BOARD MEETING DATE: September 3, 2004 AGENDA NO. 31

The AQMD Board adopted the Regional Clean Air Incentives Market (RECLAIM) program in 1993. The purpose of the RECLAIM program is to reduce NOx and SOx emissions through a market-based program. It is designed to provide facilities with the flexibility to seek the most cost-effective solution to reduce their emissions. The program replaced a series of existing command-and-control rules and control measures specified in the 1991 AQMP.

AQMD staff is proposing amendments to Rule 2007 – Trading Requirements, to address CARB concerns regarding reintroducing power plants to the trading market. The proposal contains a provision to delay removal of remaining trading restrictions until other RECLAIM rule amendments decrease allocations to implement the 2003 AQMP Control Measure CMB-10 and to reflect BARCT in accordance with California Health and Safety (H&S) Code §40440. This Board letter and its attachments serve as the staff report for the proposed amendments to Rule 2007.

In May 2001, Regulation XX was amended to address the RECLAIM Trading Credit (RTC) price spike due to California’s energy crisis. At the time, power plants were required to install BARCT, temporary mitigation programs were established to offset excess emissions from power plants, and trading restrictions were placed on power producing facilities. The goal of the May 2001 amendments was to implement realistic, effective solutions to reduce and stabilize the prices of NOx RTCs. Power producing facilities could fully rejoin the trading market in the 2004 compliance year, provided that the Board determined prior to July 2003 that their re-entry would not result in any negative effect on the remainder of the RECLAIM facilities or on California’s energy security needs. These findings were made at the June 2003 public hearing.

The Board adopted proposed changes to Rule 2007 at the December 5, 2003 public hearing, which would have removed most of the trading restrictions. However, CARB expressed concerns regarding reentry of power plants into the full market before the BARCT analysis and allocation adjustments were implemented. Staff agreed, and as part of the amendments, the Board approved a provision to allow power producers to trade among themselves and set a future effective date of September 1, 2004 when power producers would have unrestricted trading of RTCs. At that time, it was anticipated that rule amendments to implement BARCT and adjust allocations would be completed prior to September 2004.

The effort to implement the 2003 AQMP Control Measure and BARCT equivalency is still ongoing and additional time is needed to complete the rule development process. Therefore, staff is proposing to amend Rule 2007 to extend the date by which power plants may reenter the full market in order to synchronize removing the trade restrictions for power producing facilities with the BARCT implementation.

The 2003 AQMP was approved by the Board in August 2003. Subsequently, the AQMP was approved by the CARB and submitted to U.S. EPA to update the State Implementation Plan (SIP). The 2003 AQMP contains a control measure calling for additional NOx emission reductions from RECLAIM. The control measure identified an approximate three (3) tons per day reduction of NOx from the program by the end of the 2010 compliance year. The actual amount will be determined during an ongoing rule development effort, based on an analysis of BARCT.

As required in the California H&S Code §39616, which is applicable to market-based incentive programs, RECLAIM must result in an equivalent or greater level of emission reductions at an equivalent or lower cost as would have been achieved under a command-and-control regulatory structure. This equivalency demonstration was made when the RECLAIM program was adopted in October 1993 and again seven years after rule adoption (October 2000). In addition to making these demonstrations, the District found that the program met the BARCT requirements of H&S Code §40440 for all facilities, including power plants. Beginning with the 2003 AQMP, BARCT will be evaluated every three years with future AQMP updates.

