BOARD MEETING DATE: January 8, 2010
AGENDA NO. 27

SUPPLEMENTAL INFORMATION

PROPOSAL:

Informational Hearing to Receive Public Comments on Proposed Amendments to SOx RECLAIM Program (Regulation XX): Supplemental Information Provided Herewith, Draft Work Plan to Complete Rule Development for Proposed SOx RECLAIM 

SYNOPSIS:

This item constitutes an informational hearing on proposed amendments to RECLAIM rules. In conjunction with this hearing, staff is providing a report which highlights Best Available Retrofit Control Technology (BARCT) determinations, cost-effectiveness, consultants’ analyses, and options for achieving reductions from the program. The report and the informational hearing are intended to provide the Board with a status update on the rule development process, identify key issues and viewpoints, and give the public an opportunity to comment.

COMMITTEE:

Stationary Source June 20, 2008; June 19, 2009; and November 20, 2009, Reviewed 

RECOMMENDED ACTION:

Direct the staff to continue with developing proposed rule amendments to the RECLAIM program, consistent with the attached work plan, giving consideration to public input received at the meeting.
 

Barry R. Wallerstein, D.Env.
Executive Officer

Attachment

- Draft -

Work Plan to Complete Rule Development
for
Proposed Amended SOx RECLAIM

Several issues have been raised by affected facilities with regards to Proposed Amended SOx RECLAIM. The following work plan has been developed in order to better address these broader issues and outline some of the details in order to facilitate an ongoing dialog with stakeholders. It is expected that these broad categories are sufficiently flexible to address evolving issues as results of the Work Plan emerge.

1. Stranded Investments

Background

Rule 1105.1 was adopted on November 7, 2003 to reduce particulate emissions (PM10) from fluid catalytic cracking units (FCCU). Implementation of this rule resulted in large capital expenditures by some local refineries that recently installed dry electrostatic precipitators (ESPs) – some within the last two years.

Issue

These impacted refineries have raised concerns of stranded investments because either the proposed SOx RECLAIM amendment may require alternative technology that is incompatible with technology that has already been installed, facility operations or site specific conditions, or because costs are typically amortized over longer periods of time. That is, the application of wet gas scrubbers to reduce SOx emissions from the FCCUs will in effect render the Rule 1105.1 ESP useless in reducing PM10 emissions.

Action Items

1. On a facility-by-facility basis, the refineries are requested to provide District staff with the actual costs to install the FCCU ESPs and provide their reasons why the ESPs will be inoperable under the scenario of complying with the proposed SOx limit for the FCCUs. This analysis should include, where appropriate, the costs of the original installation, financing, and subsequent removal.

2. Staff will analyze and summarize the facility data for the purpose of discussion at a future Refinery Committee meeting to further determine the potential for significant stranded investments and options to mitigate such impacts, if possible. Results will also be reported at a public workshop.

2. SOx Shave Methodology

Background

At the request of industry, District staff has proposed a SOx shave methodology consistent with the methodology used for the recent NOx RECLAIM shave. Recent elements of the shave methodology were recommended in recognition of those facilities with low emission levels (21 facilities that comprise 65% of SOx RECLAIM universe but contribute 6% of the 2005 SOx emissions) that would not be able to reduce SOx emissions at their facilities. Recommendations include an alternate percent shave or an exemption from the shave.

Issue

WSPA representatives have stated that they are developing an alternative SOx shave methodology to the one proposed by staff.

Action Item

WSPA and the refineries will provide staff with their proposed SOx shave methodology. Staff will work with WSPA to analyze the methodology to determine if it demonstrates compliance with the BARCT assessment and Command and Control equivalency requirements of state law. The analysis will be discussed at a future Refinery Committee meeting and public workshop.

3. BARCT and Shave Levels

Background

Staff is proposing BARCT levels at 5ppm and 10ppm for seven process categories that largely rely on the use of wet and dry scrubbers that would result in a reduction of 6.2 tons per day of SOx emissions, and would justify an approximately 64% - 67% shave of currently held RTCs.

Issue

Industry is asserting that staff has underestimated the cost of its proposal and must also better address potential impacts to water supply. It appears that industry and WSPA may be asserting that a lower reduction and shave target would allow the use of alternate but more cost-effective control technologies that are in line with the currently targeted emission reductions in the AQMP.

