BILL ANALYSIS 1
1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
SB 696 - Wright Hearing Date:
June 16, 2009 S
As Proposed to be Amended FISCAL/Urgency B
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9
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DESCRIPTION
Under current law , known as the California Environmental Quality Act
(CEQA), an environmental impact report shall be prepared on a
project that may have a significant effect on our environment.
Under current law , every air quality management district in a
federal non-attainment area (e.g. the greater Los Angeles area) is
required to establish a system by which major new and modified
sources of air pollutants are required to obtain permits, meet
emission standards that constitute the lowest achievable emission
rates, and obtain equivalent emission reductions, or offsets, from
other sources. Pursuant to this requirement, the South Coast Air
Quality Management District (SCAQMD) promulgated various rules.
Under it's rules, the SCAQMD has accumulated emission reduction
credits in an internal bank which it makes available to specified
entities for specified purposes.
In Los Angeles Superior Court , certain of the district's rules were
found to violate CEQA, including the rule under which the SCAQMD
accumulated the emission reduction credits in its internal bank.
This bill abrogates the Court's decision, establishes the amount of
emission reduction credits in the SCAQMD's bank and authorizes the
use of those credits for essential public services, other exempt
purposes as defined by the SCAQMD, and powerplants under specified
conditions.
This bill exempts the use of the credits in the SCAQMD's bank from
CEQA.
(The author is proposing several technical amendments which have
been considered in this analysis.)
BACKGROUND
What is SCAQMD? - The South Coast Air Quality Management District
(SCAQMD, or district) is the air pollution control agency for all of
Orange County and the urban portions of Los Angeles, Riverside and
San Bernardino counties, an area of over 10,000 square miles and
home to over 16 million people. The district is responsible for
controlling emissions primarily from 28,000 stationary sources of
air pollution (e.g. neither cars nor trucks).
How SCAQMD Controls Pollutants - Every major stationary source of
air pollution is required to obtain a permit to emit those
pollutants from the district. To obtain a permit the applicant must
use the best available technology to control its pollution and it
must, in effect, offset its pollution by reducing the pollution
produced by others by at least a like amount. Entities which reduce
their emissions beyond what is required are given credits for those
reductions, known as Emission Reduction Credits (ERCs). The district
has created a market for companies to purchase the ERCs to meet
their offset requirements. The applicant can obtain a list of
sellers and brokers of ERCs from the district and can purchase the
appropriate amount from competitive sellers.
The district exempts essential public services from the requirement
to obtain necessary emission credits. The offsets are instead
provided by the district from a separate bank of emission credits,
known as the Priority Reserve, without charge (Rule 1309.1).
Similarly, the relocation of facilities and facility modifications
for environmentally beneficial purposes are exempt from obtaining
offsets (Rule 1304(c)). Those offsets are also provided without
charge from the Priority Reserve.
One of the critical pollutants covered by this mechanism is small
particulate emissions, known as PM10. These are very fine particles
less than 10 microns, or millionths of a meter, in diameter which
are particularly harmful. The price of PM10 credits has increased
by over 3000% so far this decade. To put this cost into
perspective, if a powerplant had to purchase its PM10 credits in the
market, the cost of the credits would increase the cost of the
powerplant by 20% - 30% according to the district.
SCAQMD Loses Lawsuit Over Rules Changes - In 2006 the district
changed its Priority Reserve rule (Rule 1309.1) to allow powerplants
to access the credits. (Rather than allow the powerplants to obtain
the credits for free, as is the case with essential public services,
the district set a below-market price for the credits.) It also
adopted a rule to account for the offsets and credits (Rule 1315).
These rule changes raised concerns from environmental groups which
resulted in a lawsuit asserting that the district made these changes
without proper CEQA review. The district performed a CEQA review
but the environmental groups sued again, arguing that the review was
inadequate. Again, they prevailed. Therefore, the district may not
issue any ERCs. There is some dispute as to whether previously
issued ERCs are revoked. The district has appealed the decision,
which is pending.
Collateral Damage - The success of the lawsuit has indeed held up
ERCs for major powerplants. But it has also held up ERCs for
essential public services and facility modifications, which were not
the primary concern of the lawsuit. This means that sewage
treatment plants, landfills, and schools are unable to complete
their projects. It also prevents equipment relocation, facility
modifications that decrease emissions, or the installation of new
emergency generators.
