1 MEETING 2 BEFORE THE 3 CALIFORNIA AIR RESOURCES BOARD 4 5 6 7 8 9 10 BOARD HEARING ROOM 11 2020 L STREET 12 SACRAMENTO, CALIFORNIA 13 14 15 16 17 18 19 THURSDAY, MAY 22, 1997 20 9:00 A.M. 21 22 23 24 25 Vicki L. Medeiros, C.S.R. License No. 7871 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 ii 1 MEMBERS PRESENT 2 John D. Dunlap, III, Chairman 3 Joseph C. Calhoun Dr. Friedman 4 Lynne T. Edgerton M. Patricia Hilligoss 5 Jack C. Parnell Sally Rakow 6 Barbara Riordan Ron Roberts 7 James W. Silva 8 Staff: Michael Kenny, Executive Director Tom Cackette, Chief Deputy Executive Officer 9 Mike Scheible, Deputy Executive Officer Kathleen Walsh, General Counsel 10 Jim Schnoning, Ombudsman 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 iii 1 I N D E X 2 --o0o-- 3 Page 4 Proceedings 1 5 Call to Order 1 6 Pledge of Allegiance 7 Roll Call 8 Opening remarks by Chairman Dunlap 9 AGENDA ITEMS: 10 97-4-1 Public Meeting to consider approval 11 of the proposed report to the California State Legislature on 12 Funding Sources of California's Air Pollution Control Districts with 13 Annual Budgets Exceeding one Million Dollars 14 Introductory remarks by Chairman Dunlap 2 15 Staff Presentation: 16 Mike Kenny 3 17 Mr. Schneider 4 18 97-4-2 Public Hearing to Consider the Adoption of a Statewide Methodology 19 to Calculate the Value of Interchangeable Emission Reduction 20 Credits 21 Introductory remarks by Chairman Dunlap 12 22 Staff Presentation: 23 Mike Kenny 14 Ms. Van Ommering 15 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 iv 1 I N D E X (Continued) 2 Page 3 Public Comments: 4 Mr. Lucas 40 Ms. Kurilchyk 56 5 Tim Carmichael 63 Mike Carroll 78 6 Questions/Comments 97 7 97-4-3 Public Hearing to Consider a 8 One-Year Postponement of the Requirement that 1998 and Subsequent 9 Model-Year Vehicles Produced by Ultra Small Volume Manufacturers meet the 10 Enhanced Evaporative Emission Requirements 11 Introductory remarks by Chairman Dunlap 110 12 Staff presentation: 13 Mr. Kenny 111 14 Mr. Lemieux 112 15 Afternoon Session 120 16 Public Comment: 17 Mr. Tunick 123 Mr. Busick 139 18 Mr. Qvale 140 Mr. Rodd 141 19 Mr. Holland 143 20 Question/Comment 147 21 97-4-4 Public Meeting to Consider the Role 22 of Fuel Cell Technologies in the Low and Zero Emission Vehicle Program 23 Introductory remarks by Chairman Dunlap 162 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 v 1 I N D E X (Continued) 2 Page 3 Staff presentation: 4 Mr. Kenny 163 Mr. Pakala 165 5 Public Comment: 6 Mr. McDowell 176 7 Dr. Liu 177 Dr. Berg 180 8 Question/Comment 188 9 97-4-5 Public Meeting to Consider Research 10 Proposals 11 Introductory remarks by Chairman Dunlap 190 12 Staff presentation: 13 Mr. Holmes 191 14 Question/Comment 194 15 Open Session to Provide an Opportunity for Members of the Public to Address the Board 198 16 Adjournment 199 17 Certificate of Reporter 200 18 --o0o-- 19 20 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 1 1 P R O C E E D I N G S 2 --o0o-- 3 CHAIRMAN DUNLAP: Mr. Kenny, would you put your 4 people in their places. 5 The May meeting of the California Air Resources 6 Board will now come to order. 7 I will ask the audience to rise as we follow 8 Mr. Calhoun's lead as we have the Pledge of Allegiance. 9 (Thereupon, all present recited the 10 Pledge of Allegiance.) 11 CHAIRMAN DUNLAP: Thank you, Joe. 12 Will the Clerk of the Board call the roll. 13 MS. HUTCHENS: Calhoun. 14 MR. CALHOUN: Here. 15 MS. HUTCHENS: Edgerton. 16 MS. EDGERTON: Here. 17 MS. HUTCHENS: Friedman. 18 DR. FRIEDMAN: Here. 19 MS. HUTCHENS: Hilligoss. 20 MAYOR HILLIGOSS: Here. 21 MS. HUTCHENS: Parnell. 22 MR. PARNELL: Here. 23 MS. HUTCHENS: Rakow. 24 MS. RAKOW: Here. 25 MS. HUTCHENS: Riordan. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 2 1 SUPERVISOR RIORDAN: Here. 2 MS. HUTCHENS: Roberts. 3 SUPERVISOR ROBERTS: Here. 4 MS. HUTCHENS: Silva. 5 SUPERVISOR SILVA: Here. 6 MS. HUTCHENS: Chairman Dunlap. 7 CHAIRMAN DUNLAP: Here. 8 I believe Supervisor Roberts is with us, but he's 9 in the back. I would like to remind those in the audience 10 who would like to present testimony to the Board on any of 11 today's agenda items to sign up with the Clerk of the Board. 12 If you have a written statement provide her with 20 13 copies. The first item on the Agenda is 97-4-1 a public 14 meeting to consider approval of the proposed report to the 15 California State Legislature on funding sources of 16 California's Air Pollution Control District with an annual 17 budget exceeding one million dollars. 18 To be more specific, we are considering this year's 19 version of an Annual Report to the Legislature on budget 20 information for district operations for the fiscal year 21 1995-96. 22 The report provides the information for the 12 23 districts that had budgets over the one million dollar 24 figure. 25 The 12 represent slightly more than a third of a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 3 1 California's districts. The primary requirement in State law 2 for the report is that we identify district's revenue sources 3 and the allocation of those resources to district programs. 4 The budget information used to prepare the report 5 was provided the districts. I would like to recognize their 6 efforts in providing us with the information so that we can 7 meet our legislative reporting requirements. 8 I should mention it is not always welcome to have 9 the State to request, and we are appreciative of the district 10 working with us to fulfill these requirements. 11 At this point, I would like to wish you, Mr. Kenny, 12 a good morning, and ask if you have any opening comments and 13 would like to introduce this item to the Board. 14 MR. KENNY: Thank you and good morning. This is 15 the fifth report that we have prepared on the subject. 16 Like its predecessors, this year's report is 17 straightforward representation of information about the 18 district revenues and their uses, as specified in the Health 19 and Safety Code. 20 Since there are no changes in the State law 21 relative to this report since 1993, this year's report 22 addresses the same questions addressed in the two previous 23 reports. 24 As Chairman noted, the report relies heavily on 25 information supplied by the districts. The formats and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 4 1 standardized categories used for reporting this information 2 were developed with the assistance of the California Air 3 Pollution Control Officers Association. 4 Because of the report's format and categories are 5 standardized, each district still has its own accounting 6 procedure and formats. It typically requires a good deal of 7 effort for districts to make their information to fit the 8 report's formats. 9 We appreciate the effort. I'll now turn this 10 presentation over to Mr. Ed Schneider of our Office of Air 11 Quality and Transportation Planning to give you a more 12 detailed presentation of the report's contents. 13 MR. SCHNEIDER: Thank you, Mr. Kenny, Mr. 14 Chairman, Members of the Board. 15 This year's version of the District Funding Report 16 is the fifth since the requirement was established in 1988. 17 The prior reports were prepared in 1990, 1992, 1995 18 and 1996. State law specified the topics to be covered in 19 the report. 20 This year's report covers the districts budgets for 21 the 1995-96 fiscal year. That is most recent year for which 22 the districts have complete data. 23 The reports essential focus is the districts 24 operational budgets. However, many district budgets also 25 include funds passed through other agencies or other entities PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 5 1 for clean air projects. 2 These funds mostly come from motor vehicles 3 registration fees. We refer to them as pass through funds in 4 the presentation. 5 Where these pass through funds are a significant 6 factor in comparing district budgets, I will point this out. 7 To collect the data we need from the districts for 8 this year's report, we used the same standardized format used 9 in last year's report. 10 The categories are standardized. Each district has 11 its own accounting system. Districts have accommodated us by 12 translating their fiscal information into our standardized 13 format. 14 The next line shows the 12 districts considered in 15 this report. That is those with annual budgets larger than 16 one million dollars. 17 They range from the largest, such as the South 18 Coast and Bay Area districts, to smallest, such as San Luis 19 Obispo. 20 As I mentioned earlier, State law spells out what 21 the report is to cover. The specific items to be addressed 22 are shown here. 23 They include the budget of each district, the 24 district budget development process, the sources of funds 25 supporting the budget, the sources of that part of the funds PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 6 1 brought in by stationary source fees, and the description of 2 how the districts allocate funds for their programs and 3 services, and a discussion of the relative contribution of 4 fines and penalties. 5 The next two slides present the 1995, 1996 budget 6 totals for the district. The first slide you see here covers 7 the six largest districts. 8 I mentioned earlier that some districts included 9 funds in their budgets that are actually pass through for 10 projects external to the districts operations. 11 This slide is useful in illustrating the effect 12 this can have on the budgets reported. For example, the 13 $19.4-million budget shown here for San Joaquin Valley 14 includes $5.9-million which was passed through to other 15 entities. 16 Similarly, Santa Barbara's budget includes 17 $3.3-million in pass through funds. These numbers represent 18 30 and 31 percent of these districts budgets respectively. 19 This slide shows the budget for the remaining six 20 districts. As was the case with the previous slides, these 21 numbers sometimes include pass through amounts. 22 Most outstanding example here is the budget for 23 Monterey, which includes $2.8-million, or 37 percent of its 24 budget for pass through. 25 The next part of the report covers the districts PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 7 1 budget development process. Here you see a summary of the 2 process carried out by the districts. 3 First the districts prepare draft budgets. The 4 draft budget becomes the working document for at least one 5 public workshop, although some districts holds more than 6 one. 7 The district staff then presents the proposed 8 budget to the governing board, and in a subsequent meeting 9 the governing board approves the budget. 10 The meetings for both presentation and approval of 11 the budget are noticed public meetings where interested 12 parties can provide input. 13 Additional opportunity for public input occurs in 14 those districts that submit their budgets to public advisory 15 committees. 16 The requirements for public participation are 17 spelled out in State law. The next slide lists the sources 18 of funding for the districts. 19 This summary is based on a composite of all of the 20 districts budgets. As the slide illustrates, the largest 21 source of district funding is the fees charged to stationary 22 sources. 23 These provide about 50 percent of district revenues 24 statewide. This reflects the districts primary 25 responsibility, the control of stationary sourced emissions. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 8 1 The next largest funding source is motor vehicles 2 registration fees at about 23 percent of district revenues, 3 next Federal and State grants provide, combined, provide 4 about 10 percent. 5 Local taxes provides about five percent of district 6 funds, and fines and penalties provide about two percent. 7 The next slide looks more closely at that largest 8 category of funding sources, the fees charged to stationary 9 sources. 10 Again, these are composite numbers for the 11 districts covered in this report and are aggregated by 12 standardized categories. 13 Here we see that the largest source of stationary 14 source fees is the manufacturing and industrial sector which 15 pays 52 percent of the fees collected by the districts. 16 The next largest contributor, at 26 percent, is the 17 service and commerce sector, which includes utilities, oil 18 and gas marketing, and wholesale and retail trade. 19 Finally, the resource development sector, including 20 industries such as oil and gas extraction, mining, and 21 agricultural, contributes about 11 percent of the total 22 fees. 23 As was the case with budget development, all 24 districts set fee levels using an open public process 25 specified in State law. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 9 1 District staff solicits input from the public and 2 affected parties then submits a fee proposal to the district 3 board. 4 The district board then approves the fee proposal 5 in a noticed public hearing. The next element in this report 6 is the description of how the districts allocate revenues 7 among their various programs. 