[Federal Register Volume 68, Number 30 (Thursday, February 13, 2003)]
[Proposed Rules]
[Pages 7330-7337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-3418]


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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 52

[CA280-0390A ; FRL-7450-9]


Revisions to the California State Implementation Plan, San 
Joaquin Valley Unified Air Pollution Control District

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

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SUMMARY: EPA is proposing to approve the San Joaquin Valley Unified Air 
Pollution Control District's (SJVUAPCD or District) revised permit 
exemption and new source review (NSR) rules, Rules 2020 and 2201, 
respectively, for stationary sources. The District has revised Rules 
2020 and 2201 and submitted them to EPA as a revision to the California 
State Implementation Plan (SIP). The revisions address deficiencies 
identified in our July 19, 2001 limited approval and limited 
disapproval of the previous version of these rules.
    EPA is also publishing in today's Federal Register an interim final 
determination that the District has corrected the deficiencies noted in 
the limited disapproval. The interim final determination will stay the 
sanctions clock triggered by the July 19, 2001 limited approval/limited 
disapproval of the previous versions of Rules 2020 and 2201. If EPA 
takes final action to approve these rules, the sanctions clock for this 
action will be stopped.

DATES: Comments must be sent by March 17, 2003. EPA will respond to 
comments in a final action on this proposed approval.

ADDRESSES: Send comments to: Ed Pike, Permits Office [AIR-3], Air 
Division, U.S. Environmental Protection Agency, Region 9, 75 Hawthorne 
Street, San Francisco, CA 94105-3901.
    You can review and copy the submitted Rules 2020 and 2201, the 
existing SIP rules, and EPA's Technical Support Document (TSD) at EPA's 
Region 9 office from 8:30 am to 5 pm, Monday-Friday. A reasonable fee 
may be charged for copying.
    Copies of the submitted Rules are also available for inspection at 
the following locations:
    California Air Resources Board, Stationary Source Division, Rule 
Evaluation Section, 1001 ``I'' Street, Sacramento, CA 95814.
    San Joaquin Valley Unified APCD, 1990 E. Gettysburg Avenue, Fresno, 
CA 93726.

FOR FURTHER INFORMATION CONTACT: Please call Ed Pike at (415) 972-3970 
or send e-mail to [email protected].

SUPPLEMENTARY INFORMATION: Throughout this document, ``we,'' ``us'' and 
``our'' refer to EPA.

Table of Contents

I. What is EPA proposing to approve?
II. Background
    A. History of SJVUAPCD NSR SIP revisions.
    B. Deficiencies in SJVUAPCD NSR regulations and required action.
    C. How has SJVUAPCD corrected these rule deficiencies?
    1. Offset equivalency
    a. What is the basis for allowing an annual offset equivalency 
demonstration?
    b. What is the offset equivalency tracking system in Rule 2201 
and how does it satisfy the deficiency noted in the limited 
disapproval?
    c. Does the tracking system replace applicable NSR requirements?
    d. What are the requirements for being an enforceable emission 
reduction?
    e. What kinds of emission reductions may be creditable?
    f. Are pre-1990 emission reductions creditable?
    2. Agricultural exemption
    a. How has the District corrected this deficiency?
    b. How is EPA addressing the State exemption?
    3. Lowest Achievable Emission Rate Applicability
D. Summary
III. Statutory and Executive Order Reviews
    A. Executive Order 12866, Regulatory Planning and Review
    B. Regulatory Flexibility Act

[[Page 7331]]

    C. Unfunded Mandates Reform Act
    D. Executive Order 13132, Federalism
    E. Executive Order 13175, Coordination with Indian Tribal 
Governments
    F. Executive Order 13045, Protection of Children from 
Environmental Health Risks and Safety Risks
    G. Executive Order 13211, Actions that Significantly Affect 
Energy Supply, Distribution, or Use
    H. National Technology Transfer and Advancement Act

I. What Is EPA Proposing To Approve?

    EPA today proposes to approve revisions to the California SIP by 
incorporating the submitted revised versions of District Rules 2020 and 
2201 into the SIP. If EPA finalizes this proposed action after 
considering public comment, the submitted versions of Rules 2020 and 
2201 will replace the existing versions of those rules currently in the 
SIP for the San Joaquin Valley Unified Air Pollution Control District, 
which includes the following counties: Fresno, Kern,\1\ Kings, Madera, 
Merced, San Joaquin, Stanislaus, and Tulare.
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    \1\ For more information on the District and its jurisdiction 
see 64 FR 51493 (Sept. 23, 1999).
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    The submitted versions of Rules 2020 and 2201 were adopted by the 
District on December 19, 2002, and submitted to EPA by the California 
Air Resources Board (CARB) on December 23, 2002. EPA found the 
submittal to be complete on December 30, 2002. EPA's Technical Support 
Document (TSD) accompanying this proposed action describes the portions 
of Rules 2020 and 2201 that were revised.

