BOARD MEETING DATE: December 5, 2003
AGENDA NO. 30
(Continued from November 7, 2003 Board Meeting)

Public Hearing to Amend Regulation XX – Regional Clean Air Incentives Market (RECLAIM)

SYNOPSIS:

At the May 11, 2001 Governing Board meeting, the RECLAIM rules were amended to address the California electricity situation by bifurcating the power producers from the RECLAIM trading market and establishing a mitigation fee program to offset excess emissions from utilities. At the June 6, 2003 meeting, the Board made findings that re-entry of the power producers would not result in any negative impact on the remainder of the RECLAIM facilities or on California’s energy security needs and directed staff to pursue amendments to bring the power producers back into the market. The proposed rule amendments would provide for the re-entry of power producers.

COMMITTEE:

Stationary Source, September 26, 2003, November 21, 2003, Reviewed

RECOMMENDED ACTION:

Adopt the attached resolution:

1. Certifying the Addendum to the May 2001 Final Environmental Assessment (EA); and
    
2. Amending Rules:
   2007 – Trading Requirements;
   2011 – Requirements for Monitoring, Reporting, and
             Recordkeeping for Oxides of Sulfur (SOx) Emissions;
   and
   2012 – Requirements for Monitoring, Reporting, and
             Recordkeeping for Oxides of Nitrogen (NOx)
             Emissions.

Barry R. Wallerstein, D.Env.
Executive Officer

Preface

Rule amendments that would remove trading restrictions from power plants were originally scheduled for the November 7^th public hearing. This item was postponed until the December 5^th meeting to address comments raised by CARB. In addition to CARB’s November 4^th comment letter, staff from CARB and AQMD had a productive conference call on November 13th. CARB staff was asked to identify whether their comments are policy recommendations or whether any are legal requirements that would preclude their approval of the rule amendments.

CARB’s letter raised several concerns. CARB staff further clarified their issues at a subsequent conference call between agency staff and also at a public consultation meeting. Their concerns are summarized below.

CARB recommends that power plants not be allowed to trade to prevent their potential impacts on the market (i.e., excess reductions from power plants could delay reductions elsewhere or the demand from power plants on RTCs during high generator demand could spike the market).

CARB states that if power plants are allowed to participate in trading, their allocations should be reduced. CARB’s letter references requirements of the Health & Safety Code regarding BARCT equivalency. Rule 2009 required BARCT for power plants, and implementation demonstrates much lower BARCT levels today than what was known when BARCT was assessed during RECLAIM adoption in 1993.

CARB is also concerned that if power plants rejoin the market now without trading restrictions, it would make obtaining additional reductions beyond the AQMD commitment more difficult for the rulemaking next year, and may not be equitable among various industrial sectors.

After careful consideration of CARB comments, AQMD staff disagrees. AQMD staff disagrees with the assertion that the two rule amendments (removing trading restrictions and implementing reductions for the 2003 AQMP Control Measure CMB-10) must be done together. AQMD staff also disagrees that BARCT equivalency is required every time there is a rule amendment. In fact, state law clearly states that BARCT equivalency is required upon program adoption and at Plan amendment. In addition, AQMD staff believes that under RECLAIM, BARCT can be determined on an aggregate basis.

The concern about whether the AQMD staff would more aggressively seek reductions for CMB-10 is not warranted, because AQMD, under state law, needs to perform a programmatic BARCT equivalency demonstration for all source categories, not just power plants over 50 megawatts. The BARCT technology assessment in 2004 will demonstrate BARCT equivalency. There is little district discretion in this area.

Market-based programs need to have stability so participants can have confidence in the market and know what they are required to do to comply. AQMD staff believes that is inappropriate to reduce allocations from one sector at a time when new BARCT is established. Furthermore, the 2001 amendments approved by CARB specified the conditions under which power plants are to rejoin the trading market. It is detrimental to a market based program to make frequent adjustments or to make adjustments to individual sectors. At present, AQMD staff recommends moving forward with the rule amendments to remove the trading restrictions from power plants, but may change the recommendation depending on CARB’s final position on the amendments.

