SACRAMENTO METROPOLITAN
AIR QUALITY MANAGEMENT DISTRICT

For Agenda of January 27, 2011

To : Board of Directors

Sacramento Metropolitan Air Quality Management Dist rict

From : Larry Greene

Executive Director/Air Pollution Control Officer

Subject: Public Hearing to Adopt Resolutions Approving Amend ments to Rule 203,

Prevention of Significant Deterioration

Recommendations

1. Conduct a public hearing;

2. Determine that the amendments to Rule 203 are ex empt from the California Environmental Quality Act (CEQA); and 3. Adopt the attached resolution approving the amen dments to Rule 203.

Executive Summary

Regulation of pollutants under the federal Clean Ai r Act (CAA) is divided roughly into two programs. The New Source Review program regulates pollutants for which the District has not attained the federal standard, and the Prevention o f Significant Deterioration (PSD) program governs pollutants for which the District meets the federal standard or for which the District is listed as unclassifiable. The permit thresholds in the PSD program are high and consequently only likely to impact 10 of the existing facilities within the District, or any new major sources that exceed the high permit thresholds in the PSD progra m.

In 2002, the U.S. Environmental Protection Agency ( EPA) adopted substantial revisions to the federal PSD program, referred to as PSD Reform. In 2010, EPA adopted further revisions, which established new Greenhouse Gas (GHG) PSD requ irements and are referred to as the Tailoring Rule 1 . Staff is proposing amendments to the District’s existing PSD rule, Rule 203, to

address both sets of revisions to the federal CAA r equirements. The provisions apply to new or modifying large industrial sources, and are intende d to prohibit the permitting or operation of any facility that will cause or contribute to a new vio lation of health-based air quality standards.

On September 2, 2010, EPA took two actions regardin g the District: (i) EPA made a preliminary finding 2 (referred to as a SIP Call) that California’s Stat e Implementation Plan (SIP) is “substantially inadequate” because Sacramento’s app roved PSD rule does not specifically require emission controls for GHG-emitting sources and (ii) EPA published a draft Federal

###  1 “Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule, Final Rule”, Fede ral Register, Volume 75 page 31514, June 3, 2010

2 Action to Ensure Authority to Issue Permits under the Prevention of Significant Deterioration Program to Sources of Greenhouse Gas Emissions: Finding of Su bstantial Inadequacy and SIP Call, Proposed Rule”, Federal Register, Volume 75, page 53892. Sep tember 2, 2010 (75 FR 53892)



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Implementation Plan (FIP), which EPA will be requir ed to finalize if the District fails to cure the SIP inadequacies. The District Staff worked with E PA to reverse the SIP Call, but EPA ultimately finalized the determination on December 13, 2010 3 . The final SIP Call set a deadline of January 31, 2011 for the District to submit a PS D rule revision. If the District does not submit a SIP revision before the January 31, 2011 deadline , EPA will finalize the draft FIP 4 . While a FIP is in place, only EPA would have the authority to issue a federal PSD permit regulating GHG emissions; however, separate state and local PS D requirements would still require issuance of a District PSD permit, resulting in a d uplicative federal-state two permit system. The FIP would remain in place until EPA approves th e Rule 203 revisions.

EPA’s December SIP Call resulted in a construction moratorium that precludes the District from issuing federal PSD permits authorizing new constru ction or modifications if the facility will emit GHGs above specified thresholds. The moratorium wi ll remain in effect until EPA adopts a FIP or approves the Rule 203 revisions. District staff spoke with potentially impacted sources, and confirmed that none of the sources have any plans t hat would require a PSD permit in 2011.

The proposed rule revisions are subject to special restrictions imposed by state law SB288. That legislation was adopted in 2003 in response to the federal PSD Reform. Under SB288, the Air Resources Board (ARB) must review all proposed rule revisions and ensure that the revision does not weaken prior requirements. In anticipatio n of this review, District Staff identified certain federal provisions that would have weakened the regulations and has proposed replacement language for those provisions. The rep lacement language simply keeps the existing district program intact and does not inclu de new requirements (with the exception of including GHGs into the PSD program). Since the pr oposed rules do not incorporate the federal rules verbatim, Staff has also prepared an equivale ncy determination for EPA’s use in finding that the District program is at least as stringent as the federal program. This item will be forwarded to the Board under separate cover.

