BOARD MEETING DATE: December 10, 1999 AGENDA NO. 26

Rule 1121 was adopted by the District’s Governing Board on December 1, 1978 to reduce nitrogen oxides (NOx) emissions from natural gas-fired residential water heaters less than 75,000 Btu per hour. This rule applies to manufacturers, distributors, retailers, and installers of natural gas-fired water heaters in the Basin.

Since 1982, Rule 1121 has required that residential-type gas-fired water heaters meet an emission limit of 40 nanograms of NOx (calculated as NO₂) per Joule of heat output (ng/J). An emission limit of 50 ng/J was established for gas-fired mobile home water heaters.

Rule 1121 was amended in 1995 to incorporate a new certification test protocol and require re-certification every three years. The 1995 amendments retained the original NOx emission limits.

PAR 1121 affects new residential-type natural gas-fired water heaters with a heat input less than 75,000 Btu per hour. There are approximately 4 million natural gas-fired water heaters in residences and mobile homes, and 36,000 located in commercial establishments within the AQMD’s jurisdiction.

There are currently five major water heater manufacturers in the United States that produce about 99 percent of the water heaters sold in the Basin under a variety of brand names. The five major manufacturers are American Water Heaters Company; A.O. Smith; Bradford-White Corporation; Rheem Manufacturing Company; and State Industries, Incorporated. These water heater manufacturers are located outside of California. Manufacturers will be required to produce water heaters that meet the lower NOx limit, which will be available to consumers to purchase.

During the rulemaking process for PAR 1121, the AQMD staff worked with a Focus Group to discuss proposed amendments. The Focus Group included water heater manufacturers, water heater manufacturing associations, developers of low-NOx burners, gas utility representatives, and the California Energy Commission. The Focus Group met six times during the course of the rule development process. In addition, staff visited two burner manufacturers in Northern California and two of the five water heater manufacturers in Tennessee and South Carolina. A public workshop was held on September 23, 1999.

The primary objective of amendments to Rule 1121 is to reduce NOx emissions by lowering the emission limit for gas-fired water heaters. Additional amendments are proposed to streamline monitoring and improve enforceability.

The most significant Nox revision to Rule 1121 is to reduce the emission limit. The AQMD staff proposes that the emission limit be reduced for residential water heaters in two steps, representing 50% and 75% reductions from the current limit for residential water heaters. The first step requires 20 ng/J or 30 ppmv @ 3% O₂, dry, on and after July 1, 2002. The second step requires 10 ng/J or 15 ppmv @ 3% O₂, dry, on and after January 1, 2005. In addition, PAR 1121 will establish a NOx emission limit of 40 ng/J or 55 ppmv @3% O₂ dry for mobile home water heaters.

To streamline testing procedures and provide compliance flexibility, PAR 1121 allows compliance and certification to be demonstrated based on either an output-based (ng of Nox per Joule of heat output) or an input-based emission limit (parts per million of NOx) Staff’s proposal also includes an optional compliance mechanism for manufacturers that do not wish to manufacture heaters at the interim (20 ng/J) level. A mitigation fee will be available as an alternative to meeting the first step reductions.

In addition, PAR 1121 allows distributors, retailers, and installers six months to deplete existing inventories of water heaters. The AQMD staff is also proposing to remove the NOx validation program, which is an alternative compliance certification, since no manufacturers have applied for or used this program since its inclusion in Rule 1121 in 1995.

PAR 1121 is a technology forcing rule that will require the development and commercialization of low NOx burners for residential-type water heaters. The AQMD’s initial proposal for PAR 1121 was a NOx emission limit of 10 ng/J, effective January 1, 2003. Based on comments received from water heater manufacturers and their associations, staff modified PAR 1121 incorporating a two-step implementation approach with a longer implementation period. This will provide additional time to continue developing, testing and commercializing low-NOx burner technologies. The water heater manufacturers have subsequently proposed a one-step rule.

