### SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT

Proposed SCAQMD NSR Offset Tracking System

October 14, 2005

Prepared by:

Peter Greenwald, JD Senior Policy Advisor

Mohsen Nazemi, PE Assistant Deputy Executive Officer Engineering and Compliance

Mitch Haimov, M.S. Senior Air Quality Engineer Engineering and Compliance

IN CONSULTATION WITH:
BARBARA BAIRD – PRINCIPAL DEPUTY DISTRICT COUNSEL ELAINE CHANG, Dr.PH – DEPUTY EXECUTIVE OFFICER, PLAN NING, RULE DEVELOPMENT, AND AREA
SOURCES WILLIAM THOMPSON, PE – SENIOR MANAGER, ENGINEERING A ND COMPLIANCE GARY L. TURNER, PE – AIR QUALITY ANALYSIS AND COMPLI ANCE SUPERVISOR, ENGINEERING AND
COMPLIANCECONTENTS

Background 1 Proposal Summary 2 SOURCES OF CREDITS 4 Technical Support Document 5 Pre-1990 Credits 6 Existing Pre-1990 Accounting 8 Proposed Pre-1990 Accounting 9 1990-2004 Credits 12 Existing 1990-2004 Accounting 12 Proposed 1990-2004 Accounting 12 Post-2004 Credits 15 Existing Post-2004 Accounting 15 Proposed Post-2004 Accounting 15 Summary 19 USE OF CREDITS 24 TRACKING AND BACKSTOP 25

ATTACHMENT 1: SCAQMD’S NSR OFFSET TRACKING—FEDERAL

RUNNING BALANCE ATTACHMENT 2: LIST OF SOURCES EXEMPT FROM OFFSET

REQUIREMENTS AND PROVISIONS COVERED BY EQUIVALENCY SHOWING ATTACHMENT 3: REGULATION XIII NEW SOURCE REVIEW GUI DANCE

MANUAL (October 1990) ATTACHMENT 4: EXAMPLES OF AVAILABLE PRE-1990 PERMIT

RECORDS ATTACHMENT 5: AREA SOURCE INVENTORY METHODOLOGY ATTACHMENT 6: STATUS REPORTS ON REGULATION XIII – N EW

SOURCE REVIEW COVERING AUGUST 1999 THROUGH JULY 2002PROPOSED SCAQMD NSR OFFSET TRACKING SYSTEM

BACKGROUND

In general, the Federal and California Clean Air Ac ts require that, among other things, emission increases of non-attainment air pollutants from new and modified major sources be offset with emissions reductions. The SCAQMD ha s implemented an NSR Tracking System to demonstrate adequate emission reductions for sources exempt from emission offsets requirements under Regulation XIII – New So urce Review, which are otherwise subject to offset requirements under federal and st ate NSR programs. SCAQMD staff has prepared annual reports which track credits and debits for each year and present the remaining balances of credits in SCAQMD’s offset ac counts. The NSR tracking reports go back to the year 1990, which reflects the year w hen major amendments were made to SCAQMD’s Regulation XIII. A key source of credits in the tracking system has been “orphan” shutdowns of major sources. Other credit sources have been “negative NSR balances” resulting from permit actions prior to 19 90, and the “BACT discount” currently required by Regulation XIII when banking emission r eduction credits (ERCs).

In 2002 SCAQMD adopted an Offset Budget rule (Rule 1309.2 – Offset Budget) as part of SCAQMD’s NSR program to address some of the shor tage problems with ERCs. As part of the discussions with EPA regarding Rule 130 9.2, EPA has raised some questions related to the credits in SCAQMD’s offset accounts for use in the Offset Budget rule. Among the key issues raised by EPA are the followin g:

• creditability of pre-1990 emission reductions, part icularly reductions for which no records are currently available;

• creditability of reductions resulting from the BACT discount of newly-banked ERCs, since the discount is presumably also used to satisfy the federal “surplus at time of use” requirement;

• baseline calculation procedures to assure an “actua l” baseline;

• surplus adjustment at time of use of credits in the tracking system; and

• consistency of credit use with assumptions in the S IP.

EPA staff has stated that these issues must be reso lved in order for the federal agency to approve amendments to Regulation XIII as a result o f adoption of Rule 1309.2, which establishes an “Offset Budget.” EPA staff has also requested that SCAQMD adopt a rule specifying how the tracking of debits and credits w ill occur in the future. The purpose of this document is to address issues raised by EPA wi th SCAQMD’s offset account credits and to propose an NSR offset tracking system to be used for the tracking of all future credits. Based on this, SCAQMD will then develop a new rule for tracking of NSR debits and credits and submit it to EPA so that EPA can SIP approve this rule along with Rule 1309.2 – Offset Budget.Proposed SCAQMD NSR Offset Tracking System Page 2 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc PROPOSAL SUMMARY

After numerous meetings and conference calls with E PA, SCAQMD staff agreed to review the offset accounts in consideration of EPA’ s comments. Since that time, SCAQMD staff has spent over 6,000 person-hours revi ewing the offset records in the NSR Tracking System. In addition, SCAQMD Executive , senior management and other staff have spent hundreds of hours evaluating offse t accounts and the tracking system. In order to resolve EPA’s comments, SCAQMD staff is pr oposing several modifications to procedures to be used in the tracking system. In t he revised procedures SCAQMD has proposed elimination of all credits for which SCAQM D no longer retains documentation. SCAQMD has also included additional classes of cred its in the tracking system, namely orphan shutdowns of minor sources and other surplus reductions. As a result of these proposed modifications, and even with the inclusion of the minor source orphan shutdowns and other surplus reductions, SCAQMD’s pr eviously-reported 2002 NSR federal offset account balances for all pollutants, except for NOx, will be reduced, depending on the pollutant, by from about 12 % to 7 4 %. Several elements of the proposed revisions to SCAQMD’s tracking system cont ribute to these reductions, as discussed below, but the single element of the prop osal with the greatest contribution is the reevaluation of pre-1990 credits and proposed e limination of all credits for which SCAQMD no longer retains documentation. As a resul t of this proposed change, SCAQMD’s pre-1990 credits will be reduced, dependin g on the pollutant, by from 7 % to 92 %. The specific amounts of reductions for each pollutant for the pre-1990 credit account balance and the 2002 NSR federal offset acc ount balance are shown in Table 1.

Table 1 Reductions in SCAQMD’s Pre-1990 Credit Account and 2002 NSR Federal Offset Account Balances Resulting from Implementation of Proposed Changes to the NSR Track ing System

VOC NOx SOx CO PM10

Reduction in SCAQMD’s Pre1990 Credit Account Balances 58 % 7 % 56 % 76 % 92 %

Reduction in SCAQMD’s 2002 NSR Federal Offset Account Balances 12 % -38 % 33 % 60 % 74 %

The proposed modifications to SCAQMD’s NSR tracking procedure are described in more detail below. Also, the detailed line-by-line adjusted credit balances that result from the proposed modified procedures are shown in Attachment 1: SCAQMD’s NSR Offset Tracking—Federal Running Balance . We anticipate that changes to the SCAQMD’s NSR tracking procedures for all future cre dit accounting will be incorporated into a proposed tracking rule that wil l be subject to a public workshop prior to final adoption.Proposed SCAQMD NSR Offset Tracking System Page 3 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc In summary, the key elements of SCAQMD’s proposal a re as follows:

Sources of Credits. The tracking system uses credits derived from reduc tions not required by federal law. These primarily include “orphan shutdowns,” i .e. real, permanent, enforceable, surplus, and quantifiable emission red uctions resulting from shutdowns of sources for which no ERCs were issued. In addition, these will also include surplus emission reductions otherwise not r equired by the federal NSR program. SCAQMD has in the past only utilized orph an shutdowns of major sources as credits. This in part has been due to t he fact that SCAQMD’s offset account has held a large balance of credits and the re has been no need for additional sources of credits to fund the offset ac count. The current proposal, however, also includes use of credits derived from orphan shutdowns of nonmajor sources for which no ERCs were issued and oth er surplus emission reductions otherwise not required by the federal NS R program in order to better utilize the sources of credits used for SCAQMD’s of fset accounts.

