SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DI STRICT

FINAL STAFF REPORT

DRAFT AMENDMENTS TO RULE 3170 (FEDERALLY MANDATED OZONE NONATTAINMENT F EE)

Prepared by: Carlos Garcia, Senior Air Quality Engi neer Reviewed by: David Warner, Director of Permit Servi ces, Leland Villalvazo, Supervising Air Quality Special ist, and George Heinen, Supervising Air Quality Engineer

May 19, 2011

I. SUMMARY

Section 185 of the federal Clean Air Act (CAA) Amen dments mandates that “Severe” and “Extreme” ozone nonattainment areas adopt a rul e that requires major stationary sources of air pollution to pay ozone nonattainment fees in the event the area fails to reach attainment by the required attainment date. Affected businesses would be required to pay these fees on an annual basis until the area reaches attainment of the ozone standard. These fees, often referred to as “ Section 185 nonattainment fees” or “clean air act fees,” were intended to serve as pen alties that would compel major sources that had not done all they could to control emissions of ozone precursors to reduce their emissions and expedite attainment. In 1990, the CAA set the fee at $5,000 per ton of VOC and NOx emitted by the source during the calendar year in excess of 80 percent of a facility’s “baseline emis sions”. The CAA also required that the fees be adjusted annually for inflation based o n the Consumer Price Index (CPI). The federal Bureau of Labor Statistics currently pl aces the CPI-adjusted rate at $8342 per ton for 2010 ( http://data.bls.gov/cgi-bin/cpicalc.pl ).

The San Joaquin Valley Air Basin (SJVAB) is subject to this fee requirement as the

District has been classified as “Extreme” non-attai nment for the now-revoked 1-hour

ozone standard with an attainment deadline of Novem ber 2010. To satisfy the Section 185 mandate, on May 16, 2002, the District adopted Rule 3170 (Federally Mandated Ozone Nonattainment Fee). The District included sp ecial provisions to exempt “clean units” from the fees and provided for multi-year av eraging of emissions to recognize

and reward businesses that reduced their emissions before the attainment year.

In January 2010, the U.S. Environmental Protection Agency (EPA) disapproved these special provisions and issued a limited approval an d limited disapproval (appendix A) of the current version of Rule 3170. This action by E PA began an 18-month sanction clock, and the District has until August of 2011 to submit a revised program satisfyingSan Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 the requirements of Section 185, or Federal sanctio ns take effect. If the District fails to adopt or implement a federally approved 185 fee pro gram, in addition to the customary sanction penalties, the EPA will also directly coll ect the fees, plus interest. Under

these circumstances all revenues collected will be sent to the federal treasury with no

accommodation for the fees to be returned to the re gion from which they were

collected.

In response to calls for added flexibility, in Janu ary 2010 EPA also issued a national guidance memorandum (appendix B) on Section 185 non attainment fees providing for alternative approaches to satisfy the CAA fee requi rements, provided such alternatives are no less stringent.

As provided in EPA’s 185 guidance, the District is now proposing an alternative feeequivalent program that will be submitted to EPA fo r approval into the State Implementation Plan (SIP). The District’s Governin g Board took the first steps towards implementing a fee-equivalent program as provided i n the EPA 185 guidance memorandum when they approved a motor vehicle fee o f $12 per vehicle registered in the San Joaquin Valley in October 2010. The total motor vehicle assessment of approximately $34 million dollars annually is inten ded specifically to fill any shortfall in

the District’s collection of Section 185 fees. As part of an alternative equivalent program, the District will also re-adopt a version of Rule 3170 that retains many of the initial concepts originally adopted in 2002, which were intended to facilitate an equitable distribution of responsibility and reward facilitie s that had invested in clean air technology. Finally, the District is proposing a f ee-equivalent program tracking system to demonstrate, on an annual basis, that the combin ed revenue streams from Rule 3170 and the motor vehicle fees are equivalent to t he revenue that would have resulted from a straightforward application of Section 185.

