1 BEFORE THE ILLINOIS POLLUTION CONTROL BOARD
2 VOLUME 7
3
IN THE MATTER OF: )
4 )
EMISSIONS REDUCTION MARKET )
5 SYSTEM ADOPTION OF 35 ILL. ) R97-13
ADM. CODE 205 AND AMENDMENTS ) (RULEMAKING)
6 TO 35 ILL. ADM. CODE 106. )
)
7
8
9
10 The following is a transcript of a
11 rulemaking hearing held in the above-entitled
12 matter, taken
stenographically by LISA H. BREITER,
13 CSR, RPR, CRR, a notary public within and for the
14 County of
DuPage and State of Illinois before
15 CHUCK FEINEN, Hearing Officer, at the James R.
16 Thompson Center, 9-040, 100 West Randolph Street,
17 Chicago, Cook County, Illinois on the 10th day of
18 March 1997, commencing at 9:00 o'clock a.m.
19
20
21
22
23
24
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1 ILLINOIS POLLUTION CONTROL BOARD MEMBERS PRESENT:
2
3 MS. ELIZABETH ANN
4 MS. KATHLEEN HENNESSEY
5 MS. MARILI MC FAWN
6 MR. JOSEPH YI
7 MR. RICHARD MC GILL
8 MS. CLAIRE A. MANNING
9
10 ILLINOIS ENVIRONMENTAL PROTECTION AGENCY MEMBERS
11 PRESENT:
12
13 MS. BONNIE SAWYER
14 MR. RICHARD FORBES
15 MR. BHARAT MATHUR
16 MS. SARAH DUNHAM
17 MR. CHRISTOPHER ROMAINE
18 MR. RICHARD FORBES
19 MR. GALE NEWTON
20 MR. ROGER KANERVA
21 MR. GARY BECKSTEAD
22
23 OTHER AUDIENCE MEMBERS WERE PRESENT AT THE HEARING
24 BUT NOT LISTED ON THIS APPEARANCE PAGE.
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1 I N D E X
2
PAGE
3
4 TESTIMONY OF SARAH DUNHAM................ 1360
5 TESTIMONY OF CALE CASE,
Ph.D............. 1369
6 PREFILED QUESTIONS BY MR. SAINES......... 1383
7 FOLLOW-UP QUESTIONS BY
HEARING OFFICER FEINEN................... 1407
8
PREFILED QUESTIONS BY MR. SAINES......... 1412
9
PREFILED QUESTIONS BY MS. FAUR........... 1462
10
PREFILED QUESTIONS BY MR. FORCADE........ 1463
11
PREFILED QUESTIONS BY MR. TREPANIER...... 1467
12
FOLLOW-UP QUESTIONS BY MR. SAINES........ 1475
13
FOLLOW-UP QUESTIONS BY MR. TREPANIER..... 1479
14
QUESTIONS BY MS. ANN..................... 1493
15
QUESTIONS BY HEARING OFFICER FEINEN...... 1494
16
17
E X H I B I T S:
18
IN EVIDENCE
19
20 Exhibit No. 48........................ 1367
21 Exhibit No. 49-57..................... 1368
22 Exhibit No. 58........................ 1382
23
24
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1 HEARING OFFICER FEINEN: Let's go back
2 on the record. I believe we continued this from
3 the last date which was February 4th -- no,
4 February 11th.
5 MS. DUNHAM: Right.
6 HEARING OFFICER FEINEN: It's March 10th
7 now, and we're going to start out with the
8 testimony of the agency witnesses concerning
9 economics. At this time I'll turn it over to
10 Mrs. Sawyer.
11 MS. SAWYER: Okay. Our first witness is
12 Sarah
Dunham. I have exhibits marked Exhibits 48
13 through 57. The first Exhibit 48 is a copy of
14 Sarah
Dunham's prefiled written testimony, and
15 then 49 through 57 are overheads that she's going
16 to use. There were copies available in the back
17 of all of these.
18 HEARING OFFICER FEINEN: Well, let's get
19 through her testimony and have her use all the
20 stuff and then we'll actually move into evidence
21 the exhibit at that time.
22 MS. SAWYER: Right. At this point we're
23 ready to proceed with the testimony of Sarah
24 Dunham.
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1 HEARING OFFICER FEINEN: Can we hold on
2 a second.
3 (Discussion off the record.)
4 HEARING OFFICER FEINEN: During the
5 testimony you might want to hang on to these,
6 Sarah, if you want to refer to the beginning of
7 the slides and say these have been marked as
8 exhibits.
9 MS. SAWYER: We do have a copy marked as
10 each exhibit.
11 HEARING OFFICER FEINEN: I'll try to
12 throw that into the record to reference which
13 slide she's talking about as she goes along. I
14 guess we would have the witness sworn.
15 (Witness sworn.)
16 MS. DUNHAM: To start, I'm a policy
17 analyst in the environmental policy office for the
18 Illinois EPA. I have a bachelor's of science in
19 environmental biology from Yale University and a
20 master of public policy from Harvard University.
21 I think this morning I'm just going
22 to walk through how the agency approached its
23 economic analysis. There's, I think, some
24 confusion so I just wanted to clarify exactly the
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1 approach we took. We started out by looking at
2 sort of command and control basis and what if we
3 took the command and control approach, how much
4 that would cost the sources in the Chicago
5 region.
6 The first one we looked at, this
7 one Gary
Beckstead talked about this a little bit
8 in his office, which is application of the
9 California VSE command and control rules to
10 sources in the Chicago area.
11 MS. SAWYER: This is Exhibit 49.
12 MS. DUNHAM: Gary found that 155
13 facilities in the Chicago area would be subject to
14 these requirements. 51 of o them are subject to
15 the ERMS requirements. 6.82 tons per day in
16 reductions, 776 tons per season with a total cost
17 of somewhere between $11.6 million and $16.9
18 million, but $4.3 million of that total would be
19 incurred by the ERMS sources.
20 Then we wanted to look at a couple
21 of other command and control options that would
22 achieve the same level of reductions that we're
23 trying to get out of the ERMS program. The first
24 is we looked at just those sources that are
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1 targeted to be participants in the ERMS program
2 and applied the 12 percent reduction to each of
3 them without allowing trading.
4 The second one we took -- looked at
5 what would happen if we only targeted some of the
6 largest sources to achieve the same level of
7 reduction, and we found that we could achieve this
8 level of reduction that we needed from applying
9 most stringent levels of control to only eight
10 sources in the Chicago region.
11 And the third approach we looked at
12 was taking those 59 sources that emit over 50 tons
13 per season and looking only at the sources that
14 could achieve most stringent levels of control
15 most cost effectively, how many sources would we
16 need to install those controls and still achieve
17 the level of reduction we needed for the program.
18 MS. SAWYER: That's Exhibit 50. ?
19 MS. DUNHAM: The next overhead I'm using
20 is just a summary, Exhibit 51, of some of the
21 costs that we found using those three command and
22 control approaches. We found that direct
23 pollution abatement cost of $7.2 million from just
24 using the 12 percent reduction across the board
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1 without allowing trading. Just looking at the
2 eight sources with the largest potential to reduce
3 cost $15.7 million, and looking at the 12 sources
4 you could reduce most cost effectively with most
5 stringent levels of control would cost $12.6
6 million.
7 Using that as a starting point, we
8 then wanted to look at where would there be
9 potential for cost savings through trading?
10 There's basically two ways in which facilities can
11 gain from trading. This is Exhibit 52. The first
12 one is facilities with high cost of control may
13 avoid installation of expensive control equipment
14 by purchasing
ATUs. The second is that facilities
15 with low costs of controlling emissions can sell
16 surplus
ATUs.
17 Then in order to get a better idea
18 of exactly where those gains from trading might
19 happen, we looked at 12 specific facility examples
20 to figure out whether there really were
21 opportunities for real sources in the Chicago area
22 to benefit through trading. I'm just going to go
23 through two of these examples to show you the
24 approach we took.
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1 The first one is a rubber and
2 plastics facility that we looked at. It's
3 seasonal emissions are 30.2 tons. They are in
4 compliance with applicable RACT regulations, and
5 to meet the 12 percent reduction requirement, they
6 would need to install a thermal oxidizer at a cost
7 of $279,300, or they could purchase 3.6 tons of
8 ATUs from the market at a price of somewhere
9 between zero and $10,000. The potential cost
10 savings then range from $243,300 to $279,300.
11 MS. SAWYER: This is Exhibit 53.
12 MS. DUNHAM: The second example I just
13 want to walk through in Exhibit 54, and that's an
14 organic chemical manufacturer with ozone season
15 emissions of 108 tons. They're currently
16 operating at a control efficiency of 98 percent,
17 and to meet the 12 percent reduction requirement,
18 they can further increase their control efficiency
19 to 99.5 percent at a cost per ton of $430.
20 Source would reduce emissions by 81
21 tons as a result of increasing its control
22 efficiency at a total cost of $34,830, and then
23 they can sell the surplus 68 tons to offset some
24 of those costs. For the 12 individual facilities
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1 we looked at, we found that about half of them
2 fell into the first category of sources with high
3 control costs, and the other half fell into the
4 low category of low control costs.
