1. CDAWG 2010 Laughlin, NV November 17, 2010

2. Overview  What are non-traditional ERCs?  Regulatory requirements for non-traditional ERCs  Source specific SIP vs SIP-approved rule  Status of MDAQMD ERC bank  Case Studies 2

3. What are non-traditional ERCs?  Federal CAA language re ERCs  California CAA language re ERCs  EPA Appendix S guidance  Other EPA guidance  Examples of non-traditional ERCs 3

4. Federal CAA Language re ERCs  173(a)(1)(A) “by the time the source is to commence operation, sufficient offsetting emissions reductions have been obtained, such that total allowable emissions from existing sources in the region, from new or modified sources which are not major emitting facilities, and from the proposed source will be sufficiently less than total emissions from existing sources (as determined in accordance with the regulations under this paragraph) prior to the application for such permit to construct or modify so as to represent (when considered together with the plan provisions required under section 172) reasonable further progress (as defined in section 171)”  173(a) “Any emission reductions required as a precondition of the issuance of a permit under paragraph (1) shall be federally enforceable before such permit may be issued.”  Federal law refers to stationary sources, mobile sources, area sources, and indirect sources. Thus, in principal, offsets can come from any of these sources – the key is federal enforceability. 4

5. California CAA Language re ERCs  40709. (a) “Every district board shall establish by regulation a system by which all reductions in the emission of air contaminants that are to be used to offset certain future increases in the emission of air contaminants shall be banked prior to use to offset future increases in emissions. The system shall provide that only those reductions in the emission of air contaminants that are not otherwise required by any federal, state, or district law, rule, order, permit, or regulation shall be registered, certified, or otherwise approved by the district air pollution control officer before they may be banked and used to offset future increases in the emission of air contaminants.”  40709.6. (a) “Increases in emissions of air pollutants at a stationary source located in a district may be offset by emission reductions credited to a stationary source located in another district if both stationary sources are located in the same air basin or, if not located in the same air basin, if both of the following requirements are met…”  State law does not limit emission reduction credits to stationary sources, except in cases of an inter-district or inter-basin trade. 5

6. California CAA Language re ERCs (cont’d)  Examples of statutory non-traditional ERCs in California law:  Utility displacement credits (H&SC 41605)  Offset credit for using agricultural waste (H&SC 41605.5)  Rice straw burning credits (H&SC 41865)  Mobile source ERCs (H&SC 44101) 6

7. Regulatory Requirements for Non-Traditional ERCs  Federal CAA requirements (none)  California CAA requirements (none, except for limits on inter-district and inter-basin trades)  EPA Appendix S requirements  “Condition 3. Emission reductions (offsets) from existing sources in the area of the proposed source (whether or not under the same ownership) are required such that there will be reasonable progress toward attainment of the applicable NAAQs.”  “D. Location of offsetting emissions. The owner or operator of a new or modified major stationary source may comply with any offset requirement in effect under this Ruling for increased emissions of any air pollutant only by obtaining emissions reductions of such air pollutant from the same source or other sources in the same nonattainment area, except that the reviewing authority may allow the owner or operator of a source to obtain such emissions reductions in another nonattainment area if the conditions in IV.D.1 and 2 are met.” 7

8. Regulatory Requirements for Non-Traditional ERCs  Other EPA guidance  January 2001 Guidance on Economic Incentive Plans  6/14/1994 Seitz memo re timing and federal enforceability of offsets  3/14/2000 Howekamp letter re mobile source ERCs  Undated (2004+) EPA Guidance on “Using Locomotive and Truck Idling Emission Reductions for New Source Review Offsets” 8

9. Regulatory Requirements for Non-Traditional ERCs  All non-traditional ERCs must meet the basic requirements for all ERCs:  Real  Permanent  Quantifiable  Surplus  Enforceable  Key issue for non-traditional ERCs is Federal enforceability  Source-specific SIP amendment  SIP-approved rule 9

10. Source Specific SIP Amendment  A source specific SIP amendment is a regulation, proposed by a state and adopted by EPA in the CFR, implementing source-specific requirements.  Advantages  Source specific SIP amendments can be used to make federally enforceable any type of ERC you can imagine – as long as both the state and EPA approve of the approach. 10

11. Source Specific SIP Amendment  Disadvantages  This can be a time-consuming process – much longer than it takes to process a typical ERC application.  Amendments to any permits incorporated into the SIP will require a SIP amendment.  Hearing Boards have no jurisdiction to waive federally- enforceable SIP requirements. 11

12. Source Specific SIP Amendment (cont’d)  Precedents/examples  40 CFR 52.233 (Watson Oil Refinery, Carson, CA) – SIP amendment to create a federally enforceable limit on CO emissions during a federally-imposed construction ban.  CPV Sentinel (PM 10 and SOx ERCs for power plant) AB 1318 (2009) required SCAQMD to provide credits for this project from their internal bank. July 9, 2010 adoption of source-specific SIP amendment by SCAQMD Governing Board. Sept. 10, 2010 approval of source-specific SIP amendment by CARB and submission to EPA. Oct. 27, 2010 acceptance by EPA of source-specific SIP amendment as administratively complete. EPA approval pending. 12

13. SIP-Approved Rule  A SIP-approved rule is simply a state or local rule, submitted to and approved by EPA as a SIP amendment, implementing a specific offset program.  Advantages  SIP amendment process is just as long (or longer) as compared with a source-specific SIP amendment, but the rule allows the same type of ERCs to be created by multiple sources (not just one facility or project). 13

14. SIP-Approved Rule (cont’d)  Disadvantages  Since SIP-approved rules are typically generic (and are not specific to a single source), more attention needs to be paid to EPA policies and precedents regarding rule provisions. 14