II. Background

A. History of SJVUAPCD NSR SIP Revisions

    District Rule 2201 specifies the requirements for the review of new 
and modified stationary sources and outlines the requirements to be 
included in authorities to construct (ATCs) and permits to operate 
(PTOs). Rule 2020 specifies the emission units that are not required to 
obtain ATCs or PTOs. Together, these rules define the applicability and 
requirements of the District's NSR program.
    On July 19, 2001, EPA finalized a limited approval and limited 
disapproval of previous versions of Rules 2020 and 2201.\2\ 66 FR 
37587. EPA's final action in July 2001 was a limited disapproval 
because three provisions in the previous versions of the rules did not 
comply with the CAA and were not approvable. Because of these three 
deficiencies, the rules failed to satisfy the requirements of sections 
172(c)(5) and 173 of the CAA, EPA finalized a limited disapproval of 
the previous version of Rules 2020 and 2201 under section 110(k)(3) and 
part D of CAA title I. EPA's final limited disapproval in July 2001, 
triggered the sanctions (the ``sanctions clock'') in section 179 of the 
CAA.
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    \2\ The previous version of Rule 2020 acted upon in the July 19, 
2001 final action was the version adopted by the District on 
September 17, 1998. The previous version of 2201 was the version 
adopted by the District on August 20, 1998.
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    Under section 179(a)(2), if the Administrator disapproves a 
submission under section 110(k)(3) for an area designated nonattainment 
because of the submission's failure to meet one or more of the elements 
required by the Act, the Administrator is required to apply one of the 
sanctions set forth in section 179(b) if the deficiency has not been 
corrected within 18 months of such disapproval. Section 179(b) provides 
two sanctions available to the Administrator: limitations on projects 
and grants for which the Department of Transportation may approve 
federal highway funding (``highway sanction'') and increasing the NSR 
offset requirements (``offset sanction''). By regulation, EPA 
established that we will apply the offset sanction 18 months after rule 
disapproval and the highway sanction 6 months after the offset 
sanction. 40 CFR 52.31. The CAA also provides that final disapproval 
under section 110(k)(3) triggers the federal implementation plan (FIP) 
requirement. CAA Section 110(c). The 18 month period referred to in 
section 179(a) and 40 CFR 52.31, began on August 20, 2001, which was 
the effective date of EPA's final limited disapproval, and will expire 
on February 20, 2003.
    With the limited disapproval, the July 19, 2001 action 
simultaneously finalized a limited approval of Rules 2020 and 2201. EPA 
finalized the limited approval under section 110(k)(3) in light of 
EPA's authority pursuant to section 301(a) to prescribe regulations 
necessary to further air quality by strengthening the SIP. Because 
Rules 2020 and 2201 strengthened the District's NSR program despite the 
three cited rule deficiencies, EPA's limited approval incorporated 
Rules 2020 and 2201 into the SIP subject to the section 179 mandatory 
sanctions triggered by EPA's limited disapproval.

B. Deficiencies in SJVUAPCD NSR Regulations and Required Action

    EPA's limited disapproval cited three deficiencies in the previous 
versions of Rules 2020 and 2201. First, EPA determined that the 
previous version of Rule 2201 was not approvable because its offset 
tracking equivalency system failed to contain a mandatory remedy. We 
also found the previous version of Rule 2201 deficient because it did 
not require all sources making modifications that result in a 
significant increase in emissions to meet the Lowest Achievable 
Emission Rate (LAER). Finally, we concluded the previous version of 
Rule 2020 was not approvable because section 4.5 of the rule exempted 
agricultural sources from permitting. For a more detailed discussion of 
these three rule deficiencies please see our final limited approval and 
limited disapproval, 66 FR 37587 (July 19, 2001), and the accompanying 
Technical Support Document dated August 30, 1999 (``1999 TSD'').
    EPA's July 2001 limited disapproval informed the District that the 
following actions were required to correct the rule deficiencies:
    1. The District must revise Rule 2201 to provide a mandatory, 
enforceable and automatic remedy to cure any annual shortfall and, in 
the future, prevent shortfalls in the District's New Source Review 
Offset Equivalency Tracking System.
    2. The District must remove the agricultural exemption from 
District Rule 2020.
    3. The District must revise Rule 2201 to ensure that all sources 
meet LAER \3\ if they are allowed to make a significant increase in 
their actual emissions rate.
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    \3\ Many California Districts use the term ``Best Available 
Control Technology'' (BACT) with a definition equivalent to LAER. 
Please see the TSD for additional information on the District's 
definition of BACT.
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    See 66 FR at 37590.

C. How Has SJVUAPCD Corrected These Rule Deficiencies?

1. Offset Equivalency
    a. What is the basis for allowing an annual offset equivalency 
demonstration?
    Section 173(a)(1)(A) provides that new and modified stationary 
sources seeking to commence operating in a nonattainment area must be 
required by the state permitting program to obtain sufficient 
offsetting emission reductions (``offsets'') such that, ``the total 
allowable emissions from existing sources in the region, from new or 
modified sources which are not major emitting facilities, and from the 
proposed source will be sufficiently less than total emissions from 
existing sources * * * so as to represent reasonable further progress * 
* *.'' In our July 19, 2001 final action, we explained that this 
statutory focus on total regional emissions supported the approval of a 
District offset program that

[[Page 7332]]

