# ffiu South

Coast N?il Air Quality Management District

21865 Copley Drive, Diamond Bar,CA 91765-417a (9O9) 396-2,O00' www.aqmd.gov



### BOARDMEETING

DATE: June

3. 2011 AGENDA NO. 25

PROPOSAL:

SYNOPSIS:



### COMMITTEE:

RECOMMENDED ACTION: Adopt the attached

resolution: 1. Certifying the Notice of Exemption for Proposed Amended Rule 2005 - New Source Review for RECLAIM: and.

2. Amending Rule 2005 - New SourceReview for RECLAIM.



### Barry R. Wallerstein,

D.Env. Executive

Officer LT:JC:GQ:KO Amend Rule 2005 - New SourceReview for RECLAIM

To offset emissions

from a new or modified unit. Rule 2005 requiresa RECLAIM facility to hold sufficient RECLAIM Trading Credits (RTCs) at the beginning of each year the unit is in operation. TheseRTC holding requirements may provide a disadvantage

to moderrization, potentially delaying emission reductions. The current proposal is to eliminate the requirement for existing facilities to hold RTCs in advance of second

and subsequent

years. All emissions

will still be offset by RTCs at the end of the applicablecomplianceperiod. This action is to adopt the resolution: 1) Certifying the Notice of Exemption for Proposed Amended

Rule 2005; and2) Amending Rule 2005.
Stationary

Source, January 21,20L1, ReviewedIntroduction

New SourceReview (NSR) requirements for RECLAIM pollutants at RECLAIM facilities are setforth in Rule 2005. One such requirement for existing facilitiesl is that they obtain sufficient RECLAIM Trading Credits (RTCs) to offset their NSR emissions for a year prior to beginning operation. They must also provide sufficient RTCs in advance of eachsubsequentyear to offset that year's operations.

Over time, more and more existing facilities are likely to want to install newer, more modern equipment,

which subjects

them to NSR requirements eventhough total emissions

continueto decrease.

Thus, these

facilities must hold RTCs before each operating

year, in addition to at the end of eachquarteror compliance year, asfor other RTC requirements. TheseRTC holding requirements may provide a disadvantage to modernization,

thus delaying emissionreductions. The current proposalis to eliminate the requirement

for existing facilities to hold RTCs in advance of the second

and subsequent

years. A11

emissions

will still be requiredto be offset by RTCs. All new facilities' are still subject to this holding requirement.

The "Governing Board's Helping Hand Initiative for 2009" was introducedby Chairman William Burke and supplemented by other Governing Board members at the January

9, 2009 Board meeting.This initiative was intended to provide a "helping hand" to stakeholders

during the economicdownturn while the District was working towards its clean air goals. One part of the "Helping Hand Initiative" directed staff to explore limiting the requirement for upfront purchases

of RTCs for new equipment to the first year of operation. Staff hasworked with U. S. EPA and CARB to arrive at this proposal. In addition, an operatorof existing facilities has contacted staff and indicated that the current credit holding requirement under Rule 2005 is presenting an added

cost to its plan to modernizeequipmentat its facilities. This is because equipment replacement

is considered

a new source

underU. S. EPA's NSR program. As a result, this operatoris delaying somemodernization projects. It is also anticipated that the holding requirement,

if continuedin its currentform, will present a structuralproblem for the program in the future. As time goeson, existing equipment will haveto be eventually replaced

with new units simply due to wear and tear. Emissions from all new equipmentare subject

to this holding requirement, even when it replaces

existing, higher-emitting equipment. Programmatically, there may not be adequate RTCs to meet the cumulative hold requirement simply due to the declining emissiongoal. The proposed

amendment

is designed

to address

this concernwhile maintaining the compliancerequirements at the end of a compliance year. This board letter seryes asthe staff report for Proposed Amended Rule 2005.