15. SIP-Approved Rule Precedents/Examples (cont’d)  San Diego APCD Rule 27.1  Yolo-Solano AQMD Rule 3.21  South Coast AQMD Rules 1612.1, 1631, 1632, 1633, 1634  Maricopa County (AZ) Rule 242 15

16. SIP-Approved Rule Precedents/Examples  San Diego APCD Rule 27.1  Mobile source ERCs  Approved into the SIP 8/3/2009  Requires case-by-case approval by EPA prior to credit use 16

17. SIP-Approved Rule Precedents/Examples (cont’d)  Yolo-Solano AQMD Rule 3.21  Rice straw burning ERCs  Approved into the CA SIP 6/29/2010 17

18. SIP-Approved Rule Precedents/Examples (cont’d)  South Coast AQMD Rules 1612.1, 1631, 1632, 1633, 1634  Various mobile source credit pilot programs  Approved into the CA SIP 2/7/2002; 11/24/2003 18

19. SIP-Approved Rule Precedents/Examples (cont’d)  Maricopa County (AZ) Rule 242  ERCs for paving unpaved roads  Approved into the AZ SIP 8/6/2007 19

20. Status of MDAQMD ERC Bank  Summary of available ERCs in the Mojave Desert AQMD as of 11/1/2010 (tons per year) 20

21. Status of MDAQMD ERC Bank Recent ERC Demand  Each base-load combined cycle plant requires between 60 and 200 tons per year (tpy) of PM 10 ERCs, depending on the size.  Other industrial facilities require between 40 and 100 tpy of PM 10 each.  Inter-basin use of MDAQMD ERCs also increases demand.  Only 200 tpy of PM 10 currently banked; most owners are holding these for their own potential use. 21

22. Case Studies  Otay Mesa Mobile Source ERCs  Maricopa County Road Paving ERCs  MDAQMD Rule 1406 22

23. Case Study – Otay Mesa Mobile Source ERCs  Initially proposed in 1999 by PG&E/National Energy Group to develop mobile source emission reduction credits (MERCs) for NOx for the Otay Mesa Power Plant  Reductions were to come from repowering of marine vessels and refuse haul trucks  Protocol for calculating credits and ensuring their enforceability was adopted by the SDAPCD in September 2000, following negotiations with, and approval by, CARB and EPA  CEC approved the project in April 2001 23

24. Case Study – Otay Mesa Mobile Source ERCs (cont’d)  Project was sold, and construction delayed.  Negotiations between SDAPCD, ARB and Applicant continued for years  District adopted a new rule 27.1 to codify the prior agreements on Aug. 8, 2008  Rule 27.1 was submitted to EPA as a SIP amendment on April 29, 2009  Rule 27.1 was approved into the SIP by EPA on Aug. 3, 2009  Otay Mesa power plant commenced operation shortly thereafter  MERCs for Otay Mesa have a life of 10 years; after that time, plant emissions must be reduced 24

25. Case Study – Maricopa County Road Paving ERCs  Work on Rule 242 began some time before CY 2004; this was after two project-specific road paving projects had been developed in an attempt to generate PM10 ERCs  Formal rulemaking proceeding was begun in September 2006  Rule adopted by MCAQD on June 20, 2007  Submitted to EPA July 5, 2007  Approved into the SIP by EPA August 6, 2007  Final rule includes provisions for gaining federal approval of previously implemented road paving projects 25

26. Case Study – MDAQMD Rule 1406  ERCs derived from road paving were proposed for approval by MDAQMD in a 2002 permit action  EPA commented that such credits could not be approved via permit; either a source-specific SIP amendment or a SIP-approved rule would be required  MDAQMD adopted Rule 1406 in October 2007 – just after EPA’s approval of Maricopa Rule 242  CURE challenged MDAQMD’s conclusion that the rulemaking was exempt from CEQA  MDAQMD rulemaking was upheld in Riverside County Superior Court in July 2008 26

27. Case Study – MDAQMD Rule 1406 (cont’d)  Despite the fact that Rule 1406 was modeled after Rule 242, EPA commented that Rule 1406 was not consistent with more recent EPA guidance  MDAQMD proposed rule revisions to address EPA concerns in October 2008  Over 200 pages of comments were submitted by CURE in opposition to the amended rule  MDAQMD adopted the rule revisions, but on Oct. 30, 2009, the California 4 th District Court of Appeal overturned the Superior Court decision and directed the MDAQMD to set aside the original adoption of Rule 1406, and suspend all discretionary actions related to Rule 1406 until an environmental review document compliant with CEQA’s requirements was prepared. 27

28. Case Study – MDAQMD Rule 1406 (cont’d)  Rule 1406 was rescinded on March 22, 2010  A Notice of Preparation and Initial Study was published on October 14, 2010 to support the adoption of Rule 1406  A determination as to the exact method of compliance with CEQA will be made after receipt and review of public comments on the Notice  Preparation of the required CEQA documents will continue during the winter, with consideration of Rule 1406 for adoption likely early Spring 2011  Issues to be addressed in the CEQA document include both the direct impact of the rule and reasonably foreseeable impacts that may result from adoption of the rule 28

29. Conclusions  Proposal and use of non-traditional ERCs is not for the faint of heart.  Although there are several options available, they all involve regulatory (and sometimes legislative) actions that go well beyond what is required for a typical permitting transaction  The total time for establishing non-traditional ERCs as acceptable under both state and federal law and regulations has been at least two years (Sentinel), and as much as ten years (Otay Mesa), from project conception to final regulatory approval. 29