The Gas Appliance and Manufacturers Association (GAMA) has commented on behalf of the major water heater manufacturers recommending a one-step approach to reductions. They agree that the 10 ng/J level can be reached by January 1, 2005. GAMA has commented that a one-step reduction with a five year lead time to achieve 10 ng/J is preferred because the water heater industry is facing impending design and productions changes required by other federal regulatory requirements. Moreover, GAMA has commented that a final implementation date of 2005 is needed to develop, test, and commercialize low- burner technologies that will achieve 10 ng/J.

Relative to this issue, staff recommends an interim step at 20 ng/J by July 1, 2002. This approach makes a significant contribution to early reductions (approximately one ton per day for eight years). Emission reductions are needed to contribute towards meeting PM10 standards in the year 2006. Moreover, staff believes that an interim step is necessary to assure emission reductions are occurring for this industry. The revised staff proposal will include a compliance option for manufacturers that prefer to participate through a mitigation fee, rather than modify their water heaters to meet the first step reductions.

Staff believes that a two and a half year lead-time to achieve a 20 ng/J emission limit is technically feasible based on the type and availability of burner technology. There are currently two base models of water heaters on the market that emit less than 20 ng/J. Two other burners that are similar to the current burners have been lab tested at less than 20 ng/J. The five-year lead-time to achieve 10 ng/J is sufficient to improve existing or further develop, test, and commercialize new burner technologies to achieve the 10 ng/J emission limit for residential-type water heaters. A progress report from each water heater manufacturer eighteen months before the final compliance limit will provide information relative to progress in achieving this limit.

PAR Rule 1121 will implement control measure CMB-06, Emission Standards for New Commercial and Residential Water Heaters, from the 1997 and 1994 Air Quality Management Plans (AQMPs). However, this measure is not part of the 1994 SIP approved by the U.S. EPA in 1996. Implementation of PAR 1121 will result in emission reductions that are needed to meet federal PM10 standards and to ensure attainment of the 1-hour ozone standard.

At full implementation, PAR 1121 would result in a 75 percent emission reduction, achieving 7.2 to 8.3 tons per day of NOx emission reductions. Implementation of PAR 1121 will produce 2.3 to 2.5 and 5.1 to 5.7 tons per day of NOx emission reductions at 2006 and 2010, respectively. PAR 1121 affects new water heaters, and based on a ten year life expectancy assumes that each year 10 percent of the existing water heaters will be replaced.

Pursuant to the California Environmental Quality Act (CEQA) §15002(k) and AQMD Rule 110, AQMD has prepared a Final Environmental Assessment (EA) for the proposed amendments to Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural-Gas Fired Water Heaters. The Draft EA was released for a 30-day public review and comment period from October 12, 1999 to November 16, 1999. During the 30-day public review and comment period, the AQMD did not receive any comment letters on the Draft EA. Only minor changes are necessary to make the Draft EA a Final EA. The minor changes to the Draft EA are noted by strikeout or underline in the Final EA. None of the minor changes in the Final EA alter the conclusions contained in the Draft EA that the proposed amendments to Rule 1121 will not contribute to any significant adverse environmental impacts.

A socioeconomic analysis for PAR 1121 was prepared and is included as part of the staff report. The cost-effectiveness was estimated for the two compliance dates in PAR 1121, 2002 and 2005. The cost increase of manufacturing a low- water heater is expected to range between $3 and $50 per water heater, depending on technology and the emission limit. Cost estimates do not include savings due to lower gas usage. In addition, the manufacturers are recommending a 2.44 mark-up factor to the consumer. Based on an emission limit of 20 ng/J the cost-effectiveness in 2002 is approximately $2,000 - $5,400 per ton of NOx reduced. Based on an emission limit of 10 ng/J, the cost-effectiveness in 2005 is $4,400 to $16,000 per ton of NOx reduced. The cost-effectiveness for the 2005 emission limit is based on a ceramic burner technology and is expected to be closer to the lower end of the range.