ensured equivalency with the federal requirements on an annual 
aggregate basis. 66 FR at 37588-89.\4\ Thus, we explained that an 
offset equivalency tracking system with a requirement for a mandatory 
and enforceable remedy for any shortfall would comply with the 
requirements of the Act. Id. at 37588.\5\
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    \4\ We relied on this statutory interpretation, in part, in 
approving the RECLAIM Trading Program in the South Coast Air Quality 
Management District. See 61 FR 64291 (Dec. 4, 1996).
    \5\ We have also noted the ability of States to implement 
accounting or tracking systems to demonstrate annual aggregate 
equivalency with federal requirements for surplus adjusting. See 
Memo from John S. Seitz, Dir., Office of Air Quality Planning and 
Standards (OAQPS) to David Howekamp, Dir., Region IX Air and Toxics 
Div. (Aug. 26, 1994) (``1994 Seitz Memo'').
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    The goal of the District's offset equivalency tracking system, 
therefore, is to show that, notwithstanding certain differences between 
the District and federal NSR programs, the District's rules would 
require offsets that are, in the aggregate, equivalent to offsets 
required under the federal program.\6\ In the 1999 TSD for the proposed 
limited approval/limited disapproval, 65 FR 58252 (Sept. 28, 2000), we 
identified areas where the District rules may require fewer offsets 
than the federal NSR regulations and directed the District to track 
these sources of potential shortfalls. See 1999 TSD at 15-17; see also 
66 FR at 37588 n.3.\7\ In general these differences fall into two 
categories: (1) Differences in the quantity of offsets required in the 
first instance and (2) differences in the way the value of emission 
reductions used to satisfy offset requirements is calculated. Thus, to 
demonstrate equivalency, the District's rule needs to track and report 
on both of these categories of differences. Likewise, if the remedy is 
to cure and prevent future shortfalls, the rule must be tailored to 
address the root cause of the shortfalls.\8\
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    \6\ See 65 FR 58252, 58253 (Sept. 28, 2000) (``The District 
committed to demonstrate equivalency by calculating on an annual 
basis the quantity of offsets that would be required under federal 
nonattainment NSR regulations (i.e. the quantity of offsets that 
meet all Clean Air Act requirements) and the quantity of offsets 
required under the District program.'').
    \7\ For example, the District does not require sources to offset 
the entire quantity of emissions increases (Rule 2201, section 4.5) 
and, in certain situations, does not impose the minimum offset ratio 
required under the CAA (Rule 2201, section 4.8).
    \8\ In our final limited approval/limited disapproval, we noted 
that the District had identified different remedies to address 
potential shortfalls including ``using EPA requirements for 
calculating offset baselines and quantities'' (which could address 
shortfalls related to differences in the quantity of offsets 
required in the first instance) and ``using credits that are surplus 
at the time of use'' (which could address shortfalls related to 
differences in the valuation of emission reductions used to meet 
offset requirements). See 66 FR at 37590.
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    b. What is the offset equivalency tracking system in Rule 2201 and 
how does it satisfy the deficiency noted in the limited disapproval?
    Section 7.0 of the revised District Rule 2201 (adopted Dec. 19, 
2002) provides for a system to track and demonstrate the equivalency of 
the District's NSR offset requirements to the offset requirements of 
the federal NSR program. There are three basic components of the 
tracking system provisions. Section 7.1 outlines the parameters to be 
tracked by the District on an annual basis. Sections 7.2 and 7.3 
describe how equivalency is to be demonstrated each year. Section 7.4 
describes the remedies to take effect to cure any annual shortfall and 
prevent future shortfalls. While the District action required in EPA's 
final limited approval/limited disapproval was ``to provide a mandatory 
and enforceable remedy to cure any annual shortfall and, in the future 
prevent shortfalls,'' as noted above, the provisions for tracking and 
demonstrating equivalency are critical for ensuring that the remedy is 
applied automatically and addresses the cause for the shortfall. Thus, 
each of the components provided in section 7.0 is necessary to ensure 
the remedy provision satisfies this deficiency.
    The District's tracking system requires two demonstrations to be 
included in the annual report. First, the District is to track and 
compare on an annual basis the aggregate quantity of offsets required 
under Rule 2201 and the quantity of offsets that would have been 
required under the federal NSR provisions. Rule 2201, section 7.2.1. 
This comparison will show whether the District rule requires as many 
offsets as the federal rules, regardless of the ``creditable'' value of 
the actual emission reduction used to meet the offset requirements. 
Should there be a shortfall the rule provides for two stages of remedy. 
The District may first retire unused emission reduction credits that 
meet federal requirements to make up for the shortfall. Rule 2201, 
section 7.4.1.1. If sufficient emission reduction credits are not 
available, the District must apply federal offset requirements to all 
permits issued after the annual demonstration deadline until the 
District amends its NSR provisions to require equivalent offsets. Rule 
2201, section 7.4.1.2. These remedies reasonably address the source of 
the demonstrated shortfall and satisfy our requirement for a mandatory, 
enforceable and automatic remedy.
    The second piece of the annual demonstration addresses whether the 
District's overall approach is equivalent, including the District's 
decision not to adjust the creditable value of emission reductions at 
time of use (``surplus adjusting'' or ``discounting'' at time of use). 
The District will determine the creditable surplus value of the 
emission reductions actually used each year by applying federal 
creditability criteria, and compare this adjusted aggregate number to 
the number of offsets that would have been required under the federal 
NSR program. The District shall provide an annual report to demonstrate 
that, in the aggregate, it is achieving an equivalent number of 
creditable emission reductions as would be achieved under the federal 
program. Rule 2201, section 7.2.2. If a shortfall is found in this 
comparison, and it is not the result of different offset requirements 
identified in the first piece of the demonstration described above, the 
cause of the shortfall must be related to differences in the way the 
District determines the creditable value. As a result, the remedy for 
such a shortfall is to apply federal creditability criteria, including 
discounting at time of use. In the event of a shortfall in this portion 
of the annual demonstration, section 7.4.2 will automatically require 
all ATCs issued after the annual report deadline to ensure emission 
reductions used to satisfy offset requirements are creditable and that 
the surplus value of those reductions is determined at the time of ATC 
issuance. EPA proposes to conclude that this remedy reasonably meets 
the EPA requirement for a mandatory, enforceable and automatic remedy 
to cure any shortfall and prevent future shortfalls.
    c. Does the tracking system replace applicable NSR requirements?
    The tracking system does not replace the applicable requirements of 
Rule 2201. It is important to clarify that while the tracking system 
allows EPA to approve the District NSR provisions of Rule 2201 
notwithstanding specific differences between the District's rules and 
federal NSR requirements, nothing in section 7.0 of the rule relieves 
sources from the obligation to comply with the other requirements of 
Rule 2201. For example, sources must continue to obtain offsets in 
compliance with section 4.5 of Rule 2201. Emission reductions used to 
meet these offset requirements must continue to be ``real, enforceable, 
quantifiable, surplus, and permanent.'' Rule 2201, section 3.2.1. 
Therefore, a source could not rely on the annual aggregate 
demonstration to cure the use of unenforceable (or otherwise non-
creditable) emission reductions to meet the District's offset 
requirements. Such use would be a violation of the