Action Item

Staff will use a third party reviewer, with data and input from WSPA and other stakeholders as appropriate, to help further evaluate issues raised regarding the cost analysis performed by the original consultants.

WSPA and the refineries are invited to provide staff with alternate control technologies along with their anticipated emissions reduction potential and associated cost and cost-effectiveness for further consideration.

4. Market Viability

Background

The staff proposal results in a reduction of 6.2 tons per day (64% - 67.5%) of SOx by the 11 large RECLAIM SOx emitters including the 6 petroleum refineries. These reductions are proposed to occur over a six-year period starting in 2012.

Issue

Facility operators have raised several issues regarding the proposed SOx reductions, including not having enough trading partners, significant degree of competitiveness for the remaining RTCs, limited ability of SOx controls beyond BARCT, impact on structural buyers and uneven distribution of RTC holdings.

Action Item

District staff has committed to considering the use of the compliance margin and non-tradeable RTC accounts as tools to alleviate expressed concerns. However, WSPA members and other facility operators are invited also to provide their input on ways to comply with state law and protect the SOx RECLAIM market viability. Staff will work with stakeholders to understand and report on the implications of various potential levels of shave on the RECLAIM SOx market.

5. Water Demand and Wastewater Discharge

Background

The BARCT assessment conducted as part of the staff analysis indicates that there may be as many as 11 new wet gas scrubbers in the District, if all facilities select that technology. This could result in a water demand increase of approximately 1 million gallons per day or 3 acre feet per day (a 2% increase relative to current six-refinery baseline). The wastewater discharge is also expected to increase by a similar percentage (2%) or 0.44 million gallons per day.

Issue

Concerns have been raised as to the ability of water purveyors and wastewater treatment facilities to meet this increase in water demand and treatment capacity, and reliability of water supply as mandated by recently passed legislation requiring reductions in all water use and deliveries. There is an added element of concern in water demand given our current drought situation. WSPA believes that these concerns should impact the BARCT determination.

Action Item

1. District staff will invite meeting representatives from the various water purveyors, water regulatory agencies and wastewater treatment facilities to the next Refinery Committee. These representatives will be given the opportunity to provide their insight on the impact the staff proposal will have on water supply and wastewater treatment and the implications of recent legislation.

2. District staff will also explore to what extent the water demand can be reliably offset by groundwater from wells owned and operated by refineries, by recycled water, or other means and what the associated costs are. These data will be incorporated in the final staff report and available to the Governing Board and public at the rule adoption hearing for consideration, including the BARCT determination and Shave Levels (#3 above).

6. CEQA Implications and Permitting

Background

The proposed regulation will likely require installation of new equipment or modifications to existing equipment that must be permitted by the District.

Issue

Projects designed to address the SOx shave may, depending on size and technology, need to obtain permits in compliance with Title V, CEQA (including mitigation of Greenhouse gas [GHG] emissions), BACT, NSR, offset provisions, water use and discharge, water conservation, building permits and various other clearances. Given the current permitting environment, adequate time must be provided to install BARCT technologies.

Action Item

District Staff will work with WSPA, stakeholders and individual facility operators, as appropriate, to develop a BARCT strategy that is compatible with the current permitting environment. This effort could also explore the possibility of a Program Environmental Assessment that could address and mitigate potential environmental impacts of the proposed rule amendment.

PROPOSAL:

Informational Hearing to Receive Public Comments on Proposed Amendments to SOx RECLAIM Program (Regulation XX) 

SYNOPSIS:

This item constitutes an informational hearing on proposed amendments to RECLAIM rules. In conjunction with this hearing, staff is providing a report which highlights Best Available Retrofit Control Technology (BARCT) determinations, cost-effectiveness, consultants’ analyses, and options for achieving reductions from the program. The report and the informational hearing are intended to provide the Board with a status update on the rule development process, identify key issues and viewpoints, and give the public an opportunity to comment.

COMMITTEE:

Stationary Source June 20, 2008; June 19, 2009; and November 20, 2009, Reviewed 

RECOMMENDED ACTION:

Direct the staff to continue with developing proposed rule amendments to the RECLAIM program, giving consideration to public input received at the meeting.
 

