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 Southern California Gas Company, TABC, Texaco, TRW, Costco, 23 the Walt Disney Company. 24 I will not go over all of the issues raised in my 25 letter. We are very supportive of the concept in AB 1777, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 79 1 and we believe that market based programs offer both lower 2 cost, compliance alternatives to sources so that they can 3 support the adoption of stringent standards and meet those 4 standards. 5 We think that market based programs provide an 6 incentive to develop innovative emission reduction 7 technologies. 8 If we were to design the program ourselves, it 9 would be no surprise that we do it differently, and there are 10 a dozen or so issues raised in our letter, suggestions that 11 we have for developing a model rule that we think provides 12 the most robust incentives, because for a market based system 13 to work the incentive to generate credits must be robust. 14 For the incentives to be robust, it must be 15 administratively simple to generate credits, and there has to 16 be a demand out there, so that there is a market for credits 17 to be used. 18 Our suggestions would streamline the administrative 19 process of developing credits, and it would broaden the 20 available uses of credits to provide stronger incentives to 21 those innovators out there who might generate credits to go 22 ahead and do that. 23 I won't go through that in detail, because we are 24 not opposing adoption of the program on that basis, but we do 25 hope that the staff will continue to work with us and that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 80 1 your Board will be receptive to changes down the line if it 2 proves that some of the suggestions we have made would 3 improve the program. 4 There are some issues now, and a number of them 5 have been discussed already that I do need to touch on. 6 The first is the air toxics issue. Our position 7 has always been that the vibrant air toxics program that 8 California has is sufficient to protect against any risk to 9 the public of trading programs. 10 We recognize that there is a potential for an 11 impact from air toxins, but we're not saying that that 12 potential impact should be ignored, but what we are saying is 13 that in California we have Federal, State and local 14 regulations, all of which impose limits on the maximum 15 allowable emissions of air toxins for facilities and 16 equipment and that any trading that takes place, whether it 17 is under this rule or any other rule, the reclaim program, 18 all occur underneath that ceiling which is imposed on 19 emissions of air toxins, the protection is there. 20 Your own staff, in fact, is undertaking a major 21 effort to get the Federal Government to recognize the 22 tremendous job that California has done in developing air 23 toxic regulations and to allow us to implement our own 24 programs here in lieu of the Federal max standards. 25 We have a very strong vibrant air toxins program PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 81 1 that assures that risks to the public do not occur whether it 2 be in the context of the trading program or otherwise. 3 The original staff proposal that imposes that no 4 increase threshold on air toxins would be essentially a 5 preclusion of any trading. 6 We are talking of 189 substances. They are 7 ubiquitous. They are very small amounts, in some cases trace 8 amounts, of those 189 compounds, and most of the solvents 9 used, it would essentially preclude BLC trading altogether. 10 It would also make the reclaim program illegal. If 11 you have emissions of NOX from burning natural gas, two of 12 the trace compounds are formaldehyde and poly remedial 13 hydrocarbons, those substances are on the list of 189. If 14 you impose no increase threshold on air toxics, you are 15 essentially wiping out most VOC trading and most NOX 16 trading. 17 The proposal that the staff has presented today, 18 the alternative proposal goes beyond what is necessary, 19 because the existing programs that are there address the risk 20 from toxics, but we would support that proposal today. 21 It recognizes that we do not need to be concerned 22 about every single increase in emissions of air toxics but 23 only need to be concerned with those increases that have a 24 significant risk and puts back into the hands of the district 25 the ability to establish thresholds and trading rules for air PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 82 1 toxics if they think it is necessary to go beyond what is out 2 there. 3 Mr. Carmichael pointed out that the South Coast 4 district has a rule that limits facility-wide risk to one 5 hundred in a million. 6 That is true in the environmental community and 7 industry differs about whether we think that is an 8 appropriate level. We think that it is. 9 What he failed to mention is that the district 10 trading rules impose even more stringent limits. For 11 example, the Air Quality Investment Program that was adopted 12 by the Board earlier this month imposes a ten in a million 13 risk if you are using credits. 14 It is not the case that the one hundred in a 15 million is the only limit that applies. The district rules 16 that have been adopted do include more stringent standard, 17 more stringent limits on the emissions of air toxics 18 associated with the use of trading programs. 19 The Coalition proposal is, we feel, far too 20 restrictive. To put that into context, one in a million risk 21 level, the current South Coast rule allows increase an 22 increase in risk of up to ten in a million for single new 23 piece of equipment under their Rule 1401. 24 Mr. Carmichael's proposal, which sets a one in 25 million risk limit, which is ten times more stringent would PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 83 1 apply to the entire facility, not just a single piece of 2 equipment, and that would apply to all transactions that 3 occurred at that facility over the course of the year, so we 4 think that that limit is far too stringent, and we oppose 5 that sort of a limit on emissions of air toxics. 6 With respect to the environmental benefit issue, 7 there are all sorts of environmental benefits that can be 8 achieved. 9 A 10 percent across the board discount is just one 10 way to do it. Frankly, we think it is sort of a crude way to 11 do it. 12 We think that the district should have a discretion 13 as to how to determine how to achieve their environmental 14 benefit. It may be by advancing technology. It may be by 15 any number of things, but we don't think that a 10 percent 16 discount across the board, and we don't think that the Board 17 should require that the districts seek their environmental 18 benefit in that fashion. 19 With respect to the reclaim issues that were 20 raised, if I understand the comments, it sounded like you 21 were perhaps suggesting that the reclaim universe should be 22 kept separate from this program, at least for the time 23 being. 24 I think that would be a mistake for two reasons. 25 First, on the generations side, I think that we should PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 84 1 provide incentives to the reclaim facilities to beat their 2 allocations and do better. 3 I do not think that if we wait and see if they are 4 able to generate credits and then come back later and 5 recognize those products, because the incentives are not 6 there up front, they may not do it, and we would like to 7 think that they would just do it to improve the environment 8 and some companies would, but it costs money to reduce 9 emissions, and I'm afraid that if the incentives weren't 10 there up front, we would not see the reclaim facilities 11 trying to beat their allocations. 12 On the use side, you need to provide a strong 13 market for credits. Reclaim facilities are some of the 14 biggest facilities in the South Coast district. 15 They will be users of credits in the future, they 16 will provide a demand that will cause other businesses to 17 innovate, reduce their emissions to generate credits, and 18 they will provide the demand that will cause entrepreneurs 19 out there to come up with creative ways to reduce emissions 20 and generate credits so that they can be sold to reclaim 21 facilities. 22 Both to provide incentive to reclaim facilities to 23 generate credits and to provide a strong market for others 24 who want to generate credits, I think that it would be a 25 mistake to pull the reclaim facilities out of this program. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 85 1 With respect to the interim procedure that was 2 raised by Edison, we are supportive of that. We believe that 3 it would be possible to put in place an interim procedure 4 that meets all of the requirements of the State and the 5 Federal law. 6 It meets all of the requirements of this 7 regulation. The only difference would be is that it would 8 implemented and up and running on a shorter time frame than a 9 full blown district ruling. 10 I'm sure that the district will move with all due 11 haste and, in fact, is well along in the process of 12 developing a rule to implement this regulation. 13 But despite everyone's best efforts, that sort of 14 thing takes time, as you know, and there are opportunities 15 out there. 16 CHAIRMAN DUNLAP: The conclusion, Mr. Carroll. 17 MR. CARROLL: In conclusion, we urge you to adopt 18 the program today. 19 We think that the concept is a good one. We think 20 that the amendments that have been proposed by the staff are 21 critical, and we also support the proposed amendments by 22 Southern California Edison to include some sort of an interim 23 procedure. 24 CHAIRMAN DUNLAP: Just a comment, just to let you 25 know, I acknowledge and appreciate yours and Bob Weiman's PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 86 1 involvement in this program and others, I know it is 2 significant, and I know you have a lot invested personally 3 and professionally in making these programs work, and I just 4 wanted to acknowledge that. 5 Any questions for the witness? 6 Very good. 7 We have exhausted the witness list, unless Ms. 8 Hutchens has bad news for me. 9 That concludes the public testimony, and I ask 10 staff, Mr. Kenny or Ms. Terry, would you run through the 11 written comments we have received, briefly, would be 12 appreciated. 13 MR. HONCOOP: Thank you. 14 I'll focus first on the four letters that we 15 received from people who did not present testimony today. 16 The first was from Johnson Wax. They ask that the 17 State Trading Regulation and the State Consumer Product 18 Program be integrated, and our response to that is that our 19 proposed regulation does apply to the district emission 20 trading programs; however, in our Consumer Product Program, 21 they are looking at developing the credit program for that. 22 The second letter that we had summaries and 23 comments for is from the Southern California Gas Company, and 24 their comments parallel some that we have heard already, the 25 first one dealing with toxics, so I will not address that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 87 1 one, and we have a concern about calculation methodology that 2 we addressed in the presentation in and have proposed a 3 modification for that, and other issue is a more general one 4 in that they ask that ARB play an active role in working with 5 the local districts to assure expeditious SIP approval, the 6 credit rules, and our response is that we do intend to and do 7 work closely with the districts in assuring those credit 8 programs are approved. 9 The third letter that we received was from the 10 South Coast District. They had a number of comments, many of 11 which were already addressed. 12 Some of them were dealing with minor wording 13 changes and concerns that at the point of clarification that 14 we heard today, those were very simple fixes that you will 15 see in a summary that we will do later. 16 Three of them dealing with the reclaim, the toxic 17 emission impact and credit methodology, all of them have been 18 dealt with. 19 The final letter that I will summarize came from 20 the Environmental Protection Agency. We received it 21 yesterday. They had a fairly lengthy list of comments, but 22 the one way to characterize them is that their concerns is 23 that we ensure that the trading programs are consistent and 24 meet all the Federal requirements, and in general our 25 response to that is that issue has come up periodically in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 88 1 the development of the regulation. 2 We felt it was unnecessary to reiterate the Federal 3 requirements specifically one by one within the regulation 4 and call for at various points throughout the regulation that 5 we do need to meet the Federal requirements. 6 That is a summary of the letters that we received 7 from people who were not testifying today. 8 CHAIRMAN DUNLAP: Okay. Mr. Honcoop. 9 Mr. Kenny, it seems to me, before I open it up for 10 my colleagues and the Board, and I have a crack at you, we 11 will let you run through as best you can the issues brought 12 up by the four folks that testified, and I would like to hear 13 your proposal for the suggested changes or emphasis, so that 14 we might deal with these issues. 15 MR. KENNY: There is two-page proposed language 16 changes to the regulation which has been proposed today, and 17 a number of those changes actually deal specifically with the 18 comments that the witnesses made. 19 What I will do is ask Lynn Terry to go through the 20 changes and will point out where they respond to comments. 21 CHAIRMAN DUNLAP: That is a tall order Lynn, 22 because there was a lot said by those four witnesses. 23 MS. TERRY: Just briefly, we added a couple of 24 definitions that are associated with the language on toxics, 25 and those are standard definitions that the toxicologists PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 89 1 have developed for us relative to non cancer effects hazard 2 index and reference exposure levels, so I will not get into 3 detail on those. 4 The first one that we proposed that relates to two, 5 the definition of surplus, there are two new proposed 6 editions and both were discussed earlier. 7 The first one is the issue of what is assumed in 8 the SIP, in the Clean Air Plans, that was a suggestion made 9 to us. 10 We agree. We think it is an important 11 clarification to the definition of surplus for the reasons 12 described earlier, and I will be happy to answer any 13 questions, if there are any more on that issue. 14 Secondly, several commenters, CEEB, Edison, in 15 particular, were concerned about clarifying in terms of 16 generating credits, the fact that it would be possible to 17 generate credits for earlier reductions prior to the 18 implementation date of a measure that is assumed in a plan. 19 That has been our intention all through the process 20 and we discussed that at a public workshop process so we are 21 suggesting language to clarify. 22 I should mention that the Regulatory Flex Group had 23 a related but different comment. They did not agree with 24 that approach and felt that only adopted measures should 25 serve as a benchmark for generating credits and thus that, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 90 1 for example, in a scenario where a district did not meet 2 their implementation date in their plan, that you can 3 continue to generate credits. 4 We think that damages the integrity of the SIP, and 5 we are not proposing that approach. In terms of credit 6 denomination, a minor clarification in terms of one year 7 increments for certifying credits. 8 The next big one is reclaim. As you heard from 9 Mr. Lucas, there is concern that the language that we had 10 initially proposed was very general and might require a major 11 study of reclaim, and as we discussed in the presentation 12 that was not the intent, we want this as focus analysis that 13 gets to the heart of the issue of the crossover situation 14 that we described earlier. 15 So, we have proposed additional language. We have 16 shared it with the South Coast district staff who will be 17 responsible for preparing the analysis, and the ARB would 18 have to concur, and we have imposed the deadlines upon 19 ourselves so that this process will move along quite rapidly 20 and ensure that this determination is made well in time for 21 reclaim credits to be allowed to flow out of the program once 22 this crossover point is reached. 23 We are recommending essentially that the district 24 document that this has occurred, provide that to us, and we 25 would have 90 days to determine whether we agree with that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 91 1 analysis. 2 In terms of the toxics piece, the first element of 3 the proposal that went out on April 4, essentially that 4 districts provide for an assessment in consideration of 5 potential localized impacts, that language is unchanged, it 6 is the second sentence related to no increase in toxic air 7 contaminant emissions that was discussed comprehensively this 8 morning. 9 Our proposal, as we outlined in the staff 10 presentation this morning, has a shift in emphasis from a 11 simple prohibition on emissions, to an approach, as Mr. Kenny 12 talked about, of using health risk as the benchmark. 13 In essence, we are relying on the regulatory 14 structure that is in place, as mentioned earlier, the toxic 15 hot spot program, toxic air contaminant controls, Federal max 16 requirements and so on, that establish that regulatory frame 17 work for toxic air contaminants, and then the districts own 18 determinations as to significant levels of health risk for 19 cancer risk. 20 Our proposal is that we would rely on those 21 districts to establish health risk significance levels, and 22 no trades could occur if those levels would be exceeded. 23 That would be the essential limitation on trades. 24 In terms of trades, that would not exceed a district 25 established health risk level, we still think it is very PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 92 1 important to acknowledge that there may be some increase in 2 risk, health risk, even if it is relatively small, that in 3 essence is the disclosure provision. 4 The local governing boards would have that 5 information available to them. Obviously there are 6 differences of opinion on the adequacy of this proposal. 7 There is a fundamental difference in people's views 8 on what that level of significance should be. So, in essence 9 we are allowing district boards to make that determination. 10 CHAIRMAN DUNLAP: On that point, at the outset I 11 thought that I heard that we would work closely with Capco, 12 and there was a high level awareness there; am I correct? 13 MS. TERRY: Absolutely. 14 CHAIRMAN DUNLAP: Okay. One of the things, and I 15 know there are probably some representatives of CapCo here, 16 and I will say this for the world to hear, it is my hope that 17 Lynn, and I would ask you and Mr. Kenny to have communication 18 with them along these lines, that they would move 19 expeditiously, and they would coordinate closely, and would 20 send clear, consistent signals to one another about what they 21 are going to do relative to risk and how they communicate in 22 trading and whatnot, okay, so let's make sure that that is 23 emphasized. 24 MS. TERRY: The next item is environmental 25 benefit. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 93 1 There was a very good comment this morning from Mr. 2 Carmichael along these lines, and I think that he made a very 3 good point that I would like to mention, and that was that 4 their intent was not necessarily that there be an 5 environmental benefit per se from these trading programs, but 6 that there not be a decrement in the current programs, that 7 we do not lose ground in essence. 8 I have a couple of points that I would like to make 9 along those lines. One is that I think that it is important 10 to look at the entire structure of the rule. 11 We do have some very important safeguards in there, 12 and one is the equivalency requirement. In essence we are 13 saying that in aggregate these trading programs cannot put us 14 in a different place from an emissions standpoint as where we 15 would have otherwise been. 16 That is very important to remember, and secondly, 17 the calculations protocol process that we require, that is 18 essential that as we calculate the value of credits that 19 there is technically sound approaches that recognize 20 uncertainties, as Mr. Carmichael pointed out, in staff's view 21 it is the technical protocol process that is the appropriate 22 place to address this issue of technical uncertainties, and 23 we certainly intend to work very closely with districts to 24 make sure that those protocols reflect those kinds of 25 uncertainties. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 94 1 So, we are proposing no change to the regulation on 2 that point. Finally, on the last major point, interim 3 procedures, we understand that there are some circumstances 4 that require immediate attention, and we have had extensive 5 discussions with Edison about their particular concern, as 6 well as the South Coast district. 7 We are very satisfied that the district has the 8 mechanisms available to them to deal with the immediate issue 9 that is Edison's concern, and it is our understanding that 10 they are moving quickly to address those. 11 As a practical matter, the comment that the 12 districts could develop interim procedures while they are 13 developing district rules might divert the resources from 14 what they really want, which is development of the rule in 15 the first place. 16 As a practical matter, I certainly would suggest 17 that the district use the mechanisms that they have in hand 18 and not be diverted with another procedure that would need to 19 be developed. 20 I don't know if legal counsel has anything to add 21 on that. 22 MS. WALSH: I think that we would just say that 23 legally they are going to be on much stronger ground if the 24 decision that the district boards are going to have to make 25 to implement the rules under our rule have gone through a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 95 1 formal rule making process with all of the stakeholders 2 having been involved. 3 CHAIRMAN DUNLAP: I would agree with that, but at 4 the same point, we would need to provide some leadership with 5 the working group and provide some suggestions and do some 6 survey work about what people's schedules are and the like, 7 because if the industries concerns are realized and some 8 people drag their feet, it precludes some areas of the State 9 from participating, and I think that is what Mr. Lucas was 10 trying to get at. 11 Bob, I make the offer to you, to suggest to staff 12 some ideas of how we might provide that leadership and 13 encouragement. 14 Okay. I am comfortable with that interim, take 15 what the legal office has. 16 MS. TERRY: That concludes the major issues. 17 CHAIRMAN DUNLAP: What I would like to do, and I 18 know Lynn specifically has some issues that she wants to 19 address, and I think several of yours have been covered, 20 hopefully to your liking. 21 What I would like to do, if it is okay with the 22 Board, is start over to my left with you, Ron, and work my 23 way around and see if anyone has issues that they want staff 24 to try to address, or if anything in particular resonated 25 from the witnesses and you want clarification, I will bring PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 96 1 it up, and we will chip away one by one until we get to Lynn 2 and Jack is laying in wait there. 3 Ron? 4 Patty, anything that concerns you? 5 Dr. Friedman, on toxic air contaminants, are you 6 comfortable with the explanation? 7 MR. CALHOUN: I am comfortable and appreciate the 8 staff's inclusion of comments which would allow the health 9 risk, cut it off with that. 10 CHAIRMAN DUNLAP: Okay. I will hold mine and work 11 on it a bit. 12 SUPERVISOR RIORDAN: I have no comments at this 13 time, just a appreciation of the staff's definition of 14 reclaim area and this area, and how the two work together, 15 so, I appreciate that effort. 16 CHAIRMAN DUNLAP: Jack. 17 MR. PARNELL: I'm absolutely amazed with the 18 complexity of the issue. 19 I fully appreciate the competent staff work and the 20 detailed information that was provided. 21 I suspect that if you all are comfortable with the 22 caveats that even though within the ceiling there are Federal 23 and State regulations that address the issue of toxics air 24 contaminants, if underneath that ceiling there could be some 25 movement, caveat out of the way, it makes all the sense in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 97 1 the world to me. 2 I hope that we resolve some of the concerns. It 3 seems as though they have made a noble effort to resolve some 4 of the naughty issues. 5 CHAIRMAN DUNLAP: Thank you. 6 I think, too, that is a good point, and I commend 7 you and, Lynn, the team for trying to weave it back to the 8 comments received back today. 9 Okay, I am going to skip Lynn. 10 Jim. 11 SUPERVISOR SILVA: The phone briefing on the 12 twelfth of May was great. 13 It was followed by are there any questions or 14 concerns, which I had at that time, and then when we were 15 speakers, all of a sudden the concerns and issues are out 16 there. 17 So, I appreciate the review of the speakers 18 concerns. 19 CHAIRMAN DUNLAP: Okay, Sally. 20 MS. RAKOW: I had a different concern regarding the 21 toxic contaminant and how large really the local area, 22 because I have been involved in power plants citing cases 23 where this was quite an issue, but I think with Mr. Kenny's 24 explanation of both the risk disclosure and the risk element, 25 I think that would keep things in control very well. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 98 1 On the interim procedures, I will be interested in 2 hearing further along at what Mr. Lucas comes up with as 3 suggestions to the staff, because we are dealing with an 4 enormous state, it might be more than the South Coast 5 district that has procedures in line. 6 Bureaucracy sometimes, with the best of intentions 7 do take time. I would like us to be aware of what the time 8 element is going to be. 9 CHAIRMAN DUNLAP: On that point, Sally, I have a 10 note saying that staff has been told that South Coast and the 11 Bay Area are on line to have their program emerged by the 12 first of next year, by January 1. 13 I don't know if that fits with Mr. Lucas and 14 others' time frame, but it seems to me that it is going to be 15 moving swiftly. 16 Ms. Edgerton, now, I know that you have three or 17 four issues. I ask of you this, focus them, take the easier 18 ones first, and then we will get those out of the way, and 19 then we will come back to some of the specific suggestions 20 that I am sure you are going to come up with relative to 21 changes. 22 MS. EDGERTON: Thank you, Mr. Chairman. 23 From listening to my colleagues it appears that I 24 may not get a second if we do move to separate the issues, so 25 I will have to leave it to my colleagues, I suppose, to let PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 99 1 you know if I have a second on any of them, in which case we 2 will have a vote. 3 Alternatively, we can just have the package that I 4 am uncomfortable with as a stand-along Edgerton substitute 5 motion, which I will vote on the issues. 6 CHAIRMAN DUNLAP: The process was not the intent of 7 my going around and signal. 8 It was to be able to focus on where we need to go 9 to move to the item. 10 MS. EDGERTON: The first is the toxic issue. 11 I do not believe, given the language in the 12 legislation, that it would be appropriate for me to read it 13 to allow any increase in toxic air contaminants as result of 14 the trades. 15 CHAIRMAN DUNLAP: Statewide? 16 MS. EDGERTON: Statewide. 17 CHAIRMAN DUNLAP: Okay. 18 MS. EDGERTON: I believe that the Legislature will 19 have to tell me. 20 I do not feel authorized to do that without a 21 directive from the California State Legislature. 22 CHAIRMAN DUNLAP: Let's talk about that a minute. 23 Leslie, provide, Leslie or Lynn, or whoever is 24 proper, provide some comfort about increases in toxics. 25 MS. KRINSK: I think that I can provide comfort by PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 100 1 saying that the directive in the Legislature says that we 2 ensure that the methodology results in the maintenance 3 improvements of air qualities is specifically followed by the 4 words, consistent with this division, which to me indicates 5 that the Legislature wanted to coordinate this program, which 6 is a methodology, not some new substantive requirement it 7 wanted to coordinate this procedural methodology with the 8 substantive requirements, pertaining both to criteria 9 pollutants and toxics that are already set forth elsewhere in 10 the Health and Safety Code. 11 The provisions that relate to toxics in the Health 12 and Safety Code do two things. In some cases they require 13 reductions in toxics after the Board goes through the 14 identification and control process, peer reviewed by the 15 Scientific Review Panel. 16 In other cases where it is determined that there 17 may be a different risk level, or we don't have enough 18 information for the kinds of control or reduction that we may 19 have when the site advances, it provides for notification to 20 the public of the risk, and on top of this, these two types 21 of toxic programs, we have the California Environmental 22 Quality Act, which requires the disclosure of certain risks 23 under certain circumstances to the public. 24 We think that these three direct legislative 25 directives are complied with in our rule, because we are not PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 101 1 letting there be any increases beyond what the statutory 2 programs will allow to begin with. 3 A facility now could increase its toxics to some 4 extent as long as it complies with CEQA and any disclosure 5 requirements, as long that increase is below the risk 6 threshold and the locally adopted district rule. 7 CHAIRMAN DUNLAP: Okay. That is fine. 8 I think that we will stop there. We heard from the 9 legal expert on this about legislative intent and about where 10 that leaves us with this package that we are considering 11 today. 12 MS. EDGERTON: Mr. Chairman, I appreciate, as I 13 know all of you do, that if we were before a court there 14 would be one judge who interprets the law one way and another 15 way, these are difficult balls and strikes to call. 16 I am not saying that it is a question where those 17 of you who have read the law shouldn't go forward if you feel 18 comfortable with it. 19 I am saying that with respect to this particular 20 issue, I am reading it literally. I have concluded myself 21 that without further guidance the better argument is that we 22 should not enact a program which essentially includes a toxic 23 air contaminant trading component in my view, however small. 24 That is a very big step in my view, and I would 25 like for it to be done in a forthright way and not this way. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 102 1 CHAIRMAN DUNLAP: The concern is noted. 2 MS. EDGERTON: The second issue is with respect, 3 and by the way, I want to note that I am mindful of how long 4 it takes for a toxic air contaminant to be identified and 5 listed. 6 It is very difficult. We just had five to six 7 years of involvement to get organic lead listed. They do not 8 get listed unless they are toxic and that means poisonous. 9 Second point, with respect to the 10 percent 10 minimum discount, I believe that we will provide better 11 guidance to the districts with respect to what they need to 12 have in their programs in order to have them succeed in the 13 SIP, and in order to maintain equivalence, if we have a 14 minimum 10 percent discount factor to reflect uncertainty, 15 scientific uncertainty that results from the trading issues. 16 I believe that my understanding from U.S. EPA, 17 although whether it is a policy or a regulation yet, is that 18 they will remain firm there and the history of it is that 19 there is no program approved in the South Coast with less 20 than 10 percent discount. 21 CHAIRMAN DUNLAP: Let me ask Kathleen a question on 22 that point. 23 As far as the 10 percent discount, talk about what 24 it would mean if we put it in the 10 percent discount here 25 relative to trading and compliance options and the like. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 103 1 What is your reason? 2 Maybe Lynn would be better on that. 3 MR. KENNY: If I might, with regard to the 4 discount, it is true policy issue here, and essentially you 5 could put it in a 10 percent discount the consequence of that 6 is that you would have a situation where credits are 7 generated, and they are discounted prior to the time they go 8 to the bank by 10 percent, and you would have essentially a 9 insurance policy that, in fact, as Tim Carmichael says, we 10 are not going to have any kind of degradation, but you need 11 to weigh the factor that that discount may impede the 12 development of innovative technology which could be used for 13 credits, you have that balancing before you on one hand. 14 CHAIRMAN DUNLAP: Well, I was going to say, too, I 15 just came fresh from the CapCo conference, Mike, you and I 16 were up there, and we talked with our colleagues from the 17 locals, local districts, who indicated to us very clearly 18 they are looking for flexibility and the ability to develop 19 programs that have the local flavor that they need. 20 So, as a result, when you look at the composition 21 of our Board, many of us come from the significant local 22 experience or sit directly on Boards, local district boards, 23 so, Lynn, I like the idea of being prescriptive when it 24 relates to industry, for example, I also very much like the 25 idea of providing our partners in the local districts, those PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 104 1 34 local districts are our partners, to give them the 2 flexibility of developing what is right. 3 It may not work smoothly in every case, but you 4 have the local interest in buy in and support if they have a 5 hand in developing it. That is my concern with prescribing 6 10 percent. 7 It may have a chilling effect on some trading and 8 some other innovative thinking. I understand the goal and I 9 think it is laudable, and it makes sense in some respects, 10 but I also have trust in the locals to do the right thing. 11 MS. EDGERTON: Mr. Chairman, I trust, and I know 12 that you do, and I know that would be the spirit if we did 13 not adopt the 10 percent, however, I, too, am very bullish on 14 trading programs, and I want them to work. 15 However, I believe that, and I do want them to 16 inspire innovative technologies, and before I came to this 17 Board, my fulltime job was with respect to innovative 18 technologies and thinking about how to have incentives for 19 them. 20 I do hope that my concern about the 10 percent 21 discount offset is not interpreted as anything other than 22 support for our programs, but I think that to keep integrity 23 in it, it requires it. 24 CHAIRMAN DUNLAP: A good point that I would make as 25 we put together the package where we work with the locals on PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 105 1 the time frames and considering what they do to make the 2 programs dovetail neatly district to district, and I think 3 that Lynn's concern, particularly this one, is one that we 4 need to emphasize with them, so we would look for you to do 5 that. 6 Okay. Are we on issue three? 7 MS. EDGERTON: Yes. 8 I would like to see reclaim pulled out for probably 9 a period of three years to enable me to have an opportunity 10 to see how well it has been doing. 11 I am very keen on reclaim. That is why I want to 12 protect it. 13 I want to make sure it is working and get the 14 verdict and see how the patient has done. That is my concern 15 about reclaim. 16 Also, another issue that has not been brought up is 17 there has been arguments that there should be no inter 18 pollutant trading, and that is a concern to me. 19 I prefer no inter pollutant trading and need a 20 great deal of conversation to okay it, because I do not think 21 that the science is there with respect of one versus 22 another. 23 Mr. Kenny is getting ready to tell me that it is. 24 MR. KENNY: This particular program is not one of 25 inter pollutants trading. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 106 1 MS. EDGERTON: No inter pollutant trading in this 2 regulation? 3 MR. KENNY: Correct. 4 MS. EDGERTON: So, you would be comfortable with a 5 statement in there saying that it is not. 6 MR. KENNY: What we are talking about here is 7 providing a universal credit trading system, and we are 8 talking about creating a basic framework for that. 9 We have not been talking about inter pollutant 10 aspects, and so this program has not addressed that issue at 11 all, because it is not designed for that purpose. 12 MS. EDGERTON: We are almost at the end, and I 13 appreciate your concern. 14 CHAIRMAN DUNLAP: This is the fifth and last issue, 15 as I recall. 16 MS. EDGERTON: This is shutdown credits. 17 I wanted to be sure that they would not be used for 18 shutdown credits. I know the Clean Air Act prevents that. 19 Is that clear? 20 MS. TERRY: As we mentioned in the staff 21 presentation, there is a provision that emission reduction 22 credits need to be in the plan before they are pulled out and 23 used for interchangeable purposes. 24 MS. EDGERTON: So, the answer to that is no 25 shutdown credits. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 107 1 MS. TERRY: If they are in the plan, they could be 2 used. 3 MS. EDGERTON: If they are in the plan, they could 4 be used. 5 Thank you. 6 CHAIRMAN DUNLAP: Okay. Very good. 7 MS. EDGERTON: So, I guess -- what do I do? 8 CHAIRMAN DUNLAP: All of those. 9 MS. EDGERTON: I move those changes. 10 No second. 11 So then, we get to move the changes. 12 CHAIRMAN DUNLAP: I don't hear a second, but I do 13 want to legitimize those concerns. 14 Those are important, and I will direct staff as we 15 discussed to emphasize that as we follow-up with the locals 16 and also in interaction with industry and the environmental 17 community. 18 Thank you. 19 Any other questions? 20 I appreciate everyone on the Board staying with the 21 issue. 22 It has been long, and a long time coming. 23 I will now officially close the record on the 24 Agenda Item, but the record will be reopened with a 15-day 25 Notice of Public Availability as issued. Written or oral PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 108 1 comments received after this hearing date but before the 2 15-day Notice is issued will not be accepted as part of the 3 official record on this Agenda Item. 4 When the report is reopened for 15-day comment 5 period, the public may submit written comments on the 6 proposed changes, which will be considered and responded to 7 in the Final Statement of Reasons for the regulations. 