Attachments

The following table identifies the attachments to t his memo.

Item Attachment Page Number

Board Resolution A 9 Proposed Rule 203 B 13 Staff Report C 22

Evidence of Public Notice D 33 Public Comments and Responses E 44

###  3 Action to Ensure Authority to Issue Permits under the Prevention of Significant Deterioration Program to Sources of Greenhouse Gas Emissions: Finding of Su bstantial Inadequacy and SIP Call, Final Rule”, Federal Register, Volume 75, page 77698. December 1 3, 2010 (75 FR 777698)

4 75 FR 7770, December 13, 2010



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Background

The federal Clean Air Act: 5 1) requires owners to obtain a permit before begin ning construction or operation of any new major stationary source 6 , or commencing a major modification of an existing source 7 , 2) requires facilities to use best available emis sions control technology, 3) prohibits operation of any facility that may cause or contribute to a new violation of health-based air quality standards where the area meets those st andards, and 4) includes other provisions to protect national parks, monuments and wilderness ar eas.

The PSD program applies to all EPA-regulated air po llutants. Recently, EPA began regulating

GHGs 8 . Other regulated air pollutants include fluorides , hydrogen sulfide, and total reduced sulfur. The District currently meets the federal h ealth-based air quality standards for nitrogen dioxide (NO 2 ), lead (Pb), sulfur dioxide (SO 2 ) and carbon monoxide (CO). We recently requested that EPA formally recognize that the Dist rict meets the federal PM10 standards, which will make emissions of that pollutant subject to PSD requirements.

The EPA-approved PSD rules are contained in the 198 4 version of Rule 202- New Source Review. In 1991, the District adopted a new PSD ru le, Rule 203, which adopted by reference the 1991 version of the federal PSD requirements in 40 CFR 52.21. The 1991 rule was submitted to EPA but the agency has not approved th at version of Rule 203.

In September, 2010, EPA issued a preliminary SIP Ca ll finding that the District’s 1984 rule did not authorize the District to regulated GHGs. Alth ough we worked with EPA to reverse this determination, EPA issued a final SIP Call on Decem ber 13, 2010, giving the District until January 31, 2011 to submit a revised SIP. Today’s rule amendments update the 1984 and 1991 rule and include provisions to clarify our aut hority to regulate GHGs. The rule also includes provisions to address PSD Reform and SB288 . Under SB288, the 1991 rule provides the baseline for determining whether the proposed r evisions constitute a relaxation of the PSD requirements.

Necessity for the Rule Changes

The SIP Call precludes the District from issuing a federal PSD permit to a facility that plans new construction that will emit GHGs above specified th resholds. PSD permit triggers are high and historically are rarely exceeded within the Distric t. District staff has spoken to all potentially impacted sources, and was informed by them that the y do not anticipate making any changes in 2011 that would trigger a PSD permit.

The September preliminary SIP Call included a propo sed FIP rule 9 that, if finalized by EPA, would give EPA the authority to issue a GHG PSD per mit to sources in Sacramento. This

action would lift the construction moratorium creat ed by the Tailoring Rule and SIP Call. EPA may finalize the FIP rule if Rule 203 is not submit ted before the January 31, 2011 deadline or if

EPA finds that the submitted Rule 203 does not meet Clean Air Act requirements. If finalized,

###  5 42 U.S.C.A. Section 7470 et. seq. and Code of Fede ral Regulations (CFR) Title 40, Part 52.21

6 40 CFR 52.21(b)(1)

7 40 CFR 52.21(b)(2)

8 `75 FR 17004, April 2, 2010

9 75 FR 53883 September 2, 2010



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EPA would implement the FIP and issue PSD permits. The District would still be required to issue PSD permits to satisfy state law requirements

.