5 This is just a sort of summary
6 table up here. This is Exhibit 55, which walks
7 through the facilities with high control costs,
8 and you can see that as a result of a trading
9 program or having trading as a compliance option
10 for each of these facilities, the overall
11 community of sources would save money -- save
12 about $1.9 million. That's just from these six
13 facilities.
14 On the other end, there's the group
15 2, facilities with low control costs. You can see
16 that their cost per ton numbers range from zero
17 dollars in example No. 9 up to $1,620.
18 MS. SAWYER: This is Exhibit 56.
19 MS. DUNHAM: So we did find that there
20 were , of the facilities we looked at, about half
21 had high control costs and could benefit through
22 not installing expensive control equipment, and
23 the other half did have options to reduce
24 emissions at low control costs. And then finally
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1 we wanted to run a trading simulation just to get
2 some idea based on the information we had of what
3 a possible market price might be.
4 This is just a simulation because
5 we don't have specific information for all the
6 facilities in the area as we do for those 12
7 facilities, but we used average aggregate control
8 costs by SIC to simulate a trading scenario. And
9 we found that average control costs per ton is
10 $2850. Total pollution abatement cost was $3.2
11 million per year, which is about half that of the
12 scenario we ran without trading.
13 MS. SAWYER: This is Exhibit 57. Is
14 that it?
15 MS. DUNHAM: So just to summarize, the
16 agency looked first at command and control basis,
17 how much that would cost the sources in the
18 Chicago area. Then we looked at whether there was
19 a potential for trading and a potential for cost
20 savings for trading in the area, and then we ran a
21 trading simulation to estimate a possible market
22 price.
23 HEARING OFFICER FEINEN: Can we go off
24 the record for a second.
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1 (Discussion off the record.)
2 MS. SAWYER: At this point the agency
3 would like to move to have Exhibits 48 through 57
4 entered.
5 HEARING OFFICER FEINEN: What's been
6 marked as Exhibit 48 is the
prefiled testimony of
7 Sarah
Dunham that's been dated January 2nd, 1997.
8 I'm assuming it's an accurate copy so forth and so
9 on. If there's no objections, we'll move that
10 into the record. Seeing none, that will be moved
11 in as Exhibit No. 48.
12 (Document received
13 in evidence.)
14 HEARING OFFICER FEINEN: What's been
15 marked as Exhibit 49 was the application of
16 California standards which was used in her
17 testimony today, the slide. If there's no
18 objections -- why don't I just go through all of
19 them. Exhibit 49 is application of California
20 standards, which was the first slide. Exhibit
21 No. 50 was the alternative control approaches,
22 which spelled out the three alternatives and has
23 been marked as Exhibit 50.
24 Exhibit 51 is regional economic
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1 impacts of alternative control approaches for the
2 three alternatives. Exhibit No. 52 is two ways in
3 which facilities may gain from trading. Exhibit
4 No. 53 is the example of the rubber and plastic
5 facility. Exhibit No. 54 is the example of
6 organic chemical manufacturer. Exhibit No. 55 is
7 group 1, facilities with high control costs.
8 Exhibit No. 56 is group 2, facilities with low
9 control costs, and Exhibit No. 57 is the regional
10 economic impact of trading simulation.
11 If there's no objections to moving
12 those into the record as exhibits, I'll do so.
13 Seeing none, those will be moved into the record
14 as Exhibits 49 through 57.
15 (Documents received
16 in evidence.)
17 HEARING OFFICER FEINEN: Who do you want
18 to call as a next witness?
19 MS. SAWYER: I'd like to thank
20 Ms.
Dunham for testimony, and at this point I
21 would like to call Dr. Case. We're ready to have
22 Dr.
Cale Case sworn in as a witness.
23 HEARING OFFICER FEINEN: Would you swear
24 the witness in, please.
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1 (Witness sworn.)
2 MR. CASE: Good morning. My name is
3 Cale Case, and I'm the president of my own
4 consulting company, Case & Company. I have a
5 doctorate in economics from the University of
6 Wyoming. Actually the doctorate is in resource
7 and environmental economics, and I received that
8 in 1986. I have a fairly long history of being
9 associated with trading programs in general and in
10 fact this trading program.
11 I believe it was in May of 1992
12 that we released a pre-feasibility study of
13 trading and the potential benefits of trading for
14 the Chicago metropolitan region, and I was the
15 principal author of that feasibility study under
16 contract to the agency. I've also served on the
17 design team that the agency established to
18 initially evaluate the applicability of trading to
19 NOx, and of course with the release of the Lake
20 Michigan ozone study that showed that would be
21 counterproductive, we switched to investigating
22 trading for
VOMs.
23 My profession, I basically
24 specialize in utility or energy and environmental
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1 economics. I've authored many papers in the
2 area. I've taught college courses in the area.
3 I'm a member of the American Economics
4 Association, the International Association of
5 Energy Economists. I'm very excited to be able to
6 testify to you today because I've spent so much
7 time on this project, I guess, and it's kind of
8 wonderful to see the development of a concept
9 that's really been heralded in the economics
10 literature for almost three decades now, but to
11 see it develop and move forward to implementation
12 is very exciting.
13 The purpose of my testimony today
14 is to show you that the IEPA's program is well
15 grounded in economic theory, and it's supported by
16 the very successful experience that we've had with
17 emissions trading in this country to date. I'd
18 also like to address some of the economic
19 foundations of the program and review at a fairly
20 high level the economic analysis that the agency
21 did to support the program.
22 Before I really get started,
23 though, I'd like to talk a little bit about the
24 analytical framework that we're discussing here,
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1 and it's very easy in this process to get into an
2 apples and oranges type of comparison, and I think
3 we should make a note that the economic evaluation
4 that we've used traditionally for command and
5 control type regulations doesn't fit very well in
6 the new environment.
7 You know, traditionally we've
8 evaluated command and control by focusing on
9 compliance costs with the specific technology
10 applied to a specific firm under specific
11 production levels, for example. Now, we're trying
12 to evaluate a market system and all of the
13 accompanying dynamics, and really our principal
14 focus is no longer technology based. It's more
15 based upon evaluating the viability of the
16 market. Does the program achieve its goals, and
17 do we get indeed an overall reduction in
18 pollution? It's really a very different type of
19 analysis you would apply to the very static
20 application of a specific technology of a specific
21 type or a specific firm.
22 In regards to the economic
23 justification for trading programs, it's important
24 to note that trading programs have several
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1 attributes that make them very well suited for
2 addressing pollution problems. Trading is an
3 innovative and a very resilient program. As an
4 alternative to command and control regulation, it
5 provides firms with the opportunity to benefit
6 over the, say, level of expenses that they would
7 have under command and control.
8 It doesn't guarantee that firms are
9 going to do better off, but it gives them the
10 opportunity to be better off, and in its
11 application, if you're comparing trading with
12 command and control alternative to reach the same
13 level of control of pollution, no firm in that
14 process would be worse off under trading than they
15 would be under command and control. I think
16 that's a very important conclusion.
17 Trading works because it harnesses
18 the fact that firms are different and that firms
19 have different costs of control, and trading
20 provides a way for these costs of control to be
21 equalized in the market or, in other words, where
22 people who can control pollution very cheaply can
23 do so, and firms where it's very expensive to
24 control pollution can actually pay other firms to
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1 achieve their reductions for them.
2 One thing that's important about
3 trading is that it encourages firms to go farther
4 than they have to
to meet specific legal
5 requirements. What trading does is if a firm can
6 control pollution more cheaply than the market
7 price for
ATUs under this program, they will do so
8 even if they exceed their requirements that would
9 be applicable under a command and control
10 framework. Trading is not totally new anymore.
11 We actually have a considerable history of
12 applying trading programs in the United States.
13 We have programs, of course, in
14 California with respect to
NOx. We have national
15 programs with respect to SO2 and
NOx as well.
16 Under the Montreal protocol, we have a very
17 successful program that worked with
18 chlorofluorocarbons. We have had other types of
19 trading programs such as new source review which
20 had been effective for many years. Other forms of
21 trading as it bubbles, netting and offsets all
22 have been sort of the precursors to the formalized
23 trading programs that we have now.
24 So by taking the step we are taking
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1 here in Chicago, we are building on a very
2 successful record of development of these
3 programs, and it's not suddenly adopting something
4 very brand new. Theoretically, trading is
5 extremely well documented in the economics
6 literature. In general the program is strongly
7 supported by the economics profession. There's
8 been literally hundreds of papers in the area.
9 There's been frequent situations
10 including recently on carbon dioxide where the
11 professional economists have recommended that
12 trading be used as opposed to other command and
13 control based policy alternatives. It's very well
14 supported and strongly so. It's clear that
15 emissions trading offers substantial benefits over
16 command and control because it provides the
17 opportunity to achieve pollution goals in a manner
18 that costs society less.
19 These costs are reflected in lower
20 costs for meeting environmental regulation, fewer
21 job losses, better prices for consumers, greater
22 viability of our business community. All these
23 are achievable and improvements that are achieved
24 under trading programs over command and control
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1 alternatives, and it's important to note that we
2 can expect the same results to happen in the
3 Chicago area. We can expect the same positive
4 outcomes.
5 Now, I've reviewed the economic
6 analysis conducted by the Illinois Environmental
7 Protection Agency. I've concluded that the
8 analysis supports what we would expect from the
9 theory. For example, I think it's quite clear
10 that the individual source analysis that the
11 agency did does provide a good picture of what we
12 can expect from these sources, and I think, you
13 know, the theory is confirmed by the analysis that
14 the agency did.