1 An existing facility, as defined in Rule 2000(c)(35), is "any facility that submitted Emission Fee Reports pursuant to Rule 301 - Permit Fees, for 1992 or earlier years,or with valid District Permits to Operateissuedprior to October 15, 1993,and continuedto be in operation or possess valid District permits on October 15,1993." 2A new facility, as defined in Rule 2000(cX51), is "any facility which has received all Disrict Permitsto Construct on or after October 15. 1993."Background

Rule 2005 sets

forth requirements

for new or modified equipment or processes

at RECLAIM facilities. The purpose of the rule is to ensure

that the RECLAIM program is equivalentto the federal and stateNSR program requirements. Rule 2005 provides three separate

requirements

to meet the NSR programmaticequivalency: 1. Sources causingemissionincreases must be equipped

with Best Available Control Technology (BACT), 2. Modeling must be usedto demonstrate that operationof the source will not result in a significant increase in the air quality concentration of nitrogen dioxide (NOz) if the facility total emissions exceedits 1994starting Allocations plus non-tradable credits, and 3. The facility must hold sufficient RTCs to offset emissionincreases for
one year prior to coflrmencement of operationand at the beginning of every compliance year thereafter. Theserequirements are triggered in cases

where a facility incurs an emissionincrease

as defined under Rule 2005(d) - Emission Increase. The evaluation of emissionincreases

under this paragraph

is defined on a device-by-device basis. Any time a new NOx- or SOx-emitting RECLAIM device is installed, it triggers the credit holding requirements

because it doesnot have any prior emissionso even in cases

where the new device is replacing an older, dirtier device.
Among theserequirements, the credit holding requirementensures that the facility has adequate

creditsto offset emissionincreases year-by-year. It doesnot directly require emissiondecreases.

On the other hand, all RECLAIM facilities are requiredto reconcile their Allocations to their emissions (i.e. hold enough RTCs to cover their emissions) by the end of eachquarterand eachcompliance year pursuant

to Rule 2004

- Requirements.Therefore,under RECLAIM, all facilities are requiredto have credits to offset all RECLAIM emissions regardless

if they are subjectto the requirements of Rule 2005.

Under the current rule, an existing facility is subjectto credit holding requirements for both the first year of operation [Rule 2005(c)(2)] and at the beginning of each compliance

year thereafterlRule 2005(0 - Offsets] if it incurs an "emission increase" from the installation of new or modified equipment. An existing facility is also subject to credit holding requirements under subparagraph

(c)(a)@) if the facility emissions exceed the level of its startingAllocations plus non-ffadable credits which definesthe historical baseline

emissionlevel. A new RECLAIM facility is subjectto both requirements

at the same

time wheneverit experiences emissionincreases

because a new facility starts

out with no startingAllocations. This is true evenwhen it replaces an older device with a newer one. If the new emissionlevel is lower, then the amount of credit required to be held will be lower than the amount required prior to the replacement. Therefore,new facilities are not adversely impactedby replacing existing equipmentwith lessemitting equipment. However, it is not the case for an existing facility. If it replaces

older equipment

with newer and lesspolluting equipment,it has to start holding creditsto offset thoseemissionincreases, even if its facility-wide totalemissions are still lower than both the emissions precedingthe replacement and the level of its startingAllocations plus non-tradable credits.

Under RECLAIM, RTCs servedual purposes - they can be usedto satisfy credit holding requirements

at the beginning of a complianceyear and to reconcile emissions at the end of a quarterand at the end of a complianceyear. RECLAIM effects emissionreductions by decreasing

Allocations (i.e., the amountof available RTCs) year-by-year. As the amountof Allocations decrease, fewer RTCs are availableto satisfy holding requirements. In the past, many existing facilities that were subjectto this RTC hold requirement

have beenable to satisfy the requirements with their Allocations. However, these Allocations are being decreased to a point that someof these facilities may have to start purchasing

additional RTCs to satisfy the holding requirements.

The amountof RTCs to be held by an existing facility must be at leastequalto the increase in the maximum daily potential to emit from new or modified sources. Most of the time, however,facilities do not emit at their maximum permitted level on a daily basis. As a result, an artificially high demand of RTCs is created

at the beginning of a compliance

yearto meet the holding requirements, leaving facilities with excess RTCs at the end of the year that they do not need. As more and more modernizing plans are implementedat existing facilities, the aggregate quantity of RTC holdings required grows even as overall program emissions decline with time.