A workshop was held on March 8, 2011 to discuss, pr esent and take comments on the Draft Rule 3170 amendments and the fee-equivalent p rogram and associated tracking system. Comments received since that time are addre ssed in this final draft staff report (and in appendix H), and incorporated into the rule as appropriate. While the comments incorporated do not significantly change t he amount of fees collected, they do incorporate many administrative requirements sug gested by EPA. Due to the mandatory timelines for revising the rule (EPA must approve the rule before August 2011), we are moving expeditiously, and we are reco mmending the adoption of proposed Rule 3170 at the May 19, 2011 Governing Bo ard meeting.San Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 II. DISCUSSION OF SECTION 185 ALTERNATIVE FEE-EQUIV ALENT

PROGRAM

A. Background

The failure to attain the now-revoked 1-hour ozone standard by November 2010 will trigger the imposition of the Section 185 ozone non attainment fees in the Valley. Significant progress has been made in reducing the number of one-hour ozone standard exceedances, from 50 days over the standar d in 1990 when the federal Clean Air Act amendments (CAA) were adopted by Congress, to only three days of exceedances in 2009. In 2010, the Valley experienc ed seven days of exceedances, thus triggering the Section 185 fees.



### When Section 185 was first enacted in 1990 by the U nited States Congress, it was intended to serve as a compelling incentive for sta tionary sources to install

additional controls to reduce emissions and expedite 

### attainment. Given today's circumstances, however, these fees will not have th e intended impact in the San Joaquin Valley. With the mature air pollution contr ol programs that are in place in the San Joaquin Valley, most businesses have alread y made significant investments

and installed the most advanced controls available for their facilities. Please refer to

the District's recent 2010 Ozone Mid-Course Review 

### for a detailed assessment of various stationary source regulations that Valley b usinesses must comply with. As recently as December 10, 2010, the state Air Resour ces Board has determined that the San Joaquin Valley Air District has adopted all feasible measures to control

emissions from sources under its control. Under th ese circumstances, Section 185 has become punitive, with no real ability for most facilities to avoid the fee.

The Section 185 nonattainment fees must be invoiced for the first time in 2012, generally based on a comparison between 2010 and 20 11 emissions. Under Section 185, fees would be collected from Valley businesses that are major sources of NOx or VOC emissions. Only the ozone precursors for which the facility is considered a major source are subject to the fee collected in this rul e. Since Section 185 applies only to major sources of pollution, minor sources of either NOx or VOC are not subject to the federal penalty fee

The amount that the District estimates would be col lected under the Section 185 fee requirements is approximately $29 million per year. The fees would then continue until

the District reaches attainment for the now-revoked 1-hour ozone standard.

B. EPA Section 185 “Equivalent Program” Guidance

In fulfilling the Section 185 Clean Air Act require ments, the District Governing Board has directed staff to make use of the flexibility p rovided by EPA and develop anSan Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 equivalent program that better addresses the Valley ’s unique circumstances. Concepts in the original version of Rule 3170, such as the c lean emissions unit exemption, were intended to facilitate an equitable distribution of responsibility and reward facilities that had invested in clean air technology, and EPA’s gui dance provides the means to address EPA disapproval issues while continuing to fulfill that intent.

Specifically, EPA’s January 5, 2010 guidance memora ndum titled, “ 

### Guidance on Developing Fee Programs Required by Clean Air Act S ection 185 for the 1-hour Ozone NAAQS,” provides the following alternative approaches to Se ction 185 nonattainment fee requirements:

Fee-Equivalent Alternative Programs: In their Sect ion 185 guidance memo, EPA anticipates that they will be able to approve a pro gram that clearly raises at least as much revenue as otherwise required under the basic Section 185 fee program if the proceeds are spent to pay for emissions reductions of ozone-forming pollutants (NOx and/or VOC) in the same geographic area subject to the Section 185 program.