15 I think clearly on the individual
16 source analysis that was done that we can conclude
17 that there are significant benefits to these firms
18 from participating in a market-based program as
19 proposed. The EPA's analysis clearly indicates
20 that there are gains from trade. That is, these
21 firms are different enough that they can benefit
22 by interacting with each other to take advantage
23 of these differences in control costs, and they
24 can trade to a point where they can achieve
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1 emissions reductions at a much lower cost to the
2 Chicago economy.
3 I concur with the EPA's analysis --
4 the IEPA's analysis regarding the fact the trading
5 would be beneficial to the Chicago economy in the
6 region. Clearly the analysis shows that trading
7 yields significant benefits to the Chicago region
8 over the alternatives of command and control. I
9 don't think these benefits are limited to the
10 Chicago region either. They extend to the entire
11 State of Illinois. It's important, though, that
12 we put things in perspective a little bit and go
13 back to the fact we talked about earlier about you
14 have to be careful about apples and oranges in
15 looking at these programs because one thing that
16 the EPA's analysis doesn't do and cannot do is to
17 capture the dynamic aspects, the stimulation
18 that's going to occur by allowing these firms who
19 know their processes better than anybody else,
20 better than a regulator ever could.
21 If we allow the people within the
22 firms to begin to make some of the decisions,
23 there's going to be innovations, and that can't be
24 captured in a static analysis, but clearly that
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1 will occur, and that's one thing that means that,
2 you know, at least in that area, the benefits of
3 going to trading can be even larger than indicated
4 so far. The EPA has taken measures to ensure the
5 viability of the market. They've tried to develop
6 and I think accomplish the development of a
7 program that encourages flexibility and
8 innovation, that very specifically yields to the
9 firm, that entity that knows its costs of
10 production and understands its process better than
11 anyone else, yielded to that entity the freedom to
12 choose the abatement technology that best meets
13 their needs.
14 A couple of examples of flexibility
15 embodied in the program are the fact that the
16 transactions can occur without extensive approval
17 by the regulator, specifically no pre-approval is
18 needed. The program includes banking which has I
19 think significant benefits because banking can
20 build confidence in the trading program. Banking
21 can yield a method to prevent wide variations in
22 prices for ATU over time.
23 Banking provides sources with some
24 degree of flexibility because they're going to be
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1 trying things that are new. They're going to be
2 trying some things that won't work. Banking
3 provides the flexibility to that firm to be able
4 to be innovative. If something doesn't work,
5 banking can provide a way to get through that
6 time, and as a consequence, we'll do better
7 because we're going to experiment, and we're going
8 to be innovative. Also, the fact that the agency
9 has proposed an alternative compliance market
10 account I think is significant.
11 This account will serve to support
12 the viability of the market. It's a back stop.
13 It may not be used very heavily, but it does
14 improve market viability and I think builds
15 confidence in the program. Also from the EPA's
16 economic analysis, we can be confident that there
17 is a very wide range of types of firms out there
18 with large differences in costs, and the
19 capability of trading with each other is very
20 significant, and I think for all these reasons we
21 can predict that the program as designed will be
22 quite successful.
23 The agency has also been careful to
24 consider the impacts to small businesses. This
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1 is, I think, very important. I believe that the
2 trading program will indeed provide benefits to
3 small businesses and that the steps that have been
4 taken in the design of the program are good ones.
5 One step, for example, is the fact that if you
6 have emissions of less than 15 tons per season,
7 you would be able to opt out of the program. The
8 other is, of course, the fact that there's a
9 built-in cap on the amount of expenditures that a
10 small business would be required to spend for
11 compliance.
12 One thing that we also have to note
13 is that the same factors that make emissions
14 trading a good idea for big business works for
15 small businesses. Small businesses are very
16 resourceful, and they can take advantage of these
17 cost differentials as well as anybody else.
18 Another thing that is conceivable is that to the
19 extent there are economies of scale and certain
20 types of pollution control, that small businesses
21 will be able to participate in those scale
22 economies by purchasing
ATUs from larger firms who
23 have invested in the technology that enjoys the
24 scale economies.
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1 So it's a way to kind of transfer
2 some of those scale economies to the smaller
3 firms. In conclusion there's a few points I'd
4 like to make. The first one is it's really not
5 appropriate to compare trading with the status quo
6 level of emissions control. That's not very
7 realistic. We really have to compare trading with
8 what will be required, what new and stricter level
9 of emission regulations will be required. So a
10 lot of people, I think, tend to look at trading
11 and say, oh, look at this trading program that the
12 IEPA has, look how it's going to affect us, and
13 then they make a decision about the program based
14 upon that.
15 The real question, I think, is if
16 it wasn't for that trading program, what program
17 would we face and how would that affect us? And
18 that's the comparison to make. Another point is
19 the trading is very resilient. It's going to work
20 with a wide range of prices. It's going to be
21 self adjusting, and most importantly, it's going
22 to harness those differences in control costs
23 between firms and between industries that will
24 ensure that we achieve our overall environmental
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1 goals at the lowest possible cost to our economy.
2 Trading places the decision-making
3 power into the hands of those that have the very
4 best information, the very best information, more
5 than a regulator can ever have, and it permits
6 flexibility and innovation among the emitters, and
7 through its workings, it provides a way for those
8 people that are flexible and innovative and come
9 up with new ways of doing things, it provides a
10 vehicle for them to benefit from that which is
11 something we haven't had in our past programs.
12 Trading will encourage firms to
13 control to stricter levels than command and
14 control if it makes economic sense to do so, and I
15 think really the final and perhaps most important
16 conclusion is that the trading program is going to
17 yield broad benefits to Chicago. Clearly the wide
18 variety of trading partners in the area and the
19 careful development of this program will work to
20 ensure its success. Thank you.
21 MS. SAWYER: Thank you, Dr. Case. That
22 concludes the agency's presentation of testimony.
23 At this time we would call up some other agency
24 witnesses who have already testified to begin the
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1 questions.
2 HEARING OFFICER FEINEN: Off the record
3 for a second.
4 (Discussion off the record.)
5 MS. SAWYER: I've marked the
prefiled
6 written testimony of Dr.
Cale Case as Exhibit 55
7 -- or 58. At this point I would like to move to
8 have the exhibit entered.
9 HEARING OFFICER FEINEN: What's been
10 marked as Exhibit No. 58 is the testimony of
11 Dr. Case which I believe was
prefiled on February
12 3rd with the board.
13 MS. SAWYER:
Uh-huh.
14 HEARING OFFICER FEINEN: If there's no
15 objections in moving that into the record, I will
16 do so. Seeing none, that will be moved as Exhibit
17 No. 58, the testimony of
Cale Case.
18 (Document received
19 in evidence.)
20 HEARING OFFICER FEINEN: Let's go off
21 the record.
22 (Discussion off the record.)
23 HEARING OFFICER FEINEN: Let's go back
24 on the record, and Mr.
Saines will start asking
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1 those questions.
2 MR. SAINES: Thank you. Rick
Saines for
3 the ERMS coalition. Good morning. These
4 questions are from our original
prefiled questions
5 starting on page 25, specifically pertaining to
6 the testimony of Sarah
Dunham. Question 1,
7 regarding the chart on page 3 of the testimony,
8 what are, "seasonal emission reductions," for each
9 example?
10 MS. DUNHAM: The term seasonal emission
11 reductions refers to the level of reduction that
12 can be achieved by each source during the ozone
13 season so is your question to walk through what
14 that exact level of reduction is for each
15 example?
16 MR. SAINES: Yes.
17 MS. DUNHAM: Okay. So I'm going to
18 answer it dealing with trading as an option what
19 they would actually reduce.
20 MR. SAINES: Okay.
21 MS. DUNHAM: For example A, they
22 wouldn't reduce at all. Example B, that's the
23 same. Example C and example D, both sources would
24 not reduce. Example E, they would reduce by 27
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1 tons. Example F, reduced by 165 tons. Example G,
2 they reduce 200 tons during the season.
3 HEARING OFFICER FEINEN: When you are
4 saying examples A through G, you are also
5 referring to examples 1 through 7 which are on the
6 table of your testimony?
7 MS. DUNHAM: No actually.
8 HEARING OFFICER FEINEN: No. So that
9 doesn't correspond?
10 MS. DUNHAM: No, the numbers and letters
11 don't correspond. I could go through.
12 HEARING OFFICER FEINEN: Could you go
13 through and explain what example 1's seasonal
14 emission reduction would come up with trading is
15 since that's what your example is talking about.
16 MR. SAINES: Yeah. The page numbers
17 aren't numbered in the testimony itself, but it's
18 the third page of your
prefiled testimony there's
19 a chart that says summary of individual source
20 analysis.
21 MS. DUNHAM: Right, I think that's what
22 I just went through.
23 MR. SAINES: Example 1 through 7.
24 MS. DUNHAM: Oh, I see, okay. Yeah,
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1 it's part of the
prefiled testimony. It does
2 match up.
3 HEARING OFFICER FEINEN: So A is example
4 1?
5 MS. DUNHAM: Yes.
6 HEARING OFFICER FEINEN: Example B is
7 example 2 and so forth and so on.