Background

In June 2000, RECLAIM program participants experienced a sharp and sudden increase in NOx RTC prices for both 1999 and 2000 compliance years. This was mainly due to an increased demand for power generation due to the deregulated market which resulted in the electric power industry purchasing a large quantity of RTCs and depleting the available RTCs. The average price of NOx RTCs for compliance year 2000, traded in the year 2000 increased sharply to over $45,000 per ton compared to the average price of $4,284 per ton traded in 1999.

The Governing Board, at its October 2000 meeting, directed staff to examine the issues affecting the high price of NOx RTC prices and recommend actions to stabilize NOx RTC prices. Additionally, the Governing Board directed the Executive Officer to form an Advisory Committee to provide input to staff regarding possible approaches to stabilize NOx RTC prices. It was found that increased demand for RTCs by power producers had played a significant role in the situation. For the program to remain in compliance, it was necessary for RECLAIM facilities to install control equipment to reduce NOx emissions. This would cause RTC prices to drop. However, there was a lag time between the decisions to install controls and actually operating the controls. Refinements to the RECLAIM program were needed.

One of the key amendments made in May 2001 regarding power producing was a provision that was added to Rule 2015 – Backstop Provisions. Paragraph (b)(7) states that power producing facilities would "rejoin the full RECLAIM program in the 2004 compliance year, only if it is determined by the Board in a public hearing prior to July 2003 that their reentry will not result in any negative impact on the remainder of the RECLAIM facilities or on California’s energy security needs." Pursuant to these requirements, staff conducted an assessment of the impacts on the RECLAIM market and on the energy security needs of California. At the June 6, 2003 public hearing, the Board made the finding that re-entry of the power producers in the RECLAIM program would not have a negative impact on the RECLAIM program or California energy needs.

Proposed Amendments to Rule 2007

The proposed amendments basically lift the trading restrictions placed on power producers in the 2001 RECLAIM amendments. Proposed changes to this rule will allow power producing facilities to use RTCs to reconcile emissions, and to sell or transfer RTCs below their original allocation after Compliance Year 2003.

Proposed Amendments to Rules 2011 and 2012

RECLAIM rules require that Continuous Emission Monitoring Systems (CEMS) be certified to accurately monitor emissions from major NOx or SOx sources within a specified time limit. Currently RECLAIM rules require that CEMS for a new major source be certified within 12 months of the start of operation, and that existing CEMS for a modified major source be recertified within 90 days. The proposed rule language makes more specific that the 90 day period applies when a new CEMS, or a component of an existing CEMS (e.g., analyzer, RTU or DAS units) is added to an existing or modified major RECLAIM source.

Potential Impacts for Proposed Amendments to Rules 2007, 2011, and 2012

An analysis of California Energy Commission (CEC) data prepared for the District in July 2001 and the 2003 AQMP, project generation of electricity from these power producers in the year 2010 to be 10,600 GWh. The emissions corresponding to this generation are 930 tons per year NOx. Allocations and current holdings for the 2010 compliance year are 2,330 tons per year. This data shows that for 2010 the surplus of RECLAIM RTC holdings is 1,400 tons NOx. Based on this estimated data, there appears to be sufficient allocations to cover the anticipated energy demand. Power producers are expected to be net sellers once they have re-entered the RECLAIM trading market.

In addition to the reentry of the power producers, the proposed amendments will clarify the CEMS requirements for modified equipment. The current rule language is now more specific regarding the timeframe for CEMS recertification. These changes were added to clarify existing rule language and, therefore, do not significantly affect air quality or emissions limitations.

