South Coast

Air Quality Management District

21865 E. Copley Drive, Diamond Bar, CA 91 765-4182 (909) 396-2000 www.aqmd.gov

BOARD MEETING DATE: August 2, 2002 AGENDA NO. 17

REPORT: Status Report on Regulation XIII— New Source Review

This report, submitted to the Board pursuant to subdivision (b) of

Rule 1310— Analysis and Reporting, provides information on the

status of Regulation Xffl — New Source Review (NSR) in meeting

federal and state NSR requirements. This report, which presents data

for August 2000 through July 2001, shows that AQMD’s NSR pro

gram was in compliance with applicable federal and state require

ments during the period covered.

COMMiTTEE: Stationary Source, June 28, 2002, Reviewed

RECOMMENDED ACTION:

Receive and file the attached report.

SUMMARY

The AQMD’ s New Source Review (NSR) Rules and Regulations are designed to ensure

that emissions increases from new and modified sources do not interfere with efforts to

attain and maintain compliance with the federal and state air quality standards while

maintaining economic growth in the South Coast region. Regulation Xffl -New Source

Review regulates and accounts for emissions increases from the permitting of new, modi

fied, and relocated sources within AQMD that are not subject to Regulation XX — Re

gional Clean Air Incentives Market (RECLAIM)’. Rule 1310 -Analysis and Reporting

requires the submittal of an annual report to the Board on the status of Regulation XIII in

meeting federal and state NSR requirements.

1 While the RECLAIIvI program is different than command and control and provides greater regulatory flexibility to businesses, its NSR requirements, as specified in Rule 2005, are designed to comply with the governing principles

of NSR contained in the federal Clean Air Act (CAA) and the California Health and Safety Code.

SYNOPSIS:

Barry R. Wallerstein, D.Env.

Executive Officer
The annual reports on the status of Regulation XIII cover NSR activities for a twelvemonth period and the last report submitted to the Board covered the period from August

1999 through July 2000 for both federal and state NSR requirements. This annual report

covers the period August 2000 through July 2001 and demonstrates compliance with fed

eral and state NSR requirements by establishing aggregate equivalence with federal and

state offset requirements.

The results of the analysis for the August 2000 through July 2001 timeframe for federal

and state offset accounts are summarized below in Tables 1 and 2, respectively. These

results demonstrate that there were adequate offsets available to mitigate all emission in

creases during this period, resulting in no “net” emission increase. The report, therefore,

demonstrates that AQMD’s NSR program continues to meet federal and state offset re

quirements and is equivalent to those requirements on an aggregate basis 2.

Table 1

Net Activity, Starting Balances, and Ending Balances for AQMD’s Federal Offset

Accounts (August 2000 through July 2001)

DESCRIPTION 1 VOC NOx SOx CO PM1O

Starting Balance (ton/day) 104.99 20.76 18.64 26.06 44.52

Credits* (ton/day) 1.24 1.04 0 0.78 0

Debits* (ton/day) -1.33 -0.59 0 -0.41 -1.31

Sum of Credits/Debits* (ton/day) -0.09 0.45 0 0.37 -1.31

Refinements* (ton/day) 0 0 0 0 -2.41

Net Activity* (ton/day) -0.09 0.45 0 0.37 -3.72

Ending Balance** (ton!day 10490 2121 1864 26A3 4O8O

*

Refer to Appendix A for an explanation of the sources of credits and debits, as well as of refinements

from previous years’ reports. Credits are shown as (+) and Debits as (-), while sum of Credits/Debits,

Refinements, and Net Activity are shown as (+) or (-) depending on the values of Credits and Debits. **

“Ending Balance” equals the “Starting Balance” plus the “Net Activity.”

2 The AQMD’s NSR program is deemed to be equivalent to federal and state offset requirements because AQMD’s

ending account balances remained positive, indicating there were adequate offsets during this period.

