ffiu South Coast

N?il Air Quality Management District

21865 Copley Drive, Diamond Bar, CA 91765-417a

(9O9) 396-2,O00' www.aqmd.gov

BOARD MEETING 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 Source Review for RECLAIM.

Barry R. Wallerstein, D.Env.

Executive Officer

LT:JC:GQ:KO

Amend Rule 2005 - New Source Review for RECLAIM

To offset emissions from a new or modified unit. Rule 2005

requires a RECLAIM facility to hold sufficient RECLAIM Trading

Credits (RTCs) at the beginning of each year the unit is in

operation. These RTC holding requirements may provide a

disadvantage to mod errization, 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 applicable compliance period. 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, Reviewed
Introduction

New Source Review (NSR) requirements for RECLAIM pollutants at RECLAIM

facilities are set forth 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 each subsequentyear 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 even though total

emissions continue to decrease. Thus, these facilities must hold RTCs before each

operating year, in addition to at the end of each quarter or compliance year, as for other

RTC requirements. These RTC holding requirements may provide a disadvantage to

modernization, thus delaying emission reductions. The current proposal is to eliminate

the requirement for existing facilities to hold RTCs in advance of the second and

subsequent years. A11 emissions will still be required to be offset by RTCs. All new

facilities' are still subject to this holding requirement.

The "Governing Board's Helping Hand Initiative for 2009" was introduced by 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 economic downturn 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 has worked with U. S. EPA and CARB to arrive at this

proposal. In addition, an operator of 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 modernize equipment at its facilities. This is because equipment

replacement is considered a new source under U. S. EPA's NSR program. As a result,

this operator is delaying some modernization projects. It is also anticipated that the

holding requirement, if continued in its current form, will present a structural problem

for the program in the future. As time goes on, existing equipment will have to be

eventually replaced with new units simply due to wear and tear. Emissions from all new

equipment are 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 emission goal. The

proposed amendment is designed to address this concern while maintaining the

compliance requirements at the end of a compliance year. This board letter seryes as the

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 Operate issued prior to

October 15, 1993, and continued to be in operation or possess valid District permits on October 15,1993."

2 A new facility, as defined in Rule 2000(cX51), is "any facility which has received all Disrict Permits to

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 equivalent to the federal and state NSR program requirements. Rule 2005 provides

three separate requirements to meet the NSR programmatic equivalency: 1. Sources

causing emission increases must be equipped with Best Available Control Technology

(BACT), 2. Modeling must be used to demonstrate that operation of the source will not

result in a significant increase in the air quality concentration of nitrogen dioxide (NOz)

if the facility total emissions exceedits 1994 starting Allocations plus non-tradable

credits, and 3. The facility must hold sufficient RTCs to offset emission increases for

one year prior to coflrmencement of operation and at the beginning of every compliance

year thereafter. These requirements are triggered in cases where a facility incurs an

emission increase as defined under Rule 2005(d) - Emission Increase. The evaluation

of emission increases 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 does not have any prior emissionso even in cases where

the new device is replacing an older, dirtier device.

Among these requirements, the credit holding requirement ensures that the facility has

adequate credits to offset emission increases year-by-year. It does not directly require

emission decreases. On the other hand, all RECLAIM facilities are required to reconcile

their Allocations to their emissions (i.e. hold enough RTCs to cover their emissions) by

the end of each quarter and each compliance year pursuant to Rule 2004 -

Requirements. Therefore, under RECLAIM, all facilities are required to have credits to

offset all RECLAIM emissions regardless if they are subject to the requirements of Rule

2005.

Under the current rule, an existing facility is subject to credit holding requirements for

both the first year of operation [Rule 2005(c)(2)] and at the beginning of each

compliance year thereafter lRule 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 starting Allocations plus non-ffadable credits which defines the

historical baseline emission level. A new RECLAIM facility is subject to both

requirements at the same time whenever it experiences emission increases because a

new facility starts out with no starting Allocations. This is true even when it replaces an

older device with a newer one. If the new emission level 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 impacted by replacing existing

equipment with less emitting equipment. However, it is not the case for an existing

facility. If it replaces older equipment with newer and less polluting equipment, it has to

start holding credits to offset those emission increases, even if its facility-wide total
emissions are still lower than both the emissions preceding the replacement and the level

of its starting Allocations plus non-tradable credits.

Under RECLAIM, RTCs serve dual purposes - they can be used to satisfy credit holding

requirements at the beginning of a compliance year and to reconcile emissions at the end

of a quarter and at the end of a compliance year. RECLAIM effects emission reductions

by decreasing Allocations (i.e., the amount of available RTCs) year-by-year. As the

amount of Allocations decrease, fewer RTCs are available to satisfy holding

requirements. In the past, many existing facilities that were subject to this RTC hold

requirement have been able to satisfy the requirements with their Allocations. However,

these Allocations are being decreased to a point that some of these facilities may have to

start purchasing additional RTCs to satisfy the holding requirements.

The amount of RTCs to be held by an existing facility must be at least equal to 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 year to 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

implemented at 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 generally decrease as the RTCs approach their expiration dates and

also as excess RTCs are released at a compliance year's end. The high prices related to

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 emission decreases.

Eventually, all RECLAIM facilities are negatively impacted by the requirement to hold

such offsets at the commencement of each compliance year because of the artificially

high RTC demand based on maximum potential to emit and the resultant higher RTC

prices.