COMMENTS
1. Author's Statement - The author is concerned that the state
court decision forcing the SCAQMD to stop issuing permits has
affected essential public services, small businesses looking to
expand, relocate, or open, and the replacement of equipment for
modernization or to reduce pollution. Further, the market
price for the permits is unaffordable. This bill provides a
limited CEQA exemption for specific SCAQMD rules creating or
providing offsets from the district's internal bank. The
permitting of the individual facilities would not be exempted
from CEQA. Further, the bill provides that for powerplants to
obtain offsets they must be permitted by the California Energy
Commission and either have a utility contract or be for
municipal projects serving only their native load.
The bill establishes the level of ERCs for five air pollutants
under two accounts. The first account, called the operating
account, contains the level of ERCs that the SCAQMD believes it
needs to accommodate the economic activity it expects in the
next four years. This includes sufficient ERCs for three large
powerplants, Sentinel, Walnut Creek Energy Center, and NRG El
Segundo. The second account is called the set aside account.
The sum total of ERCs in the two accounts is equal to what the
SCAQMD believes it has available today. The use of the credits
from the operating account is exempt from CEQA. The bill does
not direct that credits be sold or given to any particular
project. In effect the bill attempts to create a safe harbor
equal to four years worth of credits. After four years the
SCAQMD will have presumably successfully completed its CEQA
analysis, allowing it to distribute credits pursuant to
CEQA-consistent rules.
2. Differences in Counting - The fundamental question is how
much air pollution can the SCAQMD permit? This is represented
by the amount of emission reduction credits the district has
available in its bank. Most of the ERCs in SCAQMD's bank come
from businesses who have ceased operations and not sold them.
These are known as orphan credits. Opponents argue that
SCAQMD's decision to include the orphan credits in its bank
required a CEQA review (Rule 1315). The court agreed. This
bill resolves the dispute by establishing four years worth of
ERCs in statute, exempting the creation and use of such credits
from CEQA review.
3. Energy and our Environment - Environmental policy and energy
policy have become increasingly intertwined. When California
deregulated electric markets in 1996 the environmental issues
were a peripheral discussion at best. But that has
fundamentally changed as evidenced by the key role of energy
efficiency programs in the California Air Resources Board's AB
32 Scoping Plan, the debate over increasing the use of
renewable energy to reduce GHG emissions and, now, by the
concern over the emission of traditional pollutants by
powerplants. Energy and environmental issues must be
considered together. But the issues have been siloed, with
different agencies considering each issue separately and
independently. Other than the Legislature, there is no forum
for dealing with the increasing tension between our desire for
cleaner air in the country's most heavily polluted air basin
and our desire for adequate and reasonably priced electricity.
4. Dividing the Question - This bill deals with two problems,
which may be severable. The first problem is the inability of
the district to provide ERCs to public agencies for essential
public services and for facility modifications that provide
other environmental benefits. The second is the lack of access
to below market price ERCs by powerplants. With regard to the
first problem, there appears to be some general consensus that
the district should continue to provide free ERCs. The amount
of ERCs needed for essential public services is relatively
small compared with the needs of the power generators. And the
ERCs they seek are for urgent projects that must occur in the
SCAQMD air basin.
In contrast, there is significant controversy with giving the
powerplants access to below market price ERCs. The powerplants
need huge quantities of ERCs, more so than are currently
available, precisely because those powerplants will be emitting
pollutants, including PM10, in a heavily polluted air basin.
And unlike the essential public service projects, the new
natural gas-fired powerplants can theoretically be located
outside of the SCAQMD air basin, or be substituted with
in-basin renewable energy, energy efficiency, and demand
management.
5. Finding a Balance - The tension between clean air and an
adequate electric supply can at least be minimized by reducing
the pollution from electric generation sources. The author has
attempted to do this by limiting the use of offsets to those
powerplants that have contracts with the IOUs which have been
approved by the CPUC. The CPUC follows what is known as the
"loading order", which specifies a priority for meeting
electric demand. The first priority is energy efficiency and
demand management, the second is renewable energy sources, and
the last priority is fossil-fueled powerplants. Through a
bi-annual long-term power procurement planning process (LTPP),
the CPUC brings together electric demand forecasts and supply
forecasts for renewable energy, energy efficiency, demand
response, existing contracted capacity and existing fossil-fuel
generation. The difference between the demand forecasts and
supply forecasts is the capacity the utility needs to acquire
to meet its forecast needs (this includes a prudent reserve).