-2-
Table 2

Net Activity, Starting Balances, and Ending Balances for AQMD’s State Offset Ac

counts (August 2000 through July 2001)

DESCRIPTION VOC NOx SOx CO PMIO

Starting Balance (ton/day) 46.58 4.30 18.81 26.41 46.05

Credits* (ton/day) 3.85 1.83 0.02 1.05 0.24

Debits* (ton/day) -6.98 -1.47 -0.08 -0.83 -1.03

Sum of Credits/Debits* (ton/day) -3.13 0.36 -0.06 0.22 -0.79

Refinements* (ton/day) 0 0 0 -0.13 -2.41

Net Activity* (ton/day) -3.13 0.36 -0.06 0.09 -3.20

Ending Balance** (tonIday 43.45 4.66 18.75 26.50 42.85

*

Refer to Appendix A for an explanation of the sources of credits and debits, as well as of refinements

from previous years’ reports. Credits are shown as (+) and Debits as (-), while sum of Credits/Debits,

Refinements, and Net Activity are shown as (+) or (-) depending on the values of Credits and Debits. ** “Ending Balance” equals the “Starting Balance” plus the “Net Activity.”

BACKGROUND

AQMD originally adopted its NSR program in 1976. The original program has evolved

into the current version of the Regulation Xffl rules in response to federal and state legal

requirements and the changing needs of the local environment and economy. The most

recent significant amendments to the NSR rules were adopted on December 7, 1995. The

most notable change in that amendment was the reduction in the threshold allowances for

requiring offsets. Subsequent amendments to Regulation Xffl since 1995 have in most

part addressed other issues, such as Best Available Control Technology (BACT) for nonmajor sources. The only exceptions were the April 20, 2001, November 9, 2001, and

May 3, 2002 NSR amendments which, in order to address the state’s needs for increased

electrical generation, provided access to AQMD’s Priority Reserve for Electrical Gener

ating Facilities (EGF) to obtain PM10, SOx, and CO emission offsets. EPA approved

AQMD’s NSR program into California’s State Implementation Plan on January 21, 1981

(46FR5965) and again on December 4, 1996 (61FR64291).

AQMD’s NSR program is required to achieve, at a minimum, emission reductions

equivalent to federal and state statutory NSR requirements. To this end, AQMD’s NSR

program implements the federal and state statutory requirements for NSR and ensures that

construction and operation of new and modified sources do not interfere with progress

towards attainment of the National and State Ambient Air Quality Standards. AQMD’s

-3-
computerized emission tracking system is utilized to demonstrate equivalence with fed

eral offset requirements on an aggregate basis. Specific NSR requirements of federal and

state law are presented below.

Federal Law

Federal law requires the use of Lowest Achievable Emission Rate (LAER) and offsets for

new, modified, and relocated major stationary sources 3.Effective November 15, 1992,

the federal Clean Air Act (CAA) requires a 1.5-to-i external offset ratio and a 1.3-to-i

internal offset ratio for major stationary sources located in an extreme ozone nonattainment area. The South Coast Air Basin (SOCAB) is the only area in the nation that

has been designated as extreme ozone non-attainment. An extreme ozone non-attainment

The October 20, 2000 amendments to Rule 1302 — Definitions changed the “major stationary source” thresholds

applicable to AQMD’s jurisdiction. The applicable thresholds during the initial portion of the time period covered

by this report were as summarized below:

Au2ust I. 2000 — October I ,

20(X):

Pollutant J Non-South East Desert Air Basin South East Desert Air Basin

VOC 10 tons per year 25 tons per year

NOx 10 tons per year 25 tons per year

SOx 70 tons per year 100 tons per year

PM1O 70 tons per year 70 tons per year

CO 100 tons per year 100 tons per year

The October 20, 2000 amendments divided AQMD’s jurisdiction into three air basins that supercede the NonSouth East Desert Air Basin and South East Desert Air Basin designations: South Coast Air Basin (SOCAB), the

Riverside County portion of the Salton Sea Air Basin (SSAB), and the non-Palo Verde Riverside County portion

of the Mojave Desert Air Basin (MDAB). The “major stationary source” thresholds for these air basins are as

follows:

October20. 2000—July 31. 2001:

Pollutant SOCAB SSAB I MDAB

VOC 10 tons per year 25 tons per year 100 tons per year

NOx 10 tons per year 25 tons per year 100 tons per year

SOx 100 tons per year 100 tons per year 100 tons per year

PM1 0 70 tons per year 70 tons per year 100 tons per year

Co 50 tons per year 100 tons per year 100 tons per year

-4-
area may qualify for a 1.2-to-i offset ratio if it requires implementation of federal Best

Available Control Technology (as defined in CAA Section 169(3) for prevention of Sig

nificant Deterioration of Air Quality) on all major sources [CAA Section i82(e)(1)]. The

federal definition of Best Available Control Technology (BACT) is equivalent to state

Best Available Retrofit Control Technology (BARCT), which AQMD implements

through its Regulation XI— Source Specific Standards and other AQMD rules and regu

lations. AQMD meets this criterion and uses a 1.2-to-i offset ratio for all federal and

non-federal sources 4.This report demonstrates compliance with the federal NSR re

quirements.