Barry R. Wallerstein, D.Env.
Executive Officer

Introduction

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 and future command-and-control rules.  

AQMD staff is proposing amendments to Regulation XX – RECLAIM to achieve additional SOx reductions pursuant to the 2007 AQMP Control Measure CMB-02 and state law. Specifically, the proposed amendments also address requirements for Best Available Retrofit Control Technology (BARCT) in accordance with California Health and Safety (H&S) Code §40440, which is applicable to market-based incentive programs, as well as equivalency to command-and-control regulations, as required under H&S Code § 39616(c)(1). Reductions in SOx will help the Basin attain the federal annual average PM2.5 standard by 2015, and the federal 24-hour average standard by 2020. Other proposed rule amendments include clarifications and changes to the protocols.

Public Process

In 2008, staff formed a RECLAIM Working Group including members representing SOx RECLAIM facilities, the Western States Petroleum Association (WSPA), the environmental community, as well as CARB and U.S. EPA to discuss and brainstorm about the proposed amendments to the SOx RECLAIM program. The first meeting was conducted on February 07, 2008.

On April 03, 2008, staff released the first Preliminary Draft Staff Report, and conducted two Working Group meetings on April 03 and April 30, 2008 to discuss staff’s initial proposal including allocations, emissions inventory and distribution, and potential BARCT for seven (7) major emitting categories of stationary source equipment located at the eleven (11) major SOx RECLAIM facilities.

In May 2008, staff, WSPA and the refineries worked in collaboration to develop a Request for Proposal (RFP) to solicit expert consultants to conduct independent studies on feasibility and cost effectiveness. Additional working group meetings were held on May 15, May 28, and July 2 to discuss the Request for Proposal. On July 11, 2008, the Governing Board approved the release of the RFP and staff conducted a Bidder’s Conference immediately after. A public notice advertising the RFP and inviting bids was published in accordance with AQMD’s Procurement Policy and Procedure. The District’s procurement office received and accepted a total of six (6) proposals.  

Staff formed an evaluation panel in August 2008 to evaluate the potential contractors. The four member evaluation panel consisted of one AQMD Assistant Deputy Executive Officer from Planning, Rule Development, and Area Sources Division; one AQMD Program Supervisor of the Best Available Control Technology team; one AQMD Program Supervisor of the Refinery Team; and one representative from WSPA. Staff invited one representative from the environmental group and two representatives from the U.S. EPA; however, they could not participate in this evaluation process due to schedule conflicts.

The panel was in agreement that the contractors possessed good qualifications, presented good approaches and workable schedule. After serious consideration, the panel recommended the Governing Board to award the contracts to:

• ETS, Inc. in the amount not to exceed $289,360 to conduct analyses for refinery Fluid Catalytic Cracking Units (FCCUs), boilers/heaters, and sulfur recovery units and tail gas treatment units (SRU/TGTUs); and

• NEXIDEA Inc. in the amount not to exceed $45,500 to conduct analyses for sulfuric acid manufacturing facility and a coke calciner facility.

The panel recommendation was approved by the Governing Board in a public meeting on September 5, 2008. The two consulting firms started the projects immediately in September 2008. NEXIDEA Inc. and ETS Inc. completed their assessment for sulfuric acid manufacturing, coke calciner, container glass manufacturing, and cement plant in December 2008. ETS Inc. and their subcontractor AEC Engineering finalized their assessment for the refineries in April 2009. Their non-confidential reports are available for public information.

In 2009, staff reconvened the Working Group meetings. A Public Workshop was conducted on June 23, 2009, and in this workshop, staff released the Draft Staff Report to discuss BARCT, cost effectiveness, RECLAIM Trading Credits (RTC) reduction methodology, and timing of the proposed implementation. In addition, staff conducted numerous meetings with WSPA and WSPA members, and other affected facilities as requested. Two most recent Working Group meetings were held on August 27 and December 15, 2009.