In addition, the high demand at the beginning of a compliance year causes

credit prices to rise. This creates

an upfront cost to facilities that is generally not fully recouped because RTC prices generallydecrease asthe RTCs approach

their expiration dates

and also as excess

RTCs are released

at a compliance

year's end. The high prices relatedto RTCs held at the beginning of the year,in turn, may cause existing facilities to delay or
even abandon

their modernizing plans,thus slowing down actual emissiondecreases. Eventually, all RECLAIM facilities are negatively impactedby the requirement to hold such offsets at the commencement of eachcompliance

year because

of the artificially high RTC demand

based on maximum potential to emit and the resultanthigher RTC prices.

Under existing rules, a facility subjectto the NSR credit holding requirement may apply for conditions that limit quarterly emissions. In thosecases, the facility still hasto hold enough RTCs for the annualamount at the start of eachcompliance year, but may sell
excess RTCs for a quarterat the end of that quarter. This ability to sell excess RTCs at the end of a quarterinsteadof the end of the year only minimizes the cost difference but doesnot address

the overall problem of RTC availability.Proposed Amendments

The proposed

amendments

seekto change

only the credit hold requirement for an existing RECLAIM facility, provided its emissionlevel stays below the level of its startingAllocations plus non-tradable credits. The proposed

amendments,

if adopted, will require an existing RECLAIM facility to hold adequate RTCs for the first year of operationprior to commencement of operationof a new or modified source, but will not require the facility to hold RTCs at the commencement of subsequent

compliance

years, provided that the facility emissionlevel remainsbelow its startingAllocations plus nontradablecredits. The offset requirements for new RECLAIM facilities will remain unchanged. A new facility will have to hold adequate RTCs equalto the amountof emissionincreases

at the beginning of eachcompliance year. Any excess

RTCs cannot be sold until the end of the compliance year, or the applicablequarters if the facility has permit conditionsto cap its emissions during eachquarter,thus allowing saleof unused RTCs at the end of the quarter.
Assuming that the rule amendment is adopted

by the AQMD Governing Board as proposed

and for planning pu{poses, staff intendsto take the following steps to update RECLAIM Facility Permitsfor impactedexisting facilities. First, all RECLAIM facilities have beensent noticesof the pending proposed rule amendment. In addition to informing RECLAIM facilities of the proposal,the notice also states AQMD's intention to updatepermit conditions that areimpacted by rule amendment as adopted

by the Board. Such notice was issuedat least 30 daysprior to the hearing date. RECLAIM Facility Permits are subject to renewal on either January 1 for Cycle 1 facilities or July 1 for Cycle 2 facilities. Upon adoption of the proposed amendments,

AQMD will submit the amendments

to CARB and U. S. EPA for approval into the California State Implementation Plan (SIP) and commence review of permits for all RECLAIM facilities to determine

what, if any, changes

are necessary

to the permit conditionsto reflect the requirements

in the proposed

amendments.RECLAIM facilities can file an application to request

the appropriate

changes in their permit conditions. AQMD will not approve such applications

until the amendments

have been approved

into the SIP. For facilities that do not file an applicationto request the appropriate

changes, AQMD will update

the permit conditions upon annualrenewal of RECLAIM permits oncethe amendments have beenapproved

into the SIP.

The proposed

amendment,

if adopted,

will alleviate the disincentiveto replaceolder,
more polluting equipment with newer, cleanerequipmentat existing facilities. The remaining two requirements (i.e., BACT and modeling) will not be changed. All RECLAIM facilities are requiredto reconcile their Allocations to their emissions (i.e. hold enough RTCs to cover their emissions) by the end of eachquarterand each compliance

year pursuant

to Rule 2004. No change to this requirement

is proposed. Existing facilities will continue be subjectto the emissionreduction goals set under RECLAIM.Potential Impacts

California Environmental Quality Act (CEQA) SCAQMD staff has reviewed the proposed project pursuant

to CEQA Guidelines $15002 (k)(1), the first step

of a three-step

process for deciding

which document

to prepare for a project subjectto CEQA. The SCAQMD has determined that it can be
seen with certaintythat there is no possibility that the proposed project may have any
new significant effects on the environment, and is therefore,exempt pursuant to CEQA Guidelines

$15061(bX3)

- Reviewfor Exemption(General Rule Exemption). Furthermore,

the proposed

amendments

are categoricallyexempt because they are considered

actionsto protect or enhance the environmentpursuant to CEQA Guidelines $15308 - Class 8 Categorical

Exemption.