The current version of Rule 2007 limits power producing facilities from reconciling emissions using NOx RTCs that were purchased on or after January 12, 2001 and ending August 31, 2004, unless certain criteria are met. Under the current rule, effective September 1, 2004, the power producers will have unrestricted use of RTCs. However, to address CARB concerns regarding reintroducing power plants to the trading market, the proposal would continue the existing use restrictions until other RECLAIM rule amendments occur that will decrease allocations to reflect BARCT as required under state law. Similarly, the following provisions in Rule 2007 will continue until RECLAIM rules are amended. Power producers may:

Under the proposal, power producers would not be able to participate in unrestricted trading until the RECLAIM rules are amended to implement BARCT and the 2003 AQMP control measure for RECLAIM. Specifically, AQMD staff is proposing to amend RECLAIM at a later date to achieve the additional NOx reduction goals pursuant to the 2003 AQMP Control Measure #2003CMB-10 and state law BARCT requirements. The proposed amendments would delay the September 1, 2004 removal of trading restrictions until RECLAIM rule amendments decrease allocations to implement the 2003 AQMP Control Measure and BARCT. The intent of amending Rule 2007 at this time is to synchronize the removal of trade restrictions for power producing facilities with the BARCT assessment. The specific date for removing trading restrictions would be added to Rule 2007 at the same time the RECLAIM rule amendments reflecting BARCT evaluation are considered by the Governing Board.

Staff has reviewed the proposed amendments to Rule 2007 – Trading Requirements, pursuant to CEQA Guidelines § 15002(k)(1) - Three Step Process, and has determined that the proposed amendments are exempt from CEQA pursuant to CEQA Guidelines § 15061(b)(3) – Review for Exemption. Proposed amended Rule 2007 is covered by the general rule that CEQA applies only to projects which may have a significant effect on the environment. Staff has reviewed the proposed amendments and has determined that it can be seen with certainty that there is no possibility that proposed amended Rule 2007 will have a significant impact on air quality or other environmental areas and, therefore, the proposed project is exempt from CEQA. This is because the proposal merely continues existing trading restrictions in place. If approved by the Board, a Notice of Exemption (NOE) has been prepared (Attachment G) for the proposed project pursuant to CEQA Guidelines §15062 – Notice of Exemption, and will be mailed to the county clerks of Los Angeles, Orange, Riverside, and San Bernardino counties.

Minimal socioeconomic impacts are anticipated relating to this amendment. Trading restrictions on power plants have been in place since May 2001. The rule was modified in December 2003 to allow power plants to trade among themselves and set the September 1, 2004 removal of trading restrictions. The proposed amendments simply extend the current requirements until RECLAIM is amended to reflect BARCT equivalency.

Staff’s analysis presented in the June 2003 Board letter showed that power plants, as a sector, are expected to be sellers. In addition, power plants will continue to be able to trade among themselves should the need arise, as currently provided in Rule 2007. Therefore, no impact is expected by not being able to purchase credits from the full market.

Power producers will not, however, be able to sell RTCs in the full RECLAIM market as they otherwise would have been without these rule amendments and would therefore potentially delay recovery of any costs associated with Rule 2009 compliance (e.g., installation of BARCT controls). This would also have the effect of fewer RTCs available in the trading market. Since trading has been restricted, it is not possible to quantify the amount of RTC sales foregone, but there are currently excess RTCs in the market. Given the fact that the trading restriction is temporary until RECLAIM amendments reflect BARCT, and the current amount of excess RTCs (projected at greater than 15%), minimal socioeconomic impacts are anticipated. Therefore, it is unlikely that during the interim period until RECLAIM is amended to reflect BARCT power producers or the general market would be affected by the delay in removal of the trading restrictions.

A Public Consultation meeting was held on November 19, 2003 to discuss the December 2003 amendments and to introduce the concepts for the current proposal. It was attended by approximately 30 people including representatives from AQMD, CARB, and RECLAIM facilities.

The working group process has been used extensively throughout the rule development process. The RECLAIM Working Group includes members representing small and large businesses, the environmental community, as well as CARB and U.S. EPA. RECLAIM Working Group meetings were held on March 19, April 1, April 15, May 11, June 23, and July 14, 2004 at which time the proposed amendments to Regulation XX were discussed. These discussions focused primarily on BARCT and potential allocation adjustment approaches. At the July 14, 2004 Working Group meeting, staff recommended that amendments to Rule 2007 to continue existing trading restrictions go to the Governing Board in advance of the amendments to implement BARCT. This proposal was acceptable to the stakeholders at that meeting.