8 This reminder to the Board Members of our policy 9 concerning ex parte communications. While we may communicate 10 off the record with outside persons regarding Board 11 rulemaking, we must disclose the names of our contacts and 12 nature of the contents on the record. 13 This requirement applies specifically to 14 communications which take place after Notice of the Board 15 hearing has been published; are there any other 16 communications in which we need to disclose? 17 MS. EDGERTON: I do. 18 I spoke on the phone yesterday with Mr. Tim 19 Carmichael for about seven minutes, before I left to take my 20 plane, and I believe most all of the time was spent focusing 21 on his concern about the toxic hot spot increase potential. 22 CHAIRMAN DUNLAP: Okay. Very good. 23 Anything else that needs to be on ex parte? 24 All right. 25 Mr. Kenny or Ms. Terry, any final point you want to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 109 1 make before we review the resolution before us? 2 MR. KENNY: Nothing further. 3 Simply to recommend the Board's approval of the 4 proposal with the staff modifications. 5 CHAIRMAN DUNLAP: Okay. The Board has before it 6 resolution number 97-19, which contains the staff 7 recommendations, and it does include the amendments that you 8 ran through. 9 The Chair would entertain a motion and a second to 10 adopt the proposal. 11 MR. PARNELL: So moved. 12 SUPERVISOR RIORDAN: Second. 13 CHAIRMAN DUNLAP: Moved by Parnell and seconded by 14 Ms. Riordan. 15 Any discussion that needs to occur? 16 I would like to ask the Clerk to take the roll. 17 MS. HUTCHENS: Calhoun. 18 MR. CALHOUN: Aye. 19 MS. HUTCHENS: Edgerton. 20 MS. EDGERTON: No. 21 MS. HUTCHENS: Friedman. 22 DR. FRIEDMAN: Aye. 23 MS. HUTCHENS: Hilligoss. 24 MAYOR HILLIGOSS: Aye. 25 MS. HUTCHENS: Parnell. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 110 1 MR. PARNELL: Aye. 2 MS. HUTCHENS: Rakow. 3 MS. RAKOW: Aye. 4 MS. HUTCHENS: Riordan. 5 SUPERVISOR RIORDAN: Aye. 6 MS. HUTCHENS: Roberts. 7 SUPERVISOR ROBERTS: Aye. 8 MS. HUTCHENS: Silva. 9 SUPERVISOR SILVA: Aye. 10 MS. HUTCHENS: Dunlap. 11 CHAIRMAN DUNLAP: Aye. 12 MS. HUTCHENS: Resolution passes nine to one. 13 CHAIRMAN DUNLAP: Very good. 14 Thank you, staff. Fine job. I appreciate it. 15 Also, thanks to the witnesses that came today. I 16 appreciate their time and efforts. 17 Mr. Kenny, the next item, 97-4-3, how long is the 18 staff presentation on that item? 19 What I would like to do with the Board's indulgence 20 is to have staff go ahead, get the presentation out of the 21 way and break for lunch. 22 The next item is 97-4-3, a public hearing to 23 consider a one year postponement of the requirement that 1998 24 and subsequent model year vehicles produced by ultra low 25 volume manufacturers to meet the enhanced evaporative PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 111 1 emission requirements. 2 We have before us a proposal for the Board to amend 3 the enhanced evaporative emissions reg and the incorporated 4 test procedures applicable to 1995 and subsequent model year 5 motor vehicles. 6 This item is in response to a request from the 7 Coalition of Small Volume Manufacturers. 8 At this point, I would like to ask Mr. Kenny and 9 Mr. Cackette to introduce this brief item and give you a 10 heads-up on development, and we will take a lunch break right 11 afterwards. 12 MR. KENNY: Thank you, Mr. Chair and Members of the 13 Board. 14 The request submitted by the Coalition of Small 15 Volume Manufacturers seeks a one year postponement in the 16 enhanced evaporative emission requirements for ultra small 17 volume manufacturers. 18 In general, we are resistant to many regulations 19 which can cause any increase in emissions, especially in 20 light of the SIP goals. 21 However, the potential economic impact of denying 22 the petition are factors that must be weighed against the 23 associated emission losses. 24 The potential of loss of $49-million to 25 manufacturers could occur as well as to the importers and to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 112 1 the new car dealerships and their revenues. 2 Based on the estimated vehicles affected, staff has 3 projected the associated emission losses at up to 14 pounds a 4 day of hydrocarbon emissions in the year 2010. 5 It is also possible that if the petition is not 6 granted that there will not be certain vehicles available for 7 sale in model year 1998. 8 With that in mind, I would ask Mr. Stephen Lemieux 9 to make a brief presentation. 10 MR. LEMIEUX: Mr. Chairman and Board Members, my 11 presentation concerning this proposal to amend and enhance 12 evaporative emission regulation requirements for ultra small 13 volume manufacturers, I will start by briefly providing the 14 history of the regulation and some background information. 15 I will then present a petition brought forth by the 16 Coalition of Small Volume Manufacturers, known by the acronym 17 COSVAM, requesting an alignment of the California and U.S. 18 EPA phasing schedule for the enhanced evaporative emission 19 regulatory requirements. 20 The economic and environmental impact associated 21 with approving staff's proposal will then be presented, and 22 this will be followed by discussion on the proposed 23 regulatory amendments, and I will conclude with the staff 24 recommendation. 25 In 1990, the Board adopted regulatory amendments PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 113 1 that established enhanced operative emissions test procedures 2 applicable to 1995 and subsequent model year passenger cars, 3 light, medium trucks, medium duty vehicles and heavy duty 4 vehicles up to 14,000 pounds. 5 The evaporative test procedure models, the 6 temperature conditions experienced by vehicles on a sunny 7 Southern California summer day, when high concentrations of 8 ground level ozone are expected, to do this the enhanced test 9 procedure incorporates a diurnal, a hot soak, and running 10 loss test. 11 The diurnal test models evaporative hydrocarbon 12 emissions released when a vehicle is parked over several days 13 under ambient temperature conditions. 14 The high and low temperature variations during the 15 course of a day generates vapors in the fuel tank which must 16 be controlled on board the vehicle. 17 The hot soak test model have out hydrocarbon 18 emissions immediately following vehicle operation. When the 19 engine is turned off, and the engine compartment temperatures 20 are at their highest the evaporate hydrocarbon emissions 21 occur under these conditions, primarily due to fuel 22 permeation of fuel system components, such as rubber hoses. 23 The running loss test models evaporative 24 hydrocarbon emissions during the vehicle operation, thus 25 while the engine is running, the ring loss test assesses the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 114 1 overall performance of the evaporative control system. 2 Beginning with the 1995 model year, automotive 3 manufacturers were required to phase in the enhanced 4 operative test requirements, and 10 percent of the 5 manufacturers 1995 model year vehicle fleet was required to 6 comply, increasing to 100 percent with the 1998 model year. 7 Small volume manufacturers are exempt from the 8 phase-in schedule but must comply with the 100 percent 1995 9 model year vehicle fleet. 10 The small volume manufacturer is defined as a 11 manufacturer within California, sales of less than 3,000 new 12 vehicles per model year based on the average number of 13 vehicles sold by a manufacturer in the previous three 14 consecutive years. 15 There are a number of manufacturers that produce 16 far fewer vehicles than is allowable under this small volume 17 manufacturer definition. 18 COSVAM formed in 1996 and is an organization that 19 represents some of the manufacturers that produce vehicles in 20 numbers far below the small volume manufacturer limit. 21 Currently COSVAM represents 12 small volume 22 manufacturers. Membership is limited to manufacturers who 23 sell fewer than 5,000 vehicles per year worldwide. 24 Examples of COSVAM members include Rolls Royce, 25 Ferrari and Lamborghini. The majority of the members produce PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 115 1 exotic or collector vehicles that charge you much less than 2 the average passenger vehicle. 3 COSVAM members for recent years have averaged a 4 combined total annual sales of less than one thousand 5 vehicles in California. 6 In January of 1997, COSVAM committed to staff a 7 formal petition to postpone enhanced operative emission 8 requirements for ultra small volume manufacturers. 9 The proposed definition of ultra small volume 10 manufacturers will be discussed later in the presentation. 11 This one year postponement would align California's 12 implementation schedule for the ultra small volume 13 manufacturers with U.S. EPA implementation schedule for small 14 volume manufacturers. 15 COSVAM is requesting an alignment of the California 16 and U.S. EPA operative emission phasing requirements because 17 of the unique challenges faced by manufacturers which 18 produces only hundreds of vehicles per model year for sale in 19 California. 20 Most of the members have limited resources and must 21 rely on outside suppliers for their engineering and testing 22 services as well as for obtaining hardware and software for 23 their vehicles. 24 Since these manufacturers produce so few vehicles, 25 it is difficult for them to locate suppliers willing to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 116 1 develop and provide vehicles, specific systems that cannot be 2 acquired off the shelf, especially when large manufacturers 3 are competing for the same service. 4 When a supplier is found, high research and 5 development are spread over a very small number of vehicles, 6 thus the per vehicle cost of compliance is extremely high, 7 therefore, without an alignment many of these manufacturers 8 may be forced to forego sales in the 1998 model year in 9 California. 10 Because an alignment would allow ultra small volume 11 manufacturers to comply with enhanced operative requirements 12 in the same time frame as similar Federal operative 13 requirements, it would enable these manufacturers to 14 distribute the compliance cost of the regulation over a 15 larger number of vehicles sold throughout the U.S. 16 Based on estimates provided by COSVAM, 17 approximately 550 California new sales would be foregone in 18 the 1998 model year if the petition is not granted. 19 These are sales in the place of the most up-to-date 20 provided by COSVAM, which differs from the 625 sales estimate 21 stated in the staff report. Without an alignment, COSVAM 22 estimates that $26-million in manufacturing, import net 23 revenues and $23-million in California new car dealerships 24 diligent net revenues would be lost. 25 Furthermore, COSVAM contends that other California PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 117 1 businesses, such as independent repair shops and after market 2 parts manufacturers and retailers, would be affected. 3 Based on COSVAM sales estimate of 550 vehicles 4 potentially affected, staff used Air Resources Board latest 5 motor vehicles inventory model 7-G to estimate the 6 environmental impacts on California if the Board approves the 7 proposed amendments. 8 As shown, the proposed amendment will result in an 9 increase in hydrocarbon emissions ranging from 4 pounds per 10 day in the year 2000 to 12 pounds per day in 2010. 11 For perspective, 12 pounds per day of hydrocarbon 12 emissions statewide represents .0053 percent of the total 13 statewide emission inventory for light duty passenger 14 vehicles. 15 It should be noted that staff considers the 16 emission impact estimate to be a worst case scenario since 17 the emission model assumes that the affected vehicles are 18 driven as often as a typical passenger car, this is not the 19 case, because, as previously indicated, the majority of the 20 potentially affected vehicle manufacturers produce exotic or 21 collector vehicles which are typically driven only on an 22 occasional basis. 23 Granting COSVAM'S request requires the Board to 24 abandon all Code of Regulations Title 13, Section 1976, and 25 incorporated California Evaporative Emissions Standards and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 118 1 Test Procedures for 1978 and subsequent model year motor 2 vehicles. 3 The proposed amendment to the regulation includes 4 adding the definition of ultra small volume manufacturers, 5 staff proposes that ultra small volume manufacturer would be 6 defined as a manufacturer with California sales less than or 7 equal to 300 new vehicles per model, based on the average 8 number of vehicles sold by a manufacturer in the previous 9 three consecutive model years. 10 Staff also proposed an amendment which would 11 require ultra small volume manufacturers to comply with the 12 regulation beginning in the 1999 model year. 13 Also, staff proposed to make non substantial 14 editorial changes to the test procedures. Based on the 15 potential significant impacts on some ultra small volume 16 manufacturers and the associated relatively insignificant 17 impact on emissions, staff recommends that the Board adopt 18 the proposed amendments to the enhanced evaporative 19 regulations which would align the California and Federal 20 evaporative phases. 21 This would allow a one year postponement of the 22 enhanced evaporative requirements for manufacturers that sell 23 300 or less new vehicles per model year in California. 24 That concludes the presentation. 25 CHAIRMAN DUNLAP: Thank you for that overview. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 119 1 What I would like to do, I hear some stomachs 2 growling, and I would like to take a break for 30 or 40 3 minutes. 4 We will reconvene at 1:00, and then we will hear 5 from you, Mr. Schnoning and from the witnesses and then take 6 up the rest of the item. 7 We will recess until one o'clock. Thank you. 8 (Thereupon the lunch recess was taken.) 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 120 1 A F T E R N O O N S E S S I O N 2 --o0o-- 3 CHAIRMAN DUNLAP: All right. Jim, you are up. 4 MR. SCHONING: To review for a moment this item 5 presented by staff before lunch, as you heard prior to lunch, 6 this Agenda Item establishes a new regulatory category for 7 ultra small volume vehicle manufacturers. 8 These manufacturers are represented by a Coalition 9 that has petitioned the Board for creation of this new 10 category io order to allow a better harmonization for Federal 11 requirements. 12 The proposed regulation applies to only a handful 13 of manufacturers who sell no more than 300 vehicles each 14 year. 15 Since all of the companies affected by this 16 provision have been engaged in these discussions through 17 their participation and Coalition, the staff reasoned that 18 there was no need for a technical workshop prior to the 19 issuance of the public notice issued for these regulations. 20 The staff's reasoning was that members of the 21 affected industry segment participated in the informal 22 discussions that led to this item coming before you, and the 23 environmental emissions impact is small, thus the proposed 24 change will not adversely impact our ability to achieve our 25 air quality goals and commitments, and the proposal was PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 121 1 properly noticed. 2 In addition, the establishment of this new category 3 will avoid economic losses that otherwise would be felt by 4 importers, dealers, service and other market segments were 5 the category not to be created. 6 The public notice of this proposed regulatory 7 action was mailed on the fourth of April 1997 to 8 approximately 900 interested parties, including all vehicle 9 manufacturers participating in California. 10 One comment letter was received from COSVAM in 11 support of the proposed regulation. 12 Mr. Chairman, the lack of the written comment and 13 witnesses, as I understand it, prepared to testify today, 14 certainly validate the staff's judgment as to the magnitude 15 of this issue. 16 I would comment, however, as a matter of precedent, 17 that the apparent merit of the proposal being jeopardized by 18 the lack of the opportunity of the public to wade in any 19 prior hearing. 20 CHAIRMAN DUNLAP: So, Mr.SCHONING, what you are 21 saying is that we might have done a bit better job relative 22 to outreach on this one? 23 MR. SCHONING: The proposal would come in a 24 stronger shape had the public had an opportunity, which it 25 chose not to exercise, in the event that no one had shown up PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 122 1 to the public workshop. 2 CHAIRMAN DUNLAP: I appreciate that. All right. 3 Why don't we then see if the Board has any 4 questions before we take public testimony. 5 Yes, Mr. Calhoun. 6 MR. CALHOUN: The definition of small vehicle 7 manufacturer has been in the regulation for many, many 8 years. 9 Is that based on the Legislature, the Legislature 10 defined small volume vehicle manufacturer, or was that done 11 by regulation? 12 MS. WALSH: That was done by regulation. 13 MR. CALHOUN: What we are doing here, or what the 14 staff is proposing to do is to create a sub class within a 15 class? 16 Are you concerned about a precedent setting that 17 this would, result from this? 18 MR. CARTER: No, I'm not, Mr. Calhoun. 19 It simply sets up a sub class for the small volume 20 manufacturer, but that is all it does. 21 Simply by definition, it sets what it is. We do 22 not see any adverse impacts from that in the future. 23 CHAIRMAN DUNLAP: Move to -- 24 Who just responded to Mr. Calhoun? 25 We have a new court reporter, and she has not asked PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 123 1 for much today, so let's try to accommodate her, and let her 2 know who is responding. 3 What I think that we'll do is we will go into the 4 witness list. It is largely COSVAM members. 5 Okay. 6 Who is going to serve as the floor manager for 7 COSVAM? 8 Mr. Executive Director, come forward. 9 I will do something that on occasion I do is, which 10 is to let you manage your troops there to make a presentation 11 so that you can bring them up. 12 I ask that you ensure that the membership is not 13 redundant. Get to the point. Respond to questions, and we 14 will get on with the issue. 15 We have to remind you, I will ask Ms. Hutchens to 16 give Lance the list of who signed up to testify, which we 17 already have, give him a current list, and Lance, you may 18 bring the membership up as you see fit. 19 Limit it to few minutes each. 20 MR. TUNICK: I am going to have with me at the same 21 time to avoid redundancy, Randy Busick, who's a technical 22 advisor of Aston Martin, and he will perhaps add to my 23 remarks, and the four companies here will take approximately 24 a minute or two each only. 25 That will be swift. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 124 1 CHAIRMAN DUNLAP: Take a minute, Lance, and give an 2 overview of COSVAM for us, and I will let you introduce your 3 colleagues at the right time. 4 MR. TUNICK: Fine. 5 My statement will take a few minutes. It will have 6 an overview and some background. 