CCR §15075(d))

Rule Development Process:

As part of the rule development process, a public workshop was held March 8, 2011 to present the draft rule amendments and seek additional public participation and input regarding legal and technical concerns for incl usion in the rule development process. Staff incorporated comments received dur ing the rule development process as appropriate.

Finally, your board received and filed the draft rule at your April board meeting. The notice of the public hearing for the proposed rule amendments was published in a timelySJVUAPCD Governing Board

ADOPT PROPOSED AMENDMENTS TO RU LE 3170 (FEDERALLY MANDATED OZONE NONATTAINMENT FEE) May 19, 2011

7 manner in general circulation newspapers in each of the eight San Joaquin Valley counties, and was made available for review on the District website. The public notice

solicited written comments to be submi tted, and identified the name and telephone

numbers of the District staff who can answer questions and respond to comments. No comments have been received subsequent to the April board meeting.

FISCAL IMPACT :

This action does not significantly impact the amount of fees to be generated by this rule, as the changes do not impact the facilities a ffected, nor do they significantly change the

units that are exem pted from the fees.

The fee-equivalent program, in total, will requi re significant staffing resources for the

collection and administration of the revenues generated. However, to minimize these administrative costs, the Dis trict will utilize and leverage existing permitting and grant programs. With this approach, it is anticipated that the bulk of additional administrative work can be absorbed by the existing staff. A dditional staffing, if needed, will be subject to Board approval in future budgeting actions.

Attachments: Attachment A: Proposed Rule 3170 (8 pages) Attachment B: Resolution for Proposed Amendments to Rule 3170 (5 pages) Attachment C: Initial Study and Negative Decl aration for Proposed Amendments to Rule 3170 (28 pages)

Attachment D: Final Staff Re port for Rule 3170 (133 pages)
Appendices to Final Staff Report:
A – EPA’s Final Rule partially approving a nd partially disapproving District Rule 3170 B – EPA’s “Guidance on Developing Fee Pr ograms Required by CAA Section 185...”
C – District Staff’s Report, October 21, 2010
D – District’s ARB Findings Request and Signed Board Resolu tion, October 21, 2010 E – Assembly Bill 2522
F – ARB’s Executive Order G-10-126, making findings required by AB 2522
G – ARB’s request to the California Department of Motor Vehicles
H – District’s Response to Comment s on the 3/8/11 version of Rule 3170 I – Sample Facility Fee Calculation Worksheet