The proposed SCAQMD tracking system is also based o n past use of a portion of the pool of credits which has been validated and ge nerated through emission reductions at permitted stationary sources that occ urred prior to 1990. As is described below, all of the pre-1990 CO and PM10 cr edits and a large portion of VOC and NOx pre-1990 credits were depleted in the m id 1990’s—prior to the time of EPA’s most recent SIP approval of Regulatio n XIII in 1996. As part of this proposal and to address EPA’s comments regardi ng the use of pre-1990 credits, SCAQMD proposes retroactive elimination of all pre-1990 credits for which SCAQMD no longer retains documentation and in addition not to utilize from now on any remaining pre-1990 credits.

Another source of credits used by SCAQMD in the pas t has been the BACT discount of the post-1990 ERCs issued by SCAQMD. A s part of this new proposal, and specifically to address EPA’s comment s, SCAQMD proposes to discontinue deriving credits from the “BACT discoun t” of emission reductions banked as ERCs. This credit was specifically autho rized according to the Technical Support Document for EPA’s approval of Re gulation XIII in 1996. EPA, however, has brought up the point that the BAC T discount is used for another purpose—in lieu of a “surplus at time of us e discount,” and thus should not be used as a tracking system credit.

Furthermore, as part of this proposal and again spe cifically to address EPA’s comments, SCAQMD proposes from now on to further ad just the orphan shutdown credits by reducing their value to address EPA’s comments about actual emissions and to further adjust any orphan shutdown credits not used in the same time frame they are generated via a BARCT adjustmen t at time of use to address EPA’s comments regarding surplus adjustment at time of use.Proposed SCAQMD NSR Offset Tracking System Page 4 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc Use of Credits The above-described credits will be used to fund th e new Offset Budget as adopted by SCAQMD in Rule 1309.2, in addition to th e previous use of credits to provide offsets for sources that are exempt from of fset requirements under Regulation XIII (Rules 1304 – Exemptions and 1309.1 – Priority Reserve), which are otherwise subject to the offset requirements un der federal NSR, as part of the demonstration of equivalence to federal NSR require ments. A complete list of Regulation XIII offset exemption provisions for whi ch credits need to be used to demonstrate equivalency if offsets are required is included in Attachment 2.

Tracking and Backstop SCAQMD proposes to make an annual determination of equivalency pursuant to a tracking rule that it will develop and adopt. SC AQMD will also propose, as part of the tracking rule, backstop provisions to be tri ggered in the event that annual equivalency is not demonstrated. In such an event, the backstop provisions would require SCAQMD to:

• provide additional credits within two years; such c redits could be derived through SCAQMD purchase of credits or through SCAQM D funding of emission reduction projects using quantification pr otocols approved by EPA on a case-by case or programmatic basis; or

• suspend issuance of Offset Budget credits and not r esume the issuance of any such credits until SCAQMD has performed an eval uation of NSR program performance and made modifications, as need ed, to assure the equivalency.

The following is a more detailed description of the proposed changes.

SOURCES OF CREDITS

SCAQMD has described in its annual status reports o n Regulation XIII a 1990 starting balance for federal and state offset accounts based on data available in 1990. While a large portion of pre-1990 credits were used years a go, EPA staff has requested an accounting of the validity of such credits to ensur e that such credits were creditable. To that end, EPA staff has raised questions about the availability of all records relating to the pre-1990 credits. To address the issues raised by EPA, SCAQMD staff spent several thousand staff hours reviewing and evaluating all a vailable data for the pre-1990 credits in its 1990 starting balances. The following is a description of sources of credits in SCAQMD’s tracking system organized by time period o f credit generation including: pre 1990, 1990-2004, and post 2004. This division is d ue to differing provisions of SCAQMD rules applicable to generation of credits in these time periods, and to new tracking system elements proposed for post-2004 cre dits.Proposed SCAQMD NSR Offset Tracking System Page 5 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc Technical Support Document

EPA issued a

Technical Support Document for EPA’s Notice of Fin al Rulemaking for the California State Implementation Plan South Coast Ai r Quality Management District New Source Review (TSD) October 24, 1996 in support of EPA’s approva l of SCAQMD 1996 New Source Review amendments into California’s Stat e Implementation Plan (SIP). The TSD identifies specific sources of emission reducti ons and emission increases that are approved for inclusion in SCAQMD’s tracking system for purposes of demonstrating equivalency between the federal Clean Air Act (CAA) and SCAQMD’s SIP-approved NSR program. The various approved sources of emiss ion decreases (credits) referred to throughout this document are briefly discussed belo w:

 Surplus Reductions Resulting from use of ERCs by Mi nor Sources Rule 1303 – Requirements specifies that minor sourc es must offset their emission increases by surrendering ERCs unless otherwise exe mpt pursuant to Rule 1304 but the CAA does not require emission offsets from mino r sources. Therefore, emission offsets supplied by minor sources in the form of ER Cs represent creditable, surplus reductions. The TSD only specifically identifies t his source of emission reductions/credits for minor VOC sources, but the u nderlying logic applies equally to minor sources of NOx, SOx, CO, and PM10.

 Surplus Reductions Resulting from Orphan Shutdown o f Major and Minor Sources When permitted equipment operating at a major sourc e is shutdown it results in creditable emission reductions. If these reduction s are not used internally by the source or banked as an ERC, they are creditable to SCAQMD’s tracking system. Similarly, when permitted equipment operating at a minor source is shutdown it results in creditable emission reductions. If thes e reductions are not used internally by the source or banked as an ERC, they are credita ble to SCAQMD’s tracking system. Note that the TSD does not differentiate b etween major sources and minor sources with regard to orphan shutdowns, but simply states that “emission reductions obtained from orphaned shutdowns” are creditable (p age 17).

 Zero BACT Threshold Rule 1303 requires that all new and modified source s resulting in an emission increase apply BACT (federal LAER), but the CAA onl y applies this requirement to major sources. Therefore, the emission reductions resulting to applying BACT to minor sources are creditable.

 Discounting Newly-Banked ERCs to BACT Rule 1309 – Emission Reduction Credits and Short Te rm Credits specifies that the amount of emission reductions banked as a new ERC n ot be “greater than the equipment would have achieved if operationg with cu rrent Best Available Control Technology (BACT).” No similar requirement exists in the CAA. Therefore, the amount of any otherwise qualifying emission reducti ons not issued as an ERC due to implementation of this provision are creditable.Proposed SCAQMD NSR Offset Tracking System Page 6 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc Pre-1990 Credits

Pre-1990 Permitting Program

SCAQMD had a robust stationary source permitting pr ogram for both major and minor sources in place well before 1990. Key elements of that program are summarized below:

 Permit Rules Since prior to 1976, the year that SCAQMD adopted i ts initial NSR rules, virtually any construction or modification of a source has re quired the operator to obtain a permit to construct from SCAQMD (Rule 201 – Permit to Construct). The only exceptions to these permit requirements are, and at all times were, specified in SCAQMD Rule 219 – Equipment not Requiring a Written Permit Pursuant to Regulation II, which exempts certain equipment from permit requirements due to minimal potential to affect air quality. With the exception of the specific exemptions in Rule 219, there has never been an exemption from permit requirements for sources emitting even relatively small amounts of air conta minants; that is, all sources with potential to emit or control air contaminants, incl uding all major and non-major sources, have been required to obtain permits when constructed or modified unless specifically exempted by Rule 219.