EPA clearly states in their guidance that such fee- equivalent alternative programs may shift the fee burden from the specific set of major stationary sources that are otherwise required to pay fees according to Section 185, to o ther non-major sources of emissions, including owners/operators of mobile sources. EPA acknowledges that Section 185 is not strategic in imposing emissions fees on all maj or stationary sources, including already well-controlled sources that have few, if a ny, options for avoiding fees by achieving additional reductions. Therefore, under this option EPA would allow the District to recognize through reduced fees those ma jor sources of emissions that have already installed the latest technology, and assess the remainder of the total required fees on other sources that are not already as well controlled. Under this option, the alternative program cannot rely on emissions reduct ions already required by the applicable State Implementation Plan.

Emissions-Equivalent Alternative Programs: EPA beli eves that it can approve a program that achieves at least as much additional e missions reductions as would be expected to result from the fee-minimization incent ive of the Section 185 fee program. In other words, an emissions-equivalent program cou ld be approved if it achieves emissions reductions each year that are equal to or greater than the amount of emissions against which fees would be assessed each year under the Section 185 fee program (i.e., actual emissions in excess of 80 per cent of the baseline emissions).

For purposes of estimating the emissions reductions required in such a program, the

District must assume that sources would reduce thei r emissions to the fee applicability

threshold under Section 185. The emissions reducti ons in the alternative program could then come from the same set of major sources subject to Section 185, or from a different set of sources, in whole or in part, so l ong as all reductions come from within the nonattainment area and are equally beneficial i n reducing ozone formation.San Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 Once again, the alternative program cannot rely on emissions reductions already required by the applicable State Implementation Pla n.

Alternative Programs Combining Emissions Reductions and Fees: EPA also would approve a program that combines features of the abo ve-mentioned alternatives. Under this option a part of the reductions that are neces sary to show equivalence come from program components that directly achieve the estima ted reductions, and the remainder could come from imposition of fees on a set of sour ces identified in the alternate program. For example, if 1000 tons of emissions re ductions are needed to demonstrate equivalence, the District could instead adopt a program that obtains 600

tons of emissions reductions and collect fees total ing $3.34 million (calculated as the remaining 400 tons times $8342 per ton).

C. Implementing an Equivalent Program

1. Equivalency Considerations:

In 2002, the District became the first jurisdiction in the nation to submit a Section 185 rule to the EPA. Many other jurisdictions, inc luding some in California, missed their corresponding deadlines and have not y et submitted a rule or program to the EPA. Some of these jurisdictions ha ve already missed their attainment deadline and risk having the federal gov ernment collect fees and

confiscate revenues as described earlier. Given th at EPA has already acted to disapprove certain provisions of the District rule on this matter, the District cannot delay or abate a federal take over by simply submitting a proposed program for EPA consideration. Under these circums tances, the District must also receive EPA approval of the alternate program within 18 months (by August 2011) to avoid federal 2-to1 offsetting sanctions, and within 24 months after EPA’s action on the previously adopted rule (or no later than January 2012) to avoid triggering the imposition of a Federal Implem entation Plan.

EPA’s Section 185 guidance memorandum allows for an alternative 185 fee program that is, consistent with Section 172 (e) of the act, ‘not less stringent’, but the memo does not provide a template or provide a p re-approved alternative program model when utilizing the federal CAA’s equi valency program under Section 172(e). In fact, EPA makes it clear that a case-by-case approval will be a part of EPA’s review, as will a formal public not ice-and-comment federal rulemaking process. Also, environmental groups at the national level have taken legal action against EPA challenging the legality o f these alternatives. Therefore, it is critical to carefully consider rel evant issues and questions and design a program that would be legally defensible a nd would have optimumSan Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 chance for EPA approval. Towards that end, the Dis trict has incorporated the following guiding principles in designing the propo sed alternative program:

• All emission reductions used in the alternate prog ram must be surplus to

the District’s 1-hour Extreme Ozone Attainment Demo nstration Plan.

• To better ensure that the alternate program will y ield additional reductions that expedite attainment of the applicable standard and satisfy Section 185’s intent, the use of emission reductions from m easures for which credit is already taken in other State Implementati on Plans should be

minimized. New revenue sources and emission contro l strategies shall be given preference.

• Recognize through reduced fees those major sources of emissions that have already installed the latest technology and ha ve few, if any, options for avoiding fees by achieving additional reduction s.