8 For this purpose, standardized program categories 9 were used that are representative of the programs of most 10 districts. 11 On a statewide basis, 41 percent of the district 12 revenues were used for permitting and compliance programs, 13 which again is consistent with the districts primary 14 responsibility of reducing stationary source emissions. 15 Air monitoring and emissions inventory, programs 16 that measure air qualities and assess the progress and 17 improving it, are together allocated 15 percent of district 18 resources. 19 Planning and rule development together receive 13 20 percent. Support for external programs, that is the pass 21 through funds that go to public or private entities for clean 22 air projects, take 8 percent of district funds. 23 For the most part, these external programs are 24 supported with funds from motor vehicle fees and the projects 25 funded are aimed at reducing motor vehicles emissions. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 10 1 Local mobile source programs carried out by the 2 districts also receive 8 percent from the districts funds and 3 public outreach programs are allocated 4 percent. 4 Turning now to the question of how much of district 5 funds come from fines and penalties, we found for this year, 6 as in the past, that this was not a significant source of 7 district revenues. 8 This year, as in the previous three years, fines 9 and penalties account for about two percent of revenue 10 receipts. 11 Percentages vary from year to year in any given 12 district, but in no case have fines and penalties exceeded 13 six percent in any district, at least not for the last four 14 years. 15 Finally, staff is proposing two minor modifications 16 to the report. The first grows out of supplemental 17 information from the South Coast regarding fines and 18 penalties. 19 In addition to the $884,000 of cash penalties 20 identified in the reports for the South Coast, the district 21 negotiated $171,000 in non cash settlements. 22 The proposed second modification clarifies that 23 some requirements of the 1990 Federal Clean Air Act 24 Amendments are phased in over time, and in some, for example, 25 permitting and toxic programs, may result in increased PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 11 1 responsibilities for the district. 2 We recommend that the Board accept these changes 3 for inclusion in the report, and improve the record as 4 modified for submittal to the Governor and the Legislature. 5 Thank you, I will be happy to answer any questions 6 that you may have at this time. 7 SUPERVISOR RIORDAN: Any questions at this time 8 from the staff? 9 Mr. Kenny, do you have anything to add to that? 10 MR. KENNY: Nothing to add. 11 CHAIRMAN DUNLAP: There appears to be no requests 12 to speak, as I see this; is that right? 13 Then, is there a resolution that is before us? 14 MR. KENNY: It is just a noted item to submit, 15 okay. Mr. Chairman. 16 CHAIRMAN DUNLAP: Any other questions of staff? 17 Okay. Very good. 18 Mr. Kenny, nothing to add. 19 All right. We have no witnesses to testify before 20 the Board. 21 Staff do you want to, did you ask about summarizing 22 comments, and there are none. Very good. 23 Since this is not a regulatory item, we do not need 24 to close the record, and I would like to have this report 25 approved so that it can be forwarded to the Legislature. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 12 1 DR. FRIEDMAN: So moved. 2 SUPERVISOR RIORDAN: Second. 3 CHAIRMAN DUNLAP: Moved, we will take a voice 4 vote. 5 All those in favor, say aye. 6 Any opposed. 7 Very good. 8 The item moves. 9 Thank you, Mr. Schneider. I appreciate your 10 presentation. All right. 11 The second item on the Agenda today is emission 12 reduction credits issue. We will ask staff to change 13 places. 14 This item is 97-4-2, the public hearing to consider 15 the adoption of a Statewide methodology to calculate the 16 value of interchangeable emission reduction credits. This 17 item is a proposed statewide reg that would establish a 18 general framework for air district programs that allow the 19 interchangeable use of stationary mobile and area source 20 credits to meet certain district requirements. 21 A recent State law requires that the Board develop 22 a regulation addressing this issue, and I see substantial 23 value in this effort. 24 The anticipated result of a regulation in 25 combination with district adopted rules is increased PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 13 1 compliance flexibility for California businesses and the 2 potential to stimulate investments in new, cleaner 3 technologies. 4 Of course, an important goal in the process of 5 developing this regulation has been to ensure that the use of 6 emission credits in no way diminishes air quality progress. 7 This is meant to protect the integrity of the 8 approved State implementation plan for California, as well as 9 addressing concerns about air toxics as they relate to 10 admissions trading programs. 11 While these can be difficult issues to work 12 through, I believe that the potential benefits of trading 13 programs are well worth the effort. 14 Within our regulatory programs for fuels, motor 15 vehicles, and consumer products, this Board has provided 16 flexibility in terms of compliance options. 17 It makes sense for districts to provide similar 18 kinds of flexibility, and I expect that staff will elaborate 19 on the principles that this Board has applied in developing 20 market and performance based compliance options for Board 21 programs. 22 It is specifically how these principles are 23 reflected in the proposed regulation. It has become 24 fashionable over the last half dozen years or so in this 25 field to talk about reliance on the market and trading PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 14 1 programs, and while philosophically I think that we can all 2 embrace them and need to, providing the flexibility that the 3 industry needs to have, we also need to be very careful that 4 we do not sacrifice necessary clean air progress. 5 We need to move deliberately and with some 6 sensitivity and caution. 7 Mr. Kenny, would you introduce this item. I'm sure 8 we are going to have a lively discussion this morning. 9 MR. KENNY: Thank you, Mr. Chair, and Members of 10 the Board. 11 Before the staff discusses the detail of the 12 proposal, I would like to emphasize a couple of points. One 13 is the potential benefit of emissions trading programs in 14 terms of advancing new technology. 15 The California Clean Air Plan relies on a 16 continuing development of new technologies. The extent that 17 a market for emissions credits encourages investment in those 18 new technologies, training programs can help us meet our SIP 19 commitments. 20 I will also mention that as I see a challenging 21 aspect of this training program, that is the nuts and bolts. 22 While reaching an agreement on a concept is 23 relatively easy, there is a high degree of complexity 24 involved, translating the concept into a workable program at 25 the district level. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 15 1 I know that staff has worked closely with a wide 2 variety of stakeholders, to ensure that the regulation takes 3 into account real world concerns that will be phased at the 4 district level. 5 Nonetheless, I expect that we will hear today 6 divergent opinions on some aspects of the proposal. In 7 addition to describing the proposal, staff will also provide 8 the Board with background on issues that we anticipate will 9 be discussed in a public testimony. 10 I will now ask Ms. Lucille Van Ommering of the 11 office of air quality and transportation planning to give a 12 presentation. 13 MS. VAN OMMERING: Lucille Van Ommering. 14 CHAIRMAN DUNLAP: You are welcome to go to the 15 podium. 16 MS. VAN OMMERING: Lucille Van Ommering. Start 17 again. 18 Thank you, Mr. Kenny, Mr. Chairman, and Members of 19 the Board. 20 By way of introduction, I will provide some 21 background leading up to today's action. I will then 22 describe in some detail the proposed rule. 23 I will also provide a discussion of the issues that 24 were identified during the public comment period and how we 25 propose to address identified concerns. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 16 1 I will then conclude with our recommendation for 2 Board action. First, I will begin with discussion of events 3 leading up to the development of the proposed regulation. 4 Why was the regulation developed? 5 In 1995 the State Legislature enacted three 6 separate statutes that, taken together, comprise the 7 fundamental elements of an open market trading system. 8 The first statute, SB 456, authorized districts to 9 allow companies that they regulate, to use credits in lieu of 10 best available retrofit control technology, or what is 11 commonly referred to as BARCT. 12 The second statute, SB 1098, allowed unregulated 13 sources, not subject to district regulations, to voluntarily 14 reduce emissions in exchange for credits, provided these 15 reductions are not otherwise accounted for in the attainment 16 demonstration. 17 The third statute, AB 1777, the reason for today's 18 action, directs the ARB to develop a methodology for 19 districts to use when calculating the emissions value of 20 surplus emission reductions, or what we call credits, that 21 are used to comply with the district regulations. 22 The purpose of the legislation was to provide 23 businesses with an alternative means of complying with 24 certain requirements, primarily BARCT and new source review. 25 In addition, we believe that providing a market for PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 17 1 emission credits will encourage the development and 2 application of new innovative control technologies that will 3 be needed to attain air quality standards, particularly in 4 the South Coast air basin. 5 In short, credits will help us meet our commitment 6 to achieve clean air standards throughout the State as cost 7 effectively and expeditiously as possible. 8 How was the regulation developed? Between the 9 enactment of AB 1777 in 1995. And May of this year, scoping 10 sessions, workshops and consultative meetings were held with 11 local districts, environmental groups and members of the 12 regulated community who had expressed interest in the trading 13 program. 14 Groups who actively participated included the 15 California Air Pollution Control Officers Association or 16 CALCO, the environmental community, primarily represented by 17 the Coalition for Clean Air, and NRDC, as well as 18 representatives for the regulated community, whose membership 19 included oil companies, aerospace, gas and electric 20 utilities, sanitation districts, manufacturers and small 21 businesses that use coatings and solvents. 22 Staff of the South Coast district were actively 23 involved in the process as our rulemaking efforts tied in 24 closely with the South Coast conceptual design for a broad 25 emissions trading program, which they refer to as to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 18 1 intercredit trading. 2 Throughout this process we have also kept U.S. EPA 3 apprised of our efforts. 4 What is an emissions credit? 5 By way of introduction to the proposed regulation, 6 it might be helpful to describe the building blocks of an 7 interchangeable credit trading program. 8 The fundamental unit is an emission credit. 9 Emissions credits are based on actual emission reductions 10 that are not already required for attaining air quality 11 standards. 12 In other words, to get a credit, a source of 13 pollution must emit less than required by regulation or 14 measure that is in effect at the time that the reduction 15 occurs. 16 Next, a credit must be calculated using approved 17 methods, or what we term, calculation protocols. Finally, a 18 credit must be generated by a legally enforceable mechanism. 19 Some examples of these mechanisms would be permit 20 conditions, or legal contracts. 21 Now that we have defined what an emission credit 22 is, here are some real world examples. Credits can be 23 generated from any source category, provided they meet the 24 test of being real surplus, quantifiable and enforceable. 25 Some examples of the more commonly generated PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 19 1 credits are shown in this slide. For instance, among the 2 mobile source categories, credits have been certified for 3 motor vehicles scrappage as well as for cars or heavy duty 4 vehicles that are retrofitted to use cleaner fuels, for 5 example, natural gas. 6 On the stationary source side, companies may get 7 credits for early rule compliance. What this means is that a 8 company may decide to install pollution control equipment 9 before a districts deadline. 