[[Page 7333]]

District's rules and may be subject to enforcement by the District or 
EPA even if the District is otherwise required to make up for this 
shortfall through the offset tracking system.
    Major sources (and major modifications) should therefore ensure 
that the emission reductions used to satisfy offset requirements meet 
federal creditability criteria.\9\ The one potential exception is with 
regard to the federal requirement to determine the surplus value of an 
emission reduction at time of use. Rule 2201 allows the surplus value 
to be determined at the time the ATC for an emission reduction or the 
application for an emission reduction credit (ERC) is deemed complete. 
Rule 2201, section 3.2.2. With our final approval of the District 
tracking system, EPA will allow the District to forgo the federal 
surplus adjusting requirement and sources will be able to rely on 
emission reductions EPA might otherwise not consider surplus. This 
flexibility, however, is only available for sources covered by the 
District's tracking system. The tracking system only covers permits for 
sources with ATC applications that were not deemed complete before 
August 20, 2001. See Rule 2201, section 7.3.1. Sources with ATC 
applications deemed complete before August 20, 2001 must meet all 
federal creditability criteria including the requirement that the 
surplus value of emission reductions be discounted at time of use 
(i.e., at time ATC is issued).
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    \9\ The District's amendments to Rule 2201 reiterate these 
criteria in section 7.1.5. These criteria derive directly from the 
offset requirements of the CAA section 173(c). See 1994 Seitz Memo; 
see also 51 FR 43814 (Dec. 4, 1986) (``Emissions Trading Policy 
Statement''). As such, EPA will interpret the District requirement 
in accordance with our federal policy and guidance on creditability.
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    Because the criteria for determining the creditability of an 
emission reduction will continue to be important both for sources 
seeking permits and for the District in implementing the tracking 
system,\10\ the following sections discuss particular creditability 
issues that have recently been raised by the District and others.
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    \10\ Section 7.1.5 of Rule 2201 expressly notes that the 
creditability of a given emission reduction included in the annual 
demonstration may be subject to EPA review.
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    d. What are the requirements for being an enforceable emissions 
reduction?
    CAA sections 173(a) and (c)(1), require emission reductions to be 
federally enforceable before a construction permit may be issued, and 
in effect and enforceable by the time a new or modified source 
commences operation. EPA has explained that the District can make 
emission reductions enforceable by modifying the permit for the source 
reducing emissions or by obtaining SIP approval of the rules that 
result in the emission reduction. EPA has also explained that while the 
emission reduction need not occur before the new or modified source 
commences operation, the specific emission reduction credits to be used 
by the source under review must be identified and enforceable before 
the authority to construct may be issued. See 57 FR at 13553; see also 
Memo from John S. Seitz, Dir. OAQPS to Regional Air Dirs (June 14, 
1994) (``Offsets Required Prior to Permit Issuance''). Thus, even 
though the emissions reduction may not have occurred by the time the 
ATC is issued (e.g., the revised permit does not call for the source to 
actually reduce emissions until a later date), the new or modified 
source must identify the source of the emissions reduction to be used 
to meet the offset requirements, must provide an opportunity for review 
of the proposed emission reduction credits and, once the ATC is issued, 
cannot change the emission reduction credits unless a new ATC is 
proposed identifying the new emission reduction credits to be relied 
upon.
    e. What kinds of emission reductions may be creditable?
    Section 7.2.2.2 of Rule 2201 allows the District to include in the 
annual equivalency demonstration, ``the surplus value of additional 
creditable emission reductions that have not been used as offsets and 
have been banked or have been generated as a result of permitting 
actions.'' These unused ``additional credits'' may include emission 
reductions from a number of actions. Examples of such additional 
credits include emission reductions used to meet offset requirements by 
non-major sources and the 10 percent Air quality Improvement Deduction 
applied under section 4.12 of Rule 2201 for newly banked credits.\11\ 
This section addresses a few other issues the District has raised 
regarding the creditability of other actions that might be considered 
to generate ``additional credits.''
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    \11\ These additional credits must of course meet the 
creditability criteria described herein. This is expressly required 
by Rule 2201, section 7.4.1.1. The 1999 TSD provides additional 
discussion on the availability of these additional credits.
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    The central issue for determining the creditability of a particular 
action often will be whether the reduction is surplus. The surplus 
requirement derives from section 173(c)(2) of the Act, which provides, 
``Emission reductions otherwise required by this Act shall not be 
creditable as emissions reductions for purposes of any such offset 
requirement.'' To be creditable, a particular emission reduction must 
not be required by the Act or otherwise relied upon to meet a 
requirement of the Act. Thus, District requirements that are more 
stringent than an express requirement of the Act may generate surplus 
credits as long as the emission reductions are not relied upon 
elsewhere to comply with a requirement of the Act (e.g., to achieve the 
National Ambient Air Quality Standards (NAAQS)).\12\
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    \12\ The District has asked whether implementation of District 
rules that are not yet in the SIP could be counted as generating an 
ERC. Such rules, used to generate innovative offsets, must satisfy 
EPA requirements for Economic Incentive Programs (see EPA's guidance 
document entitled, ``Improving Air Quality with Economic Incentive 
Programs'' (January 2001)). EPA would not consider as creditable, 
emission reductions achieved through early implementation of rules 
that do not meet these requirements. In addition, any credits 
generated through these programs must continue to meet the basic 
criteria for creditability (e.g., permanent, surplus, quantifiable 
and enforceable).
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    The emission reductions must also be real and quantifiable--actual 
emissions to the air must be reduced. Paper reductions (i.e., changes 
in a source's permitted emissions that do not require actual emissions 
to decrease) are not creditable. Likewise, rules that limit the 
increase in emissions do not generate real, quantifiable reductions in 
emissions. For example, the District BACT requirements for 
modifications to existing non-major sources may generate emission 
reductions where the control requirement results in actual emissions 
reductions as compared to pre-modification emission levels. By 
contrast, BACT requirements for new non-major sources cannot generate 
emission reduction credits because there has been no reduction in 
actual emissions (instead actual emissions have increased).
    It is not possible for EPA to predict the various potential claims 
that will be made for emission reduction credits. Even for the examples 
described in this section and in the TSD, case-specific facts may 
affect the analysis on creditability. It is therefore critical for the 
District to raise specific questions to EPA so that these issues can be 
resolved on a case-by-case basis.
    f. Are pre-1990 emission reductions creditable?
    Pre-1990 emission reduction credits pose particular problems under 
each of the criteria for creditability because of the age of these 
credits. Information on their generation may be missing, making it 
difficult to verify the quantity of emission reductions and ensure 
their continued enforceability. These problems, however, can be 
overcome if