• To the extent possible provide for equitable assig nment of responsibility to mobile and stationary sources, commensurate to thei r relative emissions

and contributions to nonattainment.

• Exercise all feasible measures to prevent or minim ize the likelihood of federal take over, imposition of federal fees on va lley businesses, and

confiscation of Section 185 fee revenues.

• To the extent possible, minimize reliance on fundi ng sources or emission control strategies over which the District has litt le or no control.

• Minimize the use of revenue sources that have quic kly-approaching sunset provisions, unless appropriate alternatives are identified in

advance.

• Refrain from the use of revenue sources for which EPA approval would add a cost-prohibitive administrative burden and di minish overall effectiveness in reducing emissions, or limit the D istrict’s discretion to fund preferred projects.

• Incorporate comprehensive public reporting and acc ountability for alternate program components that rely on public fu nds to show equivalency.

• Preference shall be given to funding sources that provide additional cobenefits in satisfying other District emission redu ction goals.San Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 2. Equitable Distribution of Responsibility:

Under Section 185 of the CAA, only stationary sourc es are subjected to the nonattainment penalty fees. This is inherently ine quitable, especially in areas such as the San Joaquin Valley where stationary sou rces are already subject to some of the toughest air regulations in the nation. Since 1980, the NOx and VOC emissions from stationary sources in San Joaqui n Valley have been reduced by 80 percent. Mobile source emissions hav e been reduced by 40 percent during the same time period. Today, more t han 80 percent of the Valley’s NOx emissions, the leading contributor to Valley’s ozone and particulate exceedances, comes from mobile sources within the g eographic boundaries of the District but outside of the District’s regulato ry jurisdiction. Under the alternative options provided in the EPA’s guidance memorandum, the District can craft an equivalent program that to the extent possible would defray the cost to stationary sources through the use of mobile sou rce-based revenues.

3. The Fee-Equivalent Program

The alternative fee program that District staff is proposing to send to EPA for approval into the SIP consists of three main compon ents: one, District Rule 3170 will be used to collect 185 fees from major st ationary sources that have not done all that they can do to reduce their stationar y source emissions; two, AB2522 motor vehicle fees will be used to supplemen t the Section 185 fees
collected under Rule 3170; and three, Rule 3170 con tains a fee tracking and reporting system to verify that this overall progra m meets the Section 185 fee obligation.

a. Rule 3170

The proposed rule amendments, discussed in detail b elow, will address the deficiencies identified by EPA in their limited app roval/disapproval, and will collect fees for emissions from equipment at major sources of NOx and VOC

that have not installed advanced controls and are t herefore not “Clean

Emissions Units” under the rule.

b. AB2522 Motor Vehicle Fee

On October 21, 2010, the District Governing Board t ook the first steps towards implementing a fee equivalent program as pr ovided in the EPA guidance memorandum discussed above when they appro ved a motor vehicle fee of $12 per vehicle registered in the Sa n Joaquin Valley. The total assessment of approximately $34 million dollars ann ually is intended specifically to fill any shortfall in the District’ s collection of Section 185 fees.San Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 See appendix C for the related October 21, 2010, Di strict staff report, and appendix D for the Board’s adopted revised resolut ion.

This action adheres to all of the guiding principle s discussed above that were established to assure the defensibility of an equiv alent program:

• The motor vehicle fee assessment is a new source o f revenue authorized by Assembly Bill 2522 (Arambula, 2008).

• The District Governing Board implemented it specif ically to address any shortfall in Section 185 fees created by Rule 3170 in implementing the District’s intent to provide well-controlled units an exemption from the

fees.

• This new revenue and the emissions reduction incen tive programs that will be funded by the new revenue are not relied on in, and are therefore surplus of, the District’s 1-hour Extreme Ozone Att ainment

Demonstration Plan.

• The resulting distribution of funding of the equiv alent Section 185 program is roughly commensurate with each sector’s contribution to the ozone precursor inventory in the Valley, with the s tationary source contribution being roughly 20% in terms of both emi ssions and revenue, and mobile sources making up the balance.