California Environmental Quality Act (CEQA)

Pursuant to the California Environmental Quality Act (CEQA) Guidelines §15164, the SCAQMD has prepared an Addendum to the May 2001 Final Environmental Assessment (EA) for Proposed New and Amended Rules, Regulation XX - Regional Clean Air Incentives market (RECLAIM), Proposed Rule 1631 – Pilot Credit Generation Program for Marine Vessels, Proposed Rule 1632 - Pilot Credit Generation Program for Hotelling Operations, Proposed Rule 1633 - Pilot Credit Generation Program for Truck/Trailer Refrigeration Units, and Proposed Rule 2507 - Pilot Credit Generation Program for Agricultural Pumps (SCAQMD No. 010201JDN) to address the reentry of power producers into the RECLAIM trading market as proposed in the amendments to Rule 2007 - Trading Requirements, and to clarify the timing of Continuous Emission Monitoring Systems (CEMS) recertification period as proposed in the amendments to Rule 2011 – Requirements for Monitoring, Reporting, and Recordkeeping for Oxides of Sulfur (SOx) Emissions and Rule 2012 – Requirements for Monitoring, Reporting, and Recordkeeping for Oxides or Nitrogen (NOx) Emissions. An Addendum to the May 2001 Final EA is the appropriate document because none of the conditions described in CEQA Guidelines §15162 have occurred. For example, the proposed amendments to Rules 2007, 2011, and 2012 do not contain new information of substantial importance to CEQA and would not create any new significant adverse impacts or substantially increase the severity of the previously identified significant environmental effects in the original project. Further, the proposed rule amendments will not change the environmental analysis or conclusions in the previously certified May 2001 Final EA. Pursuant to CEQA Guidelines §15164 (c), an addendum need not be circulated for public review but can be included in or attached to the May 2001 Final EA. The previously released CEQA document, the May 2001 Final EA, can be obtained from the SCAQMD’s Public Information Center by calling (909) 396-2309 or by downloading the attachments from May 2001 Governing Board Agenda on SCAQMD’s website at: http:/www.aqmd.gov/hb/010535a.html.

Socioeconomic Assessment

Based on the AQMD analysis of the NOx RECLAIM market, power producers are expected to be net sellers of NOx RTCs. Regarding adequate power supplies, a CEC assessment shows that the electricity demand and supply looks promising through 2005 based on current infrastructure. According to CEC, the supply and demand forecast beyond 2005 becomes more uncertain.

A basic quantitative analysis of the potential impacts of the proposed amendments shows that reentry of the power producers will result in an increased supply of NOx RTCs in the RECLAIM market. This may cause a decrease in the cost of NOx RTCs. Further analysis of the RECLAIM trading market will be conducted for the proposed 2004 amendment to the RECLAIM rules. The proposed changes to Rules 2011 and 2012 are clarifications to existing rule language; the proposed amendments are not anticipated to have any negative socioeconomic impacts.

Public Process

Staff met with the RECLAIM Working Group on May 1 and 13, and again on September 2, 2003, and had one conference call on May 9, 2003, to receive input on the initial recommendation for Power Producing Facility reentry into the RECLAIM program and potential backstop measures needed. A public workshop was held on September 11, 2003. Approximately 20 people attended. All of these comments have been responded to in the staff report. The proposed changes to the protocols for Rules 2011 and 2012 were proposed after the public workshop. These changes serve to clarify the CEMS requirements for modified equipment and are administrative in nature.

Due to ARB comments received on November 6, 2003, staff held a public consultation meeting on November 19^th. ARB staff participated to hear comments directly from stakeholders.

Implementation Plan

Existing AQMD resources will be used to implement the amended rule.

Attachments

1. Summary of Proposal
2. Key Issues and Responses
3. Rule Development Process
4. Key Contacts List
5. Resolution
6. Proposed Amended Rule
7. Staff Report (including Socioeconomic Assessment)
8. Addendum to the May 2001 Final Environmental Assessment (EA) (Copies of final EAs are provided for AQMD Board Members only – others may obtain copies by calling the Public Information Center at (909) 396-2309).

ATTACHMENT C

RULE DEVELOPMENT PROCESS

Proposed Amended Rules 2007 – Trading Requirements, 2011 – Requirements for Monitoring, Reporting, and Recordkeeping for Oxides of Sulfur (SOx) Emissions, and 2012 – Requirements for Monitoring, Reporting, and Recordkeeping for Oxides of Nitrogen (NOx) Emissions.