Current Staff Proposal for SOx RTC Reductions

To estimate the SOx RTC reductions to meet the AQMP commitment and the state law requirements, a two-step process is taken. This methodology is the same as the one used for the NOx RECLAIM amendments in 2002. The first step is to determine the current applicable BARCT levels. Based on the consultant studies and staff independent reviews, the proposed new BARCT levels for the source categories are shown below, taking into account the incremental cost effectiveness from the 2000 BARCT to the proposed new BARCT, implementation schedule, and other environmental impacts. For cost effectiveness analysis, year 2005 activity levels are used and the C/E at individual facilities is considered. Once an overall control level is established for each source category, the next step is to estimate the projected future milestone year emissions as if RECLAIM facilities were under a command and control program. For this analysis, 1997 is selected as the base year to represent the beginning of the RECLAIM program when most of the controls had not been installed. The 1997 reported and audited emissions are grown to future years based on the latest growth assumptions contained in the 2007 AQMP for each industry classification and controlled by all applicable BARCTs including Tier 1(year 2000) and the proposed new BARCT. The projected controlled emissions plus a 10% compliance margin are considered the command and control equivalent emissions. The difference between the total RTC allocations and these emissions is the appropriate shave for the program to deliver BARCT equivalent reductions. 

Using this methodology, staff estimated a total SOx RTC reductions of 7.5 tons per day, approximately 64% reductions assuming an implementation across-the-board based on equal percent reductions to all RTC holdings.

It should be noted that in the SOx RECLAIM program, emissions and RTC holdings are not distributed uniformly: eleven (11) major facilities in the SOx universe of thirty-two (32) facilities contribute 94% of the SOx RECLAIM emissions, and hold almost 90% of the RTC holdings. In addition, the emission reductions due to BARCT assessment would come from seven (7) categories of sources located at the eleven (11) major facilities. The remaining facilities either do not have any equipment subject to proposed new BARCT, or their facility emissions are small.

The attached table shows the Tier I current BARCT levels established in 1993 for year 2000, the new proposed BARCT levels, the percent reduction from Tier I and the estimated cost effectiveness for each of the seven (7) categories of sources located at the eleven (11) major facilities:

The net cost of staff’s proposal for BARCT was estimated to be $745 million dollars. The weighted average cost effectiveness was about $13K per ton SOx reduced, with a range from $2K to $47K per ton SOx reduced.

The reductions would be implemented in six (6) phases:

• 1.5 tons per day of reductions in compliance year 2012

• 1.5 tons per day of reductions in compliance year 2013

• 1.5 tons per day of reductions in compliance year 2014

• 1 ton per day of reductions in compliance year 2015

• 1 ton per day of reductions in compliance year 2016

• 1 ton per day of reductions in compliance year 2017

Staff proposed to submit the first 3 tons per day RTC reductions to satisfy the SIP commitment and help the basin meets the PM2.5 standard in 2015. The remaining reductions would be submitted at a later phase.

CEQA, socioeconomic and market analyses for this proposed rule amendment are currently in progress. Rule development is ongoing and staff is committed to working with all stakeholders throughout the process. 

Key Issues

There are four (4) key issues raised by the stakeholders: 1) BARCT determination, 2) water and wastewater, 3) market viability, and 4) shaving methodology. Staff’s responses to these key issues are summarized below:

1) BARCT Determination

Stakeholders commented that staff should pursue only 3 tons per day reduction as stated in the 2007 AQMP to meet the SIP commitment. WSPA believes that the current trend of PM2.5 is declining and does not warrant a SOx shave that they estimated to cost industry over one billion dollars. In addition, the costs and cost effectiveness were under-estimated by staff and environmental impacts (e.g. water, energy) were not appropriately analyzed.

Staff’s Response: For a market based incentive program, staff is required by the H&S codes to conduct periodic BARCT reassessment and demonstrate equivalency with command-and-control rules which would otherwise be developed as a result of BARCT reassessment:

“…achieve an equivalent or greater level of emission reductions at an equivalent or lower cost as would have been achieved under a command-and-control rule”  

The overall percent reduction (64%) that staff estimated for the SOx RECLAIM universe as a whole is still much less stringent than the percent reduction (90% - 98%) that could be imposed to specific categories of sources such as FCCUs, SRU/TGs, sulfuric acid plant, cement plant, coal fired boiler, and glass melting furnaces under the command-and-control approach.

