BOARD MEETING DATE: March 6, 2009
AGENDA NO. 26

REPORT:

Stationary Source Committee

SYNOPSIS:

The Stationary Source Committee met Friday, February 20, 2009. Following is a summary of that meeting. The next meeting will be March 20, at 10:30 a.m., in Conference Room CC8.

RECOMMENDED ACTIONS:

Receive and file.
 

Dennis Yates, Chair
Stationary Source Committee

Attendance

The meeting began at 10:35 a.m. Present were Dennis Yates, Dr. Joseph Lyou and Jane Carney. Absent were Ronald Loveridge and Michael Cacciotti.
 

ACTION ITEM

1. RECLAIM Annual Report
   
   Danny Luong, Engineering & Compliance Manager, presented a summary of the Annual Audit Report on the RECLAIM Program for Compliance Year 2007. He started with a short background of the RECLAIM program and then presented the findings. There were 291 active facilities in the RECLAIM Program at the end of the 2007 Compliance Year. Total reported NOx and SOx emissions were below aggregate allocations by 21% and 13%, respectively. The rates of compliance with NOx and SOx Allocations were high. Mr. Mohsen Nazemi indicated that the only time when emissions were significantly above allocations were in Compliance Year 2000 during the California energy crisis. Mr. Luong indicated that there was also a small excess during Compliance Year 2001 as a result of the same crisis. The average price of individual year NOx and SOx RTCs were lower in calendar year 2008 when compared to 2007 and 2006. Average infinite-year block (IYB) RTCs prices indicate that the price increases between 2002 and 2007 have leveled. The average price for NOx IYB RTCs traded in 2008 increased only slightly when compared to the average price in 2007. Whereas, the average price for SOx IYB RTCs traded in 2008 actually decreased when compared to the average price in 2007. Investor participation in RECLAIM was discussed next. Investors held 4.8% and 7.9% of total supply of NOx and SOx IYB, respectively. The investors were involved in 97% and 55% of the IYB trades, either as buyers or sellers. Comparing the investor holdings to the level of emissions against the allocations in 2011, raises a concern about the possibility of a seller market in the RTC market if additional emission controls are not implemented. Dr. Wallerstein asked Mr. Nazemi to describe a recent trade of Emission Reduction Credits (ERCs) to demonstrate how investors can add unintended and extraordinary high cost to credits just because an investor holds the credits and the project proponent has no other option but to pay the high prices.
   
   The case of City of Anaheim buying and supplying ERCs to support its 200 MW power plant project was described by Mr. Nazemi. In order to permit the project, City of Anaheim needed to provide ERCs and paid an investment group about $15 million for the ERCs which the group paid less than $10 million for. In terms of PM10 ERC, the City of Anaheim paid an investor over $300,000 per pound of PM10 ERC which the investor bought at about $200,000 per pound and both sales were requested on the same day. Dr. Lyou asked if the City knew of the seller when they needed the ERCs. Mr. Nazemi indicated the investor group probably put in the purchase order first. Mayor Yates asked if the AQMD has the power to change rules to prevent similar cases in the future. Ms Carney questioned if changing the rules will help the situation because the seller did not know a buyer who is in need of the ERCs existed. Dr. Wallerstein pointed out that the concern is about an investor who has vast capital can afford to buy up the available credits, wait for the one desperate buyer, and charge an exhorbitant price which then become the prevailing market price. This causes a vicious cycle of ascending credit prices. A discussion of how best to control investor participation in the RTC markets followed. Dr. Lyou commented that staff should start looking into ways to control investor participation in the credit market. Mr. Luong concluded by asking the Board to approve sending the annual report to the Governing Board. Mr. Nazemi added that the average RTC prices in 2008 did not exceed the $15,000 per ton threshold for program review.
   