State Law

State law requires the use of BACT for new and modified sources (Health and Safety

Code Sections 40440(b)(i) and 40920.5) and “no net increase in emissions” from certain

permitted new or modified sources based on their potential to emit and the non-attainment

classification of the area in which they are located.

Based on their classification, the SOCAB and Salton Sea Air Basin (SSAB) must comply

with the requirements for extreme and severe non-attainment areas, respectively, for

ozone precursors (i.e., VOC and NOx). Both the SOCAB and the SSAB must comply

with the requirements for serious non-attainment areas for PM1O and its precursors (i.e.,

VOC, NOx, and SOx). For CU, the SOCAB must comply with the requirements for seri

ous non-attainment areas, however SSAB is considered attainment for CO. Both SOCAB

and SSAB are considered attainment for SO2and NO2,however SOx and NOx are pre

cursors to pollutants for which both SOCAB and SSAB are designated as non-attainment.

The Mojave Desert Air Basin (MDAB) is currently unclassified for all pollutants. The

various attainment statuses for the VOC, NOx, SOx, PM 10, and CU in the three air basins

result in the major source thresholds presented by pollutant and air basin in footnote 3

(page 4). This report demonstrates AQMD’s compliance with the “no net emission in

crease” requirements of state law for the period from August 2000 through July 2001 by

demonstrating compliance with the requirements for extreme ozone non-attainment areas

for ozone precursors and with the requirements for serious non-attainment areas for CU,

PM1O, and precursors to PM1O.

OVERVIEW OF ANALYSIS METHODOLOGY

The two major elements of federal and state NSR requirements are LAERJBACT and

emission offsetting. AQMD’s BACT requirements are at least as stringent as federal

LAER for major sources and state BACT requirements for all sources. Furthermore, the

‘

Non-federal sources that do not meet any of the exemption criteria of Rule 1304 and that do not qualify to obtain offsets from the Priority Reserve are also required to provide offsets (i.e., ERCs) at a ratio of 1.2-to-i.

-5-
NSR emission offset requirements that AQMD implements through its permitting process

ensure that sources provide emission reduction credits (ERCs) to offset their emission in

creases in compliance with both federal and state requirements. As a result, these sources

each comply with federal and state offset requirements by providing their own ERCs.

However, certain sources are exempt from AQMD’s offset requirements pursuant to Rule

1304 or qualify for offsets from AQMD’s Community Bank (applications received be

tween October 1, 1990 and February 1, 1996 only) or Priority Reserve, pursuant to Rule

1309.1. AQMD has determined that providing offset exemptions and the Priority Reserve

(as well as the previously administered Community Bank) is important to the NSR pro

gram and the local economy while encouraging installation of control equipment. There

fore, AQMD has assumed the responsibility to provide the necessary offsets for exempt

sources, the Priority Reserve, and the Community Bank. This report examines credits to

and debits from AQMD’s emission offset accounts and demonstrates programmatic

equivalence on an aggregate basis with federal and state emission offset requirements for

the sources exempt from providing offsets and the sources that receive offsets from the

Priority Reserve or the Community Bank.

AQMD’s Offset and Credit Accounts

Only emission increases originating at major stationary sources are subject to federal off

set requirements. However, state offset requirements apply to all increases of VOC or

NOx from equipment subject to AQMD’s permitting program and to increases of SOx,

CO. and PM1O from facilities that emit 15 or more tons per year. These same thresholds

are also used to assign credits generated through emission reductions to the federal and

state offset accounts, respectively (e.g., only emission reductions occurring at major sta

tionary sources are creditable for federal equivalency purposes). Therefore, AQMD

tracks two sets of accounts, one for purposes of demonstrating equivalence with federal

and one for state offset requirements. In addition, each of the five pollutants subject to

offset requirements (VOC, NOx, SOx, CO, and PM 10) has its own federal account and its

own state account. AQMD’s NSR program is considered to provide equivalent or greater

offsets of emissions as required by federal and state requirements for each subject pollut

ant provided the balance of credits left in AQMD’s accounts for each pollutant does not

become negative, indicating that there were adequate offsets available.