A Notice of Exemption has been prepared pursuant to CEQA Guidelines$15062

- Notice of Exemption. If approved, the Notice of Exemption will be filed with the county clerks of Los Angeles, Orange,Riverside and San Bernardinocounties.

Socioeconomic

Assessment The proposed

amendments

to Rule 2005 - New SourceReview for RECLAIM would
remove the requirement for existing facilities to hold RTCs from new or modified equipmentat the beginning of the second compliance

year and thereafter. Avoiding the needto purchase

and hold excess

RTCs that are not needed to cover actualemissions at the end of a compliance year could free up funds to modernizeexisting equipment. Equipment modernizationis one essential part to achieving RECLAIM emission goals. Any emissionreduction in excess of a facility's emissiongoal translates to surplusRTCs that can be sold, thus providing further incentive to maximize andto speed up emission reduction projects. Removing the RTC holding requirements beyondthe first year for existing RECLAIM facilities would lower the burden on facility operators as well as increase market fluidity.

Overall, the proposed

amendments

as a whole would not result in any adverse cost or other socioeconomic

impacts.

Public Process A PublicWorkshop

was held on March 3,2OlI.

Implementation Plan The proposed

amendments

are administrativein nature and remove the requirement for existing facilities to hold RTC's in advance of second

and subsequent

years to offset emissions

from the installation of new or modified units. Existing AQMD resources will be adequate

to implement the amended rule.Draft Findings under California Health and Safety (H&S) Code

California H&S Code 940727requiresthat prior to adopting,amending or repealing a rule or regulation,the AQMD Governing Board shall make findings of necessity, authority, clarrty,consistency, non-duplication,and reference based on relevant information presented

at the public hearing and in the board letter.
Necessity A need existsto amendRule 2005 - New SourceReview for RECLAIM to clarify the RTC holding requirements for existing facilities. Existing facilities will no longer be requiredto hold RTCs in advance of second

and subsequent

yearsto offset emissions from new or modified piecesof equipment.
Authority The AQMD Governing Board has authority to amendexisting Rule 2005 pursuant to California H&S Code S$39002,39616,40000, 40001, 40440,40440.1, and 40702.
Clarity The proposed

amended

rule is written or displayedso that its meaningcan be easily understood

by the persons

directly affected by it.

Consistencv The proposed

amended

rule is in harmony with and not in conflict with or contradictory to, existing statutes,

court decisions

or stateor federal regulations.

Non-Duplication The proposed

amended

rule will not imposethe same requirements

as any existing state
or federal regulations. The amendments are necessary

and proper to execute

the powers and duties granted

to, and imposed upon, AQMD.

Reference By adoptingthe proposed amended

rule, the AQMD Governing Board will be implementing, interpreting and making specific the provisions of the California H&S Code$$ 39002,

39616,40001,

40440 (a),40440.I,40702,

and Title 42U. S. C. Section 7410.

Requirement to Make Findings Pursuant to California Health & Safety Code Section 39616 California H&S Code $ 39616(e)requiresthe AQMD Governing Board to ratify findings that, relative to the subsumed rules and control measures, RECLAIM (1) achieves equivalentor greater

emissionreductionsat equivalentor lesscost, (2) has comparable

enforcement

and monitoring, (3) doesnot delay attaining California ambient air quality standards,

(4) allows the use of emissions reduction from other sources suchr- 

# Fs* South Coast Ht Air Quality ManagementDistrict

21865 CopleyDrive,Diamoncl Bar, CA 91765-417a (9O9) 396-2O00

. www.aqmcl.gov



### ATTACHMENT G

NOTICE OF EXEMPTION FROM THE CALIFORNIA ENVIRONMENTAL QUALITY ACT
PROPOSED

AMENDED RULE 2005. NEW SOURCE REVIEW FOR RECLAIM STJBJECT:

PROJECT TITLE:

Pursuantto the California Environmental Quality Act (CEQA) Guidelines, the South Coast Air Quality Management District (SCAQMD) is the Lead Agency and has prepared a Notice of Exemption for the project identified above.