   During Public Comment period, Mr. Curt Coleman addressed the Committee and asked the Committee to be careful and not adopt remedies that cause more harm than good. He cautioned that government intervention will distort the free market which is currently working to bring willing buyers and sellers together. He also added that investors provide liquidity to the market and incur risks while holding the credits. Mayor Yates asked if Mr. Coleman would agree that the current housing market crisis was a result of inadequate governmental oversight. Mr. Coleman’s view was that the government was making institute lend to people who cannot afford to make payment. Mayor Yates disagreed and pointed to lack of government supervision. Mr. Coleman agreed that there should be supervision but was leery about driving investors totally out of the market. Mayor Yates reiterated the goal of RECLAIM was to reduce emissions. Ms. Carney stated that one of the incentives in RECLAIM is to allow facility to generate emission reductions and profit from them. Dr. Wallerstein indicated that he is confident that the Board will be very cautious in selecting measures for controlling investor activities. Investors are taking minimum risk given the low interest rate available in the current market condition. He thinks the Board should act to protect the market from unreasonable profits which was experienced during the power crisis, is happening currently in the case of City of Anaheim, and may happen to the RECLAIM market in the future. Ms. Carney indicated that the problem is someone owning it all and the market would not work if there was no competition. Dr. Lyou pointed out that the program was designed to reduce emissions and generate additional RTCs available to the market. The other factor to moderating RTC price is whether or not there exists ways to reduce emissions and generate credits. Mayor Yates pointed to the spike in oil price was due to speculations by investors. Ms. Carney voiced that oil companies have their own sources and do not have to buy from speculators and the system is more complex. Dr. Wallerstein indicated that in the case of oil there are alternatives however, in a mandated program like RECLAIM, the participants had no choice but to buy RTCs to comply. There are also a lot of structural buyers in RECLAIM that can only buy credits. Mr. Nazemi pointed to out that the majority (80-90%) of the trade involved investors indicating that the investors do have the market.
   
   Mr. Miles Heller from BP made the next public comment and wanted to reinforce the role of investor. In the SOx market, there are only thirty some participants. If for example he needs 50,000 pounds of SOx credits in short notice, there is no facility ready, except for investors, to provide the 50,000 pounds. Investors provide the means to gather up the credits to make the 50,000 pounds. The reverse is also true. A seller may have a large quantity for sale. Investor is able to provide the capital for the whole amount and later sell to several buyers. It is difficult to contact everyone to see if there is adequate supply. Brokers can provide some of the support but timing is the issue. Some seller may be available some time and buyers may be available at other times. Investors bridge the gap in time. Dr. Wallerstein pointed back in time when RECLAIM was first implemented. Brokers fulfilled the need to bring buyers and sellers together without third party investors to introduce extra profits into RTC trades. Brokers had escrow accounts that would allow multiple transactions of large quantities of RTCs. Mr. Heller stated that the problem is timing. Credits may not be available when needed. Dr. Wallerstein countered that there would be credits had there not been investors to buy them up.
   
   Dr. Lyou asked if there was facility which failed to comply with their allocations year after year. Mr. Luong replied that AQMD maintains a list of facilities that violated their allocations. Mr. Nazemi added that when a facility violates its allocations, in addition to receiving a violation notice, its allocation for the next compliance year is automatically deducted. A facility cannot keep on violating because it will soon run out of credits. Dr. Lyou asked about the graph that shows emissions in excess of allocations in 2001. With the power plants out of the market, why were emissions still higher than allocations. Mr. Nazemi explained that the emissions from power plants were still accounted under RECLAIM even though power plants were removed from the RTC market. Dr. Wallerstein pointed out that the Board established RTC price thresholds for program review. There is more latitude to review and act now rather than after these thresholds are triggered.
   
   Moved (Lyou) seconded (Carney), and unanimously recommended for approval.
   
   
   INFORMATIONAL ITEM
    
2. Reg. IX-Standards for Performance for New Stationary Sources
   
   Jill Whynot, Director of Strategic Initiatives, briefed the committee on this routine rule amendment.  Each year, staff incorporates, by reference in Regulation IX, federal standards that have been adopted or amended that pertain to new source performance standards.  The changes over the last year include standards for stationary spark ignition internal combustion engines, the synthetic organic chemicals manufacturing industry, and petroleum refineries.  Mayor Yates commented that we should be careful when we adopt or comment on rules for new sources since last time he received a number of complaints from Tribes at a meeting he attended. Mr. Nazemi explained that the comments AQMD submitted to U.S. EPA which caused the concern from the Tribes were specifically related to New Source Review Rules for Tribal Land, whereas Reg. IX amendments are nationwide requirements for all sources.
    

WRITTEN REPORTS

All written reports were acknowledged by the Committee.
 

PUBLIC COMMENTS

There were no public comments.

Mayor Yates announced that the next Stationary Source Committee meeting will be on March 20, 2009.
 

The meeting was adjourned at 11:10 a.m.
 

Attachment (DOC, 56k)

February 20, 2009 Committee Agenda (without its attachments)