BILL ANALYSIS �
SB 389
SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
Senator Jerry Hill, Chair
2013-2014 Regular Session
BILL NO: SB 389
AUTHOR: Wright
AMENDED: As Introduced
FISCAL: Yes HEARING DATE: April 17, 2013
URGENCY: No CONSULTANT: Rebecca Newhouse
SUBJECT : SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT:
EMISSION OFFSET FEES
SUMMARY :
Existing federal law , under the Clean Air Act (CAA),
1)Requires the U.S. Environmental Protection Agency (US EPA) to
set national ambient air quality standards (NAAQS); authorizes
states to adopt more stringent standards; and requires states
to develop a general plan, known as a state implementation
plan (SIP), to attain and maintain the standards for each area
designated nonattainment for an NAAQS. The SIP is subject to
US EPA approval.
2)Requires the SIP to include a New Source Review (NSR)
permitting program for nonattainment areas for the
construction and operation of new and modified major sources
of air emissions. NSR regulations require that emission
increases from the permitting of major sources be offset by
corresponding emission reductions.
Existing state law :
1) Provides the California Air Resources Board (ARB) with
primary responsibility for control of mobile source air
pollution, including adoption of rules for reducing vehicle
emissions and the specification of vehicular fuel
composition. (Health and Safety Code �39000 et seq. and
�39500 et seq.). The ARB must coordinate efforts to attain
and maintain ambient air quality standards. (�39003).
2) Provides that air pollution control districts (APCDs) and air
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quality management districts (AQMDs) have primary
responsibility for controlling air pollution from all
sources, other than emissions from mobile sources, and
establishes certain powers, duties, and requirements for
those districts. (�40000 et seq.).
3) Creates certain AQMDs, with related authority, including the
South Coast Air Quality Management District (SCAQMD) under
the Lewis-Presley Air Quality Management Act. SCAQMD covers
portions of Los Angeles, Orange, Riverside, and San
Bernardino counties within the South Coast Air Basin.
(�40400 et seq.).
4) Requires every air pollution control district in a federal
nonattainment area for any national ambient air quality
standard to establish by regulation a system by which air
contaminant emission reductions that are to be used to offset
future emission increases can be banked prior to use to
offset future emission increases. The system must provide
that only those emission reductions not otherwise required by
any federal, state, or district requirement are approved by
the district before they may be banked and used to offset
future emission increases (�40709). The system must meet
certain requirements (e.g., identification of tracking
sources possessing emission credit balances, periodic
analysis of increases or decreases in emissions occurring
when credits are used, procedures for emission reductions
credited to the bank or accruing to internal accounts)
(�40709.5).
This bill prohibits the South Coast Air Quality Management
District from charging a fee for the transfer of an emissions
offset from the district's internal emissions offset account in
order to offset any emissions increase from the replacement of
electric utility steam boilers at electric generating facilities
pursuant to the district's Rule 1304.
COMMENTS :
1) Purpose of Bill . The author notes that South Coast Air
Quality Management District's Rule 1304 exempts the
replacement of specified electric utility steam boilers at
electric generating facilities from specified emissions
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offset requirements and allows those facilities to use, at no
cost, emissions offset credits from the district's internal
emissions offset accounts to offset any emissions increase
associated with those projects. According to the author,
SCAQMD's proposed amendments to Rule 1304 would impose
exorbitant fees on replacement electric generation projects
and that the primary negative consequence is that this rule
change would obstruct investment in replacement electric
generation, at a time when replacement electric power is of
paramount concern in the Los Angeles area. According to the
author, using California Independent System Operator (CAISO)
projections of electricity replacement generation needs, the
proposed Rule 1304 amendment would add between $15 and $25
million per year in fees for the "mitigation" of projects
that are essential for maintaining electrical reliability in
southern California. SB 389 would prohibit imposition of this
fee. The author also notes that the fee may violate
Proposition 26.