8 MS. DUNHAM: For the
prefiled testimony,
9 yes.
10 MR. SAINES: Would you please run
11 through that again, I'm sorry, corresponding to
12 the chart.
13 MS. DUNHAM: 1 through 4, they wouldn't
14 reduce at all. 5 is 27 tons. 6 is 165 tons, and
15 7 is 200 tons.
16 MR. SAINES: 200?
17 MS. DUNHAM: 200.
18 HEARING OFFICER FEINEN: And that is
19 seasonal emission reductions using ERMS, is that
20 correct?
21 MS. DUNHAM: Yes, yes, with trading as a
22 compliance option.
23 MR. SAINES: Pertaining to the same
24 chart on the same page of the
prefiled testimony,
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1 question No. 2, with respect to each type of
2 facility, how many sources are in each example?
3 MS. DUNHAM: It's just one source. Each
4 example corresponds to one source.
5 MR. SAINES: So the example is one
6 source from that type?
7 MS. DUNHAM: Yes.
8 MR. SAINES: Question No. 3, what does
9 "profit of" mean.
10 MS. DUNHAM: It just means beyond what
11 the control equipment or control methodology would
12 have achieved or would have cost. So if the
13 control costs $34,000 and they can sell their
ATUs
14 for $100,000, then the profit refers to the
15 difference between those two.
16 MR. SAINES: And it's not a specific
17 number because it's unattainable at this time
18 because we don't know what the ATU price would
19 be?
20 MS. DUNHAM: Right.
21 MR. SAINES: Okay. Question No. 4, on
22 page 5 of the testimony, what does a,
23 "representative set of affected sources," mean?
24 MS. DUNHAM: It just means that the way
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1 we did the analysis, we took the 1994 annual
2 emission reports and identified the sources from
3 that list who we thought would be ERMS
4 participating sources. But it doesn't -- it's not
5 necessarily the final list since we didn't go
6 through '95 and '96 which reports we haven't gone
7 through exactly which are going to be in the
8 program, but if should be fairly representative if
9 not exactly identical to the set of ERMS
10 participating sources.
11 MR. SAINES: Just a quick follow-up. In
12 selecting the sources, did the agency make it a
13 point to use sources that had varying seasonal
14 emissions over and above -- once they were
15 potentially affected, to get the representative
16 group, were there smaller sources, larger
17 sources?
18 MS. DUNHAM: It's basically every source
19 that we thought that would be subject to the ERMS
20 provisions based on 1994 annual emission reports.
21 MR. SAINES: So it would be all the
22 sources that are potentially affected?
23 MS. DUNHAM: Yeah, yeah.
24 MR. SAINES: Based on the 1994 data?
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1 MS. DUNHAM: Right.
2 MR. SAINES: Question No. 5, what is a,
3 "compliance decision model"?
4 MS. DUNHAM: The model that we applied
5 to those 212 facilities to predict whether they
6 would choose to trade or choose to reduce
7 emissions or choose to not participate in the
8 market at all.
9 MR. SAINES: Question 5A, where is such
10 model discussed in the regulations?
11 MS. DUNHAM: It's not.
12 MR. SAINES: Question 5B, where is such
13 model discussed in the technical support
14 document?
15 MS. DUNHAM: Pages 127 to 132 go through
16 the model that we used. It doesn't use that term.
17 MR. SAINES: Question No. 6, is it
18 possible that the agency's, "estimated market
19 price for
ATUs," will not be accurate?
20 MS. DUNHAM: It's entirely possible that
21 it won't be exactly the same number as what
22 actually happens. It was merely a trading
23 simulation that we used based on the information
24 that we had available to predict what might be a
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1 market price, but there's a lot of factors that we
2 can't necessarily predict that would go into
3 determining what the actual market price would be.
4 MR. SAINES: Could you elaborate on a
5 couple of those factors you just mentioned?
6 MS. DUNHAM: The model assumes that the
7 costs are based on add-on control equipment. I
8 think there's -- as the individual facility
9 examples showed, there's lots of opportunity there
10 for voluntary reductions or process changes or
11 control efficiency increases that would maybe
12 provide lower cost control.
13 There's also we made lots of
14 assumptions on who would trade and who wouldn't.
15 There may be a lot of facilities that really just
16 choose to reduce their emissions and not
17 participate in the market, and we can't
18 necessarily predict that, but that would
19 definitely influence the market price.
20 MR. SAINES: How would you say that
21 would influence the market price?
22 MS. DUNHAM: I think it could go either
23 way.
24 MR. SAINES: Question No. 7, it's a
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1 follow-up to question No. 6 which the answer to
2 that is yes, so, if so, what is the cost per ATU
3 that would make the ERMS rules no longer, "as cost
4 effective as traditional regulatory control
5 requirements"?
6 MR. CASE: If it's --
7 MS. SAWYER: Can we have Dr. Case answer
8 this question.
9 MR. SAINES: Sure.
10 MR. CASE: There really isn't a price
11 that will make trading less effective than command
12 and control as long as we're sure that we're
13 talking an apples and apples comparison. Trading
14 to achieve the same level of reduction will work
15 for a wide variety of prices and be a more
16 resilient effective, cheaper policy of choice than
17 command and control. There is no price where it's
18 too high that command and control would be better.
19 MR. SAINES: If I can just ask a
20 follow-up to that. I'm not sure I understand
21 that. The agency identified only three
22 alternatives, command and control alternatives to
23 the ERMS trading program, two of which involves
24 regulating the eight largest emitters with
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1 greatest reduction potential, that was alternative
2 2, and the alternative 3 was identifying the 12
3 largest emitters that it would be most cost
4 effective to reduce.
5 Both of those alternatives resulted
6 in a number, a cost per ton figure that would be
7 the cost as a command and control number, and
8 again I don't necessarily understand the answer
9 because it wouldn't -- if the ERMS program -- if
10 the ATU price was greater than the cost per ton
11 that was calculated based on the command and
12 control alternatives, wouldn't that make the cost
13 of the ERMS program greater than the command and
14 control program.
15 MR. CASE: The problem I think that
16 we're having here is that the market price that's
17 derived has to do with the cost of control,
18 specifically the equilibrium cost of control that
19 firms have. So if we have a policy alternative
20 under command and control where we require A, B,
21 C, D levels of technology fixes on firms, we know
22 that the regulator doesn't have the information
23 that the firms have.
24 We know that the regulator in
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1391
1 choosing to implement those types of regulations
2 doesn't optimize and doesn't have the information
3 to be able to optimize and equalize control costs
4 across all firms. Only the market can do that
5 because markets encourage people to basically sell
6 -- share information by offering for sale, you
7 know, emissions credits. So in every instance,
8 trading will be a better and have better prices
9 and be cheaper than command and control.
10 There is no -- as long as you
11 prescribe the particular command and control
12 technology such as the EPA did in their report,
13 there is no way a market price would be derived
14 that's higher and would not be more efficient than
15 the command and control alternative.
16 MR. SAINES: So you're saying there's no
17 way that the ATU price under this program can
18 exceed $10,828 per ton? There's no way that the
19 market --
20 MR. CASE: I'm not sure that I'm
21 specifying any particular number. I can't tell
22 you off the top of my head where the $10,000 comes
23 from. What I'm saying is that trading will be a
24 more efficient mechanism than command and control
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1392
1 under all alternatives because suddenly it allows
2 firms to trade with each other to equalize
3 marginal control costs.
4 MR. SAINES: Okay. Question No. 8.
5 MS. SAWYER: Just quickly, we would like
6 to have Mr.
Beckstead answer question 8 through 11
7 just so you know.
8 MR. SAINES: Okay. No problem.
9 Question No. 8, on page 6 of the testimony, why
10 did the agency assume that any program other than
11 the ERMS program for meeting ROP requirements
12 would be a, "direct extension of the 15 percent
13 ROP plan"?
14 MR. BECKSTEAD: In formulating the 15
15 percent ROP plan, the agency followed a rigorous
16 procedure of evaluating all the various emission
17 categories in search of potential VOM reductions.
18 This procedure involved comparing the present
19 Chicago non-attainment control measures with
20 control measures other regions were adopting with
21 future control measures mandated by USEPA such as
22 NESHAPs and with any control measure that appeared
23 to be technically feasible and economically
24 reasonable.
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1 This same procedure was also
2 followed or "extended," if you will, in attempting
3 to formulate a command and control scenario that
4 would obtain the reductions needed to meet the
5 1999 ROP target levels. Thus, the approach used
6 in compiling the 15 percent ROP plan was relied on
7 and extrapolated further to the next level of
8 control stringency in determining how any command
9 and control scenario might meet the 1999 ROP
10 requirements.
11 MR. SAINES: Question No. 9, what does,
12 "direct extension," mean, further reductions from
13 currently identified sources or reductions from
14 additional sources not yet identified?
15 MR. BECKSTEAD: Direct extension refers
16 to any possible scenario that might yield
17 reductions from either currently identified or not
18 yet identified sources.
19 HEARING OFFICER FEINEN: Where is that
20 direct extension language? Is that still on page
21 6?
22 MR. BECKSTEAD: It all occurs on page 6.
23 MR. SAINES: It is on page 6, the first
24 full paragraph.
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1 Question No. 10, aren't there
2 alternatives other than applying a, "direct
3 extension of the 15 percent ROP plan," that would
4 perhaps be less costly?