• The District Governing Board has discretion over t his new motor vehicle fee revenue source, and has chosen to sunset the re lated fee-collection concurrently with a demonstration of attainment of the one-hour ozone standard, which is also the date of cessation of th e Section 185 penalty fee requirement and the end of any fee obligation u nder Rule 3170.

This new revenue source, at $12 per vehicle registe red in the San Joaquin Valley, is sized to adequately address any shortfal l in revenues created by the District’s proposed “clean emissions unit” exem ption, including a cushion that is intended to address any shortcomings in the District’s estimates of

Section 185 fees. The District has estimated that a straightforward application of Section 185 in the San Joaquin Valle y would result in approximately $29 million in revenues. However, be cause the basis of these fees will be a comparison of actual emissions durin g a particular year to 80% of the emissions during 2010, and neither of those emissions numbers are currently known, the District had to make assumptio ns based on the latest known emissions inventory information, generally 20 08 and 2009 data. In addition, more units will be replaced and retrofitt ed as a result of the District’s aggressive control measure development and attritio n. In fact, this proposed rule’s innovative clean emissions unit exemption is also expected to encourage sources to control their previously under -controlled sources in an effort to avoid paying future fees.San Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 In sum, these unknowns provide some uncertainty in the District’s estimations, particularly over the multiple years t hat this fee is expected to be in place. However, the anticipated new revenue of $34 million dollars (at least 2.8 million registered motor vehicles in the San Joaquin Valley @ $12 per vehicle) should be sufficient to cover all but the most dire estimation shortcomings.

c. Fee Equivalency Tracking System

Finally, the District is proposing a fee equivalenc y tracking system to demonstrate, on an annual basis, that the combined revenue streams from Rule 3170 and the AB 2522 motor vehicle fees are eq uivalent to the revenue that would have resulted from a straight applicatio n of Section 185. The

District will demonstrate on an annual basis that o ur fee-equivalent program –

the combination of revenues from Rule 3170 and from the AB 2522 motor

vehicle fees – collects no less fee revenue than a straightforward fee

assessment under Section 185.

The following are the District’s commitments to est ablish and administer the tracking system:

• Actual Emission Tracking System

The APCO will implement a system for tracking all i nformation necessary

to demonstrate that the sum of fees collected under this rule plus AB 2522 motor vehicle fees to be collected during the billi ng year is equal to or greater than the total penalty fee that would be co llected under a literal application of the federal ozone nonattainment fee, codified in Section

185 of the federal CAA.

To that end, Rule 3170 will require that each appli cable major source

submit annual emission statements that detail the e missions from each of their permitted units, and indicate those identifie d as clean emissions units. The District will also verify the basis of the source’s determination that the unit qualifies as a clean emissions unit.

The District will then determine the annual amount of NOx and VOC emissions generated from each permitted unit, inclu ding clean units, for the reporting year in question, and then calculate the corresponding 185 fee amount as if Section 185 were strictly applied, using 2010 as the baseline period, regardless of the use of alternati ve baseline periods by any stationary sources.San Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 These tracking requirements have been added to the rule, as section 7.1, in response to EPA comments about the SIP approvabi lity of the feeequivalency program (see appendix H for the Distric t’s responses to comments).

• Annual Fee Equivalency Demonstration Report

On or before November 1 of each billing year, the A PCO will prepare an Annual Section 185 Fee Equivalency Demonstration Re port. The report

will include:

o the sum of emissions of NOx and VOC from all major sources of those pollutants for the appropriate reporting peri od;

o the sum of emissions of NOx and VOC from clean uni ts at those

sources;

o the total fees collected under Rule 3170 for the b illing year; and

o the total fees collected under the AB 2522 motor v ehicle fee

program.

The report shall demonstrate that the sum of fees c ollected under Rule 3170, plus AB 2522 motor vehicle fees to be collect ed, is equal to or greater than the total penalty fee that would be co llected under a literal application of the federal ozone nonattainment fee, codified in Section 185 of the federal CAA. The report shall be made a vailable to the public and mailed to Region IX of the federal EPA no later than November 1 of the each billing year.