 New Source Review Rules SCAQMD adopted its initial New Source Review rules in October, 1976 even prior to the adoption of the New Source Review requirements into the CAA. Originally included in Rule 213 – Standards for Permits to Con struct: Air Quality Impact, the NSR rules were moved into a series of rules in Regu lation XIII – New Source Review in 1979. The rules required offsetting of emissions increases that exceeded certain thresholds. The thresholds were decreased over tim e pursuant to rule amendments. For example, for volatile organic compounds and nit rogen oxides, the offset threshold initially was 250 pounds per day, and was reduced b y rule amendments during the 1980’s to 150 pounds per day, 75 pounds per day, 30 pounds VOC per day and 40 pounds NOx per day, and finally down to zero, requi ring no net increase in emissions, unless specifically exempt from offset requirements pursuant to NSR rules.

 NSR Balance Prior to 1990, in order to implement the offset req uirements, SCAQMD kept a running “NSR balance” for each facility with permit ted sources. The NSR balance included an entry for every increase and every decr ease in emissions at the facility that resulted from a permit action. The entries in the NSR balance were maximum allowable emissions, i.e. the maximum amount of emissions th at a source could emit given its physical capabilities and permit limitati ons and rule requirements. However, the NSR balance was initially determined f or each piece of equipment which had not previously undergone NSR analysis (i. e., pre-NSR equipment) from an

1 The Community Bank provides emission offsets to sou rces with potential to emit below identified pollut ant-specific thresholds for applications received on or before D ecember 7, 1995. The Priority Reserve provides emi ssion offsets to certain specified categories of sources, such as essential public services, research operations, an d innovative technologies.Proposed SCAQMD NSR Offset Tracking System Page 7 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc actual emissions baseline for that equipment. Any subseq uent NSR activity for such equipment was conducted on a potential-to-potential basis. Therefore, a pre-NSR source modified under NSR would be subject to NSR o n an actual-to-potential basis (i.e., actual pre-modification emissions to potenti al post-modification emissions)—a very conservative approach.

Prior to 1990, emissions offsets were required when a permit was sought for construction of a new source, or for modification o f an existing source, that would cause the sum of increases and decreases at a facil ity (i.e. the NSR balance) to exceed the pre-1990 offset threshold levels.

NSR balance entries had to be quantifiable and enfo rceable. Such entries only occurred pursuant to permit applications with suffi cient substantiating data to ensure quantifiability, after evaluation by SCAQMD enginee rs and review by multiple supervisory staff pursuant to Regulation XIII rule s and implementing policies established by the agency, and upon issuance of per mits or permit modifications which were enforceable under state law.

SCAQMD applied substantial resources to implementin g these rules. For example, from 1985 through 1989 SCAQMD’s engineering staff w hich processed permits consisted of between 97 and 175 professional engine ers and supervisory and management staff. In sum, at all times including, but not limited to, prior to 1990, SCAQMD has had a robust air quality permitting syst em—a system which we believe was qualitatively superior in terms of quantificati on and reliability to any other NSR permitting system in the nation.

 Compliance with Federal NSR Requirements In addition to being reliable, the above-described pre-1990 SCAQMD NSR rules fully complied with all federal requirements. Inde ed, SCAQMD’s NSR rules were more stringent than required by federal law in the following important respects: (1) offset thresholds were lower than required by feder al law and a 1.2 to 1.0 offset ratio was used for all sources; (2) unlike federal requir ements which allowed “bubbling” or netting out of NSR, SCAQMD’s BACT requirement (equi valent to LAER) applied to any emissions increase from an individual piece of equipment; i.e., there was no netting out of LAER; (3) offset ratios for CO and P M10 were greater than 1 to 1 (i.e., were at 1.2 to 1); (4) offsets were required for SO x at a ratio of 1.2 to 1 after SCAQMD reached attainment with SO 2 NAAQS, even though EPA had not determined SOx to be a precursor to PM10; and (5) S CAQMD had a zero BACT threshold; and (6) the fact that the NSR balance wa s initially based upon an actual emissions baseline ensured that any increase in pot ential emissions that exceeded the actual emissions baseline resulted in total potenti al emissions in excess of the offset threshold amount (which, again, was more restrictiv e than federally-required) would be subject to NSR requirements. Additionally, EPA SIP-approved SCAQMD’s Rule 201 as amended January 5, 1990, and SCAQMD’s NSR ru les as adopted or amended on the dates identified in Table 2.Proposed SCAQMD NSR Offset Tracking System Page 8 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc Table 2 SIP-Approved Revisions of SCAQMD’s NSR Rules

Rule SCAQMD Adoption Date(s) 213 10/8/1976 (Rescinded by SCAQMD 6/28/1990) 1300 (Rescinded by SCAQMD 6/28/1990) 1301 12/7/1995 1302 12/7/1995, 6/13/1997 1303 5/10/1996 1304 6/14/1996 1305 4/6/1984 (Rescinded by SCAQMD 6/28/1990) 1306 6/14/1996 1307 (Rescinded by SCAQMD 6/28/1990) 1308 10/5/1979 or 3/7/1980 or

4/4/1980 or

7/11/1980 (Rescinded by SCAQMD 6/28/1990) 1309 12/7/1995 1309.1 12/7/1995 (2001 and 2002 Amendments Pending SIP Ap proval) 1309.2 (Pending SIP Approval) 1310 12/7/1995 1311 10/5/1979 (Rescinded by SCAQMD 6/28/1990) 1312 (Rescinded by SCAQMD 6/28/1990) 1313 12/7/1995

 Negative Balances By 1990, some facilities had negative NSR balances. These negative balances were the result of equipment shutdowns or process change s since October 1976 which resulted in reductions in emissions from a source. The majority of negative balances resulted from equipment shutdowns. Like all entrie s in the NSR balance, negative balances only occurred pursuant to permit actions—i .e. either modification of a SCAQMD permit or use of reductions for mitigations. Negative balances were quantified by SCAQMD engineers based upon the physi cal capabilities of the modified or shut down equipment and applicable perm it requirements.

Existing Pre-1990 Accounting

SCAQMD’s offset accounts were established with star ting balances based on pre-1990 emissions reductions. The primary source of these pre-1990 reductions was a portion of facilities’ negative NSR balances which were discou nted as specified in the 1990 amendments to Regulation XIII (described below). T he 1990 Regulation XIII amendments also directed the Executive Officer to r ecall all existing pre-1990 ERCs which had resulted from shutdowns, discount them by eighty percent, and issue new ERCs at twenty percent of their original values. T he eighty percent discount of the pre1990 shutdown ERCs was deposited into SCAQMD’s offs et accounts along with the amounts derived from the discount of pre-1990 negat ive balances (further explanation of the implementation of the 1990 amendments to Regula tion XIII is provided with the discussion of SCAQMD’s proposed revisions to its pr e-1990 accounting). All of SCAQMD’s annual status reports prepared to date hav e included the startingProposed SCAQMD NSR Offset Tracking System Page 9 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc balances from these sources (discount of pre-1990 n egative balances and pre-1990 shutdown ERCs); SCAQMD has not taken credit for any other pre-1990 sources of credits, such as the zero BACT threshold, use of ER Cs by minor sources, or the additional 20 % of ERCs provided by major sources f or CO and PM10 at a ratio of 1.2 to 1.0 compared to 1.0 to 1.0, or ERCs provided by major sources for SOx at a ratio of 1.2 to 1.0 after SCAQMD reached attainment for SO2 NAAQS.