Similar to the existing implementation approach for Rule 1121, PAR 1121 is designed as a "point of sale" rule, that is enforced at the manufacturer, distributor, retailer and installer level. Water heater manufacturers are required to test and obtain certification for of water heaters that they intend to sell in the Basin.

There will be a temporary workload increase due to certification of water heaters prior to the 2002 and 2005 compliance dates. No additional AQMD resources are required to implement the proposed amendments.

PAR Rule 1121 – Control of Nitrogen Oxides from Residential Type,
Natural Gas-Fired Water Heaters

The Gas Appliance and Manufacturers Association (GAMA) commented on behalf of the major water heater manufacturers recommending a one-step reduction. Staff’s proposal includes an interim reduction of 20 ng/J by July 1, 2002. Both proposals include 10 ng/J by January 1, 2005. The water heater manufacturers agree that 10 ng/J can be achieved by January 1, 2005. They do not support an interim reduction because there are other changes (efficiency standards, flammable vapor standards and halon phase-outs) that affect their product in the next three years.

The AQMD staff believes that a two and a half year lead-time to achieve a 20 ng/J emission limit is technically feasible and cost effective based on the type and availability of burner technology. There are currently two base models that have been certified at or below 20 ng/J that are commercially available. Two other burners that are similar to existing burner designs have been laboratory tested at less than 20 ng/J. The staff’s proposal includes an optional compliance mechanism for manufactures that do not wish to manufacture water heaters at the interim (20 ng/J) level. A mitigation fee will be available as an alternative to meeting the first step reductions.

Water heater manufacturers have commented that it is difficult to consistently replicate emissions test results. Environmental conditions such as humidity and temperature can vary the emissions. Reducing the limit to 10 ng/J may magnify this issue.

The AQMD staff believes that the Rule 1121 NOx protocol and measurement techniques are well within the detectable NOx limits to measure 10 ng/J. The AQMD staff will continue to work with water heater manufacturers to resolve potential testing issues associated with PAR 1121.

A.O. Smith
American Water Heater Company
Bradford-White Corporation
Gas Appliance Manufacturers Association (GAMA)
Rheem Manufacturing Company
State Industries Inc.

Acotech-Furigas Corporation
Altex Technologies
Alzeta Corporation
Arthur D. Little Inc.
E.O. Lawrence Berkeley Lab
Gas Research Institute
Quantum Group Inc.
Polidoro (Rauschl and Associates)
Schott Gas Systems, Inc.
Solaronics Inc.

California Energy Commission
Department of Energy
Long Beach Gas and Electric
Parker Boiler Company
Sempra Energy
The Gas Company
United States Consumer Products Safety Commission

A Resolution of the South Coast Air Quality Management District Governing Board (Governing Board) certifying the Final Environmental Assessment for Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural-Gas Fired Water Heaters.

WHEREAS, the Governing Board has determined with certainty that the Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural-Gas Fired Water Heaters, is a "project" pursuant to the terms of the California Environmental Quality Act (CEQA); and

WHEREAS, the AQMD has had its regulatory program certified pursuant to Public Resources Code § 21080.5 and has conducted CEQA review pursuant to such program (AQMD Rule 110); and

WHEREAS, AQMD staff has prepared a Draft Environmental Assessment (EA) pursuant to its certified regulatory program and state CEQA Guidelines §15252 setting forth the potential environmental consequences of Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural-Gas Fired Water Heaters; and

WHEREAS, the Draft EA was released for a 30-day public review and comment period from October 12, 1999 to November 16, 1999. During the 30-day public review and comment period, no comments were received on the Draft EA; and

WHEREAS, it is necessary that the adequacy of the Final EA, including the response to comments, be determined by the Governing Board prior to its adoption; and

WHEREAS, no significant adverse environmental impacts were identified from the Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural-Gas Fired Water Heaters; and