5 MR. BECKSTEAD: The agency is not aware
6 of any other alternatives that are not direct
7 extensions of the 15 percent ROP plan.
8 MR. SAINES: Question No. 11, what does
9 the agency mean in the first paragraph on page 7
10 of the testimony?
11 MR. BECKSTEAD: The first paragraph of
12 page 7 of Sarah
Dunham's testimony describes the
13 comparison of annual versus seasonal control cost
14 estimates and the factors that influence the
15 calculations. I further expound on these factors
16 in my testimony. I refer you to Section 2.2, page
17 5 of my testimony and in particular table 1,
18 annual versus seasonal costs for add-on controls,
19 page 6.
20 Using USEPA methodology as
21 presented in their cost control manual, the basic
22 fact is demonstrated that control costs per ton is
23 lower if the control equipment is used year-round
24 rather than seasonally. This is a result of the
L.A. REPORTING - (312) 419-9292
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1 lower emission reductions during the ozone season
2 and the fact that amortization of capital occurs
3 year-round whether the equipment is used or not.
4 Using control costs calculated on an annual basis,
5 which is the methodology employed in the TSD,
6 presents a more conservative comparison to ERMS.
7 Seasonal cost comparisons would
8 demonstrate the advantages of ERMS to an even
9 greater extent.
10 MR. SAINES: Question No. 12, on page 8
11 of the testimony, what is the difference between
12 compliance option 1 and compliance option 2?
13 MS. DUNHAM: I'll answer that. One
14 involves participating in the market and the other
15 does not.
16 MR. SAINES: Question 12A, don't both
17 merely involve the reductions of emissions at a
18 facility?
19 MS. DUNHAM: Sure.
20 MR. SAINES: Question No. B, isn't the
21 second compliance option merely a way to offset
22 some of the costs of reducing emissions?
23 MS. DUNHAM: Yes, or more than offset.
24 MR. SAINES: Could you explain that last
L.A. REPORTING - (312) 419-9292
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1 answer, more than offset.
2 MS. DUNHAM: Well, if they have a --
3 they increase their control efficiency at $430 a
4 ton, they can sell the tons at $3,000 a ton,
5 they're going to make more than they cost.
6 MR. SAINES: Question 13, on page 10 of
7 the testimony, upon what "environmental goal" is
8 the agency basing its compliance decision model?
9 MS. DUNHAM: It's the 12 percent
10 reduction. We used 1433 tons of seasonal
11 reductions.
12 MR. SAINES: Question No. 14, upon whose
13 "general economic theory" is the agency basing
14 its compliance decision model?
15 MS. DUNHAM: That was probably a term I
16 shouldn't have used, but it's really just sort of
17 the area of emissions trading that's been the
18 focus of hundreds of papers and lots of research.
19 So the general body of literature that discusses
20 emissions trading is what we relied on.
21 MR. CASE: I think it's pretty well
22 supported.
23 MR. SAINES: Question No. 15, upon whose
24 "specific knowledge" of what "source situations"
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1 is the agency basing its compliance decision
2 model?
3 MS. DUNHAM: Agency staff, both from air
4 permit section and air planning section.
5 MR. SAINES: Question 16, upon whose
6 "ideas of economies of scale" is the agency
7 basing its compliance decision model?
8 MS. DUNHAM: That applies somewhat to
9 the earlier question. That's one of the
10 assumptions that goes into it. We basically in
11 certain situations assume that larger sources may
12 be able to reduce greater amounts more cost
13 effectively than only reducing a smaller amount.
14 MR. SAINES: Question 17, isn't it true
15 that the agency concedes that, "several additional
16 assumptions may not accurately reflect true
17 operating conditions for affected facilities" and
18 that "sufficient information was not available to
19 assume otherwise"?
20 MS. DUNHAM: Sure, yeah.
21 HEARING OFFICER FEINEN: I'm going to
22 ask a couple of questions. Several additional
23 assumptions -- I mean, you're quoting this from
24 the agency's testimony here?
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1 MR. SAINES: That's correct.
2 HEARING OFFICER FEINEN: And that's in
3 the paragraph right above further assumptions.
4 Can I have an example where I can find what those
5 additional assumptions may be.
6 MR. SAINES: I'm trying to find it
7 myself.
8 MS. DUNHAM: You're asking me?
9 HEARING OFFICER FEINEN: Yes, you --
10 MS. DUNHAM: These questions weren't on
11 the original. Can we take a couple of minutes.
12 MS. SAWYER: Can we have a couple of
13 minutes.
14 HEARING OFFICER FEINEN: Sure. In fact,
15 why don't we just take a break for 10 minutes, 15
16 -- let's take a 15-minute break.
17 (Recess taken.)
18 HEARING OFFICER FEINEN: Note that
19 Chairman Manning has joined us. Let's go back on
20 the record.
21 We're waiting for a response to the
22 follow-up question to question No. 17 of the
23 prefiled which came from me about several
24 additional assumptions. I asked for examples of
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1 those assumptions.
2 MS. DUNHAM: Those assumptions are
3 listed in my testimony. I'll just read through
4 them here. The first one is that annualized
5 capital costs begin with the 1999 season in our
6 model, and it's more likely that many facilities
7 will begin to control emissions prior to the 1999
8 season, and those incur control costs at an
9 earlier date. This assumption, therefore, may
10 cause the model to under predict the ERMS costs.
11 Another assumption we used was that
12 we used only single estimates for facility costs,
13 the costs of industrial category, and that might
14 serve to under predict the total economic impact,
15 mostly because that cost comes from add-on control
16 equipment. So it might not reflect more cost
17 effective reductions that sources in that category
18 could achieve.
19 The third one is that additional
20 facilities are likely to achieve voluntary
21 reductions, and by not considering all those
22 voluntary reductions, the analysis might have
23 overestimated control costs. And then the fourth
24 one is that many sources may choose to use
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1 reductions achieved from
intersector reductions or
2 from emission reduction generators, and those
3 reductions are not accounted for in the analysis,
4 and therefore, compliance costs may be
5 overestimated in the model.
6 HEARING OFFICER FEINEN: So when you
7 mentioned several addition assumptions, the
8 category of further assumptions was that?
9 MS. DUNHAM: Yes.
10 HEARING OFFICER FEINEN: Thank you.
11 Mr.
Saines.
12 MR. SAINES: Thank you. Question 18, on
13 page 14 of the testimony it is stated that the
14 REMI model predicts "impacts on jobs." Where is
15 the data on the "impacts on jobs" in the economic
16 analysis?
17 MS. DUNHAM: It's in appendix F of the
18 technical support document which presents all of
19 the summary from the REMI model.
20 MR. SAINES: If I could ask a follow-up
21 to question 18 because not being an economist nor
22 a computer expert, I looked at appendix F, and I
23 simply cannot comprehend it.
24 MS. DUNHAM: Okay, do you want me to
L.A. REPORTING - (312) 419-9292
1401
1 just tell you?
2 MR. SAINES: If you could provide an
3 overview what it basically does and says, that
4 would be very helpful.
5 MS. DUNHAM: Sure. As far as the job
6 impacts?
7 MR. SAINES: Yeah. I mean, where the
8 specific numbers relevant to the job impacts are
9 in the model and what they mean.
10 MS. DUNHAM: I can't tell you what page
11 it is right now, although I can certainly come
12 back to you with that, but it talks about
13 employment decreases. There should be a table in
14 the output. I'll just let you know that under the
15 ERMS analysis that we ran, the model predicted
16 there would be a decrease in 27 jobs. Under
17 alternative No. 1, there's a decrease of 44 jobs.
18 Under alternative No. 2, there's a decrease of 54
19 jobs, and alternative No. 3 was 48.
20 MR. SAINES: When you say decrease in
21 those numbers of jobs, is that individual persons
22 losing their job, or is that operations shutting
23 down?
24 MS. DUNHAM: The model can't predict or
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1402
1 can't tie it to a specific cause. All it does is
2 it predicts a forecast or a base case for the
3 Chicago area, and then when you enter the effect
4 of the policy, in this case the ERMS program, it
5 gives you what the changes from that original base
6 case or what would happen without the ERMS
7 program.
8 In this situation under the ERMS
9 analysis that we ran, the model predicted that
10 there would be 27 fewer jobs under the ERMS
11 scenario than there would be under the base case,
12 but then you have to compare that number to the
13 alternative command and control scenarios which
14 were in all of the cases twice as much.
15 MR. SAINES: Forgive me if I'm not
16 understanding you, but when you say 27 fewer jobs,
17 are you saying that there are 27 people in the
18 Chicagoland area that are no longer employed, or
19 are you saying that there are 27 fewer types of
20 jobs like, I don't know, technician at a
21 particular plastics coating facility or something
22 like that? I don't understand what jobs means.
23 MS. DUNHAM: It's the latter. Well,
24 yeah, I mean, it refers to a specific job, one.
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1403
1 So 27 fewer people will be employed.
2 MR. SAINES: So it's the former.
3 MR. CASE: I think it's fairly important
4 that when we evaluate -- once again we got to
5 compare apples and apples because when they're
6 talking about job losses to the computer trading
7 program, that's not the story here. The fact is
8 the trading program saves jobs because any other
9 form of command and control regulation that would
10 be required to achieve the same level of
11 reductions is going to cost more jobs. That's
12 really the important aspect.