Credit Accounting

When emissions from a permitted source are permanently reduced (e.g., installation of

control equipment, removal of the source) and the emission reduction is not required by

rule or law and is not called for by an AQMP control measure that has been assigned a

target implementation date 5,the permit holder may apply for ERCs for the pollutants re

Refer to Rule 1309(b)(4) for a complete explanation of eligibility requirements.

-6-
duced. Prior to issuing an ERC, AQMD “discounts” this reduction to the level of reduc

tion that would have been realized if the source had been operating at current BACT lev

els. The difference between the actual quantified emission reduction and the amount of

ERCs issued are credited to AQMD’s account of available offsets. Additionally, if the

permit holder for the source generating the emission reduction had previously received

offsets from an AQMD account or has a “positive balance” (i.e., net emission increase),

the quantity of AQMD credits used or the amount of the positive balance is subtracted

from the reduction and “paid back” to AQMD’s accounts prior to issuance of an ERC

pursuant to Rule 1306. In other cases, permit holders do not always submit applications

to claim ERCs for their equipment shutdowns or other eligible emission reductions.

These unclaimed reductions are referred to as “orphan shutdowns” or “surplus reduc

tions” and can be credited to AQMD’s accounts.

Debit Accounting

On the other hand, AQMD also tracks all emission increases that are offset through the

Priority Reserve or the Community Bank, as well as all increases that are exempt from

offset requirements pursuant to Rule 1304 — Exemptions. These increases are all debited

from AQMD’s accounts. As discussed above, AQMD uses an offset ratio of 1.2-to-i for

its federal accounts. That is, 1.2 pounds are deducted from AQMJJ’s federal accounts for

each pound of permitted increase at a federal source. Conversely, state offset require

ments aie based on actual emissions rather than maximum permitted potential to emit.

AQMD considers actual emissions as eighty percent of permitted potential to emit 6.

Thus, 0.8 pound is debited to AQMD’s state accounts for each pound of permitted emis

sions increase. There is another source of debits from AQMD’s offset accounts in addi

tion to the permitted emission increases described above. This debit is very infrequent,

but it occurs in a situation in which a permit that was previously inactivated due to non

payment of fees and deemed an orphan shutdown is reactivated. These special reactiva

tions are debited from AQMD’s federal and state accounts at the same ratios as are the

other emissions increases identified above.

The various sources of credits to and debits from the federal and state offset accounts are

discussed in greater detail in Appendix A.

DEMONSTRATION OF EQUIVALENCE WITH FEDERAL OFFSET

REQUIREMENTS

Table 3 presents the total emission reductions credited to AQMD’s federal offset ac

counts from August 2000 through July 2001. Debits from AQMD’s federal accounts in

6 The eighty percent factor is based upon an analysis and demonstration previously conducted in 1998 by AQMD

staff in coordination with CARB.

-7-
curred during the same period are summarized in Table 4. Finally, sum of creditldebit

activity (credits minus debits) for the federal accounts is displayed in Table 5.

Table 3

Credits to AQMD’s Federal Offset Accounts (August 2000 through July 2001)

CREDITS RECEIVED* VOC NOx SOx CO PM1O

Orphan Shutdown Credits (lb/day) 1,765 2,060 0 1,561 0

Surplus Reduction Credits (lb/day) 703 35 0 0 0

BACT and Other Discount of ERCs (lb/day) 0 0 0 0 0

Positive Balance Adjustment via ERC (lb/day) 18 0 0 0 0

Total Credit to AQMD Account (lb/day) 2,486 2,095 0 1.561 0

Total Credit to AQMD Account (ton/day 1.24 1.05 0.0 0.78 0.00

*

For a more detailed description of credits received see Appendix A

Table 4

Debits from AQMD’s Federal Offset Accounts (August 2000 through July 2001)