The SCAQMD has reviewed the proposedproject pursuant to CEQA Guidelines $15002 (k)(1), the^S{ {ep_gf qtlteq-tlqp process for deciding which documentto prepare for a project subject to CEQA. The SCAQMD has determinedthat that it can be seenwithiertainty that there is no possibility that the proposed project may have any new significant effects on lhe environment, and is therefore, exempt pursuant to CEQA Guidelines $15061(bX3) - Review for Exemption (General Rule Exempli_on). Furthermore, the proposed amendments are categorically ex^empt bJ".uyqg they are considered actions to protect or enhancethe environment pursuant Io CEQA Guidelines $15308- Class 8 CategoricalExemption

A Notice of Exemption has been prepared pursuant to CEQA Guidelines $15062 - Notice of Exem_ption. If approved, the Notice of Exemption will be filed with the county clerks of Los Angeles, Orange,Riverside and San Bernardino counties.
Any questions regarding this Notice of Exemption should be sent to Barbara Radlein (c/o Planning, Rule Development and Area Sources)at the above address. Ms. Radlein can also be reached at (909) 396-2716. Mr. Kevin Orellana is also available at (909) 396-3492to answer any questions

regardingthe proposed amended

rule.

Date: April8.2011 Signature: 

### ser"< Sryrr;tl.1

Steve Smith, Ph.D. Program Supervisor Planning, Rule Development & Area Sources

Reference: California Code of Resulations.Title 14



### T4To: County Clerks Counties of Los Angeles,

Orange, Riverside

andSan Bernardino

NOTICE OF EXEMPTION

From: South

Coast Air QualityManagement District 21865 Copley Drive Diamond Bar. CA 91765 Project Title: Proposed Amended

Rule2005

- New Source

Review For RECLAIM Project Location: South Coast Air Quality Management District: the four-county South Coast Air Basin (Orange County and the non-desert portions of Los Angeles, Riverside, and San Bernardino counties) and the Riverside County portion of the Mojave DesertAir Basin. Description of Nature, Purpose, and Beneficiaries of Project: The proposed amendments to Rule 2005 - New Source Review For RECLAIM, will change the RECLAIM Trading Credit (RTC) hold requirementfor an existing RECLAIM facility, provided its emission level stays below the level of its starting Allocations plus non-tradable credits. The proposedamendment, if adopted,

will require an existing RECLAIM facility to hold adequate RTCs for the first year of operation prior to commencement of operation of a new or modified source,but will not require the facility to hold RTCs at the commencement of subsequent

compliance years, provided that the facihty emission level remains below its starting Allocations plus non-tradable credits. The offset requirements for new RECLAIM facilities will remain unchanged.
Public Agency Approving Project: South CoastAir Quality Management District AgencyCarrying Out Project:

South Coast Air QualityManagement District Exempt Status: Three-Step

Process: CEQAGuidelines

$15002(kX1) General RuleExemption:

CEQA Guidelines

$15061(bX3) Class 8 Categorical

Exemption:

CEQAGuidelines

$15308
Reasons

why project is exempt: The project was reviewed and staff has determined that it can be seenwith certainty that there is no possibility that the proposedproject may have any new significant effects on the environment, and is therefore,exempt pursuantto CEQA Guidelines $15061(bX3)- Review for Exemption (GeneralRule Exemption). Furthermore, the proposed amendmentsare categorically exempt becausethey are consideredactions to protect or enhance the environment pursuant to CEQA Guidelines $15308
- Class 8 CategoricalExemption. Certification Date: SCAQMD

Governing

Board Hearing: June

3, 201I,9:00a.m.;

SCAQMD

Headquarters
CEQA Contact Person: Ms. Barbara Radlein Phone Number: (909)396-2716
RuIe Contact Person: Mr. Kevin Orellana Phone Number: (909)396-3492
Date Received

for Filing: Signature: (S igne d U p on C e rtification ) SteveSmith, Ph.D., Program Supervisor Planning, Rule Development& Area Sources



### 15