These reporting requirements have been added to the rule, as section 7.2, in response to EPA comments about the SIP approvabi lity of the feeequivalency program (see appendix H for the Distric t’s responses to comments).

• Fee Shortfall Backstop Provisions

Discussions with EPA after the March 8 workshop rev ealed several areas in which EPA felt the fee-equivalency programs need ed to be modified and improved to be SIP-approvable. One such compon ent was provisions for making up any shortfall in fees coll ected. In other words, a remedy must be in place in the rule to take effect if the sum of the Rule 3170 fees from stationary sources, plus the motor v ehicle fees collected as noted above, were not sufficient in any given ye ar to be considered equivalent to those that would have been collected under a direct implementation of Section 185.San Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 These shortfall remedy requirements have been added to the rule, as section 7.3, in response to EPA comments about the SIP approvability of the fee-equivalency program (see appendix H for the District’s responses to comments).

This approach, as demonstrated above, has all of th e components necessary for EPA to find that this program is an approvable “fee -equivalent” program, and we will ask them to do so with their approval of this revised Rule 3170.

D. Discussion of AB 2522

The effectiveness and approvability of the fee-equi valent program discussed above depends on the reliability of new revenues anticipa ted due to the Governing Board’s activation of Assembly Bill 2522 (appendix E), so a n analysis of that reliability is

warranted.

AB 2522 requires specific decisions and steps be ta ken in order to implement the motor

vehicle fees:



### • Majority vote of the Governing Board and a majority vote of the elected

members of the Board.

This requirement was met by unanimous vote of the B oard. Twelve of fifteen Board members were present, and ten of thir teen elected members were present. All present voted for approv al.

• Adoption of a resolution providing for both the fee increase and a corresponding program for expenditure of the moneys raised by the increased

fees for the reduction of mobile source emissions.

This requirement was met with the adoption of the a ttached resolution (appendix D).

• ARB makes the following findings:

o The District has undertaken all feasible measures t o reduce nonattainment air pollutants from sources within th e District's jurisdiction and regulatory control.

o The District has notified ARB that fees have been a dopted pursuant to this section and provided ARB with an estimate of t he total funds that will be provided annually by each of those fees.San Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 

### ARB has already made the findings required above (a ppendix F) and has forwarded the necessary information to the state Department of Motor Vehicles (appendix G) to start their administrative, non-discretionary process of fee co llection. The DMV is expected to initiate the collection of the A B 2522 fee approximately 9 months after receiving ARB’s findin gs, approximately September or October 2011.

Therefore, the collection of the AB 2522 motor vehi cle fees is assured and can be relied on to make up any shortfall in Section 185 f ee collection.

E. EPA Approval and Disapproval of Rule 3170

District Rule 3170 (Federally Mandated Ozone Nonatt ainment Fee) requires major sources over 10 tons per year of volatile organic c ompound and nitrogen oxide emissions, with some exceptions, to pay a fee if th e SJVAB fails to attain the 1-hour national ambient air quality standard (NAAQS) for o zone. The attainment year for the valley’s 1-hour extreme ozone designation is 2010. The fee must be paid beginning in the second year after the attainment year, and in e ach calendar year thereafter, until the area is redesignated to attainment of the 1-hou r ozone standard.

Originally, Section 185 of the 1990 CAA set the pen alty fee amount at $5,000 per ton of ozone precursors (NOx and VOC). Section 185 require s that the penalty fee be adjusted annually based on the Consumer Price Index . The federal Bureau of Labor Statistics currently places the CPI-adjusted rate a t $8370 per ton for 2010 (http://data.bls.gov/cgi-bin/cpicalc.pl).

On January 12, 2010, EPA published in the Federal R egister (75 FR1716) a final limited approval and limited disapproval of District Rule 3 170 (Federally Mandated Ozone Nonattainment Fee) for inclusion in the SIP. The E PA’s final approval/disapproval was effective on February 12, 2010. The main disapprov al issues in the existing rule are:

• Clean Unit Fee Exemption;

• Fee Exemption for units that begin operation after the attainment year;

• Standard two-year baseline period calculation, ins tead of one year;

• Omission of “irregular, cyclical, or otherwise var y significantly from year to year” language for alternative baseline periods; and

• Reference to the then-current Rule 2201 Major Sour ce definition at 25 tons per year NOx and VOC instead of 10 tons per year.