The author believes that after going through this process,
approval of the contract by the CPUC implies that the
powerplant is necessary and that all available alternatives
have been exhausted.
It appears that the author gives more weight to the process and
outcome of the LTPP than is justified, and that therefore the
proposed revision to the findings (page 4, lines 13-17) is an
overstatement. The fundamental problem is that while the LTPP
results in a quantification of the necessary fossil-fuel
generation for the IOU, it does not speak to whether that
generation needs to be contracted from existing powerplants or
new powerplants. Nor does it speak to whether the generation
should be located within the SCAQMD air basin or elsewhere.
There are technical problems as well. For example, the
calculation of energy demand comes from the California Energy
Commission, which imputes some level of energy efficiency in
its forecasts. The CPUC also determines a level of energy
efficiency for each utility, but there has been disagreement
and uncertainty over avoiding double counting of energy
efficiency between the forecasts of both agencies. The CPUC is
fine-tuning the LTPP process to deal with this and other
issues. Moreover, in the LTPP the CPUC has criticized the IOUs
for an over-reliance on fossil-fuel generation.<1> Finally,
there is a question about whether the level of energy
efficiency and renewable energy that is included in the LTPP
represents the maximum reasonable and achievable, which the
committee staff has not yet been able to establish.
While the LTPP process may fall short of establishing the
minimum fossil-fuel generation necessary in the SCAQMD basin,
the principle of permitting only the minimum necessary
fossil-fuel generation may be a solution worth pursuing. At
the least it appears to be a common goal for the author and the
bill opponents. If there were a process similar to the LTPP
that was focussed on the SCAQMD air basin, the result would be
that in-basin energy efficiency and renewable energy would be
maximized and that only fossil-fuel plants that were necessary
in the basin would be built. Perhaps there could be a linkage
between the authorization of a new fossil-fuel plant and the
retirement of one of the many much older, less efficient
existing plants, using the revenue from the sale of ERCs by the
SCAQMD to make the deal happen. This needs analysis is not a
panacea as it would require significant time and resources to
be done right. It could also result in more air pollution than
would occur if the pending lawsuit were allowed to continue.
It may violate the federal Clean Air Act. But it would provide
a process for hearing all the perspectives and a forum for
balancing our air quality and electric reliability interests.
6. Dysfunctional Market Mechanisms - Cap-and-trade mechanisms
-----------------------------
<1> D.07-12-052; "We share the concern raised by many intervenors
that the IOUs are filling, and are projecting to fill, their
respective net short positions with conventional resources to the
effect of there being no room in an IOUs' portfolio for other
resources, ?"p.6.
have been used to achieve air emission reduction goals. In
order to reduce acid rain, in the 1990's the U.S. EPA
instituted a cap and trade program on sulphur dioxide and
nitrogen oxide emissions. Also in the 1990's the SCAQMD
instituted its own cap-and-trade program to control sulphur and
nitrogen emissions known as RECLAIM. The European Union
imposed a cap-and-trade program to control greenhouse gas
emissions in 2005. These mechanisms are alternatives to, or
complementary with, more traditional direct regulation of
emissions.
The theory behind these mechanisms is that as the price to emit
rises, the incentive to reduce emissions similarly rises
because companies can sell their surplus emission credits. The
price for PM10 emission credits has dramatically increased, by
3168% from 2000 to 2008. But the supply of ERCs has declined,
not increased. One of the dysfunctions of the market may be
the mechanism for increasing the supply of credits. The
district's PM10 market is characterized by limited supplies:
SCAQMD's data show that the supply of PM10 ERCs has declined by
more than 50% since 2000. The district's PM10 market does not
provide an incentive for existing companies to reduce their
PM10 emissions. That's because a company willing to retrofit
its facilities generally cannot sell the ERCs for the emissions
which the retrofit avoids. Therefore, the primary source of
ERCs in the PM10 market are the ERCs made available when a
company shuts down a facility, a hopefully rare occurrence.