7 My name is Lance Tunick, and I am the Executive 8 Director of the Coalition of Small Volume Automobile 9 Manufacturers, COSVAM. I appreciate the opportunity to 10 discuss the situation facing the smallest of the small volume 11 auto manufacturers. 12 This segment of the industry is the ultra small 13 volume manufacturers of USVM's, and the first point I'd like 14 to make is that the term USVM is worthy of recognition. The 15 very smallest in the industry should not be considered 16 synonymous with the mere smallest. 17 COSVAM is a non-profit association, and we were 18 formed in January of 1996 to seek greater flexibility in the 19 automotive regulations for automobiles produced by USVM's 20 COSVAM members are small manufacturers that produce fewer 21 than 5,000 each per year worldwide, and some of them are 22 suppliers. 23 As of today, the members are AM General, Aston 24 Martin, Callaway Cars, DeTomaso, Ferrari, Lamborghini, Lotus, 25 Maserati, McLaren, Morgan, Rolls-Royce and TWR engineering. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 125 1 Joining me today are representatives from Aston Martin, 2 Lotus, Morgan, DeTamaso. 3 If the list of COSVAM companies seems small, you 4 are indeed correct. There simply aren't many USVM's selling 5 in the US today. 6 In fact, COSVAM has lost some seven members in one 7 year. At least two have gone out of business, and four or 8 more have decided that they cannot manage the burdens of 9 entering the US market. 10 Moreover, the two companies that went out of 11 business are American, following in the footsteps of such 12 companies as Checker and Avanti and Perkins. 13 In any event, a point that must be emphasized is 14 the tiny number of cars that the remaining COSVAM members do 15 sell to California. This is significant, because it 16 demonstrates just how small we really are. Even if the names 17 of the COSVAM members are well known, this small size that 18 the American USVM segment of the industry results in less 19 consumer choice and fewer technological contributions by 20 small specialized companies. 21 If they are not in business, they can't contribute 22 technologically. And on the subject of technology, in your 23 folders I handed out some material on the electric version of 24 Lotus's new ultra lightweight vehicle with an aluminum 25 chassis, the Elise. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 126 1 Lotus is pursuing this with the company Zytek, and 2 this new project is exciting and on the way. Thus, COSVAM 3 represents the interests of USVM's interests that are very 4 different from the larger manufacturers and sometimes even 5 different from small manufacturers. 6 I think something that must be addressed off the 7 bat is absent of the effect of the air quality, because we 8 sell an extremely small number of vehicles, and because of 9 the very low mileage that they are driven, we believe that 10 our members cannot have measurable effect on air quality. 11 The number of vehicles that are potentially or 12 realistically an issue with respect to this Agenda Item is 13 something less than 150, because although we sell somewhere 14 between 550 and 600 cars per year, as all of the companies 15 together in California, the large majority of those cars will 16 comply as best as we can tell at the moment, based on 17 forecasts today, with the enhanced evaporative requirements 18 in 1998, there are some 100 to 150 cars. 19 That cannot do it that 100 to 150 cars is made up 20 by three companies, and to these three companies this is 21 very, very, very important. 22 If USVM's are small as regards the US market, our 23 size verges on microscopic in California. The number of 24 vehicles sold in California, as I said, by all USVM's, is 25 somewhere in the vicinity of 500 to 600. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 127 1 To put this figure into perspective, there are 2 about 1.4 million cars sold each year in California 3 , and this figure of about 550 to 600 is about 0.04 percent 4 of that total. This is truly an insignificant number. 5 In addition, the common characteristic of most 6 COSVAM vehicles is the very low mileage that they are driven, 7 perhaps between 1500 to 7500 miles per year on the average. 8 They are used, frankly, as weekend cars, not everyday cars. 9 The next point that I would like to discuss 10 is the general need for flexibility by USVM's and their need 11 with respect to the promulgation and implementation of some 12 of CARB's regulations. 13 By flexibility, first of all we are generally 14 talking about some extra lead time or the continuation of the 15 existing standards, as in this case, for an additional year. 16 Flexibility also involves the ability to work with CARB staff 17 to address company-specific dilemmas. 18 The burdens of complying with requirements such as 19 OBD, ORVR, enhanced evaporative requirements and LEV are very 20 significant for USVM's, in fact, proportionally greater than 21 for larger manufacturers and even greater than the burden is 22 for SVM's. 23 This is especially so given today with so many of 24 these requirements together with many new safety standards 25 are going into effect within a very short period of time. As PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 128 1 staff has noted, the crux of the problem is the USVM's have 2 limited resources and at the same time rely on outside 3 suppliers and the manpower shortage that many of these 4 companies experience. 5 When a USVM does find such a supplier, there is 6 very high research and development costs that are spread over 7 a very small number of vehicles, causing a per vehicle cost 8 of compliance to be extremely high. 9 As a result, there is a need for extra lead-time. 10 This additional time allows technology to be refined. For 11 example, right now the enhanced evaporative test procedures 12 are being streamlined in conjunction between EPA. 13 Extra lead-time also permits more opportunities for 14 the USVM's to locate suppliers and have a greater number of 15 possibilities at more reasonable costs. 16 I would like to emphasize that although many of the 17 cars that are sold by USVM's are labeled exotic, that does 18 not mean by any stroke of the imagination that USVM's are 19 rich and flush with cash. Quite to the contrary. 20 The history of the USVM industry is fraught with 21 stories of bankruptcy and financial problems, be it Bugatti, 22 DeLorean, Bricklin, or two companies right now in the US, 23 Dexter and Excaliber. Moreover, USVM's in the last several 24 years have been bought and sold like baseball cards, although 25 unlike baseball cards, they are more important sold off in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 129 1 profit, ownership has changed because of the very real 2 difficulties in making these companies successful businesses. 3 Lastly, the cars that COSVAM members sell start at 4 the $40,000 range, that includes the cars of Lotus and 5 Morgan, which in today's market the $40,000 range is not 6 exotic. 7 It is true there are many high priced cars sold by 8 other companies, though one reason why cheaper USVM 9 companies, such as a company in England, Caterham, which was 10 a member but has dropped out, are not in the US market 11 because of the absence of a low volume type approval scheme 12 as exists in Great Britain. 13 COSVAM feels that a request for flexibility as 14 evidenced here is consistent with California law, the 15 Government Code and the Health and Safety Code, directs 16 CalEPA to consider impacts on small businesses and to analyze 17 alternatives submitted by interested parties. 18 Regardless of whether COSVAM's current request 19 squarely falls within the letter of these provisions, we feel 20 that it falls within the spirit of those laws. 21 A cost benefit analysis providing extra lead-time 22 as requested here would clearly support the appropriateness 23 of lead-time, the minute number of vehicles involved and the 24 absence of a negative impact on air quality would be 25 overwhelmed by the significant financial impact on USVM's and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 130 1 their California dealers and service establishments. 2 In addition, COSVAM's request for flexibility is 3 consistent with the Federal Government's trend towards 4 seeking common sense in a regulatory program. 5 I would like to note the CARB in the past has 6 acknowledged the appropriateness of granting extra lead-time 7 to SVM's by allowing them until the end of a phase-in before 8 requiring compliance. While this policy certainly is 9 crucial, it may not always go quite far enough in every 10 single situation in this era of high technology and high 11 costs. 12 In short, USVM's often cannot dictate their own 13 plans and strategies the way GM, Toyota or BMW can. They are 14 often at the mercy of others and may not be able to start R 15 and D for compliance programs until after a phase-in has 16 actually started. 17 Regardless of how much lead-time has been 18 established in the original regulation, they often encounter 19 unexpected financial hurdles and at times must take funds 20 from one program in order to keep another going often just to 21 keep their heads above water. 22 For example, if a safety program on air bags is 23 delayed, it requires more time, the shortage of manpower at 24 the USVM can cause people to be taken off of the emissions 25 project to be put into the airbag project until it is PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 131 1 completed. 2 This obviously causes a delay down the line. 3 Simply put, while delayed compliance until the end of a 4 phase-in is essential, to USVM's the reality is that a little 5 fine tuning for USVM's at the end of the phase-in must be 6 permitted. 7 With respect to the particular issue on this 8 Agenda, enhanced evaporative requirements and continuing the 9 existing evaporative requirements for the extra year with 10 respect to USVM's, I repeat, not to be redundant but to 11 emphasize that the problem facing USVM's is limited 12 resources, reliance on outside suppliers, high research 13 development costs spread over a very low number of vehicles 14 and an extremely high per vehicle cost, in particular USVM's 15 have problems implementing OBD changes required by enhanced 16 evap, and this is quite important. 17 Locating enhanced evap testing facilities, 18 especially in Europe, since the VT and running loss 19 facilities are just being built and have not been widely 20 available to date. At this point in Europe we know of only 21 two enhanced evap facilities that currently permit access to 22 outside manufacturers. 23 Trying to find time to do research and development, 24 not just confirmatory testing, is a key to the situation and 25 simply does not allow the very smallest manufacturers PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 132 1 satisfactory opportunity for R and D, let alone certification 2 testing. 3 We understand that a couple of European OEM's are 4 considering opening up their facilities to third parties, 5 which should make model year '99 certification considerably 6 easier. 7 In addition, at least two USVM's are planning major 8 US model changes in the near term. These companies are 9 turning to completely new engines as the result of upcoming 10 LEV, ORVR and other requirements. 11 They need the one year extension with respect to 12 enhanced evap in order to cease production of the old engines 13 and introduce the new models with a new evaporative system 14 appropriate OBD, ORVR and LEV ready. 15 Out of financial necessity, these USVM's must make 16 as many changes to a model at one time as is possible. 17 Basically, making a handful of old, soon to be 18 obsolete, engines comply with a new regulation for one year 19 is financially very taxing. As a result of the foregoing, 20 the need for the requested extra lead-time arises so as to 21 align the start dates of California and EPA as regards 22 enhanced evap. 23 This additional lead-time allows USVM's to make the 24 evap change for 50 states at one time and permits the 25 necessary technology parts facilities to be located and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 133 1 refined and permits more opportunities at more reasonable 2 costs. 3 Please note that while the total annual California 4 sales of COSVAM members may be about 5 to 600 as I said 5 before the number of vehicles that we currently anticipate 6 would actually take advantage of the extra year would only be 7 between 100 and 150 cars. 8 I think that is a very small number, but it is a 9 very major issue for the companies that it involves. 10 I would like to again thank the Board for 11 considering this issue. We know of no adverse comments that 12 have been filed, and respectfully request that the Agenda 13 Item pass. 14 I would like to ask Mr. Busick if he has any 15 additional technical issues, and we will have a have short 16 minute or two from each of the four manufacturers that are 17 here. 18 MR. BUSICK: I don't have anything to add, but we 19 talked about the technologies that the small volume 20 manufacturers apply. 21 I think in the area of power trains, small volume 22 manufacturers clearly live on trickle down technology, and 23 from that standpoint, they can't begin their development work 24 until after major manufacturers are well into their phasing 25 periods. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 134 1 But just to provide two examples, I think you have 2 in front of you an example of an electrically powered Lotus 3 Elise. That is an example of a very light weight vehicle 4 done in a small volume production and the kind of thing that 5 is needed for electric vehicle production in the future. 6 It is an area of advanced materials and advanced 7 manufacturing technologies that ultra small volume 8 manufacturers can bring expertise to the field. 9 Did you have any technical questions? I will be 10 glad to respond. 11 CHAIRMAN DUNLAP: Any questions, Board Members have 12 questions at the outset before we hear from the stream of 13 witnesses? 14 DR. FRIEDMAN: I would like to know which of the 15 three companies at risk? 16 MR. TUNICK: The three companies that are at risk 17 in the sense of in order to sell model year '98 vehicles need 18 the extra one year are Lotus, Morgan and Aston Martin. 19 DR. FRIEDMAN: It occurs to me, I'm reasonably new 20 on the Board, the industry has known for at least seven and a 21 half years that this was coming down the pipe. 22 I would like to know what the evidence is that, in 23 fact, either of these three companies or the industry have 24 recognized and made specific inroads to solve the problem. 25 If the problem only takes a year to solve, which is PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 135 1 what you are indicating by asking for the single year delay, 2 I want to know what has been done to date to approach the 3 problem and its solution, given the dates that were available 4 and known to everyone. 5 MR. TUNICK: There are a couple of questions that 6 are tied to that. 7 Number one, the fact that this might have been 8 promulgated in 1990 does not help the USVM, because they are 9 not in charge of their own destiny. 10 They are reliant on outside third party supplies to 11 provide them with the necessary hardware, software and 12 facilities. 13 It does not matter sometimes how far in advance 14 they are told about something if the suppliers are not making 15 it available to them, will not sit down with them so that 16 they can meaningfully start developing a program to integrate 17 into their car these pieces and systems, and it is something 18 that often times is outside of their control and often times 19 the suppliers will not want to talk to a company that says, 20 yes, I would like to buy 100 pieces of this from you, when 21 the supplier is dealing with the companies that are 22 purchasing billions of pieces. 23 DR. FRIEDMAN: Excuse me, but clearly 75 percent of 24 your members have successfully solved the problem. 25 I would like to know why 25 percent haven't. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 136 1 MR. TUNICK: Well, it appears to today, yes, that 2 75 percent will. 3 Not all USVM's are alike. The three that I 4 mentioned that are having problems are the smallest of the 5 smallest. 6 To the extent that a larger USVM, and that term is 7 a little bit contradictory, to the extent that the larger 8 USVM's might succeed might be because he was able to approach 9 a supplier and successfully work out a program, whereas the 10 guy who is producing Morgan, for example, produces about 500 11 cars a year worldwide. They sell to 22 countries. 12 They have not been in the US market for a couple of 13 three years, and financially it is important to them, and it 14 is important to their US importer, which is California based, 15 and they are here today, and they want to sell in the US 20 16 cars. 17 If you go to a supplier looking for that type of 18 number, they think that you dropped a zero off of the request 19 or two or three zeros. 20 It is not a question of sitting on one's hands. As 21 far as what has been done to date, a number of companies 22 certainly have started programs. 23 The companies that are switching engines have put 24 their effort in resources in the new engine to make it comply 25 with everything. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 137 1 Perhaps the new engine slipped by a year as far as 2 its introduction date. Again, the destiny of these companies 3 is not in their own hands. 4 Sometimes they incur a financial hurdle, and the 5 whole program slips one year, and therefore, what should be a 6 model year '98 engine introduction becomes a model year '99 7 introduction. 8 They have been working on the engine, and a lot of 9 resources and money have been spent on it. 10 I hope that answers. Is there anything that I 11 should add? 12 DR. FRIEDMAN: I appreciate your effort. 13 CHAIRMAN DUNLAP: Any other questions? 14 All right. 15 MR. CALHOUN: I have a question. 16 I read the request for the delay. It seems to me 17 that it is not based on lack of technology, but based purely 18 on a business decision that you are asking, that you would 19 like the Board to help you in making. 20 MR. TUNICK: Well, it is not lack of technology in 21 the sense that out there somewhere the technology exists. We 22 agree and understand that. 23 It is a question of our access to the technology. 24 That is the issue. 25 Can we fit, can we get access to the technology and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 138 1 the facilities and the suppliers when they are busy selling 2 their millions to General Motors and other large companies? 3 It is access to technology, not whether it exists 4 in the abstract. 5 MR. CALHOUN: You make a point of the desire to 6 align California's requirement with the Federal requirement. 7 I wonder if your member companies have considered 8 pulling ahead. 9 MR. TUNICK: Well, that is a good question. That 10 is the issue. 11 Phase-ins are recognized as not being particularly 12 useful to a USVM company that only sells in the US a hundred 13 cars. 14 If you have a phase-in which says ten, 30, 50, 100 15 percent for a hundred cars, it does not work. It is either 16 all or nothing. 17 You cannot build 10 cars and the next year 30 18 cars. You have to make the switch, all or nothing. 