A Public Workshop was held on April 7, 2004. It was attended by approximately 40 people including representatives from the AQMD, CARB, and RECLAIM facilities. Separate discussions were also held with CARB staff, and environmental and community representatives. Based on these discussions, CARB staff’s and environmental respresentative’s preliminary review indicated that the proposal is satisfactory because it delays lifting of trading restrictions until such time the BARCT adjustment for RECLAIM is complete.

Requirement to Make Findings Pursuant to California Health & Safety Code Section 39616

California H&S Code § 39616(e) requires the AQMD Governing Board to ratify findings that, relative to the subsumed rules and control measures, RECLAIM (1) achieves equivalent or greater emission reductions at equivalent or less cost, (2) has comparable enforcement and monitoring, (3) does not delay attaining California ambient air quality standards, (4) allows the use of emission reductions from other sources such as mobile and area sources, and (5) promotes privatization of compliance and electronic availability of data. These findings were originally made in October 2000 and subsequently in May 2001 and December 2003. The current proposed amendments to Rule 2007 do not change these findings because the amendments only continue existing trading restrictions.

California H&S Code §§ 40727 and 40727.2 require a written analysis comparing the proposed amended rule with existing regulations. Section 40727.2 analysis is traditionally done for source-specific rule requirements affecting specific types of equipment. RECLAIM applies to NOx and SOx emissions. There are no other AQMD source-specific NOx or SOx emission-related rules that apply to RECLAIM equipment at RECLAIM facilities. Requirements regarding non-RECLAIM NOx and SOx sources, and other pollutants (e.g., VOCs, CO, and PM) are contained in other regulations, such as Regulation IV – Prohibitions and Regulation XI – Source Specific Standards.

A comparative analysis, as required by H&S Code §40727.2, is applicable when an amended rule or regulation imposes, or has the potential to impose, a new emissions limit. The proposed amendments to Rule 2007 extend currently applicable requirements that restrict NOx RTC trading under the full RECLAIM market for power producers. No other state or federal rule exists regarding such restrictions. However, the current trading restrictions in Rule 2007 are in the SIP. Other AQMD regulations regarding trading of other credits, such as Emission Reduction Credits (ERCs), are subject to requirements of Regulation XIII – New Source Review, which applies to non-RECLAIM sources. Use of area and mobile source ERCs, generated pursuant to requirements in Regulations XVI – Mobile Source Offset Programs and XXV – Intercredit Trading, which can be converted to RTCs, are subject to requirements of Rule 2020 – RECLAIM Reserve.

California H&S Code § 40920.6 requires an incremental cost effectiveness analysis for BARCT rules or emission reduction strategies when there is more than one control option which would achieve the emission reduction objective of the proposed amendments, relative to ozone, CO, SOx, NOx, and their precursors. This provision does not apply to the proposed amendment because these amendments do not implement BARCT or the "all feasible measure" requirement of the California Clean Air Act.

Proposed Amended Rule 2007 – Trading Requirements

The proposed amendments to Rule 2007 will:

delay the September 1, 2004 removal of trading restrictions on power producers until other RECLAIM rule amendments decrease allocations to implement the 2003 AQMP Control Measure CMB-10 and to reflect BARCT; and
make other rule changes to allow for full market activity by the power producers contingent on the adoption of the aforementioned rule amendments.

Proposed Amended Rule 2007

Issues raised in development of this rule amendment are:

RTC trading restrictions should be removed in order to allow facilities to sell unused RTCs and to begin to recoup the cost of installed controls required pursuant to Rule 2009.

To address concerns raised by CARB, the removal of the remaining trading restrictions will be contingent on the approval of rule amendments enacting BARCT for RECLAIM as required by state law.
Small municipal electric utilities that are dependent on the purchasing of RTCs should be allowed to reenter the full RECLAIM market, as they contribute little to the overall power producer emissions.