To avoid the FIP, the District must approve and sub mit a revised Rule 203 before the January

31 st deadline. As required by SB288, when Staff revise d Rule 203 to address the SIP Call and PSD Reform, it reviewed the regulations to determin e whether the PSD Reform provisions weakened the existing regulation 10 . Staff determined, in consultation with ARB, that certain PSD Reform provisions, if included, would weaken cu rrent PSD requirements. Proposed Rule 203 explicitly excludes those specific provisions a nd establishes replacement requirements. The differences relate to methods for determining w hether a PSD permit is required, and associated monitoring and recordkeeping provisions. The replacement language substitutes the current rule language in the 1991 version of Rule 2 03. As a result, with one exception, it will not alter the existing regulatory program for sources. The exception is the inclusion of language to incorporate GHG and any other pollutants identified by EPA in the future. That provision will

avoid the need for future rule amendments whenever EPA augments the list of regulated pollutants.

As discussed above, if EPA finalizes the FIP rule, and assumes authority for issuing a federal PSD permit, the District would still be required to issue a separate state PSD permit to the source under state law and existing Rule 203. To p revent sources from being subject to two sets of PSD permit requirements, it is critical tha t the submittal of revised Rule 203 occur before the January 31 st deadline. This approach eliminates the duplicativ e state-federal PSD permit process and preserves local authority. This approa ch also offers a reasonable strategy for lifting the construction moratorium, since: (1) EP A states in the SIP Call that it would expedite review of the District’s rule, and (2) affected sou rces have stated that their operations will not be impacted by the moratorium for at least one year. District staff has been working closely with

both EPA and ARB staff to ensure that the rule is s ubmitted before the deadline and will meet

federal laws and rules.

Summary of Proposed Rule Amendments

The proposed amendments to Rule 203 will add GHG re quirements to the District’s PSD permitting program. The proposed changes also upda te other provisions of the regulations including explicit public noticing requirements. T he federal PSD provisions contain more extensive public noticing and public participation requirements than other rules.

Several sections of the current federal PSD rules a re excluded or replaced because they would violate SB288 by establishing less stringent method s to determine whether modifications trigger

PSD and allow sources to avoid District review of m odifications if a source determines (without the District’s regulatory oversight) that the resul ting emissions are below a specified facility-wide emissions limit (Plantwide Applicability Limit). F or example, under the EPA approach, a source could avoid all pre-construction review and emissio n control requirements if, at the time it adds a new process it offsets any associated emission in creases with reductions elsewhere at the facility. The facility would be required to submit biannual reports to the District, but at that juncture if the District disagrees with the facilit y’s emissions estimates, the facility would be required to install more costly retrofit controls. In addition, the District will not have the benefi t of

###  10 Health and Safety Code Section 42504



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the emission reductions achieved by requiring emiss ion controls at the outset. The prior and proposed rules do not consider offsetting reduction s because that would prevent evaluation of

emissions and available controls at the time of con struction, when installation is most cost effective. Furthermore, under the PSD Reform provi sions it may be very difficult to review the

sources claims that its emissions fall below the PA L.

Staff also prepared an equivalency determination to assure EPA that proposed Rule 203 is at least as stringent as the federal PSD rules. EPA r ecently approved New York’s PSD rule and equivalency determination, which affected the same PSD requirements at issue in Rule 203 11

. The District’s equivalency determination is consist ent with New York’s approach, but also includes additional analysis based on District-spec ific information.

For more details of the proposed changes, please se e Appendix B of the Staff Report.

Cost Impacts and Emissions Benefits

The cost impacts and emission benefits of the propo sed amendments to Rule 203 depend on the following factors:

• The size of the new major source or modification. Most projects are below PSD applicability thresholds.

• Whether the source plans include controls or other strategies that are considered the best available control technologies (BACT) for GHGs . If not, costs would include the actual cost to implement BACT.

The actual BACT requirements, and associated costs, are determined on a case-by-case basis considering factors such as technical feasibility a nd control levels achieved in practice by similar sources. EPA recently published a GHG guidance docu ment 12 with information on potential GHG BACT; but the guidance does not provide any fin al BACT determinations. However, the

BACT determination itself includes consideration of the cost of the controls, and controls that are overly costly would not be considered BACT.