10 That company then can earn credits for that period 11 of time the equipment was operating in advance of a future 12 rule compliance date. 13 On the area source side, consumer products are a 14 good example. A company can generate credits through the 15 early introduction of clean products into the market or for 16 reducing emissions of products not subject to required 17 reductions. 18 For instance, as you may know, the Consumer 19 Products Alternative Control Plan adopted by this Board in 20 1994 provides an opportunity for trading among consumer 21 products manufacturers. 22 What credit trading programs exist today? 23 There are several programs already in existence. 24 The most familiar is the new source review program 25 that mitigates the emission of new growth from industrial PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 20 1 sources of pollution. 2 Through the use of credits, new source review 3 offsets growth related emissions to ensure that economic 4 growth is accommodated without further increasing emissions. 5 These long standing programs are a core element of 6 district stationary source control programs and are required 7 by State and Federal law. 8 In addition, in 1994 the South Coast initiated the 9 the reclaim program, which is an attainment-based trading 10 system that allows a defined group of companies, in this case 11 about 400, to trade surplus reductions with each other, 12 provided that their mass emissions in the aggregate decline 13 annually. 14 Just this year, Sacramento started up its CEEB 15 emissions trading program. This program uses credits that 16 were generated when the B-52 operations ceased at the closure 17 of Mather Air Force Base. 18 These credits are used for offsetting new 19 industrial growth, as well as for a compliance alternative to 20 meet BARCT requirements. 21 Finally, the South Coast district recently adopted 22 one element of its open market emissions trading program, 23 which they term the Air Quality Investment Program, or 24 SCAQMD. 25 Beginning in 1998, the South Coast hopes to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 21 1 inaugurate a broad base credit exchange program through the 2 adoption of this intercredit trading rule, SCAQMD being one 3 part of it. 4 What does interchangeable mean? 5 An interchangeable credit is a surplus emission 6 reduction that is generated from a stationary mobile or area 7 source. 8 These credits can then be traded among various 9 district programs without regard to the origin of the 10 credit. 11 To facilitate interchangeable credit trading, there 12 needs to be a standard unit for currency. The proposed 13 regulation establishes a credit denomination of pounds of 14 pollutant calculated in one year increments. 15 How would credits be used? 16 Because these credits are interchangeable among 17 applicable district programs, each district can make credits 18 available as an alternative compliance tool to meet BARCT 19 requirements, future SIP measures or to provide credits for 20 NSR offsets. 21 Credits could be also used to mitigate equipment 22 breakdowns, or they can be retired for environmental 23 benefit. 24 How are NSR credits affected? As we mentioned 25 earlier, the New Source Review Program, or what we call NSR, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 22 1 is a long-standing Federal and State Air Pollution Control 2 Permit Program, and there is no need to revisit the NSR rules 3 because of today's proposed regulation. 4 In fact, districts are encouraged to maintain a 5 separate pool of credits for NSR purposes. The primary 6 reason for this is to ensure that a permanent and reliable 7 reserve of credit is available for new and expanding 8 businesses. 9 Districts can wall off NSR credits and maintain two 10 distinct credit programs. However, if a district decides to 11 allow the use of NSR credits, or what they call emission 12 reduction credits, ERC, in a compliance-based trading 13 program, they must be in the Air Quality Plan prior to their 14 use. 15 If the NSR credits are not included in the Air 16 Quality Plan, and are used to meet emission reductions 17 requirements, like BARCT, the area will not realize the 18 emission reductions that it needs to attain air quality 19 standards. 20 With that as background, I will now move to 21 discussing in some detail the proposed regulation. 22 What does the regulation do? 23 The proposed regulation establishes a Statewide 24 frame work for district emissions credit trading programs. 25 That frame work, which is contained in the rule, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 23 1 consists of general principles and criteria to ensure that 2 only valid credits are generated and that the use of emission 3 credits is consistent with the area's Clean Air Plan. 4 By itself, the proposed regulation does not 5 establish any emissions trading programs. Rather it requires 6 that districts adopt rules in order to implement trading 7 programs. 8 Districts that develop rules authorizing the use of 9 these credits must assure that those rules comply with the 10 State regulation before you today. 11 Some of the general requirements in the proposed 12 regulation address the certification, calculations, banking 13 and use of credits. 14 In doing so, the State regulation sets the criteria 15 for technical calculations protocols. These criteria for the 16 protocols are designed to ensure that credits are granted 17 only for emission reductions that are real, properly 18 quantified, permanent, enforceable and surplus to applicable 19 Federal, State and district requirements and adopted Air 20 Quality Plans. 21 Today's proposed rule is broken down into four key 22 provisions: One, credit exchange function, which includes 23 banking; two, generation and use; three, calculations 24 methodology; and four, reporting. 25 Let's first examine the proposed regulation PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 24 1 provisions regarding credit exchange. Under the proposed 2 regulation, credits are exchanged by first converting surplus 3 reductions into a common currency, in this case total pounds 4 reduced in a year. 5 A standardized unit was created. In order to 6 facilitate the exchange of credits from one source category 7 to another. 8 Under this uniform currency, districts would have 9 the flexibility of using the trading units over a shorter 10 period of time, such as on a calendar quarterly basis. 11 They can do that, provided the unit is consistently 12 applied to all sources, generating and using credits 13 interchangeably. 14 Next, the proposed regulation requires that a 15 district certify the credit. By that we mean a district 16 reviews the relevant information about the generation of the 17 credit and certifies or ensures that the credit is valid and 18 based on emission reductions that are real surplus, 19 enforceable and quantifiable. 20 The credits are then registered and recorded in a 21 district bank. 22 How are the credits banked? 23 The proposed regulation requires that the credits 24 be banked for several reasons. 25 We not only want to ensure that these credits can PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 25 1 be tracked but also that credits are actually generated 2 before they are used. 3 In registering the credits, districts must 4 establish an effective date, at which time credits are 5 available for use. 6 The proposed regulation also calls for no 7 discounting of banked credits. In other words, the value of 8 each district certified credit would be retained during the 9 time that the credits remain in the bank. 10 However, credits will be subject to prevailing 11 Federal, State or district requirements at the time of use. 12 One of the factors that state law required us to 13 consider in developing this regulation is how long the banked 14 credits would remain valid. 15 This was an issue of considerable interest as we 16 developed the rule. Industry wants all credits to have an 17 infinite life, while others, primarily environmental groups, 18 want to see a limited life to credits to ensure that too many 19 do not accrue in the bank, only to be released in large 20 quantities at some future date, possibly exacerbating air 21 quality. 22 In the regulation, we are proposing that the 23 lifetime of the bank credits be established on a source 24 category basis, which means that credit life times will 25 vary. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 26 1 The districts will have the discretion to establish 2 appropriate expiration dates for the life of bank credits 3 from stationary sources that they regulate, while ARB would 4 determine appropriate expiration dates for mobile sources and 5 consumer products under the State's jurisdiction. 6 The next provision in the proposed regulation 7 addresses requirements for credit generation and use. Let's 8 first look at the credit generation. The proposed regulation 9 calls for the credits to be generated on an annual basis. 10 One of the most crucial issues in credit generation 11 is in use, and how to determine the value of the credits. 12 For that reason the proposed regulation requires 13 districts to approve technical protocols that will be used to 14 determine the value of the credit. 15 Those technical protocols must meet the criteria in 16 the proposed regulation that calls for credits to be surplus 17 quantifiable, enforceable and permanent pursuant to 18 requirements in State and Federal law and regulations. 19 Next, how is surplus defined? 20 As I noted prior to this, establishing the value of 21 the credits is one of the crucial issues. 22 Defining what is surplus lays a foundation for the 23 value of the credit. 24 What do we mean by surplus, and how does the 25 district determine what reductions are surplus? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 27 1 Very simply, surplus is defined as reductions that 2 exceed existing requirements, including those in any adopted 3 local, State or Federal rule, regulations, or any measure in 4 an approved Air Quality Plan at the time that the generation 5 occurs. 6 If the control level in the most recently approved 7 locally Air Quality Plan is less stringent than the level in 8 the applicable SIP, the SIP that EPA has approved, then the 9 reduction must be surplus to the SIP. 10 We are proposing two clarifications to the 11 definition of surplus. One is that the reductions in the 12 districts Air Quality Plan that are assumed to occur are not 13 considered surplus. 14 For example, credits could not be granted for the 15 purchase of inherently cleaner products that appear in the 16 market place if the Air Quality Plan assumed these products 17 would be introduced. 18 The second proposed modification would clarify that 19 credits can be granted for early reductions occurring prior 20 to the implementation date of a control measure identified in 21 the district Air Quality Plan, not the adoption date. 22 However, once the date requiring the emission 23 reduction has passed, the reductions are no longer considered 24 surplus, and credits cannot be generated. 25 Now, let's proceed to proceed to credit use. This PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 28 1 component of the proposed regulation provides for 2 administrative safeguards to ensure that credit use is 3 consistent with Clean Air Plans and will result in a 4 continued improvement in maintenance of air quality. 5 Because emission credit trading essentially 6 involves generating emission reductions at one site and using 7 them to meet required reductions at another site, there is a 8 potential issue of localized impacts on the public exposure 9 to air pollution. 10 The proposed regulation requires that localized 11 impact to be assessed and considered. I will discuss this 12 issue in more detail later. 13 This provision also identifies circumstances in 14 which interchangeable credits cannot be used. Credits cannot 15 be used for meeting certain control technology requirements. 16 These include the Best Available Control Technology 17 or what we call BACT, which are requirements for new sources 18 of air pollution and air toxics program requirements, such as 19 Maximum and Achievable Control Technology, or MACT. 20 What is the equivalency concept? 21 A fundamental mental concept in today's proposal is 22 that of equivalency. 23 This concept resulted from concerns that credit use 24 could potentially interfere with progress anticipated in the 25 adopted Clean Air Plans. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 29 1 Our concept of equivalency is that credit use must 2 result in no greater emissions than would occur without 3 trading. 4 The determination of equivalency needs to be made 5 annually and on a pollutant specific basis, to ensure that 6 emissions trading will not result in a net emissions increase 7 in any year that credits are withdrawn for use. 8 Furthermore, districts must take into account the 9 seasonal nature of each effective pollutant to ensure that 10 overall emissions in the season of concern are not 11 increased. 