Proposed Pre-1990 Accounting

SCAQMD is now proposing to significantly reduce (by more than 60 % overall) its pre1990 emission credits by eliminating any present or past use of any credits for which SCAQMD presently has no records and cannot re-verif y the validity of such credits and to only utilize the portion of the previously-repor ted pre-1990 emission reductions which has been originally validated in 1990/91 and revali dated in 2004/05 as credits in its tracking system and for which SCAQMD has all or som e records. Most of such NOx reductions (almost 2/3) and all of such CO and PM10 reductions were utilized as offsets in SCAQMD’s tracking system during the 1990’s; howe ver, some of the pre-1990 NOx reductions and a significant portion of the pre-199 0 VOC and SOx reductions remain in SCAQMD’s offset account. The emission reductions t hat underlie those credits occurred between 15 and 29 years ago, and not all records re lated to them are available today. In many cases, however, summary data based on previous analyses are available. While not all records are available, SCAQMD at all relevant t imes prior to and after 1990 had a sufficiently robust permitting program and record v alidation procedure to provide confidence regarding the validated emission reducti ons for which SCAQMD proposes to take pre-1990 credits. This conclusion is supporte d by the preceding discussion of SCAQMD’s pre-1990 permitting program and the follow ing summary of the 1990 Regulation XIII amendments and their implementation :

 1990 Regulation XIII Amendments SCAQMD substantially modified Regulation XIII in 19 90. The offset threshold was dropped to zero, although relatively small emitting facilities (e.g. less than 30 pounds per day of VOC or 40 pounds per day of NOx) were el igible to obtain needed credits from a new “Community Bank.” Under the 1990 amendm ents, negative balances were to be “verified by the Executive Officer” and discounted by 80%. The rules specified that “upon validation” the remaining amou nt was to be issued to the permit holder in the form of an ERC (Rule 1309(a)).

 Implementation of 1990 Amendments Shortly after adoption of the 1990 amendments to Re gulation XIII, SCAQMD staff drafted a detailed internal guidance document title d “Regulation XIII – New Source Review Guidance Manual” (copy provided in Attachmen t 3) specifying how the amendments would be implemented by agency permit pr ocessing engineers. (Section 1, Regulation XIII Transition) . The required treatment of negative balances was described on pages 40 to 48 and page 68 of this doc ument. The transition document specified that negative balances would have to be “ verified” in accordance with standard procedures. Page 68, titled “NSR Database Validation,” specified that each facility’s NSR account would be searched by compute r to determine if anyProposed SCAQMD NSR Offset Tracking System Page 10 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc “forgivenesses” ( i.e. negative entries due to prior rule amendments lowe ring offset thresholds) contributed to the facility’s negative balance. The document further provided that NSR balances “shall be recalculated” since these forgivenesses were not “real” emission reductions and therefore did no t qualify for an ERC under Rule 1309 (b)(1) (p.40). The transition document also s pecified that any negative particulate matter emissions balances would be conv erted to PM10 by multiplying the particulate matter emissions by an average factor o f 0.5 (p.40). Finally, the document stated that any facility with a negative balance of 500 pounds per day or greater was to have each negative entry “confirmed by reviewing the application file which resulted in the negative NSR entry” (p. 68). The v ast majority of negative balances at the time (in excess of 80%) were associated with fa cilities with negative balances exceeding 500 pounds.

In 1991, SCAQMD’s engineering staff commenced the v erification and validation processes described in the transition document. Th e result of these processes was a substantial reduction in the amount of the negative balances for some pollutants, even prior to the 80% discount. These reductions were t he result of (1) addressing the “forgivenesses,” (2) determinations that some reduc tions were required by SCAQMD rules and thus ineligible for ERCs, and (3) in some cases simple data entry errors. Table 3 presents the 80 % portion of the 1990 negat ive balances that were deposited in SCAQMD’s offset accounts. The larger amount sho wn for each pollutant is the amount originally deposited as the result of this p rocess in the early 1990s and which has been previously reported as the 1990 starting b alance in the annual NSR status reports and the lower amount is revised based upon recent re-validation of these numbers by SCAQMD staff based on records that are s till available to address EPA’s comments and consistent with EPA policy guidance wh ich allows use of pre-1990 credits that are explicitly included and quantified as growth in the SIP. Such guidance provides that the permitting agency must m aintain information including, at a minimum, the name of the source that generated th e credit, the source category, credit quantity, specific action that generated the credit, date the credit was generated and “enough other information to determine the cred itability . . . .” (Memorandum from John Seitz to David Howekamp August 26, 1994).Proposed SCAQMD NSR Offset Tracking System Page 11 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc Table 3 Pre-1990 Credits Deposited in SCAQMD’s Offset Accou nts Tons per Day

VOC NOx SOx CO PM10 Overall Previously-Reported Pre-1990 Credits 92.4 25.8 18.4 34.9 34.5 206

Revised Pre-1990 Credits Verified with Records or Validation Procedures 38.46 23.92 8.04 8.45 2.67 81.5

Percent Reduction in Pre-1990 Credits 58 % 7 % 56 % 76 % 92 % 60 %

Records for pre-1990 emission credits are from 15 t o 29 years old. SCAQMD staff recently conducted an extensive review of the pre-1 990 credits and determined that the types of records available today include printo uts of NSR data captured in SCAQMD’s permitting database at the time of permit issuance and complete engineering files, which include the materials and documentation submitted by the applicant and SCAQMD’s engineering evaluation (refe r to Attachment 4 for examples of available pre-1990 NSR data).

In this proposal, SCAQMD is proposing to only use t he revised and verified pre-1990 credits (as set forth in Table 3). There are pre-1 990 credits which can reasonably be concluded to be creditable based on presently avail able records. In some cases, such conclusion can be reached because all of the inform ation described in the 1994 Seitz memorandum is currently available. In other cases, all of such information is not currently available, but the above-described permit ting procedures provide “enough other information to determine the creditability . . . .” However, for the majority of the pre-1990 emission reduction credits (more than 60 % overall), the SCAQMD cannot substantiate the validity of the records bas ed on the available records. SCAQMD is now proposing to significantly reduce its pre-1990 emission reduction credits by eliminating any past or present use of a ny credits for which SCAQMD presently cannot substantiate the validity of such records.

 Remaining Pre-1990 Credits The SCAQMD’s Tracking System has not previously specifi ed the age of credits held in SCAQMD’s offset accounts. However, in response to EPA’s comments about the use of pre-1990 credits, staff has completed a “Fir st In/First Out” analysis of these accounts. This analysis shows that significant por tions of the pre-1990 VOC and SOx credits remain in SCAQMD’s accounts, about one quar ter of the pre-1990 NOx credits remained in SCAQMD’s accounts as of July 20 02, and all of the pre-1990 CO and PM10 credits were depleted by 1997 2 . In order to address EPA’s comment regarding continued use of pre-1990 credits from SC AQMD’s accounts, SCAQMD proposes to eliminate any unused pre-1990 VOC, NOx, and SOx credits remaining in

2 All data for 1991 to 1997 is aggregated, so it is uncertain when in this time period the 1990 startin g account balances for CO, and PM10 were depleted. However, by assumi ng that these credits were consumed at an approxima tely constant rate, it is estimated that PM10 was deplet ed in 1994, and CO was depleted in 1995.Proposed SCAQMD NSR Offset Tracking System Page 12 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc its account at the end of the 2003-2004 reporting p eriod and not use any pre-1990 credits in its accounts post 2004.

 Other Potential Credits SCAQMD is not proposing to take any credits for pre -1990 sources of credits such as the zero BACT threshold, use of ERCs by minor sourc es, the additional 20% of ERCs provided by major sources for CO and PM10 at a rati o of 1.2 to 1.0 compared to 1.0 to 1.0, or ERCs provided by major sources for SOx a t a ratio of 1.2 to 1.0 after SCAQMD reached attainment with SO2 NAAQS and since EPA had not designated SOx as a precursor to PM10.