[[Page 7334]]

detailed records are available to support the required findings on 
creditability. The more difficult issues are related to the requirement 
that emission reductions be surplus.
    The basic purpose of the surplus requirement is to avoid ``double 
counting'' emission reductions. Double counting can occur where 
emission reductions are the result of, or would have been achieved by, 
controls expressly required by the Act or controls used to satisfy 
requirements of the Act. Double counting can also occur if credit for 
emission reductions is claimed where the State's planning actions do 
not recognize that the reduced emissions existed in the first place. 
This is especially a concern for emission reductions that occurred long 
ago.
    To avoid potential double counting, EPA has issued guidance on how 
emission reductions should be discounted at the time of use and the 
planning assumptions an area must make to allow the use of pre-1990 
credits to meet NSR offset requirements. The 1992 ``General Preamble 
for the Implementation of title I of the Clean Air Act Amendments of 
1990'' (``General Preamble'') describes the planning requirements of 
the Act as amended in 1990. 57 FR 13498 (April 16, 1992). The General 
Preamble addresses the issue of pre-1990 (or ``pre-enactment'') 
emission reductions and how areas need to ensure the use of these does 
not conflict with planning. The two types of planning actions that need 
to reflect the use of pre-1990 credits are Rate of Progress (ROP) plans 
and attainment demonstrations. See id. at 13508-509 and 13552-54; see 
also 1994 Seitz Memo.
    Section 172(c)(2) requires implementation plans for nonattainment 
areas to include provisions requiring reasonable further progress 
toward attainment. The 1990 Amendments added specific reduction 
requirements necessary to satisfy the general reasonable further 
progress requirement. For example, ozone areas classified as moderate 
nonattainment and above must achieve a 15-percent reduction in volatile 
organic compound (VOC) emissions from 1990 baseline levels within six 
years of enactment of the CAA Amendments. CAA section 182(b)(1). Ozone 
areas classified as serious and above must, in general, achieve an 
additional 3-percent reduction every three years thereafter until the 
attainment date. CAA section 182(c)(2)(B).
    Because the baseline for measuring reasonable further progress is 
the level of actual emissions from anthropogenic sources in 1990, pre-
1990 emission reductions generally are not included in the baseline. 
Thus, to avoid giving credit for reductions that the baseline already 
reflects, pre-1990 credits must be ``added back.'' The General Preamble 
explains that the required emission reductions necessary to meet 
reasonable further progress (e.g., 15 percent from 1990 levels) must be 
net of growth and net of any pre-1990 emission reduction credits the 
area plans to allow for use as offsets. 57 FR at 13508-509. This means 
that the controls identified to achieve the target level of emissions 
(e.g., 85 percent of the baseline levels) must also achieve reductions 
to offset growth and the addition of any pre-1990 emission reduction 
credits the area wishes to make available.\13\
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    \13\ For example, assume the 1990 baseline emissions level is 
100 tons per year (tpy) and the area anticipates 10 percent growth 
and wishes to make available 5 tpy of pre-1990 credits. In order to 
achieve the target level of 85 tpy (i.e., 15 percent reduction of 
baseline emissions), the ROP plan will need to identify controls 
that will achieve 30 tpy of reduction--15 tpy to demonstrate 
reasonable further progress, 10 tpy to offset growth and 5 tpy to 
offset the use of pre-1990 credits. This obviously is an overly 
simplistic example and is intended only to show how these concepts 
relate to one another.
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    There are different ways that areas can include pre-1990 credits in 
ROP plans. EPA has explained, ``A State may choose to show that the 
magnitude of pre-1990 ERC's (in absolute tonnage) was included in the 
growth factor, or the State may choose to show that it was not included 
in the growth factor, but in addition to anticipated growth.'' 1994 
Seitz Memo. Under either approach, the quantity of pre-1990 credits 
added to or included in the growth factor must be distinguishable and 
identifiable. Id. If the addition of pre-1990 credits cannot be 
distinguished from general growth, EPA will not be able to determine 
whether the growth factor used in the plan is reasonable or to compare 
the actual use of pre-1990 credits to the cap assumed in the plan.\14\
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    \14\ EPA addressed similar concerns in its 1986 Emissions 
Trading Policy Statement. 51 FR 43814 (Dec. 4, 1986). In that 
guidance, EPA described the need to distinguish between shutdowns to 
be used to generate credits to meet offset requirements and 
shutdowns built into assumptions on growth. We explained, ``In all 
cases where net turnover reductions have been quantified and relied 
on as part of attainment demonstrations, states which seek to grant 
shutdown credit for use in trading must be prepared to show clearly 
and unequivocally on the basis of SIP documents or tracking that the 
credit has not been double-counted or otherwise relied on for SIP 
planning purposes.''
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    Pre-1990 credits must also be accounted for in an area's attainment 
demonstration. 57 FR 13509 and 13553; see also 1994 Seitz Memo. In 
addition to demonstrations of reasonable further progress, the Act 
requires areas to submit a demonstration that the SIP, as revised, will 
provide for attainment of the NAAQS by the applicable attainment date 
(``attainment demonstration''). See, e.g., CAA section 182(c)(2)(A) 
(attainment demonstration required for serious ozone nonattainment 
areas). Attainment demonstrations, in very general terms, require areas 
to use modeling or other approved analytical techniques to determine 
the level of emissions required to achieve the NAAQS and to provide 
projections of emissions inventories to show how the area will control 
sources to achieve the necessary level of emissions. Because new and 
modified major sources are required to offset their emissions increases 
by obtaining emission reductions from other sources, there should be no 
net effect on emissions inventories from construction or modification 
of a major source if the emissions reduced are included in the 
inventory. This means pre-1990 emissions reductions, which would 
otherwise not be included in inventories of emissions in 1990 and 
beyond, must be added back into the area's inventories as if these 
emissions were still in the air in order to be used as offsets and 
ensure no net effect on emission inventories. See 62 FR at 13509 and 
13553; see also 1994 Seitz Memo.
    There are multiple ways that these pre-1990 emissions can be 
included in the inventories. The simplest would be to include a line 
item for the emissions to be added for use as potential offsets. No 
matter what approach an area uses, the demonstration must clearly 
identify these emissions so that the reasonableness of the approach can 
be evaluated and the actual use of these pre-1990 credits can be 
compared to the assumptions in the demonstration.
    To date, SJVUAPCD has failed to adequately account for the use of 
pre-1990 emission reduction credits in its planning activities. As a 
result, EPA does not consider these reductions to be surplus creditable 
reductions that can be used to meet federal offset requirements within 
the District.
    The San Joaquin Valley was originally classified as moderate for 
the PM-10 NAAQS following enactment of the 1990 Clean Air Act 
Amendments. The District submitted a moderate area plan in December 
1991, but this plan was never approved by EPA and, in any event, did 
not support the use of pre-1990 credits by including these credits in 
the plan's inventories as emissions in the air. On January 8, 1993, EPA 
reclassified the San Joaquin Valley as serious for PM-10. 58 FR 3334. 
The attainment deadline for serious PM