12 For instance, trading should not result in shifting 13 additional ozone precursor emissions into the summer season 14 when the ozone concentrations are at their highest. 15 The next slide shows the graph that will help to 16 understand what we mean by equivalency, the graph depicts the 17 rate of progress line for the district Air Quality Attainment 18 Plan. 19 To demonstrate equivalency, a district must be able 20 to show that annual emissions with the use of credits for the 21 district's portion of the Air Quality Plan is at or below the 22 level of emissions anticipated for that year. 23 How are localized impacts addressed? 24 A third component in this provision of the rule 25 requires the district to consider potential localized impact PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 30 1 on the public. 2 A district's trading program must adequately 3 protect the public from exposure to toxic air contaminants 4 that may pose an increased health risk. 5 In the proposed regulation that was released for 6 public review on April 4, there is language stating that no 7 increase in emissions of toxic air contaminants would be 8 allowed with the use of credits, almost immediately we heard 9 from several commenters that this no increase provision would 10 severely limit trading. 11 As a result of public comments, we are proposing 12 modifications to this provision that I will discuss in the 13 issues portion of my presentation. 14 How is reclaim addressed? 15 Reclaim facilities can use non reclaim credits 16 consistent with existing requirements. 17 The proposed regulation requires the South Coast 18 district to perform a study prior to allowing reclaim trading 19 credits to be used by sources outside of reclaim once a 20 programmatic crossover point is reached. 21 The next slide graphically illustrates this 22 concept. Reclaim caps total facility wide emissions at a 23 starting point and then requires companies to reduce the 24 total amount of emissions annually to 2003, and then 25 subsequent to that, to keep it steady, and that reclaim PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 31 1 program is effective for both emissions of knocks and socks 2 or as I mentioned, about 400 facilities. 3 As shown, reclaim 1994 starting point allocations 4 were set at a higher level than actual emissions at reclaim 5 facilities. 6 This was done to avoid capping facility wide 7 emissions to the recessionary levels of the late 1980's and 8 early 1990's. 9 Over time, the allocations have come down, and 10 somewhere between 1998 and 2000 allocations will be said to 11 crossover current actual emission levels. 12 It is at this point that surplus reductions from 13 reclaim facilities can be considered real reductions and 14 interchangeable to non reclaim facilities. 15 Let's talk a little bit about the 16 interchangeability of those reclaim credits to non reclaim 17 facilities. While we appreciate the fact that this is a 18 complicated issue, and it is compounded by the fact that two 19 different trading systems are being commingled, one that is 20 attainment based strategy which is reclaim, and the other, a 21 compliance alternative, which is the interchangeable credit 22 trading program. 23 To clarify the type of study that we think is 24 needed to address the crossover issue, we are proposing some 25 minor language changes that are consistent with comments made PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 32 1 by South Coast district staff. 2 We are also proposing that ARB complete its review 3 of the district study within 90 days of completion of that 4 study. 5 The third provision in the proposed regulation 6 addresses the criteria and procedures that the district 7 trading programs must address in calculating the emissions 8 value of credits. 9 How are credits calculated? 10 In calculating the value of credits, districts must 11 develop and adopt technical quantification protocols specific 12 to the type of source generating credit. 13 The proposed regulation requires these protocols to 14 meet the criteria in the State regulation to ensure that 15 credits are valid. 16 Therefore, protocols must address emission rates, 17 operating periods, activity levels, emission inventory 18 updates, time lines for future requirements and district 19 plans, technical uncertainty and other relative technical 20 data. 21 The regulation also specifies the use of ARB 22 calculation methodology for mobile sources and consumer 23 products. 24 The last provision of the proposed regulation 25 establishes district reporting requirements to monitor PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 33 1 trading program performance and ensure that the integrity of 2 Clean Air Plans is maintained. 3 What are the reporting requirements? 4 Under the proposed regulations reporting 5 requirements, districts with a trading program would be 6 required to prepare an annual report. This report needs to 7 provide pollutant specific and risk specific tracking of 8 credit trading activities that occurred during the year, 9 including the quantity of credits generated and how these 10 credits were used. 11 The annual report must also present a summary of 12 any program revisions that have been made to the calculations 13 methodology elements during the year. 14 Finally, the report must document actions taken to 15 comply with the equivalency and localized impact requirements 16 of the State rule. 17 As part of the tri-annual progress assessment of 18 the Air Quality Plan, districts with trading programs would 19 also assess the trading programs performance relative to the 20 Air Quality Plans progress and identify any changes to the 21 emission inventory as a result of the program 22 implementation. 23 Next, I will review two issues for which there 24 continues to be divergent opinions. 25 How are air toxics addressed? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 34 1 To recap, the language in the current proposed 2 regulation, calls for no increase in air toxic emissions with 3 credit use. 4 During public comment period, we received a wide 5 range of comments on this draft rule. Industry 6 representatives and South Coast district staff expressed 7 concern that the language contained in the proposed rule was 8 overly restrictive and went beyond existing toxic related 9 requirements and could preclude trades based on even minimal 10 increases in toxic emissions. 11 On the other hand, the Coalition for Clean Air and 12 NRDC believes that the proposed rules should clearly provide 13 protection against any increases in potential public health 14 risks to exposure to toxic emissions. 15 We met with the commenters to discuss the possible 16 options. Based on these discussions and our review of the 17 existing requirements governing air toxics, we proposed to 18 revise the current wording and the proposed rule to make it 19 consistent with existing State Air Toxic Guidelines for 20 public notification and limitations on facility-wide health 21 risks as established by the air districts. 22 Specifically, the revised language calls for the 23 following: No increase in health risk above defined 24 significance levels; the generation or use of credits cannot 25 result in a total facility-wide health risk from toxic air PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 35 1 contaminants above districts established significance 2 thresholds that apply to emissions trading. 3 Two, public notification, that is, there must be 4 public disclosure of any increases in emissions of toxic air 5 contaminants which may result in a total facility-wide cancer 6 health risk above ten in a million or exceed a total facility 7 hazard index greater than one. 8 We believe the revised language provides safeguards 9 consistent with the existing toxic programs at the district 10 level. 11 In addition, it ensures that information about the 12 potential localized impacts of air toxics is available for 13 consideration by district governing boards, which establish 14 the thresholds for the significant health risk at the local 15 level. 16 To conclude my discussion of this issue, I will 17 compare our proposed revisions to the options proposed by 18 NRDC and the Coalition for Clean Air in their joint comment 19 letter. 20 I will use the South Coast district situation as an 21 example, using its existing toxics rules. In terms of 22 facility-wide risk, both proposals, the State regulation 23 proposal and NRDC's and the Coalition's, would prohibit 24 credit trading which results in total risk of more than a 25 hundred in a million. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 36 1 In terms of incremental risk, the risk resulting 2 only from a trade itself, the NRDC would prohibit an 3 incremental increase in risk of more than in one in a 4 million. 5 This would be calculated based on incremental risk 6 from all trading transactions over a one-year period. This 7 is clearly different from our proposal, which only requires 8 disclosure of facility-wide risk between ten and one hundred 9 in a million, with no separate disclosure requirements for 10 incremental risk. 11 Our approach would, however, address incremental 12 risk as part of the facility-wide risk, unless a facility 13 fell below the ten in million risk level. 14 The next issue is concerning environmental 15 benefit. This issue concerns the question of whether the 16 proposed regulation should require trading programs to 17 discount credits in order to create an environmental 18 benefit. 19 The issue is germane for several reasons. First, 20 U.S. EPA policy calls for a 10 percent direct environmental 21 benefit for credit trading programs. 22 That 10 percent is off the value of the credit, 23 once it is calculated. However, because the issue is 24 presented in a policy statement, we believe it is not binding 25 on the district. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 37 1 Other commenters, primary environmental groups, 2 also want an explicit benefit from credit trading programs. 3 They stated that market trading programs should apply as an 4 offset factor to ensure that there is no environmental 5 detriment from the program. 6 According to these commenters, the actual offset 7 amount should be established after a market analysis is 8 performed to determine at what level a region would achieve 9 the maximum environmental benefit, while still creating an 10 incentive for businesses to participate in the program. 11 However, industry representatives strongly opposed 12 discounting, as they believe that requiring such a benefit 13 could discourage trading and be a disincentive for investment 14 in new control technologies. 15 The proposed regulation gives districts discretion 16 in determining whether to impose an environmental discount. 17 We believe such decisions are most appropriately made by 18 districts, based on local needs. 19 In conclusion, we recommend that the Board approve 20 the proposed regulation before you today with the 21 modifications that we presented today, which you should have 22 in front of you. 23 And now Gary Honcoop will -- oh, that's it. 24 Sorry. 25 CHAIRMAN DUNLAP: Thank you. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 38 1 What I think that I would like to do, I appreciate 2 that comprehensive nature of that overview, Lucille, and you 3 did it despite the mikes not working and whatnot, and I am 4 grateful for the pioneer spirit that you exhibited there. 5 What I think that I would like to do, before we get 6 into the Board Member questions, I would like to hear from 7 Mr. Schnoning to talk about the process prior to today by 8 which this item came before us and share any concerns or 9 comments he may have with the Board at this time. 10 MR. SCHNONING: Thank you, Mr. Chairman and 11 Members. 12 In this complex matter of obvious great interest to 13 a wide number of parties, staff invited approximately 400 14 stakeholders to participate in the development of the 15 proposed regulation, including all 34 of the local air 16 districts. 17 Of the 400, approximately 150 stakeholders 18 representing 31 industry groups, 15 air districts, and 3 19 environmental groups, participated in the regulations 20 development. 21 A total of seven workshops were held, three in 22 Southern California, and four in Northern California, during 23 the twelve-month period from March 1996 to March 1997. 24 The final proposed regulation which is, I believe, 25 before you now, was distributed to 400 stakeholders for final PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 39 1 review and comment before this Board meeting. 2 In the opinion of our office, the proposed 3 regulation on tradeable emission credits before you is the 4 result of an open and inclusive outreach effort that 5 effectively sought and attained the views and the informed 6 input of key stakeholders affected by the regulation. 