1990-2004 Credits

Existing 1990-2004 Accounting

SCAQMD’s tracking system currently takes credit for orphan shutdowns from major sources but not from minor sources. It also does n ot take credit for surplus reductions of SOx, CO, or PM10 provided as ERCs by major sources as a result of the differences in federal and local offset requirements for these pol lutants (local requirement is 1.2 to 1.0 while there is no federal requirement for SOx offse ts since SCAQMD is designated attainment with SO2 NAAQS and EPA had not designate d SOx as a precursor to PM10 and federal law does not specify an offset ratio in excess of 1.0 to 1.0 for CO or PM10) or for surplus reductions resulting from minor sources providing ERCs as emission offsets. The tracking system also does not take credit for S CAQMD’s zero BACT threshold. BACT discounts applied to newly-banked ERCs are cre dited to SCAQMD’s offset accounts. Credits are withdrawn from SCAQMD’s acco unts at 1.2 to 1.0 for all five pollutants when major sources that are not exempt p ursuant to the CAA are permitted using Rule 1304 exemptions, including replacement o f ODCs with VOC.

Proposed 1990-2004 Accounting

The proposed changes to the sources of credits to a nd debits from SCAQMD’s offset accounts for the 1990-2004 time period are summariz ed below:

 Minor Source Orphan Shutdowns The NSR Tracking System has only used “orphan” shut downs of major sources post1990 to fund SCAQMD’s offset accounts. However, sh utdowns of permitted minor sources also can meet the federal requirements that credits be real, permanent, enforceable, quantifiable, and surplus in the same way as do major source shutdowns. ERCs generated from minor sources are commonly used to fulfill the offset requirements for emission increases at major source s which are not exempt from offset requirements under SCAQMD’s NSR rules. Ther efore, although SCAQMD has not previously used these credits due to the la rge balances available in its offsetProposed SCAQMD NSR Offset Tracking System Page 13 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc accounts, it is appropriate to include emission red uctions from minor source orphan shutdowns as credits in SCAQMD’s offset accounts.

SCAQMD’s Rule 201 requires written authorization fr om the Executive Officer (i.e., a permit to construct) before a person may build, e rect, install, alter or replace any equipment, the use of which may cause the issuance of air contaminants or the use of which may eliminate, reduce or control the issuance of air contaminants. Rule 203 – Permit to Operate similarly prevents the operation or use of such equipment without a permit issued by the Executive Officer. The only e xceptions to these requirements are specifically identified in Rule 219. However, all of the minor sources which SCAQMD proposes to use as sources of orphan shutdow n credits as described above have been through the permitting process. In fact, such minor sources are subject to the same Regulation IV - Prohibitions, Regulation X I - Source Specific Standards, and Regulation XIII rule requirements as are major sources. In some cases the operators of these sources go through the necessary steps to quantify and generate ERCs when they experience real, permanent, enforcea ble, quantifiable, surplus emission reductions (e.g., equipment or facility sh utdown or modification). Such minor source ERCs are fully valid and eligible for use as major source offsets. Therefore, in cases where the operators do not go t hrough the steps to generate ERCs from their emission reductions, it is appropriate f or SCAQMD to treat these orphan shutdowns in the same manner as it does orphan shut downs at major sources.

 Major Source Use of CO and PM10 ERCs The tracking system will be updated to include cred it for the 20 % additional CO and PM10 ERCs provided by major sources as emission off sets at a ratio of 1.2 to 1.0 pursuant to Rule 1303 rather 1.0 to 1.0. The 20 % above a 1.0 to 1.0 offset ratio is creditable because the CAA only requires a 1.2 to 1 .0 offset ratio for precursors to ozone; the required offset ratio for CO and PM10 pu rsuant to the CAA and the TSD is “at least 1 to 1” (TSD, pages 14 and 15).

 Offset Ratio for Exempt Major Sources of CO and PM1 0 SCAQMD proposes to change the offset ratio for majo r sources of CO and PM10 offset from SCAQMD’s offset accounts from 1.2 to 1. 0 to 1.0 to 1.0. This change is consistent with the CAA and the TSD, which only req uire a 1.2 to 1.0 offset ratio to precursors of ozone.

 Major Source Use of SOx ERCs The tracking system will be updated to include cred it for SOx ERCs provided by major sources as emission offsets pursuant to Rule 1303 because such offsets are not required pursuant to the CAA (SCAQMD is attainment with SOx NAAQS and EPA had not designated SOx as a precursor to PM10).

 Offsets for Exempt Major Sources of SOx SCAQMD is in attainment with the NAAQS for SOx and EPA had not designated SOx a precursor to PM10. Therefore, it is not nece ssary for SCAQMD to provide SOx offsets for major SOx sources which are exempt from providing ERCs pursuant to Rule 1304.Proposed SCAQMD NSR Offset Tracking System Page 14 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc  ERCs Provided by Minor Sources to Offset Emission I ncreases The CAA does not require minor sources to provide o ffsets for their emission increases. Therefore, the ERCs that these sources provide to offset their increases pursuant to Rule 1303 are creditable to SCAQMD’s of fset accounts.

Inventory Issues Related to Minor Source Orphan Shu tdowns

Emissions from small permitted sources (i.e., less than 4 tpy of any criteria pollutants or 100 tpy of CO) are treated as area sources in the A QMP inventory. A detailed description of the area source inventory methodolog y for each source category tracked in the AQMP is provided in Attachment 5. Typically, a base year inventory is prepared based on the historical activity data and projected to future years based on the socioeconomic data provided by SCAG. The surrogate s used for emission growth projection are documented in Appendix III, Table 2- 3 of the 2003 AQMP. The growth factors for source categories are mostly greater th an 1 with a few exceptions. When the growth factor is greater than 1, emissions are proj ected to grow without taking into account any potential NSR constraint that offsets m ay not be available. By the same token, if the growth factor is less than 1, future emissions are estimated to be lower than the base year emissions.

EPA staff raised an issue that shutdown credits fro m source categories that are projected to decrease in the AQMP may not be appropriate to b e used as offsets, since the AQMP has already reflected such decrease. This position suggests the potential for double counting in such situations. However, closer exami nation of the AQMP process and the assumptions made in the Plan reveals that use of sh utdown credits from source categories with even negative projected growth does not result in double counting of emissions reductions. The AQMP assumes negative growth in so me categories and positive growth in others. Further, the positive growth assumption s include no constraints on growth posed by cost or availability of emission offsets ( and existing ERCs are also assumed to be “in the air” independent of the growth projectio ns). Inherent in these AQMP assumptions is the assumption that emission decreas es, including decreases associated with negative growth, result in emission credits th at can be used to offset emission increases. Therefore, movement of potential emissi ons from a negative growth category to a positive growth category via appropriately qua ntified and discounted credits is entirely consistent with the AQMP and its assumptio ns. Furthermore, even though SCAQMD has never experienced actual growth greater than that projected in the AQMP, SCAQMD reevaluates the AQMP with each AQMP revision and makes appropriate changes and corrections as a part of this process ( and commits to continue to do so consistent with state law). Finally, there is no r estriction on the generation of ERCs by sources in categories with negative projected growt h or on the use of such ERCs by sources within other categories. The standard for credits in SCAQMD’s accounts should not be higher than for privately held credits.Proposed SCAQMD NSR Offset Tracking System Page 15 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc Other Potential Credits

SCAQMD is not proposing to take any credits for 199 0-2004 sources of credits such as the zero BACT threshold and or offsets provided for or by sources converting from ODCs to VOCs.