13 MR. SAINES: I don't mean to ask
14 non-
prefiled questions, but I have another
15 additional follow-up, if that's okay.
16 With respect to the job loss that
17 the REMI model calculated, it calculated job
18 losses from alternatives 1, 2 and 3, is that
19 correct? And so in other words, the eight largest
20 emitters reducing those through command and
21 control, the REMI model predicted that there were
22 44 --
23 MS. DUNHAM: 54.
24 MR. SAINES: -- 54 jobs lost, and then
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1 alternative No. 3, which was regulating the 12
2 sources that it would be most cost effective, the
3 REMI model did its magic and then came out with a
4 number that was -- what was the number again?
5 MS. DUNHAM: 48.
6 MR. SAINES: 48. So those are 48
7 individual jobs lost in the
Chicagoland area based
8 on those alternatives?
9 MS. DUNHAM: Yeah, again it's the
10 Chicago region. It's not just from those specific
11 facilities necessarily.
12 MR. SAINES: Okay. Question 19, on page
13 16 of the testimony, how does the agency define
14 "small business"?
15 MS. DUNHAM: We didn't really for this
16 analysis.
17 MR. SAINES: Question 19A, couldn't a
18 business that has 50 tons of
VOMs per season but
19 that has only $60,000 per year in profits and only
20 10 employees be considered a "small business"?
21 MS. DUNHAM: Sure.
22 MR. SAINES: So when you refer to the
23 additional safeguards that the ERMS program has
24 implemented for small businesses, are those
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1405
1 safeguards applicable to the example that I just
2 gave of a source that has 50 tons?
3 Specifically I'm referring to the
4 10-ton source being excluded from the program, the
5 source can opt to limit its emissions to 15 tons
6 and be exempt from the rules, and then I believe
7 Dr. Case noted that there's a cap on the amount
8 the small source would have to pay to refuse, and
9 I believe that would be the ACMA, is that what you
10 meant by that?
11 MR. CASE: (Nodding head.)
12 MR. SAINES: I don't see how those --
13 how are those safeguards applicable to a 50-ton
14 source?
15 MS. DUNHAM: I agree with the first
16 couple probably may not be, but ACMA is still
17 available for that source. We still streamline
18 the whole transactions process. They still have
19 brokers available to them if they don't want to
20 have someone in house to handle all of the
21 transactions. So I think there's still a lot of
22 the provisions in the rule that would make it
23 easier for the source, even though you're right,
24 that the 10-ton threshold would not apply.
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1 HEARING OFFICER FEINEN: Before we move
2 on, I'd like to note try to speak up and answer a
3 little bit slowly. It's kind of hard for me to
4 hear.
5 I have a follow-up question for the
6 agency dealing with small businesses. You stated
7 in your testimony that several provisions were
8 included in the rule to assure that it did not
9 have adverse impact on small businesses. I
10 believe you answered Mr.
Saines' question that you
11 didn't define small businesses. I'm wondering how
12 you define small businesses when you make that
13 statement? I think -- do you understand my
14 question? The question is you have to make a
15 definition of small business to make that
16 statement. So I'm wondering what that definition
17 was.
18 MS. DUNHAM: I think what I was getting
19 at is we didn't run an analysis specifically for a
20 group of sources that we had defined as small
21 businesses. What we did was put provisions into
22 the rule to ensure that for small businesses, it
23 wouldn't adversely impact them.
24 HEARING OFFICER FEINEN: So the
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1407
1 provisions in the rules are designed to help
2 businesses not be impacted by the rule, and those
3 provisions are designed or directed towards what
4 were this undefined term as small business, is
5 that correct?
6 MS. DUNHAM: Right. I think maybe what
7 you're getting at is that we didn't run a specific
8 analysis for a group of sources that we defined
9 small businesses.
10 HEARING OFFICER FEINEN: Is there any
11 more follow-up on that from the agency?
12 MS. DUNHAM: I think when we were
13 talking about the provisions in the rule, they
14 were targeted at small sources, not necessarily
15 small businesses.
16 HEARING OFFICER FEINEN: Is there a
17 question?
18 MS. ROSEN: Whitney
Rosen from the
19 Illinois Environmental Regulatory Group. Maybe to
20 better clarify this, when you say small sources,
21 maybe you can characterize that in terms of
22 emissions or something so we can put it in
23 perspective.
24 What do you mean by that in terms
L.A. REPORTING - (312) 419-9292
1408
1 of the emissions that a small source or a small
2 business might have? Like is there a level of
3 emissions that we could -- or are there a number
4 of employees? How do you -- when you're using the
5 term small business, can you give us an element
6 that perhaps would better define it for us?
7 MS. DUNHAM: I think in terms of my
8 testimony, it was aimed at the small -- the
9 sources whose emissions are low.
10 MS. ROSEN: What do you mean by
11 emissions are low? Is there a level that you can
12 point to?
13 MR. NEWTON: Around the 15 ton a season
14 level probably. So that the provisions could
15 affect them, around 15 tons a season or in that
16 area.
17 MS. ROSEN: Is there a greater -- like
18 could you say from 15 tons to what outer limit?
19 MR. NEWTON: Probably 18 or 19 so that
20 they could reduce enough to get below that 15-ton
21 cutoff and be out of the program, if that's what
22 they chose to do.
23 MS. ROSEN: Thank you.
24 MR. MATHUR: Let me add some
L.A. REPORTING - (312) 419-9292
1409
1 clarification. I'm
Bharat Mathur with the
2 agency. The Clean Air Act has defined the small
3 business as one that does not need a Title V
4 permit. So by keeping sources that do not require
5 a Title V permit, I think the agency has already
6 kept small businesses, as defined in the Clean Air
7 Act out of this program.
8 Secondly, the provisions that Sarah
9 referred to of allowing the small business or a
10 business that could not otherwise be a small
11 business but commits to maintaining its emissions
12 at 15 is another level that the agency has
13 provided the businesses on the borderline if they
14 chose to out of this program.
15 MR. SAINES: Am I correct in stating
16 that the third type of small business would be the
17 small business that was identified by Ms.
Dunham
18 in response to my question 19A, I believe, or is
19 that not an accurate definition of a small
20 business?
21 MR. MATHUR: In a strict sense, your
22 theoretical example, since I don't believe you
23 identified exactly which business this is, a
24 business that has 50 tons of emissions in the
L.A. REPORTING - (312) 419-9292
1410
1 season would not necessarily be a small business.
2 It would not, under the Clean Air Act, be a small
3 business. It would require a Title V permit.
4 On the other hand, if you wish to
5 pursue that example, I'd like to know what small
6 business puts out 50 tons of emissions and meets
7 the other two parameters that you identified.
8 From an air quality perspective, that's fast
9 approaching a fairly large business.
10 MR. SAINES: Well, the point of the
11 example is that irrespective of the ton emissions
12 per season, there is also an element of the profit
13 margin that the company experiences during the
14 year, and the example is to show that while based
15 on emissions, there may be, quote-unquote, more
16 emissions than a small business would have, but
17 based on profits, if small business is also taking
18 into consideration the profit margin of the
19 business, which is a question that I have, they
20 may not necessarily be one and the same, and so
21 therefore, the question was could a small business
22 be a business with relatively large emissions but
23 with a relatively small profit margin? That's the
24 question.
L.A. REPORTING - (312) 419-9292
1411
1 MR. MATHUR: I think the agency is
2 looking at a small business relative to emissions
3 and relative to what program in the Clean Air Act
4 it triggers.
5 MR. SAINES: Okay, thank you.
6 HEARING OFFICER FEINEN: I think we're
7 going to move on then if there's no additional
8 follow-up questions in that point to the February
9 -- did I say February 6th filing of questions
10 from the ERMS coalition?
11 MR. SAINES: Thank you. This is Exhibit
12 2 entitled the economic impact analysis.
13 Question A, how did the agency
14 select the hypothetical command and control
15 alternatives upon which it bases its economic
16 impact analysis?
17 MS. DUNHAM: We selected three
18 hypothetical scenarios that would achieve the same
19 level of reduction as that required by the ERMS
20 program. I think there's multiple ways we could
21 have approached it, but we wanted to choose three
22 that were fairly representative of the range that
23 we would look at.
24 The first one, which just is the 12
L.A. REPORTING - (312) 419-9292
1412
1 percent reduction without trading, gives us a good
2 basis to compare and estimate what the potential
3 cost savings are from trading, and the other two
4 look at just the pool of large emitters and helps
5 us answer the question as how much would it cost
6 if we did just look at those, that pool of
7 sources.
8 MR. SAINES: I'll ask you one anyway.
9 For clarification for the record, what are these
10 three alternatives, and if you could just
11 elaborate on alternatives 2 and 3.
12 MS. DUNHAM: Sure. The second one is
13 applying the most stringent controls known to the
14 fewest number of sources that would enable the
15 agency to achieve its target emission reduction.
16 The third one was applying the most stringent
17 controls known to those sources with over 50 tons
18 of emissions per season and increasing order of
19 control costs until the target emission reduction
20 has been achieved.
21 MR. SAINES: And the second alternative,
22 how many sources did that ultimately result in?