7 CHAIRMAN DUNLAP: Now, they did not get the last 8 mailing, it didn't go out just yesterday; did it? 9 Mr. SCHONING: 45 days. 10 CHAIRMAN DUNLAP: Very good. 11 I was just wondering how many people were planning 12 on testifying today. 13 Okay. What I would like to do, if my Board agrees, 14 is hold our questions until we hear from the witnesses. 15 Are you okay with that? 16 And then we will move through the witness list. We 17 have five, four or five that have signed up here. 18 We will start with Bob Lucas, from CEEB, followed 19 by Deborah Kurilchyh, from SoCal Edison, and Mike Carroll 20 from Latham and Watkins, and Tim Carmichael, with the 21 Coalition for Clean Air. 22 If I could ask those that I have called to move to 23 the front row, Bruce, I will ask you to move over a seat or 24 two and make quick work. 25 Good morning, Mr. Lucas. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 40 1 MR. LUCAS: It is pleasure to be here today. 2 It was interesting to listen to the presentation 3 this morning. A number of things were pointed out in the 4 presentation that I overlooked, one of which was the 5 reference back not only to AB 1777 but also to AB 456, which 6 was carried by David Kelly, if I recall and SB 1098, which 7 was Senator Dills' bill. 8 Each of those bills were was sponsored by CEEB, 9 California Counsel for Environmental and Economic Balance. 10 When Lucille read through the list of the different 11 industry participants in this rulemaking, it sounded like the 12 list of participants in the CEEB organization of oil 13 utilities, and high tech and so forth. 14 It was pause for reflection in that we have worked, 15 been working on the topic for a long time in individual bits 16 and pieces. 17 As such, we become familiar with the different 18 bites but not that familiar with how to put those different 19 bites together into a cohesive whole. 20 We recognized in 1996, or 1995, that there was a 21 need for statewide consistency in dealing with the 22 interchangeability of credits. 23 As probably came to your attention in the review of 24 the staff report, there are a number of intricate issues 25 here. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 41 1 There are a number of moving targets that need to 2 be isolated and held steady for a few moments so you can take 3 a snapshot of it and see how they relate to all of the other 4 moving targets. 5 I think it is appropriate to commend the staff for 6 the work that they have done to date in compiling all of the 7 detail of high complexity into a document, but I think that 8 if you started at the beginning and worked through to the 9 end, it will likely become a national model, in other words 10 could serve as a national example, but will more importantly 11 will serve for consistent guidance for operations throughout 12 the State of California. 13 I would like to endorse your opening comments, Mr. 14 Chairman. I thought those were well placed, and there was 15 also a comment that you made just before the introduction of 16 the staff report of the need to proceed with deliberation, 17 sensitivity, and caution as we move to the next steps. 18 We agree with that, and I would like to add clarity 19 to that. This rule has independent significance from the 20 actual outcome of its application in any instance. In that I 21 mean that this rule will establish the guidelines by which 22 the districts will adopt their own rules as to how to handle 23 the specifics of intercredit exchanges. 24 In our view, it is extremely important that these 25 rules, these guidelines, be as clear as possible at this PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 42 1 level. So that when they are applied at a local level, the 2 dispute is not so much what was meant by the Air Resources 3 Board and the State reg, but the dispute, if there is any, is 4 how do we use these rules, which are very clear and 5 understandable, in crafting a rule that will apply in the 6 South Coast, or the Bay Area or wherever. 7 Most of the comments that I have you for today are 8 of that nature. You'll notice that I did submit comments on 9 behalf of CEEB to you yesterday, which represented the 10 culmination of those issues which seemed to be outstanding 11 prior to this hearing, recognize, of course, that we have 12 participated with the staff since the outset of the formation 13 of this draft and great progress has been made. 14 These comments do provide an overview of eight 15 issues that we consider to be outstanding for a variety of 16 reasons. 17 The letter lists them in accordance with the 18 section number sequence. I would like to refer to them in 19 terms of the priority of our concern. 20 CHAIRMAN DUNLAP: Bob, we have that up here. I 21 will point my colleagues on the Board to the manila folder. 22 This item is a three page letter written to Lynn 23 Terry. 24 MR. LUCAS: Bob Lucas. There was a discussion in 25 the staff report about localized impact, and I know that the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 43 1 staff was dealing with a number of different representatives 2 from the business in the environmental interests in resolving 3 this issue. 4 Our concern was a more generalized concern that the 5 resolution of the issue would allow a credit exchange to 6 occur and that the absolute ban on any increase in air toxic 7 emissions, not pool, or not disallow these trades from 8 occurring. 9 That is the more reasonable approach that we 10 arrived at. From what I understand from the staff 11 presentation today, it sounds as if a Solomon approach has 12 been arrived at, referenced to significant levels, certainly 13 take the edge off of the concerns that we had about any 14 increase at all, that absoluteness of term is one we thought 15 was inappropriate for this regulation significance, this one 16 that we think we can work with. 17 I would like to wait to see the actual final 18 language, but it sounds like it will resolve it. 19 Another remaining issue that arose late in the game 20 was one having to do, what happens in those instances where 21 it is possible to apply what we have learned through this 22 exercise of 1777 rule development before the district 23 actually adopts its own set of formal rules, recognizing that 24 it takes a district a year or more to adopt a rule on the 25 interexchange credits. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 44 1 We believe that enough is known because of what has 2 happened over the last five years, so that if an applicant 3 were to come forward to a district today and suggest that one 4 or another, a public policy purpose, it makes sense for 5 everyone to consider exchange of credits for compliance 6 purposes, possibly for reclaim, but for compliance purposes 7 for this example, that some interim procedure can be devised 8 that would allow that type of a transaction to occur and not 9 be put over at the cost of the company, at the cost to the 10 environment, at the cost to the regulators, until a more 11 formalized rule could be developed. 12 In other words, we believe that there is enough 13 specificity in how a decision could be reached on that type 14 of an instance that is contained in the rule before you today 15 to allow interim decisions to be made before formal rules are 16 adopted locally. 17 We have worked with the staff, and we have had some 18 difficulty in arriving at the exact language, but we would 19 argue that it is important from our perspective that some 20 interim flexibility be given for interim procedures however 21 it is phrased, so that the districts can consider applicants 22 coming forward with deserving projects. 23 CHAIRMAN DUNLAP: I would like to ask our legal 24 counsel, Kathleen, how could that be done; could that be 25 done? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 45 1 MS. WALSH: Our position is that in order to make 2 the assurances necessary under AB 1777, that we would need a 3 formal rule at the district level. 4 The rule that is before you today was not intended 5 to be directly enforceable in trading situations. The 6 purpose of this rule was to set the ground rules for the 7 district rules that will do that. 8 So, to require or allow district enforcement of 9 this rule really would not provide the assurances necessary 10 to meet the statutory. 11 CHAIRMAN DUNLAP: Bob, I will say, to interpret 12 what she said, nice try, good suggestion, but I would imagine 13 that some of the environmental community would want to see 14 the whole thing laid out and local action taken in a 15 definitive before we move willy nilly into this. 16 I assume that you think the spirit of legislation 17 is to get it going quickly and have a program that works and 18 is predictable and consistent and all that, and I think that 19 is laudable. 20 MR. LUCAS: Bob We do not see the sense now to 21 allow economic waste to occur in those instances where we 22 know we have enough information to proceed now. 23 I hope this point is not being moved aside on the 24 basis of a legal interpretation, that we directly apply this 25 regulation to the districts. What we are suggesting is that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 46 1 the regulation be written with enough flexibilities so that 2 the districts can adopt interim procedures. 3 CHAIRMAN DUNLAP: Okay. So they can take local 4 action which would frame it so it could get the program under 5 way. 6 MR. LUCAS: Instead of writing a local rule you 7 could write in local procedures. 8 MS. RAKOW: I have a question of staff. 9 Is there a time limit when the districts are 10 supposed to have these local rules in operation. 11 MS. WALSH: It is not written into anything, there 12 is no time limit in the legislation for the districts. 13 CHAIRMAN DUNLAP: It is possible though that we can 14 send out a questionnaire or survey of the districts and find 15 out what their time frame for movement on this would be, and 16 then we could share that publicly, which I think would answer 17 some questions. 18 Okay, Bob. We have the package here. 19 MR. LUCAS: Bob Those are the two main points, and 20 the other point is surplus, one, new source review, three, 21 downwind winds, number four, BARCT, number five and comment 22 number eight, having to do with the consistency, the 23 terminology all have to do with our perception for need of 24 clarity in the regulation. 25 It sounded to me as I was listening to the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 47 1 presentation that the staff has already addressed the issue 2 of surplus, very possibly to the extent that it will be okay 3 with us, but we saw the need for clarity, and there is a 4 suggested amendment to that. 5 With regard to comments three, four and five, new 6 source review and application endowment districts and BARCT, 7 these comments are very simple clarifications of issues that 8 we are told by staff are not in dispute, the issues are not 9 in dispute, these are not controversial points. 10 What we are asking for is that they be resolved in 11 the language of the regulation and not left open for 12 interpretation down the road. 13 We do not see any independent controversy on the 14 points. 15 CHAIRMAN DUNLAP: Staff, Ms. Van Ommering or Lynn 16 Terry, how do you feel about those suggestions? 17 MS. VAN OMMERING: As Bob indicated, we have had 18 many discussions in terms of the substance of our proposal 19 and we certainly are in agreement as to the concepts here. 20 We have gone through an extensive workshop 21 process. We have made it very clear, for example, that a 22 primary use of these credits would be for purposes of BARCT, 23 and we think that the language as written is very clear on 24 that point. 25 So I guess that I would characterize this as, we PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 48 1 think that the language is crafted quite clearly. 2 CHAIRMAN DUNLAP: Okay, Bob, go ahead. You are on 3 6, 7 and 8. 4 MR. LUCAS: The comments I made apply to all the 5 comments in the letter that have to do with the clarity, 6 number 1, 3, 4, 5 and 8. 7 With regard to, we covered number 7. With regard 8 to number 6, which has to do with the reclaim study, our 9 concern is not so much with a need for determination to be 10 made as much as the way in which the section seemed to have 11 been drafted, because it implied implications that the major 12 reclaim study, performed several years ago, entailed effort 13 on the part of the district and Air Resources Board to 14 compare them to the criteria. 15 If this could just be a drafting mode of concern 16 here rather than a difference as to whether or not we should 17 look at the reclaim criteria. 18 If I understand, this is interest of a 19 determination to be made whether or not recent reclaim 20 trading credits could occur outside of the reclaim program, 21 or whether other credits outside of reclaim could be used 22 within reclaim, is a simple determination to be made in 23 accordance with the criteria. 