South Coast Air Quality Management District Proposed Rule 1304.1 Would Impose Substantial Fees on Facilities Undertaking Replacement Projects

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Last week, the South Coast Air Quality Management District held its second stakeholder workshop on its proposed Rule 1304.1. Comments on that rule are now due February 19, 2013.

If adopted, Rule 1304.1 would impose substantial new fees on the replacement or repower of aging electrical generation facilities in the South Coast Air Basin. Under existing Rule 1303, facility owners are required to obtain emissions offsets for any new equipment, including new equipment for the replacement or repower of existing facilities. Emissions offsets for fine particulate matter (PM10) are effectively unavailable in the open market in the South Coast Air Basin. However, Rule 1304(a) allows facility owners to access the District's Priority Reserve offset account to obtain offsets for the replacement of electric steam boilers with combined cycle gas turbines or other advanced gas turbines. The offset exemption also applies to the replacement of a source with a functionally identical source, where there is no increase in the maximum rating of the equipment and no increase in the potential to emit air pollutants. Proposed Rule 1304.1 would now impose substantial fees, into the millions of dollars, on facility owners seeking to access this account.

The proposed Rule would apply to all facilities seeking to take advantage of the Rule 1304 exemption that have not been issued a final permit to construct. Facility owners would be required to pay the annual fee for the first five years of operation upfront, prior to the issuance of a permit to construct for the new equipment. Fees would be due annually thereafter as long as the new equipment is operated. Failure to pay the fees on time would result in the expiration and invalidation of the air permits for the equipment. The new fee would be non-refundable once the new equipment has begun operation. Prior to commencement of operation, a partial refund would be available based on the amount of time between the initial issuance of a permit to construct and its cancellation. No refund would be available more than five years after a permit is initially issued.

The District has already held a public consultation meeting on the new rule, as well as two stakeholder working group meetings. A third working group meeting is scheduled for February 19. The deadline to file written comments is also February 19. The District currently anticipates that a public hearing on the proposed Rule will occur on April 5, 2013, with additional working group meetings in March as necessary.

Existing facility owners have expressed concern that replacement or repower of aging electrical generation facilities would become prohibitively expensive or electricity costs would have to significantly increase to cover the cost of the new fees. Imposing a fee would also reduce any incentive facilities have to replace aging, inefficient equipment with new equipment with state-of-the-art emissions controls. Cal-ISO has commented that without the mechanism to replace existing generation under Rule 1304, there will be insufficient new or repowered generation to meet energy demand in the Los Angeles load pocket, especially in light of the retirement by 2020 of power plants using seawater for cooling pursuant to State Water Resources Control Board policy.

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Key Contributors

Seth D. Hilton
Allison C. Smith
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