The EPA’s final limited disapproval triggered an 18 -month sanction clock requiring the District to submit a SIP approval revision of Rule 3170 before August 12, 2011. Unless the rule deficiency is corrected and a SIP approvab le rule is submitted by the DistrictSan Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 before the sanction deadline expires, EPA will impo se federal sanctions which include withholding highway funds and an increased emission offset ratio requirement for stationary sources within the San Joaquin Valley. In addition to the 18-month sanction, the District could face a Federal Implementation Pl an by EPA if the District fails to submit a fully approvable SIP revision of Rule 3170 within 24 months. At that point, EPA would impose the Section 185 fees on valley sou rces and the penalty fees will be collected by EPA and the funds will be sent to the national treasury.

F. Proposed Rule Amendments

The proposed changes are included in the attached D raft Rule 3170 (5/19/11 version) in strikeout and underline format. The following c hanges were made to address

comments received thus far:

• Clean Unit Fee Exemption – This exemption is maint ained to provide

consideration to those facilities that have install ed high efficiency emission control technology, as discussed above. However, a ny shortfall in funds is supplanted by the “fee-equivalent” program. The ex emption is clarified to be pollutant-specific.

• Fee Exemption for units permitted after the attain ment year – This exemption is unnecessary, and has been deleted, since all new un its will be required to be equipped with BACT or will be required to pay the f ee for the full amount of the new emissions. An exception is granted for replace ment units, and language

has been added to allow the use of baseline emissio ns of the unit replaced in the

fee calculation.

• Two-year baseline period calculation as standard, instead of one year – Changed to a 2010 standard baseline period, but con tinue to allow two-year calculations that are more representative of normal source operation. Again, any shortfall in funds is supplanted by the “fee-equiva lent” program. A 2010 baseline is used for all calculations related to direct impl ementation of a Section 185 fee

program.

• Reference to the then-current Rule 2201 Major Sour ce definition of 25 tons per year NOx and VOC instead of 10 tons per year – Rule 2201 has since been modified and approved by EPA into the SIP in the in terim and now includes the appropriate language indicating that sources with p otential emissions above 10 tons per year of NOx or VOC are major sources.

In addition, sections have been added to the rule, largely in response to comments by EPA (see appendix H for more details on comments an d District responses):

• Clarifying that the fees cease upon EPA concurrenc e with a District finding that the national one-hour ozone standard has been met ( in Section 2.0).

• Adding various definitions, as necessary (Sections 3.1, 3.3, 3.4, 3.6).San Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 • Requiring facilities to submit emissions informati on as necessary to invoice the fees and determine compliance with the District’s f ee-equivalency obligation (Section 6.0)

• Requiring the District to determine and report the success of the fee-equivalency program each year, and implement a backstop remedy to collect any shortfall in fees (Section 7.0).

IV. RULE DEVELOPMENT PROCESS

EPA’s final limited approval and limited disapprova l (effective February 12, 2010) provides 18 months to submit an approvable Section 185 fee program for the revoked one-hour standard. Thus for this requirement, EPA m andates that Rule 3170 be submitted into the SIP and approved by EPA before A ugust 12, 2011 (75 FR1716).

District Staff conducted a workshop on March 8, 201 1 to present, discuss and take comments on the proposed rulemaking. The comments received from the public, affected sources, ARB, and EPA during the public sc oping meeting process have been incorporated into the draft rules as appropriate. The scheduled adoption date is May 19, 2011, after which the District’s Section 185 fe e equivalent program, as implemented through Rule 3170, will be forwarded to EPA for inc lusion into the SIP. The District’s Governing Board announced in their “Receive and Fil e” action on April 21, 2011, their intent to consider the rule for adoption on May 19. No additional comments were received by the deadline of May 2.