Priority Reserve (lb/day) 137 321 0 360 296

Community Bank (lb/day) 0 31 0 0 0

Other Rule 1304 Exemptions (lb/day) 2,080 621 0 323 1,881

Special Permit Reactivations (lb/day) 1 14 0 0 0

Sum Total of AQMD Offsets (lb/day) 2,218 987 0 683 2,177

120 % Offset Ratio (lb/day) 2.662 1.184 0 820 2.612

• Total Debit to AQMD Account (lb/day) 2,662 1,184 0 820 2,612

Total Debit to AQMD Account (ton/day 1.33 0.59 0 0.41 1.31

*

For a more detailed description of credits received see Appendix A

Small Source Exemption (lb/day) 0 0 0 0 0

-8-
Table 5

Sum of Credit/Debit Activity in AQMD’s Federal Offset Accounts (August 2000

through July 2001)

voc NOx SOx, PM1O

Total Credits* (lb/day) 2,486 2,095 0 1,561 0

Total Debits* (lb/day) -2,662 -1,184 0 -820 -2,612

Sum of CreditIDebit()* (lb/day) -176 911 0 741 -2,612

Sum of Credftloebit(.)* (ton/day -0.09 0.46 0.00 0.37 -1.31 *

Credits are shown as (+) and Debits as (-), while their sum is shown as (+) or (-) depending on the val

ues of Credits and Debits.

The sum of credit and debit activity (credits plus debits) from this analysis is added to or

subtracted from the starting federal account balance for each pollutant to determine com

pliance with federal NSR requirements. Refer to Table 1 for a summary of starting and

ending federal account balances for the August 2000 through July 2001 time period.

DEMONSTRATION OF EQUIVALENCE WITH STATE OFFSET

REQUIREMENTS

Table 6 presents the total emission reductions credited to AQMD’s state offset accounts

from August 2000 through July 2001. Debits from AQMD’s state accounts incurred

during the same period are summarized in Table 7. Finally, sum of credit/debit activity

(credits plus debits) for the state accounts is displayed in Table 8.

-9-
Table 6

Credits to AQMD’s State Offset Accounts (August 2000 through July 2001)

CREDITS RECEIVED* VOC NOx’ SOx CO PMIO

Orphan Shutdown Credits (lb/day) 6,453 3,393 39 2,081 474

Surplus Reduction Credits (lb/day) 1,220 260 0 12 0

BACT and Other Discount of ERCs (lb/day) 0 0 0 0 0

Positive Balance Adjustment via ERC (lb/day) 18 0 0 1 0

Total Credit to AQMD Account (lb/day) 7,691 3,653 39 2,094 474

Total Credit to AQMD Account (ton/day 3.85 1.83 0.02 1.05 0.24

*

For a more detailed description of credits received see Appendix A

Table 7

Debits from AQMD’s State Offset Accounts (August 2000 through July 2001)

DISTRICT OFFSETS USED* 1 voc NOx SOx CO PM1O

Small Source Exemption (lb/day) 14,119 779 0 885 40

Priority Reserve (lb/day) 181 370 205 807 489

Community Bank (lb/day) 354 32 0 50 5

Other Rule 1304 Exemptions (lb/day) 2,786 2,432 0 337 2,029

Special Permit Reactivations (lb/day) 1 56 0 0 0

Sum Total of AQMD Offsets (lb/day) 17,441 3,669 205 2,079 2,563

80 % PTE Adjustment (lb/day) 13,953 2,935 164 1,663 2,050

Total Debit to AQMD Account (lb/day) 13,953 2,935 164 1,663 2,050

Total Debit to AQMD Account (ton/day) 6.98 1.47 0.08 0.83 1.03

*

For a more detailed description of credits received see Appendix A

-10-
Table 8

Sum of Credit/Debit Activity in AQMD’s State Offset Accounts (August 2000

through July 2001)

VOC NOx SOx CO PMIO

Total Credits* (lb/day) 7,691 3,653 39 2,094 474

Total Debits* (lb/day) -13,953 -2,935 -164 -1,663 -2,050

Sum of CreditJDebit()* (lb/day) -6,262 718 -125 431 -1,576

Sum of CredWDebit()* (ton/day) -3.13 0.36 -0.06 0..22 -079

*

Credits are shown as (+) and Debits as (-), while their sum is shown as (+) or (-) depending on the val

ues of Credits and Debits.

The sum of credit and debit activity (credits plus debits) from this analysis is added to or

subtracted from the starting state account balance for each pollutant to determine compli

ance with state NSR requirements. Refer to Table 2 for a summary of starting and ending

state account balances for the August 2000 through July 2001 time period.