Power producers will continue to be able to purchase credits from each other, as currently allowed under the rule. As stated above, it is necessary to delay power producer re-entry into the full trading market to allow for implementation of BARCT as required under state law.

RECLAIM Working Group
	Agency Representatives California Air Resources Board U.S. Environmental Protection Agency
	Environmental Representatives Coalition for Clean Air Natural Resources Defense Council
	Industry Representatives California Council for Environmental and Economic Balance California Manufacturers Association, Southern California Air Quality Alliance California Portland Cement Company Los Angeles County Sanitation District Natsource LLC NRG Energy, Inc. Regulatory Flexibility Group Sempra Energy Utilities Southern California Gas Western States Petroleum Association
Others
	California Energy Commission Many representatives from other companies, brokers, and other interested individuals

A Resolution of the South Coast Air Quality Management District Board certifying the Notice of Exemption for the proposed amendments to Rule 2007 – Trading Requirements.

A Resolution of the AQMD Governing Board to adopt the proposed amendments to Rule 2007 – Trading Requirements.

WHEREAS, it is necessary to extend the current restrictions for power plants as currently specified in Rule 2007 – Trading Requirements to address CARB concerns regarding reintroducing power plants to the trading market; and

WHEREAS, the proposal contains a provision to lift the trading restrictions, contingent upon other RECLAIM rule amendments (currently scheduled for November 2004) that will decrease allocations to implement the 2003 AQMP Control Measure CMB-10 and to reflect Best Available Retrofit Control Technology (BARCT) as required by state law; and

WHEREAS, the South Coast Air Quality Management District Governing Board finds and determines that proposed amended Rule 2007 – Trading Requirements, is considered a "project" pursuant to the California Environmental Quality Act (CEQA); however, South Coast Air Quality Management District staff reviewed the proposed project and determined with certainty that the proposed amendments to Rule 2007 – Trading Requirements are exempt from the requirements of CEQA pursuant to CEQA Guidelines §15061(b)(3); and

WHEREAS, AQMD staff reviewed the proposed project and determined, with certainty, consistent with the provisions of Health and Safety Code §§ 40440.8, 40728.5 and 40920.6, that no measurable socioeconomic impacts are expected relative to Proposed Amended Rule 2007; and

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

WHEREAS, the AQMD Governing Board has determined that a need exists to amend Rule 2007 to continue current power plant restrictions until a BARCT analysis has been completed for RECLAIM; and

WHEREAS, the AQMD Governing Board has determined that Proposed Amended Rule 2007 is written or displayed so that the meaning can be easily understood by the persons directly affected by it; and

WHEREAS, the AQMD Governing Board has determined that Proposed Amended Rule 2007 is 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 Rule 2007 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 Rule 2007, 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 there is a problem, that the proposed amendments to Rule 2007 will alleviate (Health and Safety Code § 40001(c)). Specifically the amendments will prevent excess NOx credits into the market until RECLAIM is amended to reflect BARCT; and

WHEREAS, the AQMD Governing Board has determined that the findings required pursuant to Health and Safety Code § 39616 (e) made in October 2000, and under subsequent amendments in May 2001, December 2003, and June 2004, are not altered by these amendments and incorporates, by reference, these findings; and

WHEREAS, the AQMD specifies the manager of Rule 2007 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 amendments to Rule 2007 should be adopted for the reasons contained 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

NOW, THEREFORE, BE IT RESOLVED, that the South Coast Air Quality Management District Board does hereby certify the Notice of Exemption for Rule 2007 – Trading Requirements, as proposed to be amended, completed in compliance with CEQA Guidelines §15002(k)(1) - Three Step Process and §15061(b)(3) – Review for Exemption (General Rule Exemption). This information was presented to the Governing Board, whose members reviewed, considered, and approved the information therein prior to acting on Proposed Amended Rule 2007; and

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

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