19 It is same the thing when a California requirement 20 is going into effect one year ahead, as here. They can't 21 build 30 or 40 cars because the OTC states have to be taken 22 into consideration, too. The California standards and 60 to 23 the Federal. 24 You have to do all or nothing. It basically 25 requires them to pull ahead a year and that just becomes a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 139 1 burden for these companies, the resources are not there. 2 MR. CALHOUN: I would like to hear from the member 3 companies about pulling ahead of the technology and see what 4 their thoughts are. 5 CHAIRMAN DUNLAP: All right. Lance, bring them up. 6 MR. BUSICK: Some of the technology is trickle 7 down. 8 You use the components from the large volume 9 manufacturers, and there are some that are body specific, 10 like new fuel tank designs, for example, finding volume 11 within an existing body, you can see they are pretty minimal, 12 but finding space for the body for a liter and a half, for a 13 two liter caster, for example, and doing the hose routing, 14 that may require some work on the floor panels specific to 15 the vehicle. 16 You cannot borrow it from a large volume supplier, 17 or the ECM, or the programming of the software themselves are 18 examples of technology. It is a case of where you have to 19 borrow the hardware to get from the large volume suppliers, 20 and then you do the homework on your own product. 21 CHAIRMAN DUNLAP: Okay. Thank you. 22 Lance, are you going to bring them up? 23 MR. TUNICK: Yes. 24 The first person I would like to have speak very 25 briefly is Mr. Bruce Qvale. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 140 1 Mr. Bruce Qvale is with British Motor Car 2 Distributors, which is a large retail operation at the moment 3 in San Francisco, but he and his family have a long history 4 of being independent importers for both the British and 5 Italian markets, and he is trying to put together a new 6 business venture here in California that he would like to 7 comment on. 8 CHAIRMAN DUNLAP: Good afternoon. 9 MR. QVALE: As Lance said, I am part of a family 10 business here in San Francisco that has been in the 11 automobile business for 50 years. 12 We have specialized in importing and distributing 13 various makes of cars, Volkswagens, Jaguars, MG's over the 14 past years. 15 However, in the last five or ten years, the only 16 cars to distribute and import are the small volume, so that 17 is all we are specializing in now. 18 We have embarked on a new project with one of the 19 lines that Lance referred to, which is a very small 20 manufacturer in Italy and to bring the car back into the 21 United States. 22 Because they have not been in the country the line 23 is DeTomaso, for a number of years, they are obviously at a 24 disadvantage in time and technology and just pure sales to 25 come up with the latest technology. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 141 1 It is truly is trickle down. I think that is a 2 very accurate way of Randy describing that. In our case, a 3 California company, we have to do a lot of market research 4 and a lot of time and money trying to evaluate the market 5 size and choose the correct people and markets. 6 In our particular case, the postponement of the 7 enhanced evaporative requirement is important, because it 8 delays the launch and causes hardship on us and the factory 9 itself. 10 Specifically, from a California company, the others 11 I think are represented, one in California and the other on 12 the East Coast, it is large item for us. 13 I hope that the Board grants this for us and the 14 others. 15 Any questions? 16 CHAIRMAN DUNLAP: Thank you. 17 MR. TUNICK: The next representative for the 18 manufacturers is Simon Rodd, from Aston Martin. 19 MR. RODD: This postponement is of vital importance 20 to us. 21 I work for Aston Martin. We bring in 200 cars into 22 North America annually. Of that 200 cars, California 23 represents 20 percent of the market, or 40 cars. 24 We have three California dealers. This represents 25 $5-million in revenue to us. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 142 1 We have recently been absent in the North American 2 market, from 1993 to 1997 model year, because we were unable 3 to comply with the legislative requirements. 4 We are just now getting back on our feet with the 5 1997 model year car. If we are unable to bring the 1998 6 model year car into California, it has a broad impact, 7 because the appearance is that we are not making a success of 8 this market. 9 It has a detrimental affect to the market as a 10 whole, not just the California market. As I said we are just 11 getting back on our feet, and this postponement would be a 12 help. 13 SUPERVISOR RIORDAN: Mr. Chairman, I would like to 14 ask a question that follows Dr. Friedman's question. 15 Do you feel in the 1999 model year you will be able 16 to meet these requirements? 17 MR. RODD: Most likely, yes. 18 We are working on a new engine now. All our 19 resources are directed towards to developing this new power 20 plant. 21 We simply do not have the resources to develop the 22 evaporative emission for the current power plant due to be 23 phased out of the 1990-91 model year at this point. 24 There could be a slippage, but that is the intent 25 at this point. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 143 1 CHAIRMAN DUNLAP: Okay. All right, Lance. 2 MR. TUNICK: The next representative is Mr. Tim 3 Holland, from Lotus Cars. 4 MR. HOLLAND: I wanted to pick up on Dr. Friedman's 5 question specifically on what we have been doing since the 6 early 90's. 7 Just going over some background, traditionally 8 Lotus uses our own in-house designed engine. It became clear 9 that the current four cylinder engine could not meet the 10 emissions standards and forced us to go into a new engine 11 program and new ECM supplier problem. 12 Traditionally, we would use General Motors 13 controllers, and because of our low volume, they would not 14 support us on a low volume OV2 requirement, and here we are 15 in 1994 having to not only come up with a new engine but a 16 new controller, and we managed to do that within the two-year 17 time frame. 18 Now, all the research that had been carried out up 19 to then is scrapped because of enhanced evap is impacted, the 20 rubber pipes, the canister, the interaction. It is also a 21 function of the engine, the engine evaporative loss itself. 22 So, here we are two years for a new engine program 23 which effectively put us back two years. Yes, we have 24 carried out a lot of work, and we believe that we have 25 slipped a year in terms of enhanced evap. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 144 1 Obviously staff had to be transferred, as 2 Mr. Tunick explained. As a small company, we have to put out 3 the fires in the right area. Out of two years, we have 4 pulled back a year, and we can meet the 1990 requirement. 5 Going on to another area, small volume 6 manufacturers tend to piggy back off the large 7 manufaacturers, the Fords, the GMs for the resources to get 8 the supplies to make the components to meet the enhanced 9 evap. 10 We always come -- we are second fiddle. They make 11 sure that their vehicles meet the requirements, and the 12 volumes of the supplies of the enhanced evaporative equipment 13 manufacturers have to meet the Ford, the GM requirements, and 14 what is left over, we can pick up. 15 Usually we try to maintain the design set by the 16 larger companies where possible, but as mentioned, if it's 17 rubber pipes, et cetera, very specific to the vehicle, so 18 then we have to redesign and try to encourage the suppliers 19 of the specialist technology to work with us on the 50 to 100 20 cars that require this new part. 21 Other areas that affect us is certainly Lotus's 22 case, we have been through several ownership changes and have 23 not had the management direction to make sure that we 24 concentrate on this critical area. 25 Personally I feel we have done fairly well to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 145 1 develop a new engine to meet the OV2 standards, that we did 2 achieve, and we met the emission performance when in fact we 3 did not have to. 4 As a small volume manufacturer, we did not have to 5 meet the LEV, but we did. We have been working on an 6 extension for one year, and it should, I believe, make us 7 achieve this. 8 I don't see why not. Our data to date shows that 9 we can achieve that by 1999. 10 Did that answer your question? 11 DR. FRIEDMAN: Yes, it was very helpful. 12 CHAIRMAN DUNLAP: Thank you. 13 Any other questions for the witness? 14 Very good. Thank you. 15 Lance, you have one more representative? 16 MR. TUNICK: I would like to follow-up with a 17 couple of things. 18 The fact that Lotus was able to meet the LEV and is 19 developing the electric Elise is indicative of an interest on 20 their part in clean air and trying to be a socially 21 responsible company. 22 I think also a couple of things that Mr. Holland 23 said are worthy of emphasis that these companies are, 24 Lamborghini was owned by Chrysler and then sold. Lotus was 25 owned by GM and then sold. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 146 1 Every time something like this happens to a 2 company, very often the strategy track gets obstructed and 3 the train is derailed and the timing is not what we like it 4 to be. 5 Also, Dr. Friedman, it is important to note that we 6 have to ask ourselves when were the enhanced evaporative 7 facilities built over the past seven years? The regulation 8 might have been promulgated in 1990, but when were the 9 facilities available for use by the small companies? 10 The last person I would like to introduce is the 11 smallest company Morgan, and Mr. Bill Fink, who is also a 12 California company. 13 MR. FINK: Thank you for letting me speak today. 14 We are very small. Talking of half a dozen cars in 15 California. 16 We have been out of the market for two years in 17 California because the specification change for emissions. 18 We needed to change the engine, and the supplier of the four 19 liter engine that we intended to use had a roaring success in 20 the states and was very busy with other things. 21 The technology that we needed has not been 22 available. We have had the car in being for almost two years 23 now. 24 It is just about to the point where yes, it will 25 pass emissions, and hopefully, OV2 will come out all right. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 147 1 It is very difficult to cope with a moving goal line. 2 The company of Morgan has been in business since 3 1910. They employ 125 people. 4 They use renewable type resources. They use ash 5 framing in the bodies of the car. I would like to see them 6 last for another 85 years. 7 We could use the help in California. Thank you. 8 CHAIRMAN DUNLAP: Thank you. 9 Lance, is there anyone else? 10 Is that it? 11 MR. TUNICK: That would end the presentation. 12 Thank you very much, again. 13 CHAIRMAN DUNLAP: Very good. 14 Does the Board have any questions of staff? 15 MS. RAKOW: Mr. Chairman, I do. 16 CHAIRMAN DUNLAP: Ms. Rakow. 17 MS. RAKOW: In your presentation you noted that 18 $23-million in California dealerships would be affected, and 19 I gather that was based on 550 vehicles being sold. 20 What I heard is that they are looking at only 150 21 vehicles being sold. That perhaps was not a firm number, 22 because I think he said possible. 23 Could you tell me then how you figure out how this 24 relates to California? 25 MR. CARTER: First, the numbers started off at PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 148 1 around 625, and then later was revised to 550. 2 The reason it came from the 550, as Mr. Tunick 3 pointed out, to 150, because since the time of the staff 4 report, two manufacturers, namely Rolls Royce and Ferrari, 5 haven't told us that they do intend to certify. 6 So, that is why the number came down. Now we are 7 talking about 150. That is 23 million, so about a fifth of 8 that. 9 MS. RAKOW: I did not know if it directly 10 corresponds. 11 MR. CARTER: We estimate it at about 6 million. 12 MS. RAKOW: Still in the millions? 13 MR. CARTER: Yes. 14 CHAIRMAN DUNLAP: Mr. Kenny, do you have anything 15 to add before I go to the rest of the Board? 16 MR. KENNY: No. 17 CHAIRMAN DUNLAP: To see if there are comments or 18 questions. 19 MR. KENNY: Nothing to add. 20 CHAIRMAN DUNLAP: Mr. Roberts. 21 SUPERVISOR ROBERTS: Let me start off by saying the 22 number is not terribly significant whether you do or you 23 don't. 24 I'm kind of uncomfortable with the number thing. 25 The speaker kept comparing himself to General Motors. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 149 1 I look at a list here, and it is anything but 2 General Motors, most of which are conforming and being able 3 to meet the requirements, and it just -- I still have a 4 difficult time understanding, and I have heard it over and 5 over again, why they couldn't. 6 I am hearing that some significant portion of these 7 cars are not being sold in California today, but they want to 8 bring them to California, and so we want to change a rule to 9 bring them to California. 10 I do not feel comfortable with that, and I 11 understand maybe somebody has done some work in anticipation 12 that they are going to come here. This reeks of poor 13 planning and poor business decisions. 14 I do not feel compelled to prop up that kind of an 15 effort. It is more of the principle than it is the overall 16 impact. I would be very reluctant to vote affirmative on it. 17 CHAIRMAN DUNLAP: I appreciate that perspective. 18 A word on Mr. Tunick's organization, they have 19 recently formed, and Lance is new to represent the member 20 companies over the last year, and I appreciate the forthright 21 nature that you came to us with this. 22 I had participated with my executive staff in a 23 meeting in Southern California with you where you surfaced 24 this, and I think that for what it is worth you came in a 25 forthright nature and said you wanted to try to build a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 150 1 relationship, and that matters to us, particularly when we 2 have a situation like this emerge when we have a tough policy 3 call. 4 I have to agree with you, Ron, about the signal 5 that it sends. I know that the industry tried to focus on 6 the point that just because they are small volume and 7 represent some labels, it doesn't mean that they are high end 8 exotic vehicles in every case, the numbers are small. 9 The emissions reductions that we are talking about 10 or emissions I should say associated with them, Tom, what are 11 we looking at? 12 MR. CACKETTE: A couple pounds per day. 13 CHAIRMAN DUNLAP: Supervisor Roberts. 14 MR. CACKETTE: Somewhere between 4 and 12, 15 depending on how many of them ultimately certify. 16 CHAIRMAN DUNLAP: I was going to say, Ron, the 17 comment you made about the poor planning, I think that was 18 acknowledged relative to management changes and the like, and 19 I am not hearing them hiding that fact. 20 Mr. Calhoun. 21 MR. CALHOUN: Mr. Chairman, the small volume 22 provision has been there for a long time. 23 It was done primarily because small volume 24 manufacturers do depend for the most part on the larger 25 manufacturers for technology, as was said before. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 151 1 I am sensitive to the few manufacturers that are 2 left out there having difficulty. The cost of the air 3 quality impact is somewhat insignificant, so I am inclined to 4 support the request, because there are not that many vehicles 5 that are going to be sold. 6 You are not going to tell me that Lamborghini and 7 all of these other companies that are going to sell the cars, 8 they are going to delay selling the cars in California 9 because it cost a couple of bucks. 10 CHAIRMAN DUNLAP: Ms. Edgerton. 11 MS. EDGERTON: I had a question. 12 Can the individual makers apply for a variance, the 13 three that are not going to comply? 14 There is no variance procedure. I didn't think 15 there was. 16 I agree with Supervisor Roberts with the following 17 comment, that I wanted to find out if the staff had helped or 18 connected the car makers with the Business Compliance Unit to 19 see if you couldn't help them find the testing facilities or 20 get past the que. 21 I did hear, I think it was Aston Martin that they 22 don't have the technology yet, but in the papers there was 23 mention of some that do, but they can't get tested. 24 Was this referred to Business Compliance or 25 Business Assistance? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 152 1 MR. CARTER: What it boils down to the test lab 2 that is needed has to be able to test under the new enhanced 3 evap procedure. 4 It is a relatively new procedure as we all know, 5 and only two facilities in Europe, that is it. In the United 6 States, there are probably only four. 7 Two of them, ATL runs in Ohio and Pheonix, and GM 8 has one. Mercedes has one, as far as we know, and that is 9 it. 10 So, the availability of the testing facilities is 11 very, very limited. 12 MS. EDGERTON: The answer to the question is no. 13 MR. KENNY: Yes, the answer is no. 14 MS. EDGERTON: Thank you. 15 CHAIRMAN DUNLAP: All right. 16 Dr. Friedman, did you have anything else? 17 DR. FRIEDMAN: The biological effect of saying yes 18 is so trivial and negligible as it doesn't make any 19 difference about the health of the population. 20 There are two choices here. We can look tough, 21 because after all, you know, there is a segment of our 22 population that really wants us to be tough for all the wrong 23 reasons, for fancy names like Lamborghini, and Rolls Royce, 24 and so forth, which I consider posturing, or we can give a 25 break, even if it not $32-million, even if it is only PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 153 1 $6-million, to some small business. 2 Although I started out feeling very hard nosed 3 about this, I am inclined to give these folks a break. It is 4 one year, a couple of pounds, we are talking megatons around 5 this table since I joined this Board, and if they do not 6 comply they are out of business in the State of California. 7 I am now, I have sort of flipped the other way, and 8 I think we ought to give them the break for the one year, 9 even if it is a six or seven million dollar venture in the 10 State. 11 SUPERVISOR RIORDAN: Mr. Chairman, if I might just 12 build on that. 13 My thought is that we clearly have an opportunity 14 to help what I believe are some of the smaller automotive 15 interests in the State of California, and in the world as 16 well, probably, and I have no trouble with that as Dr. 17 Friedman just spoke, we are not talking about that much 18 pollution, but the important thing is to say to them, at 19 least in my opinion, this is from my point of view, the one 20 time that you will get an extension and make use of it, 21 because if you were to reappear next year with problems, I 22 would not be as helpful. 23 I have no problem with this request at this time 24 and with the understanding and what has been represented, 25 that we hope all of you make it in the process through the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 154 1 coming year. 2 CHAIRMAN DUNLAP: I think that is well said. 3 I would like to emphasize that point with certainly 4 a great deal of sympathy for Supervisor Roberts position for 5 extensions and planning time. 6 We are looking at seven years that people have 7 some, had the chance to focus on this, and I know it is tough 8 with management changes, but we are serious about the 9 business of clean air, and this Board exists to create better 10 air quality. 