23 MS. DUNHAM: Eight.
24 MR. SAINES: And the third one?
L.A. REPORTING - (312) 419-9292
1413
1 MS. DUNHAM: Twelve.
2 MR. SAINES: Are these alternatives
3 different from the alternatives analyzed in the
4 agency's technical feasibility study?
5 MR. BECKSTEAD: I'll address that
6 question. As part of the technical feasibility
7 study for ERMS, two control scenarios were
8 evaluated. The first entailed imposing California
9 standards on Chicago sources. It was determined
10 that only 6.82 tons per day of the 12.64 tons per
11 day of ozone emissions season reductions required
12 by the 1999 ROP were available from this control
13 scenario.
14 After establishing that this
15 control option would not provide sufficient
16 reductions, a second evaluation was undertaken to
17 ascertain if in fact sufficient reductions to meet
18 the 1999 ROP requirement were available from
19 participating ERMS sources. This evaluation
20 concentrated on the largest emitters, those with
21 seasonal VOM emissions greater than 50 tons per
22 season. This population of sources account for
23 greater than 80 percent of the total emissions of
24 all participating ERMS sources.
L.A. REPORTING - (312) 419-9292
1414
1 It was determined from this study
2 that if the most stringent controls known to be
3 available were applied to these larger sources,
4 more than enough emission reductions would be
5 available. From this study, 27.4 tons per day of
6 emission reductions were identified. Thus, it was
7 established in the technical feasibility studies
8 as described in section 7.0 of the TSD that these
9 two benchmarks bracketed the availability of
10 emission reductions applying typical measures of
11 Chicago area sources and that sufficient emission
12 reductions are potentially available for the
13 market to be viable.
14 In the analysis of the economic
15 impact of ERMS, two hypothetical command and
16 control alternatives were chosen based on the same
17 population of larger sources. These alternatives
18 were chosen because they represent the most
19 logical choices for economic comparisons to ERMS.
20 Due to the influence of economy of scale, they are
21 expected optimums that command and control
22 techniques would deliver from an economic impact
23 perspective. The first is getting the reductions
24 from the largest sources with the greatest
L.A. REPORTING - (312) 419-9292
1415
1 potential for reduction, and the second is getting
2 the reductions from the largest sources
3 considering cost effectiveness.
4 Further extension of command and
5 control techniques cannot be expected to deliver
6 better economic results than from these two
7 hypothetical alternatives, and that is the reason
8 they were chosen. As for the 12 percent across
9 the board alternative wherein all ERMS sources
10 with emissions greater than 10 tons per season are
11 required to reduce 12 percent without trading, the
12 required reduction to meet the 1999 ROP target are
13 carried equally by all participants. Given that
14 there are an infinite number of hypothetical
15 alternatives that could be chosen, the agency
16 chose three control scenarios that define the end
17 points as well as an intermediate point for
18 economic comparison to ERMS.
19 MR. SAINES: Thank you. At this point
20 we'll withdraw question No. 3 as being asked and
21 answered, at least answered, anyway. We'll
22 withdraw question B and B1, asked and answered.
23 Question B2 -- and I'll rephrase it since it I
24 have to give it in context.
L.A. REPORTING - (312) 419-9292
1416
1 In alternative No. 2, you
2 identified eight sources with the greatest
3 emission reduction potential that would achieve
4 compliance under command and control. Who are
5 these eight sources?
6 MR. BECKSTEAD: The eight sources
7 included in the second alternative are, 3M at
8 Bedford Park, Sealed Air Products located in
9 Hodgkins, Tenneco Packaging in Wheeling, Chicago
10 Heights Steel in Chicago Heights,
Edsel
11 Manufacturing in Chicago, Coppers Industries in
12 Stickney, OMC in Waukegan,
Akzo Nobel Chemical in
13 McCook.
14 MR. SAINES: Thank you. Question 3,
15 what type of control would be required at the
16 individual sources to meet the reductions
17 necessary?
18 MR. ROMAINE: The agency's review
19 targeted the process emission units at these
20 sources as identified in the 1994 annual emission
21 report with significant seasonal emissions for
22 further control measures. In general if emission
23 units were uncontrolled, it was assumed that a 98
24 percent efficient control device, usually an
L.A. REPORTING - (312) 419-9292
1417
1 afterburner, could be installed substantially
2 reducing VOM emissions.
3 In addition other emission units
4 with control devices with only moderate
5 efficiency, say, in the range of 75, 80 or maybe
6 90 percent were identified as candidates for
7 upgrade of the capture or control systems to
8 reduce emissions to a fraction of previous levels.
9 MR. SAINES: Is it technically feasible
10 to install the above-mentioned control at these
11 sources?
12 MR. ROMAINE: Yes, it is. The agency
13 evaluated the most stringent controls broadly
14 looking at the source categories as well as very
15 superficially looking at the individual sources.
16 We certainly targeted afterburners on sources -- I
17 mean process emission units where there were no
18 controls, that is technically feasible, and we're
19 certainly not aware of any technical obstacle to
20 installation of better controls on process
21 emission units that already have controls.
22 MR. SAINES: Question 5, who are the 12
23 sources identified in the third alternative at
24 which it would be most cost effective to reduce
L.A. REPORTING - (312) 419-9292
1418
1 emissions and still achieve the ERMS reduction
2 goals?
3 MR. BECKSTEAD: The 12 sources included
4 in the third alternative are 3M, Bedford Park;
5 Sealed Air Products,
Hodgkins; Jefferson Smurfit,
6 Carol Stream; Coppers Industries,
Stickney; Akzo
7 Nobel Chemical,
McCook, Akzo Nobel Chemical,
8 Morris; Clear-Lam Packaging, Elk Grove Village;
9 American Decal, Chicago; Dow Chemical,
Channahon;
10 Alden Press, Elk Grove Village; Meyer Cord
11 Company, Carol Stream; Shell Oil, Bedford Park.
12 MR. SAINES: What does "at which it
13 would be most cost effective to reduce emissions"
14 mean?
15 MS. DUNHAM: This phrase refers only to
16 the pool of emitters whose emissions exceed 50
17 tons per season. This pool of sources is
18 characterized by a range of control costs, and the
19 sources at which it would be most cost effective
20 to reduce emissions are those sources in this pool
21 of large emitters whose control costs are lowest
22 relative to the entire pool.
23 MR. SAINES: Relative to the entire
24 pool?
L.A. REPORTING - (312) 419-9292
1419
1 MS. DUNHAM: Of large emitters.
2 MR. SAINES: Let me ask a follow-up to
3 that. So it's not the cost relative to the amount
4 of emissions reduced, it's the cost relative to
5 the rest of the 50 or the group of 50-ton
6 sources?
7 MS. DUNHAM: Each facility was assigned
8 a cost per ton value essentially, and the sources
9 with the lowest cost per ton value were selected.
10 MR. SAINES: So it's cost per ton?
11 MS. DUNHAM: Yeah.
12 MR. SAINES: Thank you. Question 7,
13 what type of control would be required at the
14 individual sources to achieve these reductions?
15 And this pertains to the 12 sources.
16 MR. ROMAINE: Similar control measures
17 are being contemplated, as already discussed, for
18 the eight-source alternative. That is, addition
19 of control devices, typically afterburners, on
20 certain emission units that are not currently
21 controlled and upgrade of capture and control
22 devices, again usually afterburners, on certain
23 other emission units.
24 MR. SAINES: Question 8, is it
L.A. REPORTING - (312) 419-9292
1420
1 technically feasible to achieve this control?
2 MR. ROMAINE: Yes.
3 MR. SAINES: Question No. 9, are any of
4 these eight or twelve sources or any individual
5 emission units at these sources already reducing
6 emissions to the level identified which would meet
7 the 1999 goals?
8 MR. ROMAINE: No. They were not at the
9 most stringent level of control based on the
10 agency's records. As discussed, the purpose of
11 this evaluation was to identify further
12 reductions. At one source the agency is aware
13 that the capture systems had been
ungraded to
14 provide permanent total enclosure, but the control
15 devices themselves had not been upgraded to the
16 level of most stringent control.
17 At another source, control devices
18 had been upgraded but not to the level of most
19 stringent control. The emission reductions that
20 have already been provided are less than 10
21 percent of the total reductions required for the
22 1999 ROP demonstration. These reductions would,
23 of course, contribute to improved air quality and
24 are improving or contributing to improved air
L.A. REPORTING - (312) 419-9292
1421
1 quality, but the other thing is that the ERMS is
2 needed to facilitate reliance on these reductions
3 in terms of demonstrating that we have met ROP
4 goals.
5 MR. SAINES: Question C, did the agency
6 analyze what control would be needed at the 50
7 largest sources potentially subject to the ERMS
8 rules to achieve the exact reductions in emissions
9 necessary to meet the 1999 ROP goals?
10 MR. ROMAINE: No, we did not. This is
11 part of the reason that the agency didn't pursue
12 the evaluation of the 12 percent across the board
13 scenario. There's several technical reasons for
14 this. Control measures come in steps, and there
15 may be limited ability to achieve particular
16 levels of intermediate control.
17 For example, various types of
18 afterburners may be achieved between 95 and 99
19 percent control for a particular process. If the
20 afterburner is the only available further control
21 for the process, the only way to approach 12
22 percent control would be to operate the
23 afterburner intermittently, 15 or 20 percent of
24 the time perhaps.