ENHANCEMENTS TO ANALYSIS METHODOLOGY

The only “orphan” credits deposited in AQMD’s accounts in prior reports were those re

sulting from equipment shutdowns (“orphan shutdowns”). This report introduces another

type of credit—those resulting from emission reductions associated with permitting ac

tivity (“surplus reductions”). Surplus reductions were not included in previous analyses

because this type of emission reduction could not be automatically captured by the track

ing system and it requires the investment of staff resources required to authenticate such

reductions. However, in order to further enhance the tracking system, as well as the

tightening of the emission offset market and the recently expanded use of AQMD’ s offset

accounts to include EGFs, the scope of staff’s analysis was expanded to include these

credits.

Further, AQMD staff conducted additional review and audit of the past credit and debit

accounting and determined that in two instances an adjustment of the entries was neces

sary. These resulted in a reduced level of available past credits and is reflected as Re

finements in Tables 1 and 2.

—11—
ELECTRICAL GENERATING FACILITY ACCESS TO PRIORITY RESERVE

The April 2001 amendments to Rule 1303— Requirements and Rule 1309.1 — Priority Re

serve provided EGFs with access to PM1O offsets from the Priority Reserve 7.Subse

quently, the November 2001 and May 2002 amendments to Rule 1309.1 expanded EGF

access to Priority Reserve offsets to include SOx and CO. Table 9 summarizes the Prior

ity Reserve offsets provided to EGFs during the August 2000 through July 2001 time pe

riod. These priority reserve offsets are included in (not in addition to) the offsets summa

rized in Tables 4, 5, 7, and 8.

Table 9

EGF Access to Priority Reserve Offsets (August 2000 through July 2001)

PM’IO SOx CO

Priority Reserve Offsets Used (lb/day) 338 0 0

Priority Reserve Offsets Used (ton/day) 0.17 0 0

CONCLUSIONS

e

The analysis presented in this report demonstrates that AQMD’s NSR program provides

equivalent offsets to those required by federal and state NSR requirements and is equiva

lent to the federal and state requirements on an aggregate basis. The majority of sources

subject to AQMD’s permitting program are not major stationary sources and, therefore,

are not subject to federal offset requirements. AQMD’s federal account balances re

mained relatively unchanged, with the exception of an about eight percent reduction in

the PM1O account. The PM1O reduction, however, is primarily due to a refinement of the

amount credited to AQMD’s account during the August 1998 through July 1999 time pe

riod. As such, this reduction is considered a one-time event and is not cause for concern.

The pollutant of lowest balance is NOx. The state NOx balance was 4.30 tons per day at

the beginning of the reporting period and was increased by 0.47 ton per day during the

twelve months covered by this report. AQMD’s state VOC account balance (46.58 tons

per day at the beginning of the reporting period) is significantly higher than the NOx bal

ance. However, in the past, the VOC account has generally experienced a greater rate of

depletion than have the other accounts. The reductions of AQMD’s state VOC and PM1O

balances during this reporting period were each about seven percent during the August

2000 through July 2001 timeframe. As indicated above, the PM1O reduction is primarily

due to the one-time refinement. AQMD’s state SOx and CO account balances remained

relatively unchanged.

Refer to Rule 1309.1(a)(4) for eligibility requirements.

-12-
Staff will continue to track credits to and debits from the federal and state offset accounts

and will provide annual reports and equivalency demonstrations to the Board to ensure

that AQMD’s NSR program continues to operate in compliante with federal and state

NSR requirements.

-13-
0
APPENDIX A

Sources of Credits to and Debits from AQMD’s Emission Offset Accounts
Sources of Credits to and Debits from AQMD’s Emission Offset Accounts

This appendix provides a more detailed description of the sources of Credits to and Deb

its from AQMD’s federal and state offset accounts.

I. Sources of Emission Reductions Creditable to AQMD Accounts

A. BACT Discount of ERCs

Rule 1309 specifies that ERCs issued for an emission reduction not be “greater

than the equipment would have achieved if operating with current [BACT].” In

other words, ERCs are not issued for total actual emissions reductions but are only

issued by AQMD for the portion of the emission reduction beyond what would be

achieved by the installation of current BACT on the source providing the reduc

tions. The BACT discount portion of the reduction is available for offsetting

emission increases for purposes of demonstrating equivalence with federal and

state NSR requirements. Thus, the BACT discount portion of ERC-generating

emission reductions are credited to AQMD’s federal and state accounts. Note that

only emission reductions originating at major stationary sources are credited to

AQMD’s federal accounts and, for CO. PM10, and SOx, only reductions originat

ing at facilities with the potential to emit at least 15 tons per year of these pollut

ants are credited to AQMD’s state accounts. For NOx and VOC sources such

emission reductions are credited to state accounts regardless of the facility’s po

tential to emit.