V. COST EFFECTIVENESS AND SOCIOECONOMIC IMPACT ANAL YSIS

Pursuant to CH&SC Section 40920.6(a), the District is required to analyze the cost

effectiveness of new rules or rule amendments that implement Best Available Retrofit Control Technology (BARCT). The draft amendments do not add BARCT requirements and therefore are not subject to the cost effective ness analysis mandate.

Additionally, state law requires the District to an alyze the socioeconomic impacts of any proposed rule amendment that significantly affects air quality or strengthens an

emission limitation. The draft amendments will have neither effect and are mandated by federal law. Therefore they not subject to the soc ioeconomic analysis mandate.

VI. RULE CONSISTENCY ANALYSIS

Pursuant to CH&SC Section 40727.2 (g) a rule consis tency analysis of the draft rule is not required. Regardless, in response to comments we have changed reporting schedules originally proposed in this rule to be co nsistent with similar reportingSan Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 requirements for Rule 4320. In addition, we are at tempting to eliminate any duplicative facility reporting requirements by aligning this ru le with future emissions inventory reporting requirements.

VII. ENVIRONMENTAL ASSESSMENT

The purpose of this project is to amend existing Di strict Rule 3170 (Federally Mandated Ozone Nonattainment Fee), which was adopted by the District’s Governing Board on May 16, 2002. Rule 3170 assesses a fee for volatile organic compounds (VOCs) and oxides of nitrogen (NOx) emissions from major sourc e facilities, as required by Sections 185 and 182(f) of the FCAA. This project also will develop an alternative fee equivalency program to satisfy the fee requirements of Section 185 of the federal Clean

Air Act.

Pursuant to the California Environmental Quality Ac t (CEQA), District staff has reviewed the possible environmental impacts of the proposed rule amendments. District staff

concludes that there is no substantial evidence in the whole record before the District that the proposed amendments to Rule 3170 and to th e proposed alternative fee equivalency program would cause any adverse effects on the environment. As such,

District staff concludes that it can be seen with c ertainty that the proposed amendments to Rule 3170 and the development an alternative fee equivalency program to satisfy

Section 185 of the federal Clean Air Act will not h ave any significant adverse effect on the environment. Although the District finds that the project could be considered exempt per the general rule that CEQA applies only to projects which have the potential for causing a significant effect on the environment (CEQA Guidelines §15061(b)(3)), to provide clarity in the administrative record, Distr ict staff has prepared a Negative Declaration that was made available for public revi ew and comment. Only one comment was received stating that the project will have no significant effect. Approval of the draft amendments does not change the meaning of current rule language, and implementation of an alternative fee equivalency pr ogram to satisfy the fee requirements of Section 185 of the federal Clean Ai r Act would not impose new regulatory requirements. Thus, air quality and per haps greenhouse gas emissions are the only potentially affected environmental resourc es. Therefore, consistent with California Code of Regulations, Title 14, Division 6, Chapter 3, Section 15006 (Reducing Delay and Paperwork) the scope of the Neg ative Declaration focused on potential air quality and greenhouse gas emission i mpacts.

Upon approval of the proposed project by the Distri ct's Governing Board, District staff

will file a Notice of Determination with each Count y Clerk within the boundaries of the District, indicating the District’s determination t hat the project will not have a significant effect on the environment (CCR §15075(d)).San Joaquin Valley Unified Air Pollution Control Di strict

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for Rule 3170 Appendix A – EPA’s Final Rule partially approving a nd partially disapproving District Rule 3170 Appendix B – EPA’s “Guidance on Developing Fee Prog rams Required by Clean Air Act Section 185...” Appendix C – District Staff’s Report, October 21, 2 010 Appendix D – District’s November 10, 2010 ARB Findi ngs Request and Signed Board Resolution Appendix E – Assembly Bill 2522 Appendix F – ARB’s Executive Order G-10-126, making findings required by AB 2522 Appendix G – ARB’s request to the California Depart ment of Motor Vehicles Appendix H – District’s Response to Comments on the 3/8/11 version of Rule 3170 Appendix I – Sample Facility Fee Calculation Works heet