11 Lance, there is clearly a message being sent to you 12 all, you need to get it together and focus on what is 13 important to us here, or you won't have a place in this 14 market. 15 We are sorry to say that, we are for economic 16 development, and certainly for people to have access to the 17 California market place, but public health is important, too. 18 With that -- 19 SUPERVISOR SILVA: In my district there is a 20 neighbor that I am familiar with, and they have of the 12 21 cars that were listed here, I think 4 of them. 22 You can see them on the road once in a while, 23 usually on Sunday afternoon, Callaway, Corvette, the Ferrari, 24 the Lamborghini, the Rolls Royce, and for the most part these 25 are specialty cars, not used on a regular basis, and I think PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 155 1 we should be sensitive to the manufacturers. 2 I think by voting yes we are encouraging a market 3 that is considered throughout the world, and I think that the 4 more competition we have, and if it takes one year to get 5 their feet on the ground, I support that. 6 MS. EDGERTON: I need to ask a question. 7 CHAIRMAN DUNLAP: Sure. 8 MS. EDGERTON: If this Board does go forward with 9 this, I hope that it wouldn't because we extended it for a 10 year that Rolls Royce would not certify, what would the 11 effect be of this on the 75 percent that are prepared to 12 certify? 13 MR. CARTER: If they don't certify, then the worst 14 we are looking at is what the original staff report said, 12 15 pounds per day. 16 I do not see any reason why Rolls Royce would not 17 certify, it is in their interest to sell their cars. 18 MS. EDGERTON: It seems to me that even within the 19 existing extension, there should be some showing of the 20 remaining three that cannot make it. 21 SUPERVISOR RIORDAN: Realistically speaking, how 22 many Rolls Royce's are sold in California? 23 Our economy is getting better, but I do not know if 24 it is that much better. 25 They are all over where she lives. Seriously, in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 156 1 the whole perspective on the South Coast basin, in which both 2 of us live, we are not talking that many cars, in that 3 particular family of cars. 4 MR. CROSS: The other point, if you do create a 5 special exemption, or requirement for evaluation or some 6 hoops, you also create an evaluation requirement where the 7 staff has to get deeply involved in the engineering and 8 timing issues associated with these manufacturers for the 9 small number of cars that we are talking about. 10 I recommend against that. 11 MS. EDGERTON: I would like to respond. 12 I did look at the, for purposes of voting on this, 13 we have to look at the total emission, because there would be 14 no requirement for Rolls Royce's and so forth to certify. 15 There have been comments about how this is a couple 16 of pounds, but that is not by the year 2010. There are 17 several tons in this report by the year 2010. 18 I am reminded when we went -- 19 CHAIRMAN DUNLAP: Lynn, that is not right. 20 MR. KENNY: You are correct about the fact that we 21 do provide a one year delay, that all the cars that we are 22 talking about whether it is Ferrari, Rolls Royce, that we do 23 think will certify, would have the option of an additional 24 year, but if all of those taking additional year, we are not 25 tons in that situation. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 157 1 We are talking about 12 pounds in 2010. It never 2 gets to tons. 3 MS. EDGERTON: I went through a clear briefing, and 4 we added up the number of tons. 5 MR. CARTER: Tons per year, pounds per day, but if 6 you multiply that by 365 days, it came out to a couple tons. 7 MS. EDGERTON: And do it per year, that is not a 8 pound. 9 MR. CARTER: Tons per year, not day. 10 MR. KENNY: The inventory is in the thousand per 11 day. 12 SUPERVISOR RIORDAN: The point needs to be made 13 that we are talking only about one year of sales. 14 We are not talking about all those that we see on 15 the road that are very old. Some are old. 16 So, we are talking about very narrow number that 17 do, as Supervisor Silva said, appear usually only on Saturday 18 and Sunday in the general area. 19 We do not drive our, whatever, our Morgans to work 20 and leave them out in a parking stall. I don't think they 21 would last very long. 22 CHAIRMAN DUNLAP: Supervisor Silva. 23 SUPERVISOR SILVA: I would be ready to make a 24 motion at any time. 25 CHAIRMAN DUNLAP: Very good. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 158 1 Supervisor Roberts. 2 SUPERVISOR ROBERTS: May I make a comment, because 3 I am sensitive to a comment I heard about posturing. 4 Last year Supervisor Silva and I, I think it was 5 Mr. Calhoun, went to Detroit, and we saw a car that we were 6 involved in building from the ground up. 7 It is a new prototype. 8 CHAIRMAN DUNLAP: World Electric Vehicle. 9 SUPERVISOR ROBERTS: At the Detroit Design 10 Center. 11 I'm looking at the number of years that these 12 companies have to comply with technology, that is not 13 terribly sophisticated compared to what we are doing, in a 14 far shorter time, producing a lot less quantity, with less 15 experience, and I have to tell you, I think what you are 16 talking about is bad business decisions, and I am not going 17 to support that, and whether that is posturing or not, I 18 think that there is something here that is more important 19 than the pounds or tons or however you want to measure that. 20 CHAIRMAN DUNLAP: Good point. 21 What I would like to do at this juncture is 22 conclude the public testimony, and I would like staff at this 23 juncture to summarize any written comments to the staff. 24 MS. NOLAN: No additional comments were received. 25 CHAIRMAN DUNLAP: Since all testimony, written PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 159 1 submissions and staff comments for this item have been 2 entered into the record, and the Board has not granted an 3 extension of a common period, I'm officially closing the 4 record on this portion of Agenda Item 97-4-3. 5 Written or oral comments received after the comment 6 period has been closed will not be accepted as part of the 7 official record on this Agenda Item. 8 Ex parte communications need to be disclosed. Is 9 there anything that we need to disclose at this point? 10 Mr. Cross and Mr. Cackette, I was in a briefing 11 with COSVAM originally, but I believe that was prior to the 12 notice period that was many months ago, but I will 13 acknowledge that meeting and the fact that I became 14 acquainted with COSVAM then. 15 All right. I guess to conclude, and then I will 16 certainly recognize any motion, the staff is recommending 17 that the Board adopt amendments to the enhanced evaporative 18 emission reg and test procedures that allow a one year 19 postponement of the regulation for the ultra small volume 20 manufacturers. 21 The purpose of these amendments is to provide ultra 22 small volume manufacturers additional time to comply with the 23 regulation and align California implementations schedule with 24 the U.S. EPA implementation schedule currently in place. 25 Granting this request will prevent economic losses for PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 160 1 manufacturers and California small business with only an 2 extremely small increase in emissions. 3 I would like to summarize yet again, a few things 4 for COSVAM's benefit. Number one, you need to take very 5 seriously our deadlines and time periods. 6 We are looking forward to working with you all in 7 the future, but we want to hold you accountable, and do not 8 want to see you back in a year. 9 In addition, I seem to recall COSVAM suggesting at 10 my original meeting that you would be willing to engage in 11 some kind of creative emissions offset voluntary program such 12 as scrappage or something along those lines, and I did not 13 hear you mention that today, but Lance, I will take you at 14 your word, and say that we would certainly welcome some 15 communication in the future about what you might do to make 16 those 8 to 12 tons whole, it is pounds, excuse me, pounds, to 17 be whole, and I will be interested in hearing what you have 18 to say at the right time. 19 MR. TUNICK: We have started a diagnosis log on 20 that. 21 CHAIRMAN DUNLAP: With that, the Chair entertains a 22 motion to move this item. 23 SUPERVISOR SILVA: So moved. 24 MS. RAKOW: Second. 25 CHAIRMAN DUNLAP: We have before us Resolution PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 161 1 97-20, which contains the staff recommendations. 2 We have a motion and a second to adopt the staff 3 proposal. 4 Any discussion that needs to occur? 5 I will ask Pat, the Board Clerk, to call the roll. 6 MS. HUTCHENS: Calhoun. 7 MR. CALHOUN: Aye. 8 MS. HUTCHENS: Edgerton. 9 MS. EDGERTON: No. 10 MS. HUTCHENS: Friedman,. 11 DR. FRIEDMAN: Aye. 12 MS. HUTCHENS: Hilligoss. 13 MAYOR HILLIGOSS: As long as there are going to be 14 very few cars, and they are going to do some work to take 15 care of that, I will go along with it. 16 MS. HUTCHENS: That is a yes? 17 MAYOR HILLIGOSS: Yes. 18 MS. HUTCHENS: Parnell. 19 MR. PARNELL: Aye. 20 MS. HUTCHENS: Rakow. 21 MS. RAKOW: Aye. 22 MS. HUTCHENS: Riordan. 23 SUPERVISOR RIORDAN: Aye. 24 MS. HUTCHENS: Roberts. 25 SUPERVISOR ROBERTS: No. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 162 1 MS. HUTCHENS: Silva. 2 SUPERVISOR SILVA: In honor of Lynn's neighborhood, 3 I vote yes. 4 MS. HUTCHENS: Dunlap. 5 CHAIRMAN DUNLAP: Aye. 6 MS. HUTCHENS: Resolution passes 8 to 2. 7 CHAIRMAN DUNLAP: Thank you. Thank you very much. 8 Move to the next item, 97-4-4, a public meeting to 9 consider the role of the Fuel Cell Technologies in the Low 10 and Zero Emission Vehicle Program. 11 We will now hear a report on recent developments in 12 fuel cell technologies and their role in the low emission 13 vehicle effort. 14 As many of you know, the low emission vehicle 15 program is a primary element of California's long term plan 16 for reducing air pollution from light and medium duty 17 vehicles. The Board adopted this program in September of 18 1990. 19 In November of last year, staff presented an 20 information progress report on the Low Emission Vehicle 21 Program indicating significant technological 22 progress has been made in complying with the program 23 requirements. 24 While extremely clean conventional vehicles and 25 advanced battery powered zero emission vehicles are now being PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 163 1 introduced to the public worldwide, fuel cell activity is 2 also gaining momentum. Fuel cell technologies are another 3 technology that appears promising for low and zero emission 4 vehicle applications. 5 It is interesting to note that when I was in 6 Detroit with Tom Cackette two years ago, we asked about 7 prospects for commercial production of fuel cell vehicles, 8 and the answer was that it was a very long way off, but as 9 recent news reports have indicated, prototype fuel cell 10 vehicles are being produced, and it appears fuel cell 11 vehicles may be closer to commercial production than we had 12 been led to believe. 13 I'm sure staff will address this point in its 14 presentation on recent progress in fuel technology 15 development. I should mention for those of you in the 16 audience that don't know her, Lynn Edgerton has been very 17 interested and has encouraged the staff of the Board to stay 18 abreast of this issue, and I appreciate her interest and 19 involvement there. 20 With that, Mr. Kenny, I will ask you to introduce 21 this item. 22 MR. KENNY: Thank you, Mr. Chair and Members of the 23 Board. 24 In 1990 amendments to the Clean Air Act required 25 California to develop a comprehensive plan to meet compliance PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 164 1 with Federal air quality standards within the specified 2 timeframes. 3 A SIP has been approved for California by the 4 Federal EPA. According to emission inventory models, mobile 5 sources account for more than 60 percent of ozone precursor 6 emissions in the State, therefore, reducing emissions from 7 these sources is essential to meeting the State and Federal 8 air quality standards. 9 A vital element of California's plan to reduce 10 mobile source emissions and achieve our air quality goals is 11 the Low emission Vehicle Program. 12 I believe it is fair to say that the program has 13 set the pace for the development of new technologies to 14 achieve very low and even zero emissions from motor 15 vehicles. 16 Although today's briefing for fuel cell 17 developments, I do want to emphasize that the staff continues 18 to believe that battery technology development is progressing 19 very well, and we are looking forward to evaluating the 20 advance battery electric vehicles that will be available in 21 the next few years, staff expects that fuel cells also have 22 strong potential to satisfy the zero emission vehicle 23 requirement based on their particular attributes, and they 24 will serve us in expanding the zero emission vehicle share of 25 the vehicle market in the future. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 165 1 I would now like turn to Neeraj Pakala. 2 MR. PAKALA: Thank you, Mr. Kenny. 3 Good afternoon everyone. 4 The topic of this presentation is the recent 5 developments in the fuel cell technology and the role in the 6 ARB Low emission Vehicle Program. 7 I will begin by providing an outline of the 8 presentation. First, I will provide some background on fuel 9 cells, emphasizing the types of fuel cell technologies that 10 are most useful for vehicle applications. 11 Second, I will describe advantages and 12 disadvantages of these various technologies, and I will 13 provide a status report on the current level of development 14 of fuel cells. 15 Finally, I will briefly describe ARB fuel cell 16 program. This is a typical fuel cell powering an electric 17 motor. 18 Either a solid or liquidity is sandwiched between 19 two electrodes. In this case, a platinum solid volume film 20 proton exchange membrane, or PEM, functions as the 21 electrolyte that transports protons across the cell. 22 As shown here, hydrogen fuel is introduced on the 23 the left electrode, and oxygen to the right electrode. The 24 resulting chemical reaction in the presence of the platinum 25 catalyst generates electricity in water. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 166 1 To generate higher levels of power, multiple sets 2 of these cells are used. 3 Listed here are various types of fuel cells in 4 increasing order of their operating temperature. The fuel 5 cell is generally identified by the electrolyte being used. 6 For example, a proton exchange membrane, or PEM, 7 functions as the electrolyte in the first entry of the table, 8 which is the same as the one shown in the previous slide. 9 Phosphoric acid fuel cells are successfully being 10 used for stationary power applications, and an applicability 11 of these systems for buses has been demonstrated. 12 Recently, molten carbonate fuel cells have received 13 interest in the stationary area. A key point here is that 14 hydrogen and methanol are preferred as fuels for low 15 temperature operation. 16 PEM fuel cells are already being applied to 17 vehicles for several reasons. As was shown in the previous 18 slide, the item PEM cells operate at 200 degrees Fahrenheit. 19 High currents densities can be obtained at these 20 temperatures. 21 The cell quickly responds to transient loads. No 22 corrosive electrolytes are used in the process. 23 PEM fuel cells are somewhat insensitive to 24 orientation, and compact and lightweight cells can be 25 fabricated. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 167 1 Since we are concentrating on automotive 2 applications, the rest of the talk will focus on PEM fuel 3 cells only. PEM fuel cells have many advantages for 4 automotive applications. 5 First, stored hydrogen fuel cell vehicles would 6 meet the zero emission vehicle requirements because water is 7 the only exhaust constituent. 8 Second, fuel cells offer two to three times higher 9 appreciancy than a conventional engine. 10 Also, many fuel cells use alternative fuels, such 11 as hydrogen and methanol. Thus fuel cells not only reduce 12 fuel consumption but also promote the efficient use of 13 alternative fuels. 14 Fuel cell vehicles can potentially offer driving 15 range and refueling time similar to the gasoline engine, a 16 key factor in bringing these vehicles to the market place. 17 Fuel cell power plants can yield a longer operating 18 life due to the absence of moving parts and require less 19 maintenance. 20 Another key feature is that individual cells can be 21 combined to produce more power, a fairly straightforward 22 process compared to the output of the conventional engine. 23 Fuel cell vehicles will use electric motors and 24 controllers that are being developed for electric vehicles. 25 Based on the method of on board fuel utilization, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 168 1 regular fuel cells can be conveniently divided into two 2 types, direct systems and indirect systems. 3 For direct systems, the on board fuel is directly 4 introduced into the fuel cell stack. On the other hand, for 5 indirect systems, another fuel is processed by the vehicle to 6 produce the hydrogen that is ultimately used by a fuel cell. 7 Next I will talk about the status of the direct 8 systems. Stored hydrogen PEM fuel cells are the most mature 9 technology according to a study by the AD Little Company. 10 Fuel cells stack cost is about $70 per kilowatt on 11 a high production volume basis. This amount is about three 12 times the current target of vehicle manufacturers. 13 Improvements in membranes and other components 14 therefore are needed to reduce costs. Power density, which 15 determines the size of a fuel cell stack and platinum 16 loading, which is a major factor for the cost of the stack, 17 appear to be at adequate levels for vehicle applications. 18 Significant focus has been made in the past 19 decade. For example, power density has increased 7 fold, and 20 platinum loading has decreased by 60 fold. 21 Clearly these accomplishments, along with 22 implements in other related components, have led to recent 23 successful vehicle demonstrations. 24 This is the second generation fuel cell car built 25 by Daimler Benz. Compressed hydrogen is stored in the two PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 169 1 bottles placed in the roof. 2 The fuel cell system is located in the rear of the 3 vehicle, while the motor and electronics are placed in the 4 front of the vehicle. 5 This table compares the features of Necar I and 6 Necar II, the first and second generation cars. 7 The seating capacity has gone up from two to six, 8 and the driving range has increased by 50 percent for the 9 same power level. 10 The weight of the power plant has decreased by more 11 than three fold. Given the three year interval between the 12 models, these accomplishments are quite remarkable. 13 Toyota unveiled a hybrid fuel cell vehicle last 14 fall. It used its Way for Electric Vehicle Platform to 15 expedite the development and demonstration of the vehicle. 