Also as part of the enhancements to the methodology, AQMD staff conducted ad

ditional review and audit of past credit and debit accounts and determined that the

report prepared for the August 1998 through July 1999 time period reflected an

overcrediting of AQMD’s federal and state accounts by 2.41 tons of PM1O per

year in the “BACT Discount of ERCs” line item. A refmement to AQMD’s fed

eral and state accounts for this is shown as a line item in Tables 1 and 2.

B. Other Discounts of ERCs (Prior AQMD Offsets and Positive NSR Balances)

Rule 1306(e) specifies that all of the following be subtracted from an emission re

duction after the BACT discount is applied and before ERCs are issued:

• The Positive NSR balance of the facility generating the emission reduction;

• All Community Bank allocations previously issued to the facility generating the

emission reduction;

-Al -
• All Priority Reserve allocations previously issued to the facility generating the

emission reduction; and

‘ All offsets obtained by the facility generating the emission reduction pursuant

to the exemption provisions of Rule 1304.

This provision prevents facilities from generating salable ERCs from offsets origi

nally obtained from AQMD’s accounts. Therefore, these offset discounts are

captured back into AQMD’s accounts and are available for demonstration of

equivalence with federal and state offset requirements. Again, only reductions

originating at major stationary sources are credited to AQMD’s federal accounts

and reductions of CO, PM 10, and SOx originating at facilities with the potential to

emit at least 15 tons per year of the pollutant and reductions of NOx and VOC

originating at all facilities are credited to AQMD’s state accounts.

C. Orphan Shutdowns

Orphan shutdowns are emission reductions from AQMD-permitted sources that

are removed from service and permanently cease emitting activities, have their

permits inactivated, and are not claimed as emission reductions under an ERC ap

plication. AQMD tracks these accounts. Only orphan shutdown reductions origi

natmg at major stationary sources are credited to AQMD’s federal accounts and

shutdowns of CO, PM10, and SOx originating at facilities with the potential to

emit at least 15 tons per year of the pollutant and NOx and VOC shutdowns at all

facilities are credited to AQMD’s state accounts. The calculation of the quantity

of offsets to be credited to AQMD’s offset accounts is dependent on the nature of

the offsets originally used for the source that has shut down and is generating the

emission reduction:

• If the shut down source was originally offset from the Community Bank, the

Priority Reserve, or a Rule 1304 exemption, the actual amount of the offset

provided (i.e., the potential to emit) is credited to AQMD’s federal accounts

and eighty percent of the actual amount of the offset provided is credited to

AQMD’s state offset accounts. The exception to this is orphan shutdowns of

equipment formerly exempt from permit requirements pursuant to Rule 219

and, therefore, never subject to NSR, which are credited to AQMD’s federal

and state accounts at twenty percent of the actual amount of the offset pro

vided. This also includes equipment that has been shut down at a source where

a prior permit for the same source obtained offsets from the Community Bank,

the Priority Reserve, or a Rule 1304 exemption.

• The quantity of offsets to be credited to AQMD’s offset accounts for orphan

shutdowns other than those described above was calculated on a case-by-case

basis from the following two cases, whichever results in lower emissions:

-A2--
• Twenty-three percent 8of the amount originally offset for the source in

NSR; or

• Twenty-three percent of twenty-four times the hourly controlled emissions

from the source as recorded in AQMD’s automated emission inventory

system (AEIS).

This provides a very conservative approach to ensure that the creditable emission

reductions are not overestimated.

D. Surplus Reductions

Surplus reductions are creditable emission reductions (excluding orphan shut

downs) associated with permitting activities. There are two basic categories of

surplus reductions:

• When permits to construct that received emissions offsets from AQMD’s ac

counts are cancelled the offsets provided are returned to AQMD’s accounts.

• When a permit is modified in a manner that permanently and enforceably re

duces the equipment’s “potential to emit;” the reduction is not required by rule,

proposed rule, law, or control measure 9;and the facility does not receive credit

for the reduction, the reduction is credited to AQMD’s accounts. Examples of

these types of emission reductions include situations in which facilities install

control equipment that is not required for compliance, process modifications

that reduce emissions below statutory and rule requirements, and retrofit down

to BACT levels for sources pending change of location.