[[Page 7335]]

nonattainment areas was December 31, 2001. CAA section 188(c)(2). The 
attainment demonstration, due with the serious area plan on February 8, 
1997, was withdrawn by the District on February 26, 2002. On July 23, 
2002, EPA issued a finding that the San Joaquin Valley failed to attain 
the PM-10 NAAQS by the applicable deadline. In accordance with CAA 
section 189(d), the State was required to submit by December 31, 2002, 
a new attainment demonstration for San Joaquin Valley, along with 
measures sufficient to achieve an annual reduction in PM-10 or PM-10 
precursor emissions of not less than 5 percent. This new demonstration 
has not been submitted. The District, because it failed to attain the 
PM standard by the statutory deadline and has not submitted required 
progress and attainment plans, has failed to show how the use of pre-
1990 emission reductions would be consistent with the need for 
expeditious attainment of the PM NAAQS.\15\
---------------------------------------------------------------------------

    \15\ This conclusion is consistent with our policy regarding the 
use of shutdown credits as offsets. Memo from John S. Seitz, Dir., 
OAQPS to Regional Air Dirs (July 21, 1993). Under the policy 
described in the 1993 memo, we explained that the use of shutdown 
credits as offsets was limited to ensure that reductions came out of 
the area's existing emissions and thus assured reasonable further 
progress. Before 1990, this could only be accomplished if the area 
had a demonstration of attainment that made this showing. After 
1990, because the deadlines for submitting attainment demonstrations 
had been extended by the Clean Air Act Amendments, we decided that 
an attainment demonstration should not be required before shutdown 
credits could be used. We added, however, ``This policy cannot be 
extended to situations where an attainment demonstration is 
lacking.'' Thus if any of the required planning submittals is 
delinquent, deemed incomplete or disapproved, shutdown credits 
cannot be used to meet offset requirements.
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    The San Joaquin Valley is currently designated as a severe 
nonattainment area for the 1-hour ozone NAAQS. 66 FR 56476 (Nov. 8, 
2001). EPA approved a serious area plan (the ``1994 ozone plan'') for 
the District on January 8, 1997. 62 FR 1150. The plan included a 
demonstration that the area would attain the ozone NAAQS by 1999. The 
attainment demonstration in the 1994 ozone plan did not specifically 
identify and account for the possible use of pre-1990 emission 
reductions. The area failed to attain the ozone standard in 1999, and 
as a result EPA reclassified the area to severe on November 8, 2001. 66 
FR 56476. The severe area plan was due on May 31, 2002. 66 FR at 56481. 
The attainment deadline for severe areas is November 15, 2005. CAA 
section 181(a)(1). The District failed to submit the required plan by 
the May 2002 deadline and is now subject to the offset sanction 
beginning March 18, 2004, for failure to submit the required plan. 67 
FR 61784 (Oct. 2, 2002).
    The 1994 ozone plan included ROP milestone provisions for 1996 and 
1999. The plan, however, did not include pre-1990 credits in the ROP 
provisions or attainment demonstration. The District has recently 
prepared and adopted a ROP plan for the 2002 and 2005 milestones.\16\ 
We will review this ROP plan to determine if the District has properly 
accounted for the use of pre-1990 credits and met applicable ROP 
requirements, but this alone will not provide the necessary 
demonstration that the use of these credits is consistent with the need 
for the area to attain the ozone NAAQS as expeditiously as 
possible.\17\ Unless and until the area submits a new attainment 
demonstration that shows expeditious attainment can be achieved while 
still allowing the use of these credits, EPA cannot reasonably conclude 
that these pre-1990 reductions are surplus creditable reductions.
---------------------------------------------------------------------------