Post-2004 Credits

Existing post-2004 Accounting

SCAQMD’s tracking system currently takes credit for orphan shutdowns from major sources but not from minor sources. It also does n ot take credit for surplus reductions of SOx, CO, or PM10 provided as ERCs by major sources as a result of the differences in federal and local offset requirements for these pol lutants (the local requirement is 1.2 to 1.0 while there is no federal requirement for SOx o ffsets and federal law does not specify an offset ratio in excess of 1.0 to 1.0 for CO or P M10) or for surplus reductions resulting from minor sources providing ERCs as emission offse ts. The tracking system also does not take credit for SCAQMD’s zero BACT threshold. Pre-1990 credits remaining in SCAQMD’s offset accounts continue to be usable in t he tracking system. BACT discounts applied to newly-banked ERCs are credited to SCAQMD’s offset accounts. The existing tracking system credits orphan shutdow ns to SCAQMD’s offset accounts based upon the allowable permitted level of emissio ns of the shutdown source, and no further discount/adjustment is applied to the credi ts to specifically account for surplus at the time of use. SCAQMD’s portion of the Californi a SIP does not include assumptions reflecting the NSR tracking system or commitments t o make up any shortfall in SCAQMD’s offset accounts. Additionally, the tracki ng system does not take credit for surplus reductions resulting from modifications at major sources that do not constitute “major modifications” pursuant to the new NSR Refor m Regulations. Credits are withdrawn from SCAQMD’s accounts at 1.2 to 1.0 for all five pollutants when major sources that are not exempt pursuant to the CAA are permitted using Rule 1304 exemptions or Rule 1309.1 offsets, including replac ement of ODCs with VOC.

Proposed post-2004 Accounting

The proposed changes to the sources of credits to a nd debits from SCAQMD’s offset accounts for the post-2004 time period are summariz ed below:

 Minor Source Orphan Shutdowns The tracking system will be updated to include cred it for future (post-2004) minor source orphan shutdowns, as described above for the 1990 to 2004 time period.

 Minor Source Use of ERCs The tracking system will be updated to include cred it for future ERCs provided byProposed SCAQMD NSR Offset Tracking System Page 16 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc minor sources as emission offsets pursuant to Rule 1303 because such offsets are not required pursuant to the CAA.

 Major Source Use of SOx ERCs The tracking system will be updated to include cred it for SOx ERCs provided by major sources as emission offsets pursuant to Rule 1303 because such offsets are not required pursuant to the CAA (SCAQMD is attainment with SOx NAAQS and EPA had not designated SOx as a precursor to PM10).

 Major Source Use of CO and PM10 ERCs The tracking system will be updated to include cred it for the 20 % additional CO and PM10 ERCs provided by major sources as emission off sets at a ratio of 1.2 to 1.0 rather 1.0 to 1.0 pursuant to Rule 1303. The 20 % above a 1.0 to 1.0 offset ratio is creditable because the CAA only requires a 1.2 to 1 .0 offset ratio for precursors to ozone; the required offset ratio for CO and PM10 pu rsuant to the CAA and the TSD is “at least 1 to 1” (TSD, pages 14 and 15).

 Pre-1990 Credits in SCAQMD’s Offset Accounts SCAQMD proposes to eliminate any future use of any remaining pre-1990 credits, even though records were re-verified by SCAQMD in 2 004-05, in its offset accounts which remain unused at the end of the 2003-2004 rep orting period rather than use them to offset future emission reductions.

 BACT Discount of ERCs EPA has raised an issue about the use of the amount of BACT discounts from ERCs issued by SCAQMD as credits in SCAQMD’s offset acco unts. Although SCAQMD believes that this provision was specifically appro ved by EPA to be used as credits in the TSD (page 17), in order to resolve the outstand ing issues raised by EPA, SCAQMD proposes to no longer take any credits for B ACT discount of ERCs in SCAQMD’s offset accounts starting August 2004.

 Surplus Discount at Time of Use Credits in SCAQMD’s accounts that resulted from pos t-1990 orphan shutdowns and which, based on a first-in/first-out analysis, are not used in the same timeframe they are banked are proposed to be subject to a BARCT at the time of use adjustment. This will be accomplished based on the percentage r eduction in reported permitted emissions each year, potentially with an adjustment for sources at BACT and for growth. Specifically, SCAQMD is proposing that eac h year all credits in SCAQMD’s offset accounts carried over from the prev ious year be discounted by the amount of the percentage reduction between that yea r’s reported emissions and the previous year’s reported emissions for the pollutan t in question. This analysis will be performed on an aggregate basis each year for credi ts carried over from the previous year. SCAQMD anticipates that this approach will b e accurate in the aggregate because in general implementation of BARCT drives r eductions in reported emissions.Proposed SCAQMD NSR Offset Tracking System Page 17 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc  Actual Emissions Baseline It is not feasible for SCAQMD to discount orphan sh utdown credits to actual emissions because the actual emission data generall y are unavailable. Therefore, staff proposes to use an average discount factor to accou nt for the difference between potential and actual emissions. Since 1997, SCAQMD has used a twenty percent discount to convert potential emissions to estimate d actual emissions for purposes of compliance with state “no net increase” requirement s. This procedure has been used with concurrence of the California Air Resources Bo ard. We propose to use the same factor for federal NSR tracking purposes. In light of the methodology used to quantify potential emissions (explained in more det ail below), staff’s engineering judgment indicates that, on average, a twenty perce nt reduction from potential emissions is a reasonable estimate of actual emissi ons. Actual emissions for individual sources will range from the sources’ pot ential emissions down to less than eighty percent of potential emissions, but eighty p ercent of potential emissions represents an acceptable estimate of aggregate actu al emissions. The use of eighty percent of potential emissions as a surrogate for a ctual emissions is well documented in SCAQMD’s annual status reports regarding Regulat ion XIII. The most recent three such reports are included in Attachment 6 (fo r example, refer to Table 7— “Debits from AQMD’s State Offset Accounts”—in each of these reports).

Facilities with potential to emit in excess of the Rule 1304 exemption thresholds (4 tons per year for VOC, NOx, SOx, and PM10 and 29 to ns per year for CO), provide ERCs to offset their increases in potential emissio ns so they have a strong incentive to keep their potential emissions in line with actual emissions at times of high production. Smaller facilities with potential to e mit below the exemption thresholds may be inclined to request permits based potential emissions at the exemption threshold levels because the offsets are provided b y SCAQMD at no cost to the facility. However, SCAQMD engineers perform a thor ough evaluation of each permit application prior to recommending issuance o f a permit to construct or a permit to operate. These evaluations include a det ermination of the actual controlled emission rate (based on source test results, VOC co ntent of coatings, or sulfur content of fuel, for example) or expected actual controlled emission rate (based on established emission factors or manufacturers’ guarantees, for example). This data is then combined with the maximum anticipated production ra te to determine the equipment’s potential to emit. Note that the maxim um production rate used in these calculations is based on what is reasonably expecte d for the facility and source in question during periods of high production and is n ot based on either “24-7” operations (except for those facilities that actual ly do operate in such a manner) or an artificially highest permissible emission level for each source. Therefore, actual emissions are not expected to be considerably diffe rent than potential emissions and 80 % of potential emissions provides a reasonable e stimate of actual emissions. This conclusion is further supported by potential to emi t data for facilities at or below the exemption thresholds. Table 4 shows that there are far more facilities with potentials to emit below the exemption thresholds than at the exemption thresholds.Proposed SCAQMD NSR Offset Tracking System Page 18 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc Table 4 Ratio of Numbers of Facilities with Potential to Em it (PTE) Below Exemptions Thresholds to Numbers of Facilities with PTE at Exe mption Thresholds

Facility Count Ratio (Below Threshold: Pollutant PTE Range A 1 PTE Range B 2 PTE C 3 at Threshold) VOC 1,336 1,348 601 4.5:1 NOx 2,021 1,534 363 10:1 SOx 545 180 32 23:1 CO 2,789 330 10 310:1 PM10 1,686 940 188 14:1

1 PTE Range A is greater than zero but less than 2 t ons per year for VOC, NOx, SOx, and PM10 and is greater than zero but less tha n 15 tons per year for CO.

2 PTE Range B is greater than or equal to two but le ss than four tons per year for VOC, NOx, SOx, and PM10 and is greater than 15 but less than 29 tons per year for CO.