ATTACHMENT D

KEY CONTACTS LIST

The list below includes those Organizations and Companies that participated in working group meetings during rule development:
 

A Resolution of the South Coast Air Quality Management District (AQMD) Governing Board certifying the Addendum to the May 2001 Final Environmental Assessment for Proposed New and Amended Rules; Regulation XX – Regional Clean Air Incentives market (RECLAIM); Proposed Rule 1631 – Pilot Credit Generation Program for Marine Vessels; Proposed Rule 1632 - Pilot Credit Generation Program for Hotelling Operations; Proposed Rule 1633 - Pilot Credit Generation Program for Truck/Trailer Refrigeration Units; and Proposed Rule 2507 - Pilot Credit Generation Program for Agricultural Pumps (SCAQMD No. 010201JDN) for Proposed Amended Rules 2007 - Trading Requirements; 2011 – Requirements for Monitoring, Reporting, and Recordkeeping for Oxides of Sulfur (SOx) Emissions; and 2012 – Requirements for Monitoring, Reporting, and Recordkeeping for Oxides of Nitrogen (NOx) Emissions.

A Resolution of the AQMD Governing Board to adopt the proposed amendments to Rule 2007 – Trading Requirements; Rule 2011 – Requirements for Monitoring, Reporting, and Recordkeeping for Oxides of Sulfur (SOx) Emissions; and Rule 2012 – Requirements for Monitoring, Reporting, and Recordkeeping for Oxides of Nitrogen (NOx) Emissions.

                        WHEREAS, the AQMD Governing Board recognizes the need to have adequate power supply for the region and the need to act quickly to address energy related issues, while balancing the need for environmental protection and reliable power supply; and

                        WHEREAS, the AQMD Governing Board recognizes the need to clarify the requirements for recertifying continuous emissions monitoring systems (CEMS) for modified equipment; and

                        WHEREAS, the AQMD Governing Board finds and determines that Proposed Amended Rules 2007, 2011, and 2012, are considered 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 and analysis pursuant to such program (AQMD Rule 110); and

                        WHEREAS, AQMD staff has prepared an addendum to the May 2001 Final Environmental Assessment (EA) pursuant to its certified regulatory program and CEQA Guidelines § 15164, setting forth the potential environmental consequences of Proposed Amended Rules 2007, 2011, and 2012; and

                        WHEREAS, the AQMD Governing Board has determined that the requirements for a subsequent environmental assessment have not been triggered pursuant to CEQA Guidelines § 15162 and that an addendum to the previously certified May 2001 Final EA is appropriate; and

                        WHEREAS, pursuant to CEQA Guidelines § 15164(c), an addendum need not be circulated for public review; and

                        WHEREAS, the adequacy of the Addendum to the May 2001 Final EA must be determined by the AQMD Governing Board prior to its certification; and

                        WHEREAS, the Board package includes the May 2001 Final EA (certified at the May 2001 AQMD Governing Board meeting), as well as the Addendum to the May 2001 Final EA and other supporting documentation, and this information was presented to the AQMD Governing Board and that the Board has reviewed and considered the entirety of this information before approving the staff recommendations; and

                        WHEREAS, the AQMD is not required to prepare a Statement of Findings, a Statement of Overriding Considerations, or a Mitigation Monitoring Plan because the proposed project is not expected to generate significant adverse environmental impacts; and

                        WHEREAS, the AQMD Governing Board voting to adopt Proposed Amended Rules 2007, 2011, and 2012, has reviewed and considered the information contained in the Addendum to the May 2001 Final EA, and has determined that the document has been completed in compliance with CEQA; and

                        WHEREAS, the AQMD Governing Board has determined that the socioeconomic impact assessment of Proposed Amended Rules 2007, 2011, and 2012 is consistent with the provisions of Health and Safety Code §§ 40440.8, 40728.5 and 40920.6; and

                        WHEREAS, the AQMD Governing Board has actively considered the socioeconomic impact analysis and has made a good faith effort to minimize any socioeconomic impacts; and

                        WHEREAS, the AQMD Governing Board obtains its authority to adopt Proposed Amended Rules 2007, 2011, and 2012, pursuant to Health and Safety Code §§ 39002, 39616, 40000, 40001, 40440, 40440.1, 40702; and 40725 through 40728.5; and