16 It has a 20 kilowatt fuel cell stack supported by a 17 nickel methohydrate battery pack for hard accelerations. The 18 device containing a titanium based alloy is used for hydrogen 19 storage. The driving range is reported to be about is 120 20 miles per hydrogen fill. 21 Ford has recently announced its plans to build a 22 family size car by the year 2000. This project, named P 23 2000, will be partly funded by the Department of Energy. 24 The car will be made of light weight materials, 25 such as aluminum, and will carry bottles containing PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 170 1 compressed hydrogen gas. 2 The car may run solely on the fuel cell or may 3 contain a small battery pack for storing recovered power that 4 is generated during the braking process. 5 Direct methanol fuel cell systems generate power by 6 converting methanol into water and carbon dioxide, while the 7 basic cell is similar to the hydrogen system. Several 8 attributes make the methanol based system promising. 9 Methanol is liquid with an energy content several 10 times higher than that of hydrogen, and methanol storage and 11 handling is relatively simple and occupies less space. 12 Methanol systems will produce carbon dioxide 13 emissions but at lower levels than gasoline engines. These 14 systems are reported to exhibit a rapid transient response. 15 Methanol can be reasonably accommodated in the 16 existing fueling infrastructure certainly with less 17 difficulty than establishing a hydrogen fueling 18 infrastructure. 19 California currently has 55 publicly available 20 methanol fueling stations. 21 Some issues remain with the direct system. Lack of 22 a hydrogen refueling infrastructure is considered a strong 23 challenge to marketing stored hydrogen fuel cell vehicles. 24 Further, gas storage techniques and related safety 25 issues need to be further addressed. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 171 1 Direct methanol fuel cells are still in the initial 2 stage of development, and their power densities are low 3 compared to direct hydrogen systems. 4 Further, these systems require higher platinum 5 loadings. As a result, further development and demonstration 6 is required. 7 I would now like to talk about indirect fuel cell 8 systems. Since indirect fuel cell systems operate on a great 9 deal of fuels, a variety of fuels, gasoline, methanol and 10 natural gas, the fueling infrastructure issue is not as 11 great. 12 But the immediate question is how do these systems 13 operate on different fuels? 14 These systems are equipped with on board fuel cell 15 processor that is capable of generating hydrogen from 16 gasoline, methanol or natural gas, and the fuel cell stack 17 uses the resulting hydrogen. 18 The fuel processor functions at different 19 conditions based on the fuel being used. Chrysler recently 20 announced its plans to double up a gasoline powered fuel cell 21 car. 22 For example, this is Chrysler's concept fuel cell 23 car that has a fuel processor able to use gasoline or another 24 fuel to produce the hydrogen. Chrysler plans to double up 25 this vehicle by 1999. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 172 1 As shown here, the fuel processor contains a unit 2 to store fuel, a partial oxidation reactor that produces 3 hydrogen and carbon monoxide from the vaporized fuel and two 4 other reactors for producing the unwanted carbon monoxide 5 carbon. 6 The resulting hydrogen rich stream is fed to the 7 fuel cell stack for power generation. Unfortunately, the 8 fuel processor makes the system complex and leads to 9 emissions, such as carbon monoxide. 10 Because the fuel processor contains several units, 11 the overall energy efficiency will be reduced, and the 12 response to load changes will be delayed. 13 The platinum catalyst in the fuel cell stack is 14 sensitive to carbon monoxide poisoning, and therefore, it 15 should be tightly controlled. 16 In summary, direct hydrogen fuel cells, although 17 fairly well developed, are limited by lack of a hydrogen 18 refueling infrastructure. 19 On the other hand, indirect fuel cells address the 20 hydrogen refueling issue but will lead to emissions, add 21 complexity and reduce the energy efficiency. These factors, 22 however, may delay the fuel being utilized. 23 The ARB program is described in the next few 24 slides. 25 In addition to ARB staff monitoring of fuel cell PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 173 1 technology, an expert fuel cell panel is the being assembled 2 to provide the Board with guidance in its policy on planning 3 related to fuel cells. 4 The panel is expected to assess present and future 5 worldwide fuel cell technology development while visiting 6 manufacturing facilities and by interviewing experts in the 7 field. 8 As the Chairman of the Battery Technical Advisory 9 Panel, Dr. Fritz Kalhammer stated, it has displayed 10 considerable expertise in assessing the performance and 11 availability of batteries for electric vehicles. 12 In recognition of this and because fuel cells share 13 many of the technical properties of batteries, Dr. Kalhammer 14 was chosen as the Chairman of the present four member Fuel 15 Cell Technical Advisory Panel. 16 The selection of the three other members has been 17 completed and will be announced once their contracts are in 18 place. 19 From an emission and technology standpoint, stored 20 hydrogen fuel cells are among the best fuel cell designs. 21 The zero emission technology can be promoted by exploring new 22 approaches to address the hydrogen infrastructure issue. 23 According to a recent study by Direct Technologies 24 Inc., for the Ford Motor Company and the Department of 25 Energy, small scale natural gassed processors or hydrogen PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 174 1 regeneration are cost effective compared to large scaled 2 unit. 3 Such studies, staff believes, need to be expanded 4 to assess the environmental impact and practicality of this 5 approach for centralized fleet applications. 6 Further, staff will work with other governmental 7 agencies, including the Department of Energy and the South 8 Coast Air Management District to promote fuel cell vehicles 9 and related infrastructure development. 10 Methanol based systems appear to be promising 11 because the gasoline infrastructure can be used for methanol 12 with some reasonable modifications. 13 As mentioned earlier, California already has the 14 beginning of the methanol fueling infrastructure in place. 15 Staff plans to measure emissions from a methanol 16 power fuel cell bus that uses a methanol fuel processor. 17 Also, ARB is sponsoring a comprehensive study to 18 quantify emissions from different combinations of fuel and 19 fuel processors using theoretical models. The study is being 20 conducted. 21 The staff is working with researchers to facilitate 22 the development of the direct methanol technology. 23 This concludes my presentation, and I will be happy 24 to respond to any questions at this point. 25 SUPERVISOR RIORDAN: Are there questions from the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 175 1 Board Members at this time? 2 We appreciate your extensive staff report. That 3 was very helpful, because we are on occasion asked how fuel 4 cell technology is going, and this gives us the opportunity 5 to respond with some credibility, I think. 6 Mr. Chairman, I don't think there were any 7 questions of staff. 8 CHAIRMAN DUNLAP: Well, we have three witnesses who 9 have signed up. 10 If there are no questions of staff, at this 11 juncture, let's hear from the witnesses. 12 I mentioned at the outset of the item how important 13 it is for us, as the Supervisor just mentioned, to be aware 14 of what is going on in the fuel cell area, but also to use 15 the limited brain power or financial resources to nurture the 16 development of fuel cell technology is important, and we want 17 to do that, and this presentation signifies how important it 18 is for us to be engaged in the process. 19 Why don't I call the three witnesses who have 20 signed up to come forward. Jim McDowell, of Nova BUS, Chung 21 Liu, from the South Coast District, and Dr. Larry Berg, from 22 Ballard, who sent us a nice package. 23 I appreciate that Larry. 24 Mr. McDowell. I will not give you three gentlemen 25 the same license that I gave that last panel to broker your PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 176 1 comments. 2 MR. McDOWELL: We are more independent perhaps than 3 the last group as well. 4 I appreciate the Board receiving us today and to 5 have an opportunity to provide our comments. 6 I have circulated a short note that kind of is what 7 the position of Nova BUS is, and this reflects our experience 8 in hybrid electric and fuel cell technology development as it 9 relates to transit buses. 10 Nova BUS is a manufacturer of transit buses. We 11 build about 1400 vehicles a year. These vehicles are used in 12 metropolitan areas throughout the United States. 13 Since 1992, we have been involved in a number of 14 different fuel cell development programs, to provide 15 conceptual designs or provide a demonstration vehicle fuel 16 cell technology. 17 In our experience one of the things that I do is 18 caution the Air Resource Board and staff in propagating 19 regulations that may cause this technology being introduced 20 before it is ready. 21 In many applications, if you see technology that 22 looks like it is at the forefront in publications and 23 newspapers, it seems like there is a preference 24 recommendation to advance that technology as quickly as 25 possible. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 177 1 There has been experience that we have had both in 2 the hybrid electric and other technology development that 3 indicates that putting that technology out prior to the 4 natural maturation may in fact be detrimental to the overall 5 use. 6 The experience I guess I related to in the paper 7 that was provided was on a couple of different hybrid 8 electric vehicle experiments where the technology involved in 9 the development of electric propulsion systems is minimal 10 compared to the advancement necessary for fuel cells, but the 11 hybrid electric propulsion system is remaining problematic 12 since entering into revenue service. 13 There is a potential for fuel cells, and I believe 14 that fuel cells may offer a significant solution for emission 15 reduction and hybrid electric vehicles at some point in the 16 future. 17 That is the summary of my presentation. If there 18 are any questions that the staff or Board may have? 19 CHAIRMAN DUNLAP: Any questions? 20 Very good. 21 Thank you for joining us. I appreciate it. 22 Dr. Liu. 23 DR. LIU: I am Chung Liu, Executive Director of the 24 South Coast Air Quality Management District. 25 I come here on behalf of our Executive Officer and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 178 1 appreciate the opportunity to address you on this important 2 issue. 3 AQMD is very proud of a process involving the fuel 4 cell development. We strongly support the effort of the 5 Board and staff to evaluate the low and zero based emission 6 program. 7 Fuel cells are specifically mentioned in our Air 8 Quality Management Plan as important avenues for us to 9 achieve clean air in the future. 10 We believe that wide scaled deployment of fuel cell 11 technology is essential to maintain air quality by the 12 Federally mandated 2010. 13 Since 1988, the South Coast district has committed 14 resources in supporting the development and commercialization 15 of fuel cells for both stationary and transportation 16 technologies. 17 For example, agency has cosponsored technology 18 development projects for the battery powered systems, 19 International Fuel Cells, Energy Partners, Chrysler, 20 AlliedSignal Aerospace and Georgetown University. Of 21 particular importance was our cooperative effort with Ballard 22 to build the world's first two prototype PEM fuel cell 23 buses. 24 AQMD's strong support has helped Ballard enter into 25 its phase 3 deployment of zero emission transit buses in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 179 1 Chicago, Vancouver and possibly a site in the South Coast 2 region. 3 The South Coast district also plays an important 4 role in commercializing the stationary fuel cell by becoming 5 the first stationary fuel cell power plant in our district, 6 and right now there are over 100 units being sold worldwide. 7 Recently the South Coast district has worked 8 cooperatively with ARB staff to see if we can work together 9 on a few innovative technologies in these areas, such as our 10 joint efforts to quantify emissions from fuel cell reformers 11 in an evaluation of direct methanol cell technology, as your 12 staff just described to you. 13 We, therefore, are very pleased that your Board and 14 staff has established the advisory panel, and we offer one 15 suggestion regarding the implementation. 16 In the ongoing spirit of our partnership with ARB 17 and keeping the importance of fuel cell technology in our Air 18 Quality Management Plan, we request that the South Coast 19 district talk with the ARB fuel cell technical advisory panel 20 on an informal basis. 21 The primary purpose of our involvement will be to 22 keep abreast of the latest development in fuel cell 23 technology with interaction with panel members and technology 24 developers. In turn the extensive knowledge basis that we 25 have at AQMD can't also contradict your process. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 180 1 We are excited by the further development and 2 partnership with ARB, and we look forward to continuing 3 corporation and commercialization. 4 Thank you for this opportunity, and if there are 5 any questions, I will be glad to answer them. 6 CHAIRMAN DUNLAP: Thanks, Chung. 7 I think that is an appropriate request. We 8 appreciate it. 9 The staff has told me for some time of the close 10 relationship that they have with your office, and we cost 11 share on a number of projects and programs. As a matter of 12 fact, I think I researched items coming up, Tom, we have two 13 or three where we are partners with South Coast. 14 For my part, if my Board Member colleagues and 15 staff are comfortable, we will be happy to include you in the 16 process and make sure you are aware of what is going on and 17 have a role to play as the information is available. 18 Thank you. Good to see you. 19 Dr. Berg, thank you for the nice package that you 20 provided us about Ballard and the annual reports and the 21 background information, and I appreciate you running my fax 22 machine out of paper once a month, sending me everything 23 going on in the fuel cell area. 24 We appreciate that. 25 DR. BERG: It was 14 months ago when I was here PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 181 1 when the mandate was modified and you included fuel cells in 2 your Advanced Technology Program, and we wanted to once again 3 say thank you for that, and thank you, the staff, and you, 4 Mr. Chairman, and your colleagues, for working with us in the 5 past year. 6 A couple of quick comments. It has been an 7 exciting year since we left here at the end of March, if my 8 recollection is correct, in that a number of other automobile 9 manufacturers have received the PEM fuel cell stacks, such as 10 Volvo and Volkswagen. 11 The most significant event in terms of our company 12 and in terms of the commercialization of the fuel cells in 13 the short term was recently announced, a joint venture 14 between Daimler Benz and Ballard Power Systems into which I 15 won't go into any detail. 16 But I would like to say a couple of things about 17 the questions asked of me in a variety of settings since 18 then, what does it mean, I think, in terms of putting in 19 perspective of commercialization, it means half a billion 20 dollars can be going into the technology. 21 If you look at that, you have done far more than I 22 have. In the context of other expenditures of other 23 technologies in the last decade, it indicates a significant 24 commitment on a part of one of the, if not the premiere 25 automobile manufacturer to PEM technology. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 182 1 That commitment on the part of Daimler Benz was the 2 reason that Ballard decided and our Board voted in the first 3 week of April to accept one proposal for such a venture and 4 to reject another proposal from a competing company. 5 It was based on several things. First of all, the 6 reputation and the skills that are involved at Daimler. 7 Daimler is the largest investment group corporation 8 in Germany. We also as a company, a small company, wanted to 9 make sure that when we went into partnership in this case a 10 25 percent partnership in common stock, that that company had 11 shared our commitment to the technology, and we believe that 12 Daimler Benz and Mercedes Benz, their automobile unit, can do 13 that, did that. 14 In response to that question, though, I want to 15 state that we went into this because we had a four-year 16 relationship with them, and it was very good and produced the 17 first two vehicles. That is the reason. 18 The second thing I wanted to point out is that we 19 are putting all of our fuel cell systems into a new company 20 system. I won't tell you the name until it is approved by 21 everybody. 22 That means that the engine then becomes the focus 23 in terms of reduction of cost and a variety of other factors, 24 and we think that the experience of Mercedes will bring about 25 the commercialization much quicker. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 183 1 There is a more specific comment that I wanted to 2 make specifically to Supervisor Roberts. A year ago I 3 mentioned that we were opening a facility in San Diego 4 County. We have done that. 5 We went from zero people, which is where we were, 6 working in that facility, and more in the US, but working in 7 the facility today are 16 individuals who have been hired 8 new, all of them from California. 9 That is going to grow at a very substantial rate, 10 and presently, Supervisor Roberts, we are investing 11 three-quarters of a million dollars in retrofits in the 12 building to expand. 13 We have had to expand it before we even got into 14 it, basically, so to speak. I also have some other news 15 related to California and jobs and relationship to Daimler 16 Benz. 17 I was informed that all of the heavy duty methanol 18 work, and that relates not just to buses, one of the other 19 attractions to Daimler is that they are one of the world's 20 largest manufacturers of buses and heavy trucks, all of the 21 methanol related work on the heavy duty will be done in North 22 America, and one half of that will be done in San Diego 23 County. 24 In that system's company, we also will be 25 transferring -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 184 1 CHAIRMAN DUNLAP: I created a problem, Larry. 2 The rest of the Board will give him a bad time for 3 months. 4 DR. BERG: We will do what. We can be sharing 5 here. 6 I was authorized to say that in the State of 7 California, we plan to, at the very minimum, triple the 8 operation in the next three years. 9 We also, in December, formed a stationary 10 subsidiary, which is an US subsidiary, based in Princeton, 11 New Jersey, and they are also coming down to sunny San Diego 12 County. 