Furthermore, it should be noted that SOx is a significant building block of PM2.5. Chemical speciation of PM2.5 samples indicated that in the South Coast Air Basin 25% of the ambient PM2.5 is attributed to contribution from sulfates. Furthermore, SOx reductions are highly effective in reducing ambient PM2.5 levels as compared to other primary and secondary contributors to PM2.5 formation (1 tons SOx = 1.5 tons PM2.5 = 15 tons NOx). Therefore, the reductions of SOx are essential for the basin to meet the federal annual standard of PM2.5 by 2015 and the federal 24-hour average standard of PM2.5 by 2020. As indicated in the 2007 AQMP, the control strategies included in the Plan to meet the annual PM2.5 standard when fully implemented will fall short of meeting the 24-hour standard by approximately 30%. Therefore, additional reductions above and beyond the control strategies committed in the 2007 AQMP for meeting the 2015 annual PM2.5 standard are necessary to meet the 24-hour PM2.5 standard in 2020. For further information, please refer to Chapter 5 of the 2007 AQMP.

In addition, it is worth mentioning that the U.S. EPA is proposing to set a new, more stringent, one-hour standard for SO2 between 50 – 100 parts per billion (ppb) and revoke the current 24-hour of 140 ppb and the current annual standard of 30 ppb to further protect public health. The U.S. EPA and the state are also proposing to tighten the annual average PM2.5 standard.

Regarding the costs and cost effectiveness analyses, after verifying the consultants’ analyses, staff formulated its proposal based largely on consultants’ recommendations. In response to comments from industry related to costs and in an effort to optimize the effectiveness of its proposal, staff removed the least cost effective control strategies (exceeding $50,000 per ton SOx reduced) from the staff proposal. While these refinements to the staff proposal have reduced anticipated reductions by 5% (0.33 tons per day), they improved the overall cost effectiveness to $13,000 per ton SOx reduced and reduced the total compliance costs by 25%. To further reduce the cost impacts, staff proposes to spread the potential emission reductions into 6 years starting from 2012. Staff also proposes to submit only 3 tons per day reductions to satisfy the SIP commitment in Phase 1 (i.e. 3 tpd reductions by 2014). The remaining reductions will be submitted later.

2) Water & Wastewater Impacts

Stakeholders commented that the water and wastewater impacts of the project will be significant.

Staff’s Response: Industry argues that staff proposal will result in significant increases in water demand and wastewater impacts due to the water-intensive operation of wet gas scrubbers. To the extent that wet gas scrubbers are used to comply with the proposed SOx control requirements of the proposed project, staff acknowledges that the total water demand will increase, (by approximately 1 million gallons per day or 3 acre feet per day), but increased water demand over current water usage at affected facilities is well below the SCAQMD’s significance threshold of 5 million gallons per day of total increased water demand (i.e. potable water, recycled water, and groundwater). The information that staff received to date from the water purveyors is that there are adequate supplies to meet the total water demand because, in part, the water demand can be largely offset by recycled water and groundwater sources. Availability of water supplies to meet increased water demand is another water demand significance threshold criterion. Even though the potential increase in total water demand is below the
SCAQMD’s significance threshold of 5 million gallons per day, and because California is in a state of emergency for drought, staff has identified another criterion for what would be considered a substantial use of when determining whether a project, could be considered a “water demand” project as defined by CEQA. However, even using the more stringent criterion of what constitutes a potable water demand project, the proposed project would not qualify as a “water demand” project since quantified potable water demand from the proposed project does not exceed the more stringent criterion.

Relative to the wastewater impact, staff’s analysis based on the Survey conducted among the affected facilities indicates that the overall wastewater increase will be less than 2% and that the facilities have adequate wastewater treatment capacity to treat the increase in wastewater generated. An increase of 25 percent would trigger a permit revision and would be considered a significant adverse wastewater impact. Since all of the affected facilities have been shown to have a potential wastewater increase less than 25 percent, no modifications to any existing wastewater discharge permits are anticipated as a result of the proposed project. Nevertheless, staff will continue working with water purveyors and the impacted facilities to further refine the water demand analysis and analyze other impacts and alternatives.