3 PTE C is four tons per year for VOC, NOx, SOx, and PM10 and is 29 tons per year for CO.Proposed SCAQMD NSR Offset Tracking System Page 19 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc  Offset Ratio for Exempt Major Sources of CO and PM1 0 SCAQMD will provide offsets to major sources of CO and PM10 which are exempt from offset requirements pursuant to Rule 1304 or w hich receive Rule 1309.1 offsets but which are not exempt from offset requirements p ursuant to the CAA at a ratio of 1.0 to 1.0, rather than 1.2 to 1.0.

 Offsets for Exempt Major Sources of SOx SCAQMD will no longer provide offsets for major sou rces of SOx which are exempt from offset requirements pursuant to Rule 1304 or w hich receive Rule 1309.1 offsets. Such offsets are not required (i.e., these sources are exempt pursuant to the CAA) because SCAQMD is in attainment with SOx NAAQS and EPA had not designated SOx a precursor to PM10.

 Offsets for Major Sources Converting from ODCs to V OC SCAQMD will no longer provide offsets for major sou rces of VOC which switch from use of ODCs to use of VOCs. This change is co nsistent with SCAQMD’s attainment demonstration and the TSD.

 SIP Inventory and Growth Assumptions To date, the SCAQMD has incorporated a sufficient p ortion of available tracking system credits into the AQMP at the time of plan re vision to assure that the growth assumptions in the plan are consistent with NSR cre dits used. In order to assure that the SIP assumes that all necessary credits are “in the air,” the SCAQMD proposes to provide EPA an enforceable commitment to make up an y shortfall in the amount of credits assumed to be “in the air” at the time of t he next triennial plan revision required by state law.

 Other Potential Credits SCAQMD is not proposing to take any credits for pos t-2004 sources of credits such as the zero BACT threshold or any surplus reduction s resulting from modifications at major sources that do not constitute major modifica tions pursuant to the NSR Reform Regulations at this time.

Summary SCAQMD believes that the proposed revisions to the NSR credit tracking procedures represent a very conservative proposal in an effort to address EPA’s questions related to credits used for Offset Budget and NSR equivalency purposes. As indicated earlier, the proposed revisions will reduce SCAQMD’s previously- reported pre-1990 credits from a 7 % reduction in NOx to a 92 % reduction in PM10 an d will change the previouslyreported 2002 NSR federal offset account from a 38 % actual increase in NOx credits to a 74 % reduction in PM10 credits. The overall impact on emission credits resulting from the proposals described above are summarized in Tab le 5 for both the 1990 starting balance and July 2002 running balance.Proposed SCAQMD NSR Offset Tracking System Page 20 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc Table 5 Summary of SCAQMD’s Offsets Account

Tons per Day

VOC NOx SOx CO PM10 Previously-Reported 1990 Starting Balance 92.4 25.8 18.4 34.9 34.5
Final Proposed Revised 1990 Starting Balance 38.46 23.92 8.04 8.45 2.67

Reductions in SCAQMD’s Pre-1990 NSR Federal Account Balances 58 % 7 % 56 % 76 % 92 %
Previously-Reported 2002 Running Balance 107.65 21.60 18.76 24.09 41.24
Final Proposed Revised 2002 Running Balance 95.01 29.74 12.60 9.71 10.67

Reductions in SCAQMD’s 2002 NSR Federal Account Balances 11.7 % -37.7 % 32.8 % 59.7 % 74.1 %

In addition, SCAQMD’s proposed post-2004 emission c redits adjustments, as described above, will address all of the issues raised by EPA prospectively.

Table 6 summarizes the changes between SCAQMD’s exi sting and proposed revised NSR tracking systems. This table summarizes the ex isting and proposed revised NSR tracking system for pre-1990, 1990-2004, and post-2 004 emission reductions.Proposed SCAQMD NSR Offset Tracking System Page 21 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc Table 6 Summary of Changes between SCAQMD’S Existing and Proposed Revised NSR Tracking Systems

Pre-1990 Emission Reductions SCAQMD’s Existing NSR Offset Account

and Tracking System SCAQMD’s Proposed Revised NSR Offset Account and Tracking System

 Starting Balance based on data generated in 1990 from facilities’ (both major and minor sources) emission reductions recorded as negative NSR balances. This data has been used and previously reported in all annual NSR status reports.

 No credit taken for surplus reductions from SOx, CO, and PM10 offsets provided (at 120 %) as ERCs for minor sources (1)

.

 No credit taken for surplus reductions from SOx offsets (ERCs) for major sources provided at 120 % because SOx offsets not required since EPA had not determined SOx to be a precursor to PM10 (2) , or for the 20 % additional CO and PM10 offsets (ERCs) for major sources provided at a ratio of 1.2 to 1.0 compared to 1.0 to 1.0 (2)

.

 No credit taken for emission reductions created from the application of zero BACT threshold (1)

.  Initial Starting Balance based on data from facilities’ (both major and minor sources) emission reductions recorded as negative NSR balances which were originally verified in 1990/91 and re-verified in 2004/05 and all or some records currently exist

.

 No credit taken for surplus reductions from SOx, CO, and PM10 offsets provided (at 120 %) as ERCs for minor sources (1)

.

 No credit taken for surplus reductions from SOx offsets (ERCs) for major sources provided at 120 % because SOx offsets not required since EPA had not determined SOx to be a precursor to PM10 (2) , or for the 20 % additional CO and PM10 offsets (ERCs) for major sources provided at a ratio of 1.2 to 1.0 compared to 1.0 to 1.0 (2)

.

 No credit taken for emission reductions created from the application of zero BACT threshold at this time (1)

. (1) EPA’s Technical Support Document (TSD) dated 10/24 /96 for EPA’s Notice of Final Rulemaking (Federal Register 12/4/96) for SIP Appro val of SCAQMD NSR Rules allows for such credits, page 17. (2) TSD, pages 14 and 15.Proposed SCAQMD NSR Offset Tracking System Page 22 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc Table 6 continued

1990-Present (2004) Emission Reductions SCAQMD’s Existing NSR Offset Account

and Tracking System SCAQMD’s Proposed Revised NSR Offset Account and Tracking System

 No credit taken for orphan shutdowns from minor sources.

 VOC and NOx offsets provided by SCAQMD for federal sources exempted by SCAQMD at a ratio of 1.2 to 1.0.

 No credit taken for surplus reductions from CO and PM10 offsets provided by SCAQMD for federal sources exempted by SCAQMD at a ratio of 1.2 to 1.0 compared to 1.0 to 1.0.

 No credit taken for surplus reductions from SOx offsets provided by SCAQMD for federal sources exempted by SCAQMD at a ratio of 1.2 to 1.0.

 VOC offsets provided by SCAQMD at a ratio of 1.2 to 1.0 for federal sources exempted by SCAQMD which switch from ozone depleting compounds to VOCs.

 No credit taken for surplus reductions created from offsets (ERCs) provided (at 120 %) by minor sources which are not exempt from offset requirements under SCAQMD NSR rules (i.e., > 4 but < 10 TPY of VOCs and NOx, etc.).

 No credit taken for surplus reductions created from SOx offsets (ERCs) provided (at 120 %) by major sources.

 No credit taken for surplus reductions created from the 20 % additional CO and PM10 offsets (ERCs) provided by major sources at 1.2 to 1.0 ratio compared to 1.0 to 1.0 ratio.

 No credit taken for emission reductions created from the application of zero BACT threshold (4)

.  Orphan shutdowns include shutdowns of both major and minor sources.

 VOC and NOx offsets provided by SCAQMD for federal sources exempted by SCAQMD at a ratio of 1.2 to 1.0.

 CO and PM10 offsets provided by SCAQMD for federal sources exempted by SCAQMD at a ratio of 1.0 to 1.0 (1)

.

 SOx offsets not provided by SCAQMD for exempt sources because SOx offsets not required since EPA had not determined SOx to be a precursor to PM10 (2)

.