    \16\ The 2002 ROP Plan was adopted by the District Board on 
December 19, 2002, and submitted to ARB. A copy of the Plan can be 
found at the District's website at http://www.valleyair.org/Air_Quality_Plans/AQ_plans_Ozone.htm#Amendment 2002 and 2005 ROP 103.
    \17\ The 1994 Seitz Memo explains that pre-1990 credits to be 
used in an area ``must be contained in: (1) The current applicable 
federally-approved RFP and ROP plans as growth, and (2) all 
federally-required attainment demonstrations as emissions in the 
air.'' While an argument could be made that inclusion of these 
credits in the ROP and not in an attainment demonstration might be 
sufficient to support their use where the attainment demonstration 
is not yet due, this argument is not reasonable where, as here, the 
area has not only failed to meet the plan submission deadlines but 
has had to be reclassified because of the area's failure to attain 
by the statutory deadlines.
---------------------------------------------------------------------------

    Based on these findings regarding the creditability of pre-1990 
credits, EPA will consider the creditable value of these credits used 
in the District's tracking system to be zero. EPA, therefore, 
encourages the District and sources to avoid using these pre-1990 
credits and, if problems arise, to work with EPA to explore options for 
other sources of emission reduction credits.
2. Agricultural Exemption
    a. How has the District corrected this deficiency?
    On December 19, 2002, the District adopted a version of Rule 2020 
that deleted section 4.5, and thereby eliminated any exemption in its 
NSR rule for permitting a new or modified major stationary source of 
air pollutants. The District's deletion of the exemption from its NSR 
rule corrects the rule deficiency set out in our July 2001 limited 
disapproval. Because the District removed the exemption from its rule 
and for the reasons discussed below, EPA is proposing to find that the 
District has corrected the deficiency and to approve Rule 2020 as 
revised.
    b. How is EPA addressing the State exemption?
    EPA is aware, however, that California Health & Safety Code 
42310(e) continues to preclude the District, as well as all other 
districts in California, from permitting agricultural sources under 
either title I or title V of the CAA. While the State is on notice of 
the need to remove the exemption for major sources for purposes of 
title V, the State must also remove the exemption for any major sources 
for purposes of title I. Therefore, concurrent with today's proposed 
approval of the District's revised version of Rule 2020 (deleting the 
exemption), EPA is publishing in the Federal Register a proposal 
pursuant to section 110(k)(5) of the CAA to find the California SIP is 
substantially inadequate for all nonattainment air pollution control 
districts in the State and for all attainment area districts that have 
an approved Prevention of Significant Deterioration (PSD) program 
because the State cannot provide ``necessary assurances'' that it or 
the districts have authority to carry out the applicable nonattainment 
NSR or PSD portions of the SIP.
    This concurrent proposal will inform the Executive Officer of the 
CARB that the California SIP is and will remain inadequate until the 
California legislature amends Health & Safety Code section 42310(e) to 
the extent necessary to allow the State of California through the air 
districts to issue permits under title I, parts C and D, to all major 
sources, including those involved in agriculture. This action proposes 
to require the State to correct the inadequacy by November 23, 2003 to 
avoid a finding under section 179 of the Act which would trigger 
mandatory sanctions.\18\
---------------------------------------------------------------------------

    \18\ EPA is proposing this deadline to coincide with the 
deadline for sanctions under title V to correct the agriculture 
exemption in that program. See CAA Section 110(k)(5) (providing EPA 
discretion to establish reasonable deadlines).
---------------------------------------------------------------------------

3. Lowest Achievable Emission Rate Applicability
    EPA determined that the previous version of District Rule 2201 did 
not always require LAER for major modifications because it did not 
require LAER if a modification resulted in an increase in actual 
emissions but not an increase in the emission unit's permitted emission 
rate. Therefore, EPA required the District to modify Rule 2201 to 
ensure that all major

[[Page 7336]]

modifications as defined at 40 CFR 51.165(a)(1)(v) are subject to LAER.
    The District has corrected this deficiency by adding a backstop in 
addition to the current LAER applicability requirements. This backstop 
requires that any major modifications, as defined at 40 CFR 51.165, 
must meet LAER. See Rule 2201, sections 3.24 and 4.1.3. Sections 4.1.1 
and 4.1.2 also continue to require LAER for minor sources regardless of 
whether changes at those sources are defined as major modifications.

D. Summary

    EPA is proposing to approve revised versions of SJVUAPCD Rules 2020 
and 2201. The revisions to these rules satisfy the requirements 
outlined in our July 19, 2001 limited approval/limited disapproval of 
previous versions of these rules. EPA is simultaneously publishing an 
interim final determination to stay the sanctions clock started by the 
limited disapproval. Additional information on the amendments to Rules 
2020 and 2201 is contained in the TSD for this proposal.
    Concurrent with this proposal, we are also proposing to call in the 
State to repeal or amend Health and Safety Code Section 42310(e). Once 
EPA determines that the State has provided the necessary assurances 
required under section 110(a)(2)(E), the NSR program for the SJVUAPCD 
will fully meet the requirements of sections 172(c)(5), 173 and 182 of 
the CAA.

III. Statutory and Executive Order Reviews

A. Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) has exempted this 
regulatory action from Executive Order 12866, entitled ``Regulatory 
Planning and Review.''

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct a regulatory flexibility analysis of any rule subject to 
notice and comment rulemaking requirements unless the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities. Small entities include small 
businesses, small not-for-profit enterprises, and small governmental 
jurisdictions.
    This rule will not have a significant impact on a substantial 
number of small entities because SIP approvals under section 110 and 
title I, part D of the Clean Air Act do not create any new requirements 
but simply approve requirements that the State is already imposing. 
Therefore, because SIP approval does not create any new requirements, I 
certify that this action will not have a significant economic impact on 
a substantial number of small entities.
    Moreover, due to the nature of the Federal-State relationship under 
the Clean Air Act, preparation of flexibility analysis would constitute 
Federal inquiry into the economic reasonableness of state action. The 
Clean Air Act forbids EPA to base its actions concerning SIPs on such 
grounds. Union Electric Co., v. U.S. EPA, 427 U.S. 246, 255-66 (1976); 
CAA section 110(a)(2).