2) ERCs and offsets in South Coast . SCAQMD is a nonattainment
area for ozone (extreme designation) and particulate matter
(PM). Air districts in nonattainment regions are required to
have programs where actions or projects that result in a
quantifiable reduction in emissions from a permitted facility
may be banked and used to offset future emissions increases.
These emission reduction credits, or ERCs, may be used
internally to offset future emission increases for the entity
that generated them, or sold on the open market to other
entities that are required to obtain offsets for planned
projects with estimated emission increases. The market for
ERCs in the South Coast Air Basin is incredibly limited. In
order to build large new facilities with high emission
potential, a very large number of ERCs are needed, and in
fact, the number needed can exceed the number of ERCs
available on the open market.
In addition to ERCs available in the market, the SCAQMD has
an internal offset account that includes a Priority Reserve
bank that accumulates offsets when an operator of a permitted
facility reduces emissions from shutdowns or other emission
reduction actions and does not convert the emission
reductions into ERCs. The SCAQMD allocates these offsets to
meet offset requirements when issuing permits for "essential
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public services," which are defined to include publicly owned
or operated sewage treatment plants, prisons, police and
firefighting facilities, schools, hospitals, landfill gas
control or processing facilities, water delivery facilities,
and public transit facilities. SCAQMD also uses this internal
offset account to offset emission increases from existing
powerplants replacing electric steam boilers (see Comment #3)
to more efficient technologies.
South Coast Powerplant . AB 1318 (V. Perez), Chapter 285,
Statutes of 2009, allowed the CPV Sentinal powerplant in the
Coachella Valley, which did not own any utility boilers,
access to the South Coast's internal offset bank, in order to
be built. Sentinal voluntarily paid approximately $53
million in mitigation fees for access to SCAQMD's internal
offset bank. According to SCAQMD, these fees enabled the
district to fund air quality mitigation and improvement
projects in the Coachella Valley, including helping school
districts replace or clean up dirty diesel school buses,
installing air filtration systems in classrooms and assisting
local cities and communities with solar panel installations,
cleaner vehicles and dust control projects.
In another example, AES Corporation sold two of its utility
boilers at Huntington Beach facility to Edison Mission
Energy, which in turn shut down the old boilers and used the
exemption to obtain offsets from the district's internal
account for their new Walnut Creek powerplant in the City of
Industry. SCAQMD contends that the money paid by Edison
Mission Energy to buy the AES boilers in order to gain access
to the district's internal offsets should have instead gone
to SCAQMD to provide additional emission reductions in the
South Coast region to help clean the air.
Electric uncertainty . On January 31, 2012, the San Onofre
Nuclear Generation Station (SONGS) unexpectedly shut down
after a radioactive steam leak was discovered at the nuclear
facility. According to CAISO, the loss of power generation
from SONGS means the amount of electrical generation needed
in the region in the absence of SONGS is between 4,300 and
4,600 MW.
3) South Coast rules . SCAQMD's Regulation XIII New Source
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Review (NSR) Rules set forth review requirements for new,
modified, or relocated facilities, to ensure that the
operation of such facilities does not interfere with progress
in attainment of the national and state ambient air quality
standards, and that future economic growth within the SCAQMD
is not unnecessarily restricted. According to the district,
the air quality goal of this regulation is to achieve no net
increases from new or modified permitted sources of
nonattainment air contaminants or their precursors.
Specifically, Rule 1303 requires new sources of air emissions
to use Best Available Control Technology (BACT) and to
purchase ERCs to offset any additional emissions that the
replacement or retrofit may cause.
Exemption . The district's Rule 1304(a)(2) provides an
exemption to the requirement for ERCs to offset any emission
increases for the replacement of an electric steam utility
boiler to more efficient or advanced technology, such as a
combined cycle natural gas unit. However, in order for the
district to show equivalency with the federal clean air act,
which does not allow for exemptions to the offsets
requirement for emission increases from major sources, they
have been retiring offsets from the district's internal
account without a fee.