WHEREAS, the AQMD Governing Board voting on this Resolution has reviewed, and considered the Final EA for the Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural-Gas Fired Water Heaters; and

WHEREAS, the Governing Board has determined that the socioeconomic impact assessment of the Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural Gas-Fired Water Heaters is consistent with the Governing Board March 17, 1989 and October 14, 1994 resolutions and the provisions of Health and Safety Code Sections 40440.8, 40728.5 and 40920.6; and

WHEREAS, the Governing Board has reviewed and considered the staff's findings related to cost and employment impacts of the Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural Gas-Fired Water Heaters as set forth in the socioeconomic impact assessment made public with the agenda package for this meeting, and hereby find and determines that cost and employment impacts are as set forth in that assessment; and

WHEREAS, the Governing Board has determined that a need exists to adopt the Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural Gas-Fired Water Heaters to implement CMB-06 from the 1997 AQMP and Proposed 1999 AQMP Amendment to reduce nitrogen oxides emissions from residential gas-fired water heaters is needed help to achieve federal PM10 and ozone standards in 2006 and 2010 respectively; and

WHEREAS, the Governing Board of the South Coast Air Quality Management District obtains its authority to adopt, amend, or repeal rules and regulations from Sections 39002, 40000, 40001, 40440, 40441, 40463, 40702, 40725 through 40728, and 41508f of the California Health and Safety Code; and

WHEREAS, the Governing Board has determined that Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural Gas-Fired Water Heaters, as proposed to be amended is in harmony with, and not in conflict with or contradictory to, existing federal or state statutes, court decisions, or regulations; and

WHEREAS, the Governing Board has determined that Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural Gas-Fired Water Heaters, as proposed to be amended does not impose the same requirements as any existing state or federal regulation and the proposed rule is necessary and proper to execute the powers and duties granted to, and imposed upon, the District; and

WHEREAS, the Governing Board has determined that Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural Gas-Fired Water Heaters, as proposed to be amended, references the following statutes which the AQMD hereby implements, interprets or makes specific: Title 42 U.S.C. Section 7411 (performance standards for new stationary sources); Health and Safety Code 40001(a) and (b) (air quality standards and air pollution episodes); (40702 (adoption of rules and regulations), 40440 (rules and regulations retrofit control technology); and

WHEREAS, a public hearing has been properly noticed in accordance with the provisions of Health and Safety Code Section 40725; and

WHEREAS, the Governing Board has held a public hearing in accordance with all provisions of law;

WHEREAS, Proposed Amended Rule 1121 - Control of Nitrogen Oxides From Residential-Type, Natural Gas-Fired Water Heaters is a control measure in the 1997 AQMP and, thus, has been ranked by cost-effectiveness relative to other AQMP control measures in the 1997 AQMP; and

WHEREAS, Proposed Amended Rule 1121 - Control of Nitrogen Oxides From Residential-Type, Natural Gas-Fired Water Heaters, as proposed to be amended requires water heater manufacturers to submit a progress report 18 months prior to the final compliance date of January 1, 2005; and

NOW, THEREFORE, BE IT RESOLVED, that the Governing Board directs staff to provide a summary of the information collected through the progress report that water heater manufacturers are required to submit regarding progress made towards achieving compliance with the final emission limit of 10 ng/J in 2005; and

BE IT FURTHER RESOLVED, that the Governing Board does hereby certify the Final EA for Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural Gas-Fired Water Heaters which was completed in compliance with CEQA and Rule 110 provisions; and finds that the Final EA was presented to the Governing Board, whose members reviewed, considered and approved the information therein prior to acting on Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural Gas-Fired Water Heaters; and

BE IT FURTHER RESOLVED, that the Governing Board does hereby amend, pursuant to the authority granted by law, Proposed Amended Rule 1121 – Control of Nitrogen Oxides From Residential-Type, Natural Gas-Fired Water Heaters, as set forth in the attached and incorporated herein by reference.