24 We believe that there is a better way of writing 25 that section to convey that thought without the price of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 49 1 implication that we do a full-blown reclaim study. 2 CHAIRMAN DUNLAP: On the surface that makes pretty 3 good sense. South Coast I saw Mr. Walerstein here, I don't 4 know, Lynn do you want to take a stab at responding to that. 5 MS. TERRY: We agreed with that concern that we 6 wanted to be very clear on this point that we did not want to 7 reopen reclaim. 8 We had a relatively narrow concern about the 9 movement of credits outside of reclaim prior to reaching the 10 crossover point, as was described at a staff presentation, so 11 we have proposed today new language that we think is much 12 more specific, and to that point, and work with the district, 13 and they are in agreement with the language, and we imposed 14 on ourselves a time frame for making that determination, the 15 districts part and our own as well, so that it goes in a 16 timely fashion. 17 CHAIRMAN DUNLAP: We will hear from you at the end 18 of the witness comment period about some proposed language, 19 or suggestion, correct? 20 Okay. Mr. Kenny, you are going to be equipped to 21 semi relate those suggestions back to individual testimony, I 22 assume? 23 Okay. Very good. 24 That keeps us from having to have a ledge. 25 Hold on, Joe and -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 50 1 MR. CALHOUN: I want some clarification of which 2 when you allow the use of credits generated in reclaim use 3 outside of reclaim. 4 Would you go over that very briefly again? You 5 said that you had reached some clarification of it. I'm not 6 sure where you are. 7 MS. TERRY: The concern is that, of course, a 8 primary criteria for credit is that it is real. 9 It represents a real emission, real emission 10 reduction. 11 Because of the nature of the reclaim program, as 12 you saw in the diagram, when the program was initiated, there 13 was a substantial difference between the starting point for 14 the reclaim program and the actual emissions that were going 15 into the air. 16 Once the two lines essentially crossover, and they 17 are no longer an over allocation, that actual emissions are 18 equivalent to the allocation within the reclaim program. 19 Now, if a reclaim source were to generate a credit 20 like any other source, it would be surplus to all of the 21 existing requirements, including reclaim itself, there would 22 be no reason for that credit to flow out of the reclaim 23 program, to be used by another source. 24 MR. CALHOUN: That relates back to point one on the 25 sheet, surplus. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 51 1 Ms. Terry: Absolutely. 2 CHAIRMAN DUNLAP: All right, Bob. 3 Ms. Edgerton, and then we will go back to Mr. 4 Lucas. 5 MS. EDGERTON: Ms. Terry, I was there when reclaim 6 was approved. I voted for it. 7 However, my recollection is that part of our 8 concept was that reclaim was going to catch up later and 9 provide additional benefits toward 2010, and consequently, 10 the thought that some of those, that there would be something 11 surplus now is inconsistent with my recollection of how I 12 thought that program would work. 13 It seems to me that program should maintain its own 14 integrity to see if it should work without any tinkering at 15 this point. You seem to be suggesting something else. 16 Ms. Terry: All right. I would like to clarify 17 that. 18 Reclaim, we are certainly not suggesting any 19 tinkering with reclaim. 20 Reclaim is essentially equivalent to a command and 21 control rule, and it meets those obligations in terms of 22 providing emission reduction benefits on an equivalent basis 23 for purposes of this SIP. 24 That commitment is intact, and there are no changes 25 to that. Now, there is a possible scenario where source PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 52 1 within reclaim could reduce its emission beyond its reclaim 2 commitment, in essence, just as it could reduce an emission 3 beyond a typical command and control regulation. 4 Conceptually, there is really no difference, we 5 consider reclaim, as it was approved, to be a replacement for 6 command and control measure. 7 We are simply saying that the same rules would 8 apply to a source within reclaim, regardless of whether 9 meeting reclaim rule or a traditional command and control 10 rule. 11 MS. EDGERTON: I understand conceptually what you 12 have presented. 13 My recollection with my vote in favor of it was in 14 line that that program was going to go intact, and any 15 additional benefits that were gleaned in that program were 16 going to stay within that program and were going to be for 17 all time for the breathers. 18 I feel the idea that some of that would be used 19 outside of reclaim, I end up feeling kind of tricked, so, 20 thank you. 21 CHAIRMAN DUNLAP: Good point, but I, think Lynn, I 22 emphasized that the reclaim emissions reductions were going 23 to be whole. 24 What I would like to do, we have some assurance 25 that we are going to hear later after the testimony how we PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 53 1 can respond to this, or what staff is recommending. 2 MR. KENNY: If I could respond a little bit. 3 There is a fundamental issue that we are trying to 4 address here and that is basically the difference between a 5 reclaim type program, which really is a true market incentive 6 program in the truest sense of the word, because what it does 7 is it really substitutes for command and control, provides 8 for declining cap over time, and its goal is to reach 9 attainment. 10 What we are talking about today is not that same 11 kind of program. We are talking about alternative compliance 12 option that would be used for non market incentive type 13 programs generally where you have command and control. 14 The concern here is because both programs even 15 though they are very different in nature, deal with credits. 16 There is potential for the credits to be 17 interchangeable between the two. When you go back to the 18 reclaim program when the original allocations were done for 19 reclaim, those allocations took into account a number of 20 factors in order to ensure that, in fact, the reclaim program 21 was started up in a fair fashion. 22 However, those allocations are decreasing over 23 time. There is a point at which those allocations that took 24 into account all of those different factors for startup 25 purposes are as no longer as patent as they were in the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 54 1 beginning. 2 At that point in time it may make sense for reclaim 3 ERC's to be transferred outside of the reclaim system and 4 into this interchangeable credit system, if, in fact, there 5 are efforts that are made above and beyond what is necessary 6 to achieve compliance with the declining cap. 7 I don't think that you need to feel tricked here. 8 I think that the key thing that we are trying to really do is 9 find out where that point is, where the allocations are no 10 longer reflective of the startup, and really are more 11 reflective of an attainment demonstration. 12 MS. EDGERTON: In response to that, one of the 13 other things that was persuasive with me in voting for 14 reclaim was my belief that it was important to try creative, 15 new ways to achieve emissions reduction, and my understanding 16 of that program as an experiment. 17 Now all of the materials which have been presented 18 today in connection with this particular program, likewise, 19 reference reclaim as still an experiment, and we are getting 20 ready to see, hopefully, a crossover where there are real 21 emission reduction benefits. 22 I am not yet, I don't have a crystal ball, and I am 23 not yet at the place where I am able to say that is 24 unequivocal success. It may be, and I hope it will be, and I 25 have been a supporter for it. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 55 1 I would be more comfortable as we move forward. If 2 we left that program for now, and then if we get to that 3 point where we see that we have additional credits from 4 reclaim, and it has been that big of a success, let's go back 5 and modify this, but let that program in its integrity be 6 that way. 7 CHAIRMAN DUNLAP: Lynn, you will have a chance to 8 express that in detail? 9 I know where you are going. We are responding to 10 some legislative requirements here, and this is not about 11 reclaim, but a broader program across the board involving our 12 partners and locals. 13 Mr. Lucas, you have had our attention for some 25 14 minutes. Can I get you to wrap this up. 15 MR. LUCAS: Bob That is it. 16 One other item that I would ask is that as the 17 staff does prepare modified language. That we have the 18 opportunity to work with them, and I assume this will follow 19 the normal 15 day or whatever. 20 MS. WALSH: Yes. 21 MR. LUCAS: Our concern about the clarity does 22 respond to Ms. Edgerton's comments here. 23 There are opportunities here to misinterpret what 24 may be happening. We do have some clear, common 25 misunderstanding of what these terms are and how they work, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 56 1 and we can work through this potential misunderstanding. 2 CHAIRMAN DUNLAP: Thank you. 3 I also commend CEEB, as Mr. Lucas mentioned at the 4 outset, they have been strong supporters of the bill that 5 brought this program forward and other bills. We appreciate 6 the continued involvement and leadership. 7 Deborah Kurilchyk, of Southern California Edison. 8 Welcome. 9 And we have a letter, I trust, from you as well, 10 and I know you are an active participant in SCAQMD. Can you 11 differentiate the Edison position from the SCAQMD position so 12 that we understand it not go over the same ground twice? 13 MS. KURILCHYK: I will try to do that, Mr. 14 Chairman. 15 Good morning, I'm Deborah Kurilchyk, with Southern 16 California Edison. 17 As you have indicated, Edison was an early 18 component in concert with CEEB in developing the enabling 19 legislation for this agency to provide the direction to air 20 districts on implementing an intercredit trading program. 21 As a result, we appreciate the efforts that the 22 staff has given to develop this regulation before you today. 23 A bit of historical context from us, we view this 24 regulation as a significant element in the regulatory 25 infrastructure needed to facilitate exchange of credits PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 57 1 between local stationary and area sources on the local level 2 to achieve least cost reductions while providing the 3 incentives to advance technology which are going to be needed 4 to meet both existing and future air quality standards. 5 Another bit of context on the process of 6 intercredit trading from our view, and we have written and 7 circulated several white papers on the subject to all of 8 you. 9 We view the intercredit trading process in three 10 distinct stages or parts. The first, there is credit 11 creation, where credits are generated and certified by the 12 local districts in accordance with the ARB guidance. 13 The second stage is credit exchange, and Lucille 14 did go over this, but just to emphasize it from Edison's 15 point of view, the second stage is credit exchange that we 16 are dealing with here today, after credits are created, they 17 are eligible for use in an intercredit trading programs, 18 subject to district rules established to this rulemaking. 19 The third stage use is credit use which is 20 determined by local districts source specific rules. This 21 proposed regulation appropriately provides for the use of 22 interchangeable credits. It allows emissions banking, and 23 is expressed in appropriate credit denominations. 24 However, there are still several remaining issues 25 which Bob touched on, and we do agree with those, so I will PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 58 1 be brief. 2 First and foremost for Edison is the issue of the 3 use of credits in the interim. This interim period is before 4 an air district can schedule a rule amendment on the rule 5 making calendar and then adopt it. 6 For those of us who work with the South Coast, they 7 have a very busy calendar, and that can take up to a year. I 8 don't know if it is appropriate to go into a specific 9 circumstance, but our company just happened to experience, 10 just coincidently the timing, and in a compliance matter that 11 we have a business and environment win-win solution for the 12 use of credits, and we feel that a procedure or permit 13 conditions would allow benefit to the environment and provide 14 us with some financial relief. 15 Bob also talked about -- before I leave that, we 16 had a constructive conversation with district officials just 17 in the airport this morning, which we feel there is an 18 opportunity to allay concerns about enforcement and that 19 there is a way to do this. 20 I would encourage us to keep up the dialogue on 21 this. There is a way to address both concerns. 