The very high price for these ERCs could be the result of
normal supply and demand. If credits are scarce then they will
be expensive. And if the current very high price is simply the
result of a well-functioning market then the market is saying
that it will be much cheaper to locate anything that needs PM10
credits outside of the SCAQMD territory. An expensive lesson
learned during the 2000-2001 electricity crisis is that a
market without a referee to enforce the rules is subject to
manipulation. While the SCAQMD ensures that the emission
credits are valid, there isn't any mechanism to ensure that the
market is functioning properly. No one knows whether the very
high prices are the result of speculation, withholding by the
holders of credits or a market that is simply functioning in
unexpected ways.
The district's response to very high PM10 ERC prices and low
supply was to allow the largest PM10 ERC consumers (e.g.
powerplants) to get their ERCs elsewhere for a more affordable
price. In other words, the district let the powerplants out of
the market. This is at least a tacit admission that this
market does not work. There must be many cautionary lessons
for regulators as they attempt to create a much more
complicated cap-and-trade market for greenhouse gas emissions.
7. Pending Litigation - This bill comes to the Legislature as
the Los Angeles Superior Court decision is being appealed. A
related federal lawsuit has been filed. Without a consensus
agreement by the litigating parties, the effectiveness of any
legislation will be limited by the likelihood of ongoing
lawsuits.
8. Related Legislation - AB 1318 (Perez) deals with the air
quality issues for the Sentinel powerplant, which could be
effected by this bill. AB 1318, an urgency bill, is pending in
the Assembly Appropriations Committee. Committee staff
understands that negotiations are ongoing.
9. Double Referral - This bill has been double referred to the
Senate Committee on Environmental Quality.
POSITIONS
Sponsor:
South Coast Air Quality Management District
Support:
Alston and Bird
Arevalo Tortilleria, Incorporated
Baker Furnace, Incorporated
Bay Valve Service and Engineering
Buena Park Area Chamber of Commerce
Burbank Chamber of Commerce
C T Finishing, Incorporated
California Auto Body Association
California Black Chamber of Commerce
California Cleaners Association
California Construction and Industrial
California Contract Cities Association
California Council for Environmental and Economic Balance
California Dump Truck Owners Association
California Farm Bureau Federation
California Fence Contractors' Association
California Hispanic Chambers of Commerce
California Hospital Association
California Independent Oil Marketers Association
California Independent Petroleum Association
California League of Food Processors
California Metals Coalition
California Manufacturers and Technology Association
California-Nevada Conference of Operating Engineers
California Retailers Association
California Small Business Association
California State Association of Electrical Workers
California State Council of Laborers
California State Pipe Trades Council
California Steel Industries, Incorporated
CalPortland Company
Camino Cleaners
Carson Black Chamber of Commerce
Celebrity Cleaners
CEMEX
Chemical Industry Council of California
Circle Dry Cleaners
City of Azusa
City of Baldwin Park
City of Bellflower Park
City of Bradbury
City of Burbank (if amended)
City of Calabasas
Support (continued):
City of Claremont
City of Colton
City of Compton
City of Covina
City of Diamond Bar
City of Duarte
City of El Monte
City of El Segundo
City of Glendale
City of Glendora
City of Huntington Beach
City of Industry
City of Irwindale
City of La Mirada
City of La Puente
City of La Quinta
City of Lakewood
City of Long Beach
City of Monrovia
City of Monterey Park
City of Moreno Valley
City of Murrieta
City of Newport Beach
City of Pasadena
City of Pico Rivera
City of Pomona
City of Rosemead
City of Sierra Madre Department of Public Works
City of Signal Hills
City of South El Monte
City of South Gate
City of Temple City
City of West Covina Public Works Department
City of Westminster
Coachella Valley Water District
Coalition of California Utility Employees
Conloo, Incorporated
Construction Industry Air Quality Coalition
County of San Bernardino
Courtesy Cleaners
Crescenta Valley Water District
Crown Cleaners
DM Auto Body
Dallas Finer Cleaners