3) Market Viability

Stakeholders commented that there were not enough trading partners, the SOx market was very competitive and reserved, and there was an uneven distribution of RTC holdings.

Staff’s Response: For a market based incentive program, staff is required by the H&S codes to conduct periodic BARCT reassessment and demonstrate equivalency with command-and-control rules which would otherwise be developed as a result of BARCT reassessment. To ease the issues identified by the stakeholders, staff is proposing to return a portion of the reductions to the facilities as a compliance margin (10%). This approach was also utilized as part of the 2005 NOx RECLAIM amendments. In addition, staff is proposing to establish a set-aside, non-tradable reserve that could be tapped when RTC value in the open market reaches a certain level. Staff is also proposing to initially submit only three (3) tons per day reductions to meet the minimum AQMP obligation and submit the remaining at later date. Staff believes that compliance with a facility cap still provides the facilities more operational flexibilities than being subject to stringent requirements in command-and-control rules and regulations. 

4) Shaving Methodology

Facilities with no equipment subject to new BARCT commented that the uniform shave was not equitable, would create significant difficulties for them to stay in compliance, and indicated that they had limited ability to buy RTCs from large facilities

Staff’s Response: Because of the non-uniform characteristics of the SOx RECLAIM market (11 major facilities hold 87% of RTCs and contribute more than 94% of emissions, and the remaining 21 facilities hold only 6% of RTCs and contribute about 6% of emissions), a uniform percent shave of 64% across the board may not be the ultimate solution. The 21 facilities that have no equipment subject to the new BARCT cannot reduce their emissions further and cannot sustain operation and remain in compliance after the shave. To keep the 21 facilities active in the SOx market, staff is proposing to not shave the RTC holdings for these facilities if their RTC holdings as of August 31, 2009, are below their initial allocations provided to them at the start of the RECLAIM program. However, the amount of RTC holdings above their initial allocation will be shaved at the same rate as the other 11 facilities and investors. With this approach, staff estimated that instead of a 64% shave across the board, the 11 facilities will have a shave of 67.5%. Three of the 21 remaining facilities that have RTC holdings above their initial allocations may be subject to the same percentage shave the other 11 facilities and the investors would be subject to, not to exceed their initial allocation levels, while 18 of the 21 facilities would be exempt totally from the shave. This would equate to a shave of 4% for the remaining 21 facilities, which could also be considered as an alternative. Staff may refine the alternative shave approach in the future to address comments and input from the stakeholders.

Draft Staff Report

The attached revised Draft Staff Report includes the following information:

• BARCT determinations;

• Cost-effectiveness;

• Summary of consultants’ analyses;

• Method of determining RTC reductions and amount estimated;

• Timing of reductions; and

• Preliminary methods of applying reductions.

Draft Staff Report changes since June 23, 2009

Since the release of the draft Staff Report in the Public Workshop conducted on June 23, 2009, staff modified the document as follows:

• Removed cases that resulted in high cost effectiveness of larger than $50 K per ton (1 for FCCU, 2 for SRU/TGTUs, 1 for Boilers/Heaters) from the cost analysis

• Added achieved-in-practice information,

• Added a draft analysis on water and waste, and

• Provided responses to the comments received in the Public Workshop

Other minor changes are:

• Reorganized the report for clarity

• Revised the 1997-1998 inventory for sulfuric acid plants from 0.75 tpd to 1.28 tpd

• Revised inventory for boilers/heaters from 7.08 tpd to 6.5 tpd

• Revised growth factor for category “Others” from 1 to 1.07

• Revised BARCT proposed level for SRU/TGTUs from to 4.72 lbs/hr to 5.28 lbs/hr, and control factor from 0.56 to 0.63; coke calciner from 0.07 lbs/ton to 0.11 lbs/ton, and control factor from 0.03 to 0.05; cement kiln from 0.035 to 0.04 lbs/ton, and

• Made some grammatical and other general corrections.

Staff will address the remaining comments submitted in July 14, 2009 and revise the draft Staff Report as needed in a near future.

Attachment (EXE, 1.3m)

Draft Staff Report - SOx RECLAIM

• Part 1 – BARCT Assessment & RTC Reductions Analysis

• Part 2 – Summary of Consultants’ Analyses