C. Unfunded Mandates Reform Act

    Under sections 202 of the Unfunded Mandates Reform Act of 1995 
(UMRA), signed into law on March 22, 1995, EPA must prepare a budgetary 
impact statement to accompany any proposed or final rule that includes 
a Federal mandate that may result in estimated costs to State, local, 
or tribal governments in the aggregate; or to the private sector, of 
$100 million or more. Under section 205, EPA must select the most cost-
effective and least burdensome alternative that achieves the objectives 
of the rule and is consistent with statutory requirements. Section 203 
requires EPA to establish a plan for informing and advising any small 
governments that may be significantly or uniquely impacted by the rule.
    EPA has determined that the approval action proposed does not 
include a Federal mandate that may result in estimated costs of $100 
million or more to either State, local, or tribal governments in the 
aggregate, or to the private sector. This Federal action proposes to 
approve pre-existing requirements under State or local law, and imposes 
no new requirements. Accordingly, no additional costs to State, local, 
or tribal governments, or to the private sector, result from this 
action.

D. Executive Order 13132, Federalism

    Federalism (64 FR 43255, August 10, 1999) revokes and replaces 
Executive Orders 12612 (Federalism) and 12875 (Enhancing the 
Intergovernmental Partnership). Executive Order 13132 requires EPA to 
develop an accountable process to ensure ``meaningful and timely input 
by State and local officials in the development of regulatory policies 
that have federalism implications.'' ``Policies that have federalism 
implications'' is defined in the Executive Order to include regulations 
that have ``substantial direct effects on the States, on the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government.'' Under Executive Order 13132, EPA may not issue a 
regulation that has federalism implications, that imposes substantial 
direct compliance costs, and that is not required by statute, unless 
the Federal government provides the funds necessary to pay the direct 
compliance costs incurred by State and local governments, or EPA 
consults with State and local officials early in the process of 
developing the proposed regulation. EPA also may not issue a regulation 
that has federalism implications and that preempts State law unless the 
Agency consults with State and local officials early in the process of 
developing the proposed regulation.
    This rule will not have substantial direct effects on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government, as specified in Executive Order 13132, because it 
merely approves a state rule implementing a federal standard, and does 
not alter the relationship or the distribution of power and 
responsibilities established in the Clean Air Act. Thus, the 
requirements of section 6 of the Executive Order do not apply to this 
rule.

E. Executive Order 13175, Coordination With Indian Tribal Governments

    Executive Order 13175, entitled ``Consultation and Coordination 
with Indian Tribal Governments'' (65 FR 67249, November 9, 2000), 
requires EPA to develop an accountable process to ensure ``meaningful 
and timely input by tribal officials in the development of regulatory 
policies that have tribal implications.'' This proposed rule does not 
have tribal implications, as specified in Executive Order 13175. We are 
merely proposing to approve a state rule implementing a federal 
standard. EPA's action does not impose requirements on Tribes and the 
rules being approved do not significantly or uniquely affect Tribes. 
Thus, Executive Order 13175 does not apply to this rule.
    EPA specifically solicits additional comment on this proposed rule 
from tribal officials.

[[Page 7337]]

F. Executive Order 13045, Protection of Children From Environmental 
Health Risks and Safety Risks

    Protection of Children from Environmental Health Risks and Safety 
Risks (62 FR 19885, April 23, 1997), applies to any rule that: (1) Is 
determined to be ``economically significant'' as defined under 
Executive Order 12866, and (2) concerns an environmental health or 
safety risk that EPA has reason to believe may have a disproportionate 
effect on children. If the regulatory action meets both criteria, the 
Agency must evaluate the environmental health or safety effects of the 
planned rule on children, and explain why the planned regulation is 
preferable to other potentially effective and reasonably feasible 
alternatives considered by the Agency.
    This rule is not subject to Executive Order 13045 because it does 
not involve decisions intended to mitigate environmental health or 
safety risks and is not a significant regulatory action.

G. Executive Order 13211, Actions That Significantly Affect Energy 
Supply, Distribution, or Use

    This rule is not subject to Executive Order 13211, ``Actions 
Concerning Regulations That Significantly Affect Energy Supply, 
Distribution, or Use'' (66 FR 28355, May 22, 2001) because it is not a 
significant regulatory action under Executive Order 12866.

H. National Technology Transfer and Advancement Act

    Section 12 of the National Technology Transfer and Advancement Act 
(NTTAA) of 1995 requires Federal agencies to evaluate existing 
technical standards when developing a new regulation. To comply with 
NTTAA, EPA must consider and use ``voluntary consensus standards'' 
(VCS) if available and applicable when developing programs and policies 
unless doing so would be inconsistent with applicable law or otherwise 
impractical.
    The EPA believes that VCS are inapplicable to this action. Today's 
action does not require the public to perform activities conducive to 
the use of VCS.

List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Incorporation by 
reference, Intergovernmental relations, New Source Review, Nitrogen 
dioxide, Ozone, Particulate matter, Reporting and recordkeeping 
requirements, Volatile organic compounds.

    Note: Incorporation by reference of the State Implementation 
Plan for the State of California was approved by the Director of the 
Federal Register on July 1, 1982.


    Dated: January 31, 2003.
Wayne Nastri,
Regional Administrator, Region IX.
[FR Doc. 03-3418 Filed 2-12-03; 8:45 am]
BILLING CODE 6560-50-P