22 We are hoping that the Board will authorize us 23 continuing to pursue this remedy. 24 CHAIRMAN DUNLAP: It is nice to hear that the 25 airport provides a community service. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 59 1 MS. KURILCHYK: Catch as catch can. 2 CHAIRMAN DUNLAP: I'm looking at your letter and 3 looking at CEEB letter side, by side and there are about six 4 of the eight issues are dovetailed, and I think those points, 5 Bob did a fine job, I know where you are coming from. 6 I think we plan to ask the staff to address the 7 issues with suggestions after we hear the rest of the 8 testimony. 9 MS. KURILCHYK: While we think we are materially or 10 substantially in agreement with staff, and really do want to 11 commend them for the work that went into this, there are 12 clarifying language amendments that would improve it, and we 13 would encourage that to continue. 14 CHAIRMAN DUNLAP: Thank you. 15 The interim comments are a good one, and I 16 understand where you are coming from, but I am concerned 17 about any kind of short cuts that we encourage to be taken 18 and what the implications might be over the long haul, and so 19 I want to hear a little bit more. 20 Kathleen, I will come to you and ask for some 21 counsel from you about how we can provide a righteous nudge 22 to the districts to move expeditiously and at the same time 23 not do anything that will compromise the environment to make 24 unnecessary administrative mistakes. 25 MS. EDGERTON: I need to ask a question. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 60 1 CHAIRMAN DUNLAP: Ms. Edgerton. 2 MS. EDGERTON: I would ask you to turn to page 3 of 3 your letter, page 3, the first page 3 that has Ms. 4 Kurilchyk's. 5 MS. KURILCHYK: Deborah is fine. The signature 6 page. 7 MS. EDGERTON: Yes, the signature page. 8 Here you talk about Section 91509A and some changes 9 that you wanted us to make. 10 Particularly I'm focusing on, you have item one and 11 item two. I'm looking at item two. 12 Certified reductions shall be calculated using the 13 most stringent of historic actual emissions, applicable 14 requirements, or assumed in the district Air Quality Plan, or 15 the Federally approved SIP as surplus. 16 The word assumed concerns me there. 17 Would you be agreeable to deleting that? 18 MS. KURILCHYK: I actually think this is staff 19 language. 20 MR. KENNY: That actually is language that staff 21 prefers, because what it does is it takes into account the 22 fact that there may be emission reductions which are 23 contemplated in the plan that we want to make sure are 24 considered so that there is not a double counting effect. 25 That is language that we prefer to have in there. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 61 1 MS. EDGERTON: Again please. 2 MR. KENNY: The reason that we are talking about 3 that is that you can have two types of emission reductions 4 basically the ones that are specifically quantified in 5 emission reductions or the ones that are assumed in emission 6 reductions. 7 MS. EDGERTON: Assumed to result from particular 8 regulations. 9 MR. KENNY: Yes. 10 We want to make sure that we basically take those 11 into account for the baseline whether it is the specifically 12 quantified ones or the ones that are assumed, such that the 13 baseline is at a particular level. 14 If we do not count the assumed ones, the baseline 15 is going to be lower, and it is going to be impossible to 16 generate credits. Essentially more liberally than would 17 otherwise per. 18 MS. EDGERTON: Well help me with this Mr. Kenny. 19 I understand the concept of assumed reductions 20 because that is how we get our SIP approved, we have to 21 assume certain reductions in the future from the regulation. 22 However, as time overtakes those regulations, we 23 learn that some of our assumptions were correct and some were 24 not. 25 My concern is that when we have learned that the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 62 1 assumptions were over optimistic, or incorrect, that we use 2 the actual data where we have it. 3 MR. KENNY: That would occur. 4 What we are talking here is a situation in which 5 the credits are being generated prior to implementation of a 6 particular regulation. 7 When the credits are being generated at that point 8 and time, this is prior to implementation, there is a base 9 line of emissions reductions that were either contemplated 10 very specifically or that were assumed in more general 11 fashion. 12 We want to make sure that the generation in terms 13 of the surplus regulations for credit purposes is above that 14 line. 15 Once you get to the point where the implementation 16 actually occurs, those credits are not going to be generating 17 more, because they are no longer going to be surplus. They 18 basically then are required by the particular regulation. 19 CHAIRMAN DUNLAP: The other thing Lynn, not to take 20 you away from where you would like to go, but nobody is 21 looking to make this a specific language that we make an 22 amendment for at this point, we are not. 23 MS. EDGERTON: We can discuss it later then. 24 CHAIRMAN DUNLAP: Mr. Kenny, you will have to cover 25 that at the conclusion. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 63 1 . Any other questions from our colleagues? 2 From Edison? 3 Thank you. 4 Mr. Carmichael, followed by Mr. Carroll. 5 I will apologize sending you a signal that you be 6 next. I want to hear a different line for a few minutes. 7 Welcome. 8 MR. CARMICHAEL: Let me start with the thank you 9 for the staff, Lucille Van Ommering, Lynn Terry, they made 10 the effort to meet with us and listen to our concerns. This 11 is a complicated program, one that we have a lot of concerns 12 about, and we appreciate the time that they have put into 13 talking to us about our concerns. 14 Let me give two thoughts to start with. One of the 15 reasons that the environmental community is so concerned 16 about credit trading programs is because there are risks 17 associated with these programs, very real risks. 18 Foremost among them is the potential for localized 19 toxic impacts and increased health exposure to a community 20 surrounding a facility that enters into one of these 21 programs. 22 I will be back to that in a minute. That is the 23 primary reason why we have given these programs so much 24 attention. 25 The other issue that we should keep in mind when we PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 64 1 talk about credit trading programs is that we should be 2 giving credits where credit is due. 3 We have time and time again made that point in the 4 context of the definition of surplus, for example, that is 5 why we have spent a lot of time both at the local level of 6 the South Coast district and with the State staff talking 7 about the definition of surplus. 8 We are concerned about giving the credits where it 9 is not appropriate to give them. We understand the need for 10 compliance flexibility. We simply are striving to ensure 11 that the appropriate protections are incorporated into these 12 programs. 13 Real briefly, let me talk about the definition of 14 surplus. It was raised by Ms. Edgerton. 15 Let me give one other example that should be 16 considered and the reason that we support that the inclusion 17 of the language or assumed, outside of the regulatory 18 spectrum, under the Air Quality Management Plan of the State 19 Implementation Plan, there are assumptions that society will 20 make certain changes, equipment will turn over at a certain 21 rate, whether or not there is a regulation there or not, 22 there is that assumption incorporated into the development of 23 our plans. 24 If we ignore that assumption, we would give a 25 credit for someone that turns over their equipment even if PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 65 1 that would have happened in the normal course of events and 2 that is highly problematic from our perspective, and we are 3 happy to see the inclusion of this language. 4 Another big issue for us is the issue of the 5 environmental offset. We indicate in our letter that we feel 6 strongly that at a minimum that the State should be requiring 7 a 10 percent environmental offset not so much to get 8 environmental benefit out of this program but to more so 9 prevent an environmental detriment. 10 We are concerned that these credit trading programs 11 run the risk of increasing emissions. We will lose some 12 ground by giving credits and not actually achieving the 13 emission reductions that we need today. 14 CHAIRMAN DUNLAP: Let me interrupt you on that 15 point. 16 As I understand, what I heard from the staff 17 presentation on that point, that is an issue that I am 18 concerned with as well, is that there is a Federal 19 requirement that there be discounted 10 percent; is that 20 correct, staff? 21 And that we are providing the flexibility for the 22 locals to deal with that damaged part of their process. 23 Would we agree that that is the case? 24 MR. CARMICHAEL: First of all, Lucille pointed out 25 earlier that the State is making a distinction between the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 66 1 Federal policy and the Federal requirement, and we have to 2 work with EPA on developing policies as opposed to 3 requirements. 4 However, we do think it is entirely appropriate for 5 the State to say we need to incorporate this protection into 6 this program, whether EPA requires it or not. 7 The State should be providing that protection to 8 the people of California, and there is no reason why you 9 can't. 10 CHAIRMAN DUNLAP: I wanted to understand that. 11 So, you are saying that if we were to do it, it 12 would be more certain than a Federal policy. 13 MR. CARMICHAEL: Thus far the programs in the South 14 Coast, they have incorporated them, because of the EPA stick 15 policy or regulation. 16 We would like to see the State incorporate it. 17 CHAIRMAN DUNLAP: I will ask staff to comment on 18 that later. Let me go back to an earlier point, if I may, I 19 am trying to keep up with you here. 20 As it relates to increases in toxic air contaminant 21 emissions as result of the trading, we are concerned with 22 that as well. 23 Do you see this proposal as a response to 24 legislation as allowing for increases in toxic air 25 emissions? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 67 1 MR. CARMICHAEL: Yes. 2 Can I save a more detailed response until later? 3 Actually, it is probably the next issue that I want 4 to talk. 5 I have several points to make on that front. First 6 of all, we do, in direct response to your question, we do see 7 it allowing an increase in toxic emissions. 8 In fact, one of the language changes that was 9 described by the staff is an allowance in increase in toxic 10 emissions, because the business community thought it was too 11 restrictive to have a program that said absolutely no 12 increase in toxic emissions. 13 We would prefer to see that. We would like to have 14 a program that says, no increase in toxic emissions. 15 The reason that we feel that you could do that is 16 this is a voluntary program. It is an important distinction 17 between the program that the businesses are required to 18 participate in and a program that the business can 19 voluntarily enter into. 20 This is a compliance flexibility program. We do 21 not want to design a program that nobody participates in. If 22 it is voluntary, the businesses are not required to 23 participate, and we should make it protective as possible. 24 Let me talk about that for a couple of points. In 25 the place of the language which stated in the April fourth PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 68 1 draft of the rule that there would be no increase in toxic 2 emissions, the staff is proposing a combined alternative, a 3 two part alternative. 4 One is, let's rely on significance level at the 5 district level, the health risk significance level. We think 6 that is a problem. 7 The reason that we think that it is a problem, in 8 South Coast, for example, the district board established that 9 the health risk significance level of one hundred cases in a 10 million. 11 We think that is too high. They know it, and we 12 hope to remedy that sometime in the next year, and we are 13 going to continue to work on that at the local level. 14 Relying on the district significance level we do 15 not think is protective enough. 16 CHAIRMAN DUNLAP: You want us to be more 17 prescriptive, less flexibility and more specificity? 18 MR. CARMICHAEL: When it comes to protecting the 19 public health. 20 CHAIRMAN DUNLAP: So I guess I would say that it is 21 a direct counter to Mr. Lucas and the Edison representative. 22 MR. CARMICHAEL: The second part of the staff's 23 replacement program for absolute no increase in toxic 24 emissions is a disclosure provision, that if the facility 25 risk is over ten in a million, if a trade results in a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 69 1 facility risk of over a ten in a million, the facility has to 2 disclose that to the public. 