Proposed Rule 1304.1 . District staff has proposed to charge
an annual fee for electrical generating facilities that are
using the exemption in Rule 1304(a)(2) and currently granted
access to the district's internal offsets account. The
initial draft of Rule 1304.1 proposed the fee be based on
several factors, including the average annualized cost of
ERCs on the open market based on prior years and the revenue
would be used by SCAQMD to fund emission reduction projects
throughout the district. The initial proposed rule would have
also required payment for district offsets for the first five
years upfront, and annually thereafter resulting in a
significant upfront cost for powerplants seeking access to
the district's internal offsets, with, at maximum, a 50%
refund if the offsets are no longer required. In a
legislative update released on March 13th of this year, CAISO
expressed concerns that the proposed rule may lead to
unintended consequences that could affect reliability in the
Los Angeles Basin by creating a disincentive for developers
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to repower plants due to the requirements of five years of
fees upfront and the limited refund policy.
In response to concerns from CAISO and other stakeholders, on
April 4, 2013, the district released an updated version of
proposed Rule 1304.1. The changes allow for a full refund if
a written request by the facility owner or operator is
received prior to the commencement of operation and allow for
an annual payment option, without the five-year upfront
investment. The changes would significantly reduce the annual
fee relative to the initial proposal.
CEQA review . On April 5, 2013, SCAQMD issued a Notice of
Preparation and Initial Study (NP/IS) to solicit information
on the scope of the environmental analysis for the proposed
project and to notify the public that the SCAQMD will prepare
a Draft Environmental Assessment (EA) to further assess
potential adverse environmental impacts that may result from
implementing the proposed rule. The NP/IS states that the
draft EA will evaluate whether delayed equipment replacement,
a potential result of the adoption of the fee in proposed
Rule 1304.1, would have an impact on the electricity supply
system as a result of rule adoption, and specifically,
whether the potential for the San Onofre Nuclear Generating
Station extended power outage would be an exacerbation of any
impact.
4) SCAQMD's reason for charging fee . As previously noted, the
district currently provides offsets for powerplants using the
exemption in Rule 1304 (a)(2) from their internal account
without a fee in order to demonstrate equivalency with
federal requirements. According to SCAQMD, the fee would make
the current system more equitable between existing outdated
powerplants and potential new powerplants in the region,
since when existing powerplants in the district shutdown
their existing utility boilers, they receive an exemption
through Rule 1304(a)(2) and in turn obtain free offsets from
SCAQMD internal offset bank to use toward permitting new
equipment. In contrast, other private companies who do not
have existing boilers that they could shut down would have to
buy their offsets in the open market, where emission
reduction credits are scarce and expensive, with prices for
PM10 ranging from around $90,000 to over $350,000 per pound
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in the past five years. SCAQMD asserts that in the past five
years, utility boiler replacements have used, in some cases,
six to 100 times more offsets from SCAQMD's internal offset
account compared to all other essential public service and
other exempt projects added together.
SCAQMD also asserts that proposed Rule 1304.1 acknowledges
that the offsets in the SCAQMD's internal credit bank are a
public good and as such, they should not be given away
without a corresponding public benefit, which the proposed
rule will provide by using the revenues to obtain emission
reductions.
5) Is this bill premature ? The latest changes to proposed Rule
1304.1 were aimed at addressing specific concerns raised by
CAISO regarding disincentives for developers to repower
plants. The district also plans to conduct an environmental
assessment of the proposed rule, and may adopt further
changes to the rule as a result of that analysis. The
committee may wish to consider the outcome of this analysis
prior to considering this measure. This bill should be held
pending the further refinement of the rule and completion of
the environmental assessment to give the Senate Environmental
Quality Committee the opportunity to review this information.
SOURCE : Senator Wright
SUPPORT : None on file
OPPOSITION : South Coast Air Quality Management District