Davenport Engineering, Incorporated
Del Rey Sandblasting
Del Amo Cleaners
Support (continued):
Desert Contractors Association
Diversified printers, Incorporated
Dress for Success Cleaners
Dulin and Boynton
Eastern Municipal Water District
El Camino Cleaners
El Monte / South El Monte Chamber of Commerce
El Segundo Chamber of Commerce
EMBEE, Incorporated
Engineering Contractors' Association
Evergreen Cleaners
Fifth Avenue Cleaners, Incorporated
Flasher/Barricade Association
Gallerie Cleaners
Greater Corona Hispanic Chamber of Commerce
Greater Lakwood Chamber of Commerce
Greater Los Angeles African American Chamber of Commerce
Gruma Corporation
Happy Cleaners
Harvey Cleaners
Hawthorne Cleaners
Hillcrest Beverly Oil Corporation
Hilton Auto Collision Center
Holly Park Cleaners
Huntington Memorial Hospital
Hyde Park Cleaners
Independent Cities Association
Indio Chamber of Commerce
Industrial Environmental Association
Irwindale Chamber of Commerce
Joseph's Cleaners
Justice Brothers, Incorporated
Kern County Black Chamber of Commerce
Korean Drycleaners-Laundry Association
L to Z Enterprises, Incorporated
LA Works
Lake Hemet Municipal Water District
Las Virgenes Municipal Water District
League of California Cities, Los Angeles Division
Lindus West
Long Beach Area Chamber of Commerce
Los Angeles Area Chamber of Commerce
Los Angeles County Business Federation
Los Angeles County Sheriff's Department
Los Angeles Unified School District
Los Angeles/Orange Counties Building and Construction Trades
Council
Lucky Cleaners
Manhattan Beach Chamber
Support (continued):
Marin Builders' Association
Marty Village Cleaners
Modern Way Cleaners
Monrovia Chamber of Commerce
Nomura Dry Cleaners
Norge Cleaners
Norwalk-La Mirada Unified School District
Orange County Board of Supervisors
Orange County Business Council
Orange County Fire Authority
Orange County Sanitation District
Pacific States Environmental Contractors, Incorporated
Palm Desert Chamber of Commerce
Pass Area Legislative Council
Pemaco Metal Processing
Plains All American Pipeline, L.P.
Plaza Cleaners
Printing Industries of California
Processes Unlimited International, Incorporated
Redman Equipment and Manufacturing Co.
Regional Black Chamber of Commerce
Regional Chamber of Commerce of San Gabriel Valley
Regional Hispanic Chamber of Commerce
Rix Business Sales
Robertson's
Rosemead Chamber of Commerce
Sacramento Black Chamber of Commerce
Saint John's Health Center
San Gabriel Valley Coalition of Chambers
San Gabriel Valley Council of Governments
San Gabriel Valley Economic Partnership
San Pedro Cleaners
San Pedro Chamber of Commerce
Sanitation Districts of Los Angeles County
Santa Clarita Valley Chamber of Commerce
Sea Shield Marine Products, Incorporated
Silicon Valley Black Chamber of Commerce
Solar Turbines, Incorporated
South Bay Cities Council of Governments
South Orange County Chambers of Commerce
South Pasadena Chamber of Commerce
Southern California Alliance of POTWs
Southern California Edison (if amended)
Techmer PM
Three Valleys Municipal Water District
Torrance Area Chamber of Commerce
Tracey's Cleaners
Turf Cleaners
Support (continued):
Tustin Unified School District
Valley Industry and Commerce Association
Valley Sanitary District
View Cleaners
Villa Dry Cleaners
Village Dry Cleaners
Vulcan Materials Company
West Covina Chamber of Commerce
West San Gabriel Valley Consortium (Career Partners)
Western Electrical Contractors Association
Western Municipal Water District
Western States Council of Sheet Metal Workers
Western States Petroleum Association (if amended)
Willow Cleaners
Wilmington Chamber of Commerce
Woodwest Concepts Incorporated
Wyatt-Bennett Equipment Co., Incorporated
10 individuals
Oppose
Breathe California
California Communities Against Toxics
California Environmental Rights Alliance
California League of Conservation Voters
Center for Race, Poverty and the Environmental
City of Commerce
Clean Power Campaign
Coalition for Clean Air
Communities for a Better Environment
County of Los Angeles (unless amended)
Environmental Health Coalition
Just Transition Alliance
LA Community Legal Center and Educational Incorporated
Natural Resources Defense Council
Pacoima Beautiful
People Organized to Demand Environmental and Economic Rights
Planning and Conservation League
Sierra Club California
Union of Concerned Scientists
Urban Semillas
Randy Chinn
SB 696 Analysis
Hearing Date: June 16, 2009