Only reductions occurring at facilities with potential to emit above the federal

thresholds are credited to AQMD’s federal accounts and with potential to emit

above the state thresholds are credited to AQMD’s state accounts.

E. Negative NSR Balances

Prior to the 1990 amendments to Regulation Xffl, negative NSR balances repre

sented a facility’s emission reduction balance that had not been issued as ERCs.

Negative NSR balances were generated by emission reductions resulting from on

site equipment or facility modifications, over controls, or shutdowns. The 1990

amendments to Regulation XIII specified that all negative NSR balances be re

duced by eighty percent and converted to ERCs. The eighty percent portions of

8 An eight-hour per day, five days per week, fifty weeks per year operating schedule represents twenty-three percent

of the operating time of a twenty-four hour per day, seven days per week, fifty-two weeks per year operating

schedule.

Refer to Rule 1309.1 (b)(4) for a complete explanation of eligibility requirements.

-A3-
the negative balances from all such facilities were used to fund both AQMD’s fed

eral and state offset accounts. This was a one-time source of funding for the fed

eral and state offset accounts and is not ongoing.

II. Sources of Emission Increases Debited from AQMD Accounts

A. Priority Reserve

Pursuant to AQMD Rule 1309.1, essential public services (e.g., sewage treatment

facilities, police and fire fighting facilities, schools) are not required to provide

emission offsets in the form of ERCs when they receive permits involving emis

sion increases. Instead, AQMD provides their offsets through the Priority Reserve.

EGFs are also able to obtain PM10, CO, and SOx emissions offsets from the Pri

ority Reserve. These offsets are deducted from AQMD’s federal (for the case of

major stationary sources) and state offset accounts (except CO, PM1O, and SOx

from facilities whose potential to emit these pollutants is below 15 tons per year).

B. Community Bank

For applications deemed complete prior to February 1996, no offsets were required

for projects with project emission increases below the following thresholds:

• 30 pounds per day of VOCs;

• 40 pounds per day of NOx;

• 60 pounds per day of SOx;

• 220 pounds per day of CO; and

• 30 pounds per day of PM 10.

AQMD provided offsets for these projects from its accounts through what was

then termed the “Community Bank.” Community Bank offsets provided to major

stationary sources are deducted from AQMD’s federal accounts and all Commu

nity Bank offsets are deducted from AQMD’s state accounts (except CO. PM 10,

and SOx provided to facilities whose potential to emit these pollutants is below 15

tons per year).

C. Offset Exemptions

The Community Bank was replaced with offset exemption thresholds for applica

tions received in or after February 1996. Facilities with aggregate potential to emit

below these thresholds are eligible to receive emission offsets from AQMD’s off

-A4-
set accounts, up to the levels of the thresholds. The exemption thresholds speci

fied in Rule 1304 are as follows:

• 4 tons per year of VOCs;

• 4 tons per year of NOx;

• 4 tons per year of SOx;

• 4 tons per year of PM 10; and

• 29 tons per year of CO.

Rule 1304 also includes offset exemptions for a variety of source types such as re

placement of ozone-depleting compounds, methyl bromide fumigation, emergency

equipment, and certain modifications and process changes implemented to reduce

issuance of air contaminants. The majority of these exemptions are intended to in

centivize installation of control equipment or facilitate compliance with other

regulatory mandates. These offsets are debited from AQMD’s federal and state

offset accounts. Note that only offsets provided to sources at major stationary

sources are deducted from AQMD’s federal accounts. Similarly, only CO. PM 10,

and SOx offsets provided to facilities whose potential to emit these pollutants is

greater than or equal to 15 tons per year are deducted from AQMD’ s state ac

counts, whereas all NOx and VOC offsets are deducted from the state accounts.

Also as part of the enhancements to the methodology, AQMD staff conducted ad

ditional review and audit of past credit and debit accounts and determined that CO

under “Other Exemptions” (i.e., exemptions other than the small source exemp

tion) were underreported for AQMD’s federal (6 pounds per day) and state (264

pounds per day) accounts for the August 1999 through July 2000 time period. The

appropriate refinements are shown as line items in Tables 1 and 2.

D. Special Permit Reactivations

There have been rare cases where the permits for equipment that was previously

considered an orphan shutdown have been reactivated. The orphan shutdown re

ductions previously credited to AQMD’s federal and state offset accounts for these

sources are debited from these accounts when such permits are reactivated.

-A5-