3 Sounds pretty good. The problem is that it is 4 already required. Prop 65, AB 2588, require public 5 disclosure depending on the district, over ten in a million, 6 so we are not getting anything more out of that public 7 disclosure. 8 We think that public disclosure is good thing. 9 Toxic release inventory, AB 2588, we think that limitation, 10 or the threshold should be lower than ten in a million. 11 If a trade results in an incremental health risk of 12 one in a million, the facility should disclose that to the 13 community, and that is more stringent than the staff is 14 proposing, but we think it is appropriate. 15 We have discussed with staff what we believe is an 16 appropriate prohibition of entering into the program. If 17 your risks at your facility is over ten in a million, you 18 should be prohibited from participating in a credit trading 19 program. 20 You are already a significant risk to the community 21 and we do not want to run the risk of increasing that risk. 22 That is what we put in the letter, and that is what 23 we feel the level should be. However, we have also proposed 24 a compromise position, somewhere in between the business 25 community and that position, where we suggested that if you PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 70 1 are under a hundred in a million in risk, if the facility is 2 under hundred in a million and a trade results in an 3 incremental risk of one in a million, you would be, sorry, if 4 a trade would result in a risk of greater than one in a 5 million you would not be able to participate. 6 If it is under one in a million, you would be able 7 to participate. If the facility risk is over a hundred in a 8 million, you cannot participate in this program. 9 The staff says that prohibition is incorporated in 10 this program, and they are relying on the significance 11 thresholds at the district level. 12 There is a possibility despite our efforts to 13 ensure that no district increase the risk threshold beyond 14 the hundred in a million, it is possible that another 15 district will come along and say it is appropriate to have a 16 risk factor of 150 a million, this state should say no, it is 17 not appropriate. 18 CHAIRMAN DUNLAP: Where they would not mesh, and 19 there would be some different program requirements right, 20 good point. 21 MR. CARMICHAEL: I think that is a good summary of 22 our divergent positions. 23 CHAIRMAN DUNLAP: Okay. I appreciate that and 24 thanks for addressing it so we could follow it with the 25 previous testimony. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 71 1 I appreciate you doing that. 2 MR. CARMICHAEL: I am sorry. I should say that we 3 address a few other points in our letter, and we do believe 4 that they are important. 5 I just wanted to highlight the three biggest points 6 for us, and that is why I focused on those in my testimony. 7 CHAIRMAN DUNLAP: Thank you. Thank you very much. 8 MS. EDGERTON: Tim, it is my understanding, and 9 when it comes time to mention that I spoke with people, I 10 have spoken with you, it was my understanding -- 11 CHAIRMAN DUNLAP: Was this at an airport? 12 MS. EDGERTON: Not in the airport, it was just 13 before going to the airport. 14 The Coalition and NRDC have taken the position that 15 the statute itself, which directs us to adopt this 16 regulation, precludes our having any possibility of increase 17 in toxic air emissions in that it provides that this statute 18 is supposed to provide for the maintenance and improvement of 19 clean air, and therefore that we cannot authorize a trade 20 which would increase toxics; is that correct? 21 MR. CARMICHAEL: Item I did not bring my attorney, 22 so I don't know if that is exactly what the law says. 23 That is the position that we have taken. We said 24 that there should be no increase in toxic emissions, period. 25 MS. EDGERTON: The site that you all had and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 72 1 something that I saw, I mean you have the exact language 2 don't you there. 3 MR. CARMICHAEL: I think it is in a previous. 4 CHAIRMAN DUNLAP: I see more than one attorney out 5 there, Lynn, Ms. Walsh or Ms. Krinsk. 6 MS. KRINSK: The language does not specifically 7 require that the methodology result in the maintenance and 8 improvement of air quality and consistent with Division 26, 9 which includes toxic air contaminants. 10 CHAIRMAN DUNLAP: Toxic emissions cannot be 11 increased as result of the trade; is that a correct 12 statement? 13 MS. WALSH: The statute reads, as Ms. Krinsk 14 indicated, but the question of whether that would preclude 15 any increase in toxic air contaminants is not as clear-cut a 16 question where you are dealing with ambient air quality 17 standards, since those are traded under the AB 1807 process 18 and AB 2588. 19 The staff's position that the limitations that we 20 have established in the proposed regulation would be 21 consistent with those programs and Division 26 as required 22 under AB 1777. 23 CHAIRMAN DUNLAP: I appreciate that legal response 24 but the question still stands, can trading allow for an 25 increase, can a trade occur that would allow for an increase PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 73 1 in toxic air contaminant emissions, yes or no? 2 MS. WALSH: To summarize my answer it is yes, but 3 it is a policy decision, and you folks are going to need to 4 decide whether the limits that the staff has proposed are 5 consistent. 6 CHAIRMAN DUNLAP: I, for one, am going to look for 7 the conclusion that does not provide for an increase for 8 toxic or contaminant emissions to occur as a result of 9 trades. 10 So, I give you a heads-up you might want to look at 11 some language that we could include that to make that 12 certain. 13 MR. CALHOUN: Let me ask a question. 14 Does mean that no local increase or overall? 15 MR. CARMICHAEL: The problem with toxics is a 16 localized problem for the most part. 17 It is the communities that surround the facilities 18 that are emitting toxic emissions. So when you think about 19 toxics you should think about the communities that surround 20 the facilities that enter this program. 21 MR. CALHOUN: I guess what I had reference to was 22 what about the legal statute as it applies to that particular 23 issue. 24 MR. CARMICHAEL: The statute does not specify 25 whether the impacts that aren't allowed to occur aren't PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 74 1 allowed to occur locally or over some greater area. 2 So, generally it would be interpreted that there 3 would be no increase anywhere, not allowed by specifics but 4 by statute. 5 CHAIRMAN DUNLAP: It is more complicated when we 6 get into looking at we are talking about a statewide program 7 here ultimately, and I am well-aware of how some locals are 8 concerned about the emissions in the their individual 9 community versus elsewhere throughout the state and I know 10 that is very sensitive. 11 I think we will have a discussion on that at the 12 right point. Mike, do you want to take a crack at it and 13 then we will hear from Lynn and thank Mr. Carmichael and get 14 on with our last witness. 15 MR. KENNY: Toxics is probably the most sensitive 16 issue that we had to deal with in proposing this particular 17 regulation, and what we tried to do in the context of that 18 was to figure out a way in which the trades could occur 19 within a reasonable frame work. 20 If you have a provision that essentially said you 21 cannot have any toxics increases, just an absolute provision 22 like that, the ultimate result of that is probably you cannot 23 have any trades. 24 What we were trying to do is sort of mesh what the 25 Legislature was telling us to do in regard to providing for PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 75 1 trading mechanism under 1777 and also providing for no 2 increases in toxics. 3 The way that we tried to do that was within the 4 context of the existing toxic structure, which provides for 5 risk-based approaches, and we are tying our approach really 6 to the risks associated with the trades to make sure there 7 are net increases at the facility, and secondly that when we 8 are talking about levels of risk above ten in a million that 9 we have a disclosure requirement so that people in the locale 10 have a good sense of what is happening in that particular 11 locale, and that was the way that we tried to mesh these two 12 programs. 13 CHAIRMAN DUNLAP: But then again the disclosure is 14 important as well. 15 MR. CARMICHAEL: As I understand it, your current 16 program would allow an increase of nine cases in a million 17 with no requirement. 18 So, yes, for ten in a million and more, you have to 19 do public disclosure, contrast that with absolute no 20 increase. 21 We do not think that the staff has gone far enough 22 to provide the protection to the public. It may be too much 23 to say absolutely no increases, but ten in a million, public 24 disclosure, we do not think it is enough. 25 CHAIRMAN DUNLAP: Okay. Understood. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 76 1 Mike, we have the cover that ground in a bit. 2 Okay. We have one witness. 3 MS. EDGERTON: One more question. 4 It is my understanding, Tim, also, that when we 5 spoke you clarified that actually although, and I am confused 6 about this, it was on the slide, it is my understanding that 7 the U.S. EPA has now taken the position that the 10 percent 8 discount offset is required because of scientific uncertainty 9 likely to ensue in trading and not to achieve an 10 environmental benefit, per se, but to achieve equivalency, 11 the slide was different that you all had about the 10 12 percent, it is quite different if it is a benefit or if it is 13 trying to make sure that you are maintaining air quality and 14 not slippage. 15 My understanding is that you all thought that at a 16 minimum you would have a slippage. 17 MR. CARMICHAEL: That is our concern. 18 That is why we think that the State should require 19 a 10 percent protection, not for additional environmental 20 benefit, but to protect against an environmental detriment. 21 Whether you call it technical uncertainty or 22 calculation uncertainty or protecting against environmental 23 detriment, we think it is necessary. 24 We do say in our letter that it is appropriate 25 beyond that 10 percent for district to do analysis, what can PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 77 1 the market support. 2 We know that the business community feels that 10 3 percent is burdensome. It is possible that they are wrong 4 and if you entered this program even if there is 25 discount. 5 CHAIRMAN DUNLAP: I understand, but also, one of 6 the things about this new way of thinking about markets and 7 trading is that in order for it to work we need to have some 8 opportunities for people to try. 9 MR. CARMICHAEL: With adequate protection. 10 CHAIRMAN DUNLAP: I think you made important points 11 about disclosure and environmental risk and about what could 12 happen in individual communities if this is not handled 13 properly, I think those are right on the money, but at the 14 same time we need to have appreciation and understanding of 15 what it is going to take to get people to try this. 16 Tim, I know where you are coming from relative to 17 the prescriptive nature of what we do here, but I also have 18 great confidence in some of the local districts to do the 19 right thing for their community, and they play an integral 20 part as partner in implementing this program. 21 I come right back to you with the point that we 22 want to provide some decision making power for them so that 23 they can partner with the program. 24 I think we covered the ground and appreciate your 25 comments. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 78 1 Mr. Carroll, Latham and Watkins, I assume you 2 represent the Reg Flex Group? 3 We have some written testimony from you in the 4 packet, I see. It appears to be among the thicker 5 submissions, six or eight pages or so. 6 MR. CARROLL: Six pages. 7 CHAIRMAN DUNLAP: I notice that it dovetails nicely 8 it tails with some of the CEEB comments and our friend from 9 Edison. 10 If you want to kind of distinguish your basic 11 concerns with theirs, I would appreciate it. 12 MR. CARROLL: For those of you who are not familiar 13 with Regulatory flexibility Group, it is a coalition put 14 together initially to advocate the development and 15 implementation of market based programs. 16 Our agenda has broadened since that time in 1990, 17 but the market based programs continue to be at the core of 18 what our group advocates. The group includes the Chevron USA 19 Products Company, Hughes Electronics Los Angeles Times, 20 McDonnell-Douglas Corporation, Northrup Corporation, Boeing 21 North America, Shell Oil Company, Southern California Edison, 22