13 So, we are very excited. There is one other 14 development that will be announced in the near future, and I 15 am authorized to tell you that we are going to be able to 16 speed up the fuel side of the technology by signing a 17 Memorandum of Understanding with Methanex Corporation, and 18 Daimler Benz will be a working partner, not under the 19 memorandum but an understanding, but we will bring in another 20 resource which will help speed the process of this technology 21 to the point where it is commercial. 22 And I will close simply by reminding everyone that 23 the Executive Vice President of Daimler Benz at the 24 announcement ceremony in Vancouver indicated that they had no 25 intention of moving into a niche market. We plan to market a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 185 1 hundred thousand of these engines by the year 2005. 2 We at Ballard, being smaller and somewhat prone to 3 be impatient, hope that our distinguished partners will be 4 able to meet that in the time frame of your mandate. 5 My own prediction is that we will do that. 6 CHAIRMAN DUNLAP: Thank you, Larry. 7 For the Board Members that do not know Dr. Berg, he 8 served for many years on the South Coast Board with a key 9 voice for clean air, and I enjoyed my time working with him, 10 and I have enjoyed having him make sure that I was aware of 11 fuel cell developments worldwide. 12 DR. BERG: I will get you some paper. 13 CHAIRMAN DUNLAP: Go ahead, Ron and Lynn. 14 SUPERVISOR ROBERTS: For a company that shows such 15 good judgment, that bodes well for you, and I am absolutely 16 certain that you are going to succeed, but it should not go 17 unnoticed that we have also supported the City of Chula Vista 18 in their efforts to acquire the Ballard buses for their city 19 as a test program, and we hope that will culminate in a 20 successful purchase here. 21 DR. BERG: We are discussing a program with them 22 and also with several other communities. 23 Three buses are being delivered to Chicago by the 24 end of next month and go in service on regular routes in 25 Chicago in July. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 186 1 In September, three more go in service on fare 2 carrying capacity in the community of Bernaby, which is where 3 the facility is located, right outside of Vancouver. 4 We hope that the next buses that will become 5 available will be here for testing. Also, I think you will 6 see in the near future from our colleagues that Mercedes Benz 7 and Daimler, I believe that you will see one of these fuel 8 cell buses in Europe in the not too distant future. 9 MS. EDGERTON: The record should reflect that Dr. 10 Berg is a large reason why we have Ballard in California 11 instead of somewhere else. 12 I wonder if you would go over the consequence to 13 California. Can you, since Ballard is a Canadian company, I 14 would like to, if you have any other details available at 15 this time, with respect to potential dollar value of what is 16 going on here, or any more details about impact of 17 California's economy? 18 DR. BERG: There are a couple of things. 19 I would not put a dollar value on it, but I would 20 say that there are a couple of things, first of all, Ballard 21 from the beginning we envisioned it as an international 22 company. 23 We envisioned facilities. We envisioned facilities 24 in Europe. We envisioned facilities both manufacturing and 25 research and development in the United States. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 187 1 The research and development part on the heavy duty 2 side will be located in California. 3 We also have Ballard Power Corporation, which is 4 located there. That is our US subsidiary of Ballard Power 5 Systems. 6 We have just formed another company, Ballard 7 Generation Systems, which will be marketing stationary fuel 8 cells of all sizes up to one megawatt. Part of that program 9 will be in San Diego. 10 I think that items of the marketing and development 11 programs that we have, our contribution in California will be 12 in the hundreds of employees in the not too distant future. 13 I think we should point out that the money that is 14 being invested there is in addition to Canadian money moving 15 to California, which is occurring, and the staff made 16 reference to the forward technology, that is part of our 17 program as well. 18 The Canadian Government is putting $8-million into 19 the US partnership for a new generation of vehicles. I do 20 not know what free trade means in a whole lot of places, but 21 I see money go back and forth in a beneficial way. 22 Basically what we are looking for in California is 23 the research and development center for this aspect of our 24 part of work. 25 MS. EDGERTON: One second question. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 188 1 You covered it briefly, but I wanted to focus on 2 it, because I believe -- what difference would you say all of 3 this excitement, or what sort of time line difference does it 4 make in terms of zero emission vehicles 10 percent mandate 5 for the year 2003? 6 DR. BERG: I'm speaking personally now, based on my 7 own experience, not as a Ballard director, but I have been 8 involved in watching this technology for many years. 9 I think that the action that this Board and staff 10 took a year ago including us without providing this is not a 11 financial action. This is a market incentive action taken to 12 send a signal, and part of that signal has permitted us to 13 raise a very substantial amount of private capital, and the 14 mandate that you have in 2003 is going to be the mandate that 15 brings in the twenty-first century energy systems that I 16 believe is going to be difficult. 17 Personally, and those of us at Ballard, since we 18 have not formally ratified the agreement, we are optimistic 19 that you will see fuel cell vehicles here in time for that, 20 and that is not Mercedes talking, that is Larry Berg. 21 CHAIRMAN DUNLAP: Thank you. 22 Supervisor Silva, do you have a question? 23 SUPERVISOR SILVA: I have a quick point of 24 information. 25 In addition to being an Orange County Supervisor, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 189 1 Dr. Berg, I am also on the Orange County Transit Authority, 2 and we operate over 800 buses in Orange County. 3 DR. BERG; I know. 4 SUPERVISOR SILVA: How many test buses are 5 scheduled for Orange County? 6 CHAIRMAN DUNLAP: We will shake you down region by 7 region on this Board. 8 DR. BERG: I am all in favor of that. 9 I support the Supervisor's request 100 percent. 10 What I would say is that it is very frustrating for 11 me to go around, and I get a request such as the one that you 12 have given me, and I go to the -- refer back to staff's 13 presentation, that we have been reluctant to move right away 14 before we put these first six out. 15 We have learned in driving the one that we have 16 now, which periodically commutes, you can imagine commuting 17 in a 40-foot bus, which one of our engineers does, we need to 18 begin to move on delivery to you in the year, early 1999, 19 that is the time frame that we are looking for market. 20 In the next six months, my colleagues at Ballard, 21 as we form this new market corporation with Daimler Benz, we 22 will be visiting Orange County. 23 I have spoken with your colleagues there, with 24 staff, and we believe it is California where the 25 commercialization of these buses will occur first, and more PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 190 1 specifically, where we need it the most, which was the South 2 Coast and right here in Sacramento. 3 It will be a pleasure to invite you to the 4 beginning of the delivery of that bus. 5 SUPERVISOR SILVA: I will be there. 6 CHAIRMAN DUNLAP: Thank you. One last thing, Jack 7 Parnell and I live in Placer County, and we want you to talk 8 to the transit district up there. 9 DR. BERG: That is a real good idea. 10 CHAIRMAN DUNLAP: Mr. Kenny, anything else to add? 11 MR. KENNY: No. 12 CHAIRMAN DUNLAP: Staff, thank you for this 13 presentation. 14 Tom, I know you have been more than nudged by Ms. 15 Edgerton and I to get involved in this area, and you have 16 risen to the occasion, and I appreciate your team providing 17 the leadership that is so necessary. Thank you. 18 We have one last item, and then we will conclude 19 the meeting. Agenda 97-4-5, which is public meeting to 20 consider research proposals. 21 The Board has had for sometime these proposals to 22 review, and I would like to get to that, but we have one 23 witness, so, what I would do before we entertain a motion or 24 a discussion, what I would like to do is to call forward the 25 sole witness, John Goodman, from the Automotive Services PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 191 1 Council. 2 Is Mr. Goodman here? 3 Pat, did we run him off? 4 MS. HUTCHENS: I don't know. 5 CHAIRMAN DUNLAP: I don't see Mr. Goodman. 6 So, what we will do is we will move into the item. 7 We have had the proposal before us for some time, 8 and Dr. Friedman is briefed, and we appreciate, Bill, your 9 getting involved and serving as a Board liaison with the 10 research staff. 11 What I would like to do is have Mr. Kenny introduce 12 the item, and I know you want to move it quickly. Is there 13 anything that you wanted to say, and we will have the 14 discussion and work to move the item? 15 MR. HOLMES: John Holmes. 16 We have six new proposals before you for 17 consideration, with one additional resolution that represents 18 augmentation to an ongoing project. 19 Mr. Barns and staff are here to cover the details 20 that you would like to have. If you have additional 21 questions, we will be pleased to provide whatever we can for 22 you. 23 CHAIRMAN DUNLAP: We have seven items. 24 Just a word, for Sally and Dr. Friedman, since they 25 are newer Board Members. I always get a detailed briefing, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 192 1 and several of the Board Members avail themselves to the 2 offer from staff to have a briefing. 3 Supervisor Roberts in the past, we have given him 4 far too much credit, I'm sure, for his role relative to 5 proper fiscal management, but we have emphasized making sure 6 overhead rates are within reason, and the staff is put 7 through the paces thinking about why these proposals are 8 brought forward, and we have the Research Screening Committee 9 that helps us. 10 It helps the staff, and I feel comfortable about 11 the seven that are before us. Process-wise, Sally and Bill, 12 if you want to pull an item out and have a discussion, that 13 is fine. 14 We have, over my two and half year tenure, we have 15 not had much controversy surrounding the research proposals. 16 I think there have only been two or three items that we have 17 had prolonged discussion on. 18 If there is nothing specific to discuss on the 19 seven -- 20 DR. FRIEDMAN: I have reviewed in detail with our 21 colleagues and the research division, and I have no problem 22 with the goals or approaches or the questions that these are 23 requesting. 24 They are all appropriate. I think, as I have 25 discussed, I have been in a progressive learning phase of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 193 1 trying to understand these budgets, and in the future, as I 2 have asked and I should formalize the request, since we put 3 out about 600 pounds of paper for each of us, I would like 4 the budget justification pages to accompany these budgets. 5 Because there are items in the budget that I find 6 incomprehensible. I will give you an example. 7 We pay for personnel. We pay for supplies. We pay 8 for equipment. Sometimes we pay for computers, and then as a 9 line item, we call analysis, which means we pay extra for if 10 these people think. 11 That makes no sense. That is why you are paying 12 for all of these other items. 13 I need to see how that is justified. I also need 14 to see how we justify overhead, to me is cost of doing 15 business. 16 Well, how you split overhead with general and 17 administrative expenses into two separate items is beyond 18 me. 19 I must understand how that is justified, and we 20 must understand that as a Board. Ron, was very concerned 21 about overhead, and I have learned a lot more about overhead 22 because a lot has been explained to me, but I also need to 23 understand about dependence on Federal overhead as just a 24 green light for our endorsement. 25 We agree that all those things are going to be PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 194 1 forthcoming between this meeting and the next meeting and the 2 next time that we discuss the research proposals. 3 We owe each other a better understanding of the 4 distribution of dollars and the requests and so forth. So 5 there are ground rules that go out in the RFP, and we need to 6 see that, and we need to agree to get this done. 7 In terms of the proposals in front of us, they are 8 sound. The questions and approaches are appropriate. 9 CHAIRMAN DUNLAP: Good. 10 Did I hear a motion from that, Dr. Friedman? 11 DR. FRIEDMAN: So moved. 12 MR. CALHOUN: Second. 13 CHAIRMAN DUNLAP: Okay. 14 Mr. Calhoun. 15 MR. CALHOUN: I had mentioned to the staff that the 16 item two, pertaining to the so-called OBD3, I would like to 17 be involved in or at least know about it, whether or not I 18 get involved in the management review. 19 I know you will have periodic meetings with the 20 contractors, whoever gets this particular contract, the six. 21 MR. HOLMES: I appreciate that, Mr.Calhoun. 22 There are certain sensitivities involved in this 23 project, as all of you know, and to have one or more Board 24 Members involved in those periodic meetings with the 25 contractor is fine. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 195 1 CHAIRMAN DUNLAP: That offer, I think, Mr. Kenny, 2 if he has not already, will extend to each of the Board 3 Members. 4 If you have a specific interest, you can get 5 regular updates. I found that Dr. Holmes is willing to do 6 that. 7 DR. FRIEDMAN: We are going to get a better handle 8 on the calculations of the profit item, which does not occur 9 with the University contracts or contract or grants, but that 10 is the forthcoming information. 11 MR. HOLMES: There are two things. 12 We can provide the budget pages from each of the 13 proposals that we put before you, that provides, would mean 14 an additional 6 or 8 pages for each project. 15 That is easy enough to do. It is only a xeroxing 16 job. As far as the archaic process of federal approval of 17 overhead rates and general administrative expenses, charges, 18 that is a little more. 19 We could spend a whole afternoon on that. 20 But I will be happy to sit with you and show you 21 examples of how the calculations are done for the Federal 22 Government. 23 DR. FRIEDMAN: I think that is important. 24 I think what I want to know is what our policies 25 are with respect to approving items like profit. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 196 1 We ought to have in writing what the guidelines are 2 about these different budget items. If we don't, we need 3 them. 4 MR. HOLMES: They are basically the same as for 5 universities. 6 DR. FRIEDMAN: Universities make no profit, John. 7 MR. HOLMES: The universities are lower. 8 DR. FRIEDMAN: There is no line item on any 9 university grant called profit. 10 There are indirects, and those are spelled out. 11 There is a vast difference between dealing, and I understand 12 that with companies of the business world, but we need to 13 understand precisely what our guidelines are for allowing 14 these different amounts. 15 It is just straightforward. 16 We will get it done. 17 MR. BARNS: One thing that we are planning on doing 18 is coming to the Board in July with the research plan, and at 19 that time we plan to go over with the Board in some detail 20 how we go about doing some of these things, and we would like 21 to get together with you. 22 CHAIRMAN DUNLAP: For the reporter. 23 MR. BARNS: Barns. 24 CHAIRMAN DUNLAP: All right. 25 Mr. Kenny, you have some responsibility to work PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 197 1 with John and Mike and the team and get back with a more 2 fully framed proposal. 3 CHAIRMAN DUNLAP: Very good. 4 We have a motion and a second. Any other 5 discussion that needs to occur on these seven research 6 items? 7 SUPERVISOR ROBERTS: There are two proposals, one 8 from U.C. Berkeley, and one from U.C. Riverside, if I 9 remember correctly, and it is interesting to note their 10 indirect costs are exceedingly low, and I remember the one 11 that we had the original problem was U.C. Berkeley, 12 Livermore, that had a huge indirect number, but it is also 13 clear as you go through these that what some people are 14 calling overhead others are not. 15 As I look to see how the costs have shifted and 16 what is in the direct expense on some are part of the 17 overhead figures on the others, I always like to see those 18 lower numbers. 19 CHAIRMAN DUNLAP: U.C. Riverside did it right then, 20 is what I am hearing. 21 Come forward Mr. Norbeck and take a bow. Stand up, 22 Joe. 23 This is Joe Norbeck, from UCR, and he has done a 24 number of projects, and he's smiling ear to ear when you said 25 that. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 198 1 All right. Any other discussion that needs to 2 occur? 3 All right. We will take a voice vote on this 4 item. 5 We have before us Resolutions 97-21, 97-22, 97-23, 6 97-24, 97-25, 97-26 and 97-27, and we have motion and a 7 second. 8 All those in favor, say aye. 9 Any opposed? 10 Very good. The motion carries. 11 Well done. 12 This is almost the end of the meeting. We have an 13 open comment period here, and we have one person who signed 14 up. 15 Mr. Jeff Johnson. 16 Is he here? 17 All right. I guess we have lost him. 18 I would like to recognize one individual in the 19 audience who has been a long time friend to clean air. 20 Someone I have worked with over the years, a member and 21 alternate member of the South Coast Hearing Board, Dr. Bob 22 Zweig. 23 DR. ZWEIG: Thank you for the action. 24 You made a giant step forward for mankind. 25 CHAIRMAN DUNLAP: He is a Medical Doctor, and he PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 199 1 has been very active in promoting hydrogen, among other 2 things, and a Member of the American Lung Association Board, 3 who served with my wife. 4 Thank you for coming. 5 All right. 6 I think that concludes the business of the Board. 7 With that, we will adjourn the May meeting of the Air 8 Resources Board. 9 (Thereupon the Air Resources Board Meeting was 10 adjourned at 3:15 p.m.) 11 --o0o-- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 200 1 CERTIFICATE OF SHORTHAND REPORTER 2 3 4 I, VICKI L. MEDEIROS, a Certified Shorthand 5 Reporter of the State of California, do hereby certify: 6 That I am a disinterested person herein; that the 7 foregoing hearing was reported in shorthand by me, Vicki L. 8 Medeiros, a Certified Shorthand Reporter of the State of 9 California, and thereafter transcribed into typewriting. 10 I further certify that I am not of counsel or 11 attorney for any of the parties to said hearing nor in any 12 way interested in the outcome of said hearing. 13 IN WITNESS WHEREOF, I have hereunto set my hand 14 this second day of June, 1997. 15 16 17 18 VICKI L. MEDEIROS 19 Certified Shorthand Reporter 20 License No. 7871 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345