 VOC offsets provided by SCAQMD at a ratio of 1.2 to 1.0 for federal sources exempted by SCAQMD which switch from ozone depleting compounds to VOCs, although not required because accounted for by attainment demonstration (3)

.

 Credit taken for surplus reductions created from offsets (ERCs) provided (at 120 %) by minor sources which are not exempt from offsets requirements under SCAQMD rules (4)

.

 Credit taken for surplus reductions created from SOx offsets (ERCs) provided (at 120 %) by major sources because SOx offsets not required since EPA had not determined SOx to be a precursor to PM10 (4)

.

 Credit taken for surplus reductions created from the 20 % additional CO and PM10 offsets (ERCs) provided by federal major sources at a ratio of 1.2 to 1.0 compared to 1.0 to 1.0 ratio (1)

.

 No credit taken for emission reductions created from the application of zero BACT threshold at this time (4)

. (1) EPA’s Technical Support Document (TSD) dated 10/24 /96 for EPA’s Notice of Final Rulemaking (Federal Register 12/4/96) for SIP Appro val of SCAQMD NSR Rules, pages 14, 15, and 17. (2) TSD, page 15. (3) TSD, page 16 and 17. (4) TSD, page 17.Proposed SCAQMD NSR Offset Tracking System Page 23 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc Table 6 continued

Future (Post-2004) Emission Reductions SCAQMD’s Existing NSR Offset Account

and Tracking System SCAQMD’s Proposed Revised NSR Offset Account and Tracking System

 Remaining pre-1990 credits still eligible for

use.

 BACT discount credit portion of newlyissued ERCs still eligible for crediting to SCAQMD’s offset accounts (as previously approved by EPA) (1)

.

 Orphan shutdowns credited to SCAQMD’s offset accounts in the past only included shutdowns of major sources.

 No further discount/adjustment for orphan shutdowns due to surplus/BARCT at time of use.

 No further discount/adjustment applied to estimate actual emissions.

 VOC and NOx offsets provided by SCAQMD for federal sources exempted by SCAQMD at a ratio of 1.2 to 1.0.

 No credit taken for surplus reductions from CO and PM10 offsets provided by SCAQMD for federal sources exempted by SCAQMD at a ratio of 1.2 to 1.0 compared to 1.0 to 1.0.

 No credit taken for surplus reductions from SOx offsets provided by SCAQMD for federal sources exempted by SCAQMD at a ratio of 1.2 to 1.0.

 VOC offsets provided by SCAQMD at a ratio of 1.2 to 1.0 for federal sources exempted by SCAQMD which switch from ozone depleting compounds to VOCs.

 No credit taken for surplus reductions created from offsets (ERCs) provided (at 120 %) by minor sources which are not exempt from offset requirements under SCAQMD NSR rules (i.e., > 4 but < 10 TPY of VOCs and NOx, etc.).  No pre-1990 credits will be used post-2004.

 No BACT-discount credits from newlyissued ERCs will be eligible for crediting to SCAQMD’s offset accounts.

 Post-1990 orphan shutdowns will include shutdown of both major and minor sources.

 All orphan shutdowns will be discounted/ adjusted to surplus/BARCT at time of use.

 All orphan shutdowns will be discounted/ adjusted to reflect estimated actual emissions.

 VOC and NOx offsets will be provided by SCAQMD for federal sources exempted by SCAQMD at a ratio of 1.2 to 1.0.

 CO and PM10 offsets will be provided by SCAQMD for federal sources exempted by SCAQMD at a ratio of 1.0 to 1.0 (1)

.

 SOx offsets will not be provided by SCAQMD for exempt sources because EPA had not determined SOx to be a precursor to PM10 (2)

.

 VOC offsets will not be provided by SCAQMD for federal sources exempted by SCAQMD which switch from ozone depleting compounds to VOCs (3)

.

 Credit will be taken for surplus reductions created from offsets (ERCs) provided (at 120 %) by minor sources which are not exempt from offsets requirements under SCAQMD rules (4)

.

(1) EPA’s Technical Support Document (TSD) dated 10/24 /96 for EPA’s Notice of Final Rulemaking (Federal Register 12/4/96) for SIP Appro val of SCAQMD NSR Rules, pages 14, 15, and 17. (2) TSD, page 15. (3) TSD, page 16 and 17. (4) TSD, page 17.Proposed SCAQMD NSR Offset Tracking System Page 24 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc Table 6 continued

Future (Post-2004) Emission Reductions (continued) SCAQMD’s Existing NSR Offset Account

and Tracking System SCAQMD’s Proposed Revised NSR Offset Account and Tracking System

 No credit taken for surplus reductions created from SOx offsets (ERCs) provided (at 120 %) by major sources.

 No credit taken for surplus reductions created from the 20 % additional CO and PM10 offsets (ERCs) provided at 1.2 to 1.0 ratio compared to 1.0 to 1.0 ratio.

 No SIP adjustment for NSR tracking system.

 No credit taken for emission reductions crated from application of zero BACT threshold (4)

.

 No credit taken for surplus reductions created from offsets (ERCs) provided (at 120 %) by modifications to major sources, which are otherwise not defined as “major modifications” to a major source under the new federal NSR Reform Regulations.  Credit will be taken for surplus reductions created from SOx offsets (ERCs) provided (at 120 %) by major sources because SOx offsets not required since EPA had not determined SOx to be a precursor to PM10 (4)

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 Credit will be taken for surplus reductions created from the 20 % additional CO and PM10 offsets (ERCs) provided by federal major sources at a ratio of 1.2 to 1.0 compared to 1.0 to 1.0 ratio (1)

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 Appropriate assumptions in the SIP to reflect NSR tracking system with commitment to make up any shortfall in next AQMP revision pursuant to state law.

 No credit taken for emission reductions crated from application of zero BACT threshold at this time (4)

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 No credit will be taken for surplus reductions created from offsets (ERCs) provided (at 120 %) by modifications to major sources, which are otherwise not defined as “major modifications” to a major source under the new federal NSR Reform Regulations at this time. (1) EPA’s Technical Support Document (TSD) dated 10/24 /96 for EPA’s Notice of Final Rulemaking (Federal Register 12/4/96) for SIP Appro val of SCAQMD NSR Rules, pages 14, 15, and 17. (4) TSD, page 17.

USE OF CREDITS

The above-described credits will be used to fund th e Offset Budget as adopted by SCAQMD in Rule 1309.2 in addition to the current us e of credits to provide offsets for sources that are exempt from offset requirements un der SCAQMD Regulation XIII (Rules 1304 and 1309.1) and to provide equivalence to federal NSR requirements. As indicated earlier, a list of Regulation XIII provis ions for which sources are exempt from offset requirements and credits may be used to demo nstrate equivalency is presented in Attachment 2.Proposed SCAQMD NSR Offset Tracking System Page 25 Deliberative Process Draft

C:\Documents and Settings\mhaimov\Desktop\Proposed NSR Tracking System 10-14-2005.doc TRACKING AND BACKSTOP

SCAQMD proposes to make an annual determination of equivalency pursuant to a tracking rule that will be adopted by the agency co nsistent with the procedures described above for the post-2004 proposed accounting mechani sm.

SCAQMD will also propose as part of the tracking ru le a backstop provision to be triggered in the event that annual equivalency is n ot demonstrated. In such an event, the backstop provision would require:

 SCAQMD to provide additional credits within two yea rs; such credits could be derived through SCAQMD purchase of credits or throu gh SCAQMD funding of emission reduction projects using quantification pr otocols approved by EPA on a case-by case or programmatic basis; or

 SCAQMD to suspend issuance of Offset Budget credits and not resume the issuance of any such credits until SCAQMD has performed an e valuation of program performance and made modifications, as needed to co rrect the equivalency.