There will be no change in costs, emission benefits , or cost effectiveness for any of the other PSD pollutants because the proposed rule does not s ubstantially change the applicability thresholds, BACT, or any other requirements.

###  11 “Approval and Promulgation of Implementation Plan s; New York Prevention of Significant Deterioration of Air Quality and Nonattainment New Source Review, Final Rule”, Federal Register, Volume 75, page 70140. November 17, 2010 (75 FR 70140)

12 U.S. EPA. PSD and Title V Permitting Guidance for Greenhouse Gases . November 2010.



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District Impacts

Historically, there have been very few sources that have triggered PSD requirements. At a December 15, 2010 meeting with potentially impacted sources (major sources and those with high GHG emissions), Staff asked whether any source anticipated making modifications that might trigger a PSD review. No source indicated an y plans for such a change in the next year. Given the historic infrequency and source projectio ns, at the present time, no additional staff resources are needed to implement the proposed amen dments.

Environmental Review and Compliance

The proposed rules are exempt from the California E nvironmental Quality Act because: (i) they constitute an action by a regulatory agency for pro tection of the environment (Class 8 Categorical Exemption, Section 15308 State CEQA Gui delines) and (ii) it can be seen with certainty that there is no possibility that the act ivity in question may have a significant adverse effect on the environment (Section 15061(b)(3), Sta te CEQA Guidelines).

California Public Resources Code (Section 21159) re quires an environmental analysis of the reasonably foreseeable methods of compliance. Staf f compared the impact of the amendments of the rules with the existing rules. The proposed rule implements PSD permitting for GHG emissions. The analysis concludes the amendments t o Rule 203 may result in an emission benefit; therefore, Staff has concluded that no adv erse environmental impacts will be caused by compliance with the proposed rules.

Public Outreach and Comments

Staff conducted an informational meeting with sourc es to explain the changes to the PSD rules, specifically how inclusion of GHG will be implement ed. As noted above, we also contacted each potentially impacted source directly to discus s the requirements and the impact of the rule changes on their current business plans. Because b oth the existing rules that are retained and the EPA rules that are adopted by reference have al ready been through an extensive public process we did not have a public workshop. This is consistent with past practice for rules adopted by reference. On December 27, 2010, a publ ic hearing notice was published in the

Sacramento Bee and sent via e-mail to interested an d potentially affected parties. The draft rule was also posted on the District’s website on that d ay. One comment has been received. The comment letter and staff response are in Attachment E.



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Non-substantive Change After Posting of Rule 203

The proposed Rule 203 has been modified after posti ng of the public hearing notice to correct the date of the federal rule (40 CFR 52.21) that is incorporated by reference, to restructure the exemption sections, to prevent potential inconsiste ncy of the rule applicability, and to more clearly specify the location for public review of m aterials related to proposed PSD permits.

The noticed rule incorrectly stated that the effect ive date of the federal Tailoring Rule was July 1, 2010. In fact, the effective date is August 2, 2010, and the final rule corrects the error. Since this is simply a date correction, the change is non -substantive. This change was made in Sections 103, 104, and 105.

Under the noticed rule language, the rule would app ly to any major modification with a significant net emissions increase. However, the l anguage inadvertently also included a federal definition of major modification that was inconsist ent with this approach. To maintain the integrity and enforceability of the rule, Staff has replaced the federal definition with the existing language in the 1991 version of the District Rule. Staff considers this revision a non-substantive change to the proposed rule language since it simpl y clarifies application of the rule to major modifications. The change was made in Section 205.

In addition, the proposed Rule 203 has been modifie d to clarify and restructure the discussion of

the subsections of 40 CFR 52.21 that are excluded a nd the corresponding replacement subsection. Rather than simply referencing the exc luded and replacement sections, the rule language now includes the text.

A clarification has also been made to Section 401.2 to state that proposed permits and related

information would be made available at the District ’s office.

The revised proposed Rule 203 is included in Attach ment B.



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