Under existing rules, a facility subject to the NSR credit holding requirement may apply

for conditions that limit quarterly emissions. In those cases, the facility still has to hold

enough RTCs for the annual amount at the start of each compliance year, but may sell

excess RTCs for a quarter at the end of that quarter. This ability to sell excess RTCs at

the end of a quarter instead of the end of the year only minimizes the cost difference but

does not address the overall problem of RTC availability.
Proposed Amendments

The proposed amendments seek to change only the credit hold requirement for an

existing RECLAIM facility, provided its emission level stays below the level of its

starting Allocations plus non-tradable credits. The proposed amendments, 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 facility emission level remains below its starting Allocations plus nontradable credits. The offset requirements for new RECLAIM facilities will remain

unchanged. A new facility will have to hold adequate RTCs equal to the amount of

emission increases at the beginning of each compliance year. Any excess RTCs cannot

be sold until the end of the compliance year, or the applicable quarters if the facility has

permit conditions to cap its emissions during each quarter, thus allowing sale of 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 intends to take the following steps to update

RECLAIM Facility Permits for impacted existing facilities. First, all RECLAIM

facilities have been sent notices of the pending proposed rule amendment. In addition to

informing RECLAIM facilities of the proposal, the notice also states AQMD's intention

to update permit conditions that are impacted by rule amendment as adopted by the

Board. Such notice was issued at least 30 days prior 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 conditions to 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 application to request the appropriate changes, AQMD will update the

permit conditions upon annual renewal of RECLAIM permits once the amendments

have been approved into the SIP.

The proposed amendment, if adopted, will alleviate the disincentive to replace older,

more polluting equipment with newer, cleaner equipment at existing facilities. The

remaining two requirements (i.e., BACT and modeling) will not be changed. All

RECLAIM facilities are required to reconcile their Allocations to their emissions (i.e.

hold enough RTCs to cover their emissions) by the end of each quarter and each

compliance year pursuant to Rule 2004. No change to this requirement is proposed.

Existing facilities will continue be subject to the emission reduction 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 subject to CEQA. The SCAQMD has determined that it can be

seen with certainty that 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) - Review for Exemption (General Rule Exemption).

Furthermore, the proposed amendments are categorically exempt because they are

considered actions to protect or enhance the environment pursuant 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 Bernardino counties.

Socioeconomic Assessment

The proposed amendments to Rule 2005 - New Source Review for RECLAIM would

remove the requirement for existing facilities to hold RTCs from new or modified

equipment at the beginning of the second compliance year and thereafter. Avoiding the

need to purchase and hold excess RTCs that are not needed to cover actual emissions at

the end of a compliance year could free up funds to modernize existing equipment.

Equipment modernization is one essential part to achieving RECLAIM emission goals.

Any emission reduction in excess of a facility's emission goal translates to surplus RTCs

that can be sold, thus providing further incentive to maximize and to speed up emission

reduction projects. Removing the RTC holding requirements beyond the 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 Public Workshop was held on March 3,2OlI.

Implementation Plan

The proposed amendments are administrative in 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 940727 requires that 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 exists to amend Rule 2005 - New Source Review for RECLAIM to clarify the

RTC holding requirements for existing facilities. Existing facilities will no longer be

required to hold RTCs in advance of second and subsequent years to offset emissions

from new or modified pieces of equipment.

Authority

The AQMD Governing Board has authority to amend existing 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 displayed so that its meaning can 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 state or federal regulations.

Non-Duplication

The proposed amended rule will not impose the 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 adopting the 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) requires the AQMD Governing Board to ratify

findings that, relative to the subsumed rules and control measures, RECLAIM (1)

achieves equivalent or greater emission reductions at equivalent or less cost, (2) has

comparable enforcement and monitoring, (3) does not delay attaining California ambient

air quality standards, (4) allows the use of emissions reduction from other sources such
r-Fs* South Coast

Ht Air Quality Management District

21865 Copley Drive, 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:

Pursuant to 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 proposed project pursuant to CEQA Guidelines $15002 (k)(1),

the^S{ {ep_gf qtlteq-tlqp process for deciding which document to prepare for a project subject

to CEQA. The SCAQMD has determined that that it can be seen withiertainty 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 enhance the environment pursuant Io CEQA

Guidelines $15308 - Class 8 Categorical Exemption

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) 396-3492 to answer

any questions regarding the 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

T4
To: County Clerks

Counties of Los Angeles, Orange,

Riverside and San Bernardino

NOTICE OF EXEMPTION

From: South Coast Air Quality Management District

21865 Copley Drive

Diamond Bar. CA 91765

Project Title:

Proposed Amended Rule 2005 - 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 Desert Air 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 requirement for an existing RECLAIM facility, provided its

emission level stays below the level of its starting Allocations plus non-tradable credits. The

proposed amendment, 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 Coast Air Quality Management District

Agency Carrying Out Project:

South Coast Air Quality Management District

Exempt Status:

Three-Step Process: CEQA Guidelines $ 15002(kX1)

General Rule Exemption: CEQA Guidelines $15061(bX3)

Class 8 Categorical Exemption: CEQA Guidelines $15308

Reasons why project is exempt:

The project was reviewed and staff has determined that it can be seen with certainty that 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) - Review for Exemption (General Rule

Exemption). Furthermore, the proposed amendments are categorically exempt because they are

considered actions to protect or enhance the environment pursuant to CEQA Guidelines $15308 -

Class 8 Categorical Exemption.

Certification Date:

SCAQMD Governing Board Hearing: June 3, 201I,9:00 a.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 i gne d U p on C e rtification )

Steve Smith, Ph.D., Program Supervisor

Planning, Rule Development & Area

Sources

15