                        WHEREAS, the AQMD Governing Board has determined that a need exists to amend Rules 2007, 2011, and 2012, to allow reentry of power producers into the RECLAIM trading market and clarify requirements for recertification of CEMS for modified equipment; and

                        WHEREAS, the AQMD Governing Board has earlier determined in a public hearing held on June 6, 2003 that the reentry of power producing facilities will not result in any negative impact on the remainder of the RECLAIM facilities or on California’s energy needs, as further supported by the staff report; and

                        WHEREAS, the AQMD Governing Board has determined that Proposed Amended Rules 2011 and 2012 should be adopted based on the need to clarify the requirements for recertification of CEMS for modified equipment; and

                        WHEREAS, the AQMD specifies the manager of Rules 2007, 2011, and 2012 as the custodian of the documents or other materials which constitute the record of proceedings upon which the adoption of these proposed amendments is based, which are located at the South Coast Air Quality Management District, 21865 Copley Drive, Diamond Bar, California; and

                        WHEREAS, the AQMD Governing Board has determined that Proposed Amended Rules 2007, 2011, and 2012 are written or displayed so that their meaning can be easily understood by the persons directly affected by them; and

                        WHEREAS, the AQMD Governing Board has determined that Proposed Amended Rules 2007, 2011, and 2012 are in harmony with and not in conflict with or contradictory to, existing statutes, court decisions or state or federal regulations; and

                        WHEREAS, the AQMD Governing Board has determined that Proposed Amended Rules 2007, 2011, and 2012 will not impose the same requirements as any existing state or federal regulations. The amendments are necessary and proper to execute the powers and duties granted to, and imposed upon, AQMD; and

                        WHEREAS, the AQMD Governing Board has determined that by adopting Proposed Amended Rules 2007, 2011, and 2012, the AQMD Governing Board will be implementing, interpreting and making specific the provisions of the Health and Safety Code §§ 39002, 39616, 40000, 40001, 40440 (a), 40440.1, 40702, and 40725 through 40728.5; and Title 42 U. S. C. §§ 7410 and 7511a; and

                        WHEREAS, the AQMD Governing Board has determined that the Health and Safety Code § 39616 findings are not altered by these amendments and the AQMD Governing Board incorporates, by reference, the findings in the staff report; and

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

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

                        WHEREAS, the AQMD Governing Board finds and determines, taking into consideration the factors in Section (d)(4)(D) of the Governing Board Procedures, that the modifications adopted which have been made to Rules 2007, 2011, and 2012 since the notice of public hearing was published do not significantly change the meaning of the proposed amended rules within the meaning of Health and Safety Code § 40726 and would not constitute new information pursuant to CEQA; and

                        NOW, THEREFORE BE IT RESOLVED that the AQMD Governing Board hereby certifies, pursuant to the authority granted by law, the Addendum to the May 2001 Final EA for Rules 2007, 2011, and 2012; and

                        BE IT FURTHER RESOLVED, that the AQMD Governing Board does hereby amend, pursuant to the authority granted by law, Rules 2007, 2011, and 2012, as set forth in the attached, and incorporated herein by reference; and

                        BE IT FURTHER RESOLVED, that the AQMD Governing Board does hereby approve the Socioeconomic Impact Assessment; and

                        BE IT FURTHER RESOLVED, the AQMD Governing Board is strongly supportive of trading programs, including RECLAIM, and believes that market incentive programs are essential to achieving clean air objectives. The AQMD Governing Board thereby directs staff to continue investigation of possible safeguards, deemed appropriate, to further enhance the RECLAIM program; and

                        BE IT FURTHER RESOLVED, that the AQMD Governing Board directs staff to consider further amendments to Regulation XX – RECLAIM to remove rule language where requirement dates have passed during rule development in 2004 to address the 2003 RECLAIM NOx Control Measure; and

                        BE IT FURTHER RESOLVED, that the AQMD Governing Board does hereby adopt, pursuant to the authority granted by law, Proposed Amended Rules 2007, 2011, and 2012, as set forth in the attached and incorporated herein by reference.

Date: _____________________        _______________________________
                                                                        Clerk

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