L.A. REPORTING - (312) 419-9292
1422
1 In addition the principle of
2 economy of scale generally suggests that, other
3 things being similar, an afterburner or other
4 control device would be most effective if applied
5 to the greatest amount of emissions. Thus, if
6 some control device is to be installed on a
7 process, one will seek to control a process with
8 the best mix of high concentration and high VOM
9 emission rate and then attempt to maximize
10 operation of the control system rather than simply
11 targeting a 12 percent control for a process and
12 then having to control more processes at
13 additional expense.
14 Then finally, it's important to
15 note that even with a 12 percent reduction just
16 going for that target, sources would still have
17 the ability to select only certain emission units
18 that would be further controlled. Perhaps they
19 would again select the most stringent controls for
20 the emission -- those emission units so that the
21 source would fulfill its obligation to reduce its
22 VOM emissions.
23 MR. SAINES: Okay, if I could just ask a
24 follow-up on the last point you just made. I'll
L.A. REPORTING - (312) 419-9292
1423
1 invoke a hypothetical. Let's say there are 10
2 emission units at a source. Applying the most
3 stringent controls known to the source defined as
4 the entire facility, would it hypothetically
5 require some sort of add-on control that covers
6 all 10 emission units? Is that accurate?
7 MR. ROMAINE: Yes, it is.
8 MR. SAINES: So if there was something
9 less than the most stringent controls known, that
10 was analyzed, wouldn't that perhaps not
11 necessitate applying add-on controls to each one
12 of those 10 units? Maybe do five of the ten as
13 opposed to all ten.
14 MR. ROMAINE: That's possible, but it's
15 just as likely that the alternative would be
16 applying the most stringent controls to only five
17 of those units and no controls to the other five
18 units
19 MR. SAINES: Exactly, that's my point.
20 Is that what you're sort of saying is a way to
21 achieve something less than most stringent
22 controls?
23 MR. ROMAINE: But that would be applying
24 most stringent controls to certain emission units.
L.A. REPORTING - (312) 419-9292
1424
1 MR. SAINES: Correct, correct, but the
2 facility as a whole then would not be controlled
3 with the most stringent controls known because its
4 emission reductions would be less?
5 MR. ROMAINE: Yes.
6 MR. SAINES: Is that correct?
7 MR. ROMAINE: That's correct.
8 MR. SAINES: I want to withdraw question
9 C1.
10 Question C2, did the agency only
11 assess the specific costs of reducing emissions at
12 8 and 12 sources of these 50 sources?
13 MS. DUNHAM: I want to make two points
14 in response to this. The first one is that the
15 agency used aggregate costs based upon industrial
16 category, not costs specific to the individual
17 sources, just to clarify that.
18 MR. SAINES: Okay.
19 MS. DUNHAM: And then the second one,
20 which I think responds to you, is that the agency
21 did assess the costs again based on aggregate
22 estimates for each of the largest emitters so that
23 we did have cost numbers for all 59 sources, but
24 we only used the 8 and the 12 in the actual
L.A. REPORTING - (312) 419-9292
1425
1 analysis.
2 MR. SAINES: So I'll just ask question
3 3, is it correct that the agency did not determine
4 the specific costs of reducing emissions at all 50
5 sources to a level sufficient to meet the 1990
6 goals? 1999 goals, it should be.
7 MR. ROMAINE: That is correct.
8 MR. SAINES: We'll withdraw question 3A
9 and 3B as being -- well, I'll just withdraw
10 those.
11 Question 3C, would it be
12 technically feasible to install less than the most
13 stringent control on these 50 sources, the sources
14 that we've discussed?
15 MR. ROMAINE: Yes, it would be
16 technically feasible to install something less
17 than the most stringent control on these sources.
18 As we've already discussed, there are many
19 different alternatives, perhaps thousands of
20 alternatives that theoretically could be applied
21 to the sources. One has to consider the different
22 combinations of individual emission units at these
23 sources for application of further controls.
24 Second, one would have to consider alternative
L.A. REPORTING - (312) 419-9292
1426
1 levels of emission controls for those individual
2 emission units as an alternative to the most
3 stringent controls.
4 The three alternatives evaluated by
5 the agency, the 8-source, the 12-source, the 12
6 percent the trading scenarios were an attempt to
7 show how the ERMS will be more cost effective than
8 a command and control rule. This is the key
9 point. The ERMS, by using market mechanisms, will
10 facilitate lowest cost combination of measures
11 that will reduce VOM emissions to meet the 1990
12 ROP requirement.
13 MR. SAINES: Question 4, in reaching its
14 conclusion that controlling the largest 50 sources
15 would reduce emissions well beyond the reductions
16 needed to meet the 1999 ROP goals, did the agency
17 assess if any sources currently control emissions
18 to the level that would be required?
19 MR. ROMAINE: If I understand the
20 question correctly, you're asking whether any of
21 the 50-ton and above sources had installed most
22 stringent controls?
23 MR. SAINES: That's correct.
24 MR. ROMAINE: As previously discussed,
L.A. REPORTING - (312) 419-9292
1427
1 the goal of the evaluation was to identify further
2 reductions in emissions that could be achieved in
3 the Chicago area. A handful of sources have
4 already improved control measures, but not the
5 level of the most stringent controls as already
6 discussed. When looking at the total population,
7 another source's VOM emissions have been reduced
8 by the reclassification of acetone so that it is
9 no longer classified as a volatile organic
10 material.
11 These reductions do contribute to
12 improved air quality, that is, reduced VOM
13 emissions, but they are by no means sufficient to
14 achieve the rate of progress requirement for
15 1999. In addition the trading program is
16 necessary to rely on these reductions to show how
17 the rate of progress target will be met.
18 MR. SAINES: You mentioned a handful.
19 My question for you is if so, how many? Do you
20 have a specific number?
21 MR. ROMAINE: Four.
22 MR. SAINES: Four.
23 MR. ROMAINE: Well, back off. The only
24 one that may have gone all the way to the most
L.A. REPORTING - (312) 419-9292
1428
1 stringent would be this one source that has
2 converted to acetone. The others have made some
3 reductions and maybe four that have made some
4 further reductions.
5 MR. SAINES: Okay. We withdraw question
6 B, 4B, that is.
7 Question 4C, how many sources in
8 Illinois comply with RACT requirements by add-on
9 control?
10 MR. BECKSTEAD: You say here Illinois.
11 Are you really referring to the Chicago
12 non-attainment area, or do you want the State of
13 Illinois?
14 MR. SAINES: Chicago non-attainment
15 area, the area that is relevant to the current
16 rules.
17 MR. BECKSTEAD: According to our
18 inventory data through the end of 1995, there were
19 507 sources in the Chicago area with add-on
20 controls that meet or exceed 81 percent average
21 overall control efficiency.
22 MR. SAINES: And those are sources with
23 add-on control, is that correct?
24 MR. BECKSTEAD: Yes, that's add-on
L.A. REPORTING - (312) 419-9292
1429
1 control.
2 MR. SAINES: Question 4D, how many
3 source was add-on control exceed the control
4 required by RACT? You said meet or exceed. Do
5 you have a breakdown?
6 MR. BECKSTEAD: 502 in the Chicago area
7 are exceeding RACT requirements of 81 percent
8 average overall control efficiency.
9 MR. SAINES: Question 4E, how many of
10 these 502 sources have obtained reductions beyond
11 the RACT requirements after 1990?
12 MR. BECKSTEAD: 127 sources installed
13 add-on control devices after January 1, 1990.
14 MR. SAINES: And those 127 exceed the
15 RACT requirements?
16 MR. BECKSTEAD: I can't answer that
17 question. That's not what I searched for. All I
18 know is they added add-on controls beyond RACT.
19 It would be 81 percent or greater, yes, yes.
20 MR. SAINES: Question D, are any of the
21 units at the 8 or 12 sources discussed in the
22 alternatives subject or will be subject to maximum
23 achievable control technology regulations?
24 MR. BECKSTEAD: Well, in the 1997
L.A. REPORTING - (312) 419-9292
1430
1 through 1999 time frame, two of the eight sources
2 identified in the second alternative will be
3 required to comply with MACT regulations. The
4 remaining six will be subject to
MACTs that are
5 scheduled for promulgation after 1999. No control
6 requirement levels have been established for those
7 MACTs.
8 Similarly, two of the 12 sources
9 identified in the third alternative will be
10 required to comply with MACT regulations in the
11 1997 to 1999 time frame. Of the remaining 10
12 sources, 6 will be subject to
MACTs that are
13 scheduled for promulgation after 1999. Again no
14 control requirement levels have been established
15 for these
MACTs either. And as of this date, 4 of
16 the 12 sources do not appear to be affected by
17 MACTs currently being scheduled by USEPA.
18 MR. SAINES: We withdraw question
19 No. 2. We withdraw question No. 3. Question D4,
20 will the sources identified in the answer to my
21 questions have to incur the costs of installing
22 and maintaining MACT control regardless of the
23 ERMS rules?
24 MR. BECKSTEAD: Yes. A source is
L.A. REPORTING - (312) 419-9292
1431
1 required to meet the MACT standards as mandated by
2 the Clean Air Act, and it will incur a cost to
3 control. The ERMS rule gives a source the
4 incentive to route as many VOM laden streams to
5 the MACT-required control device since the VOM
6 reductions are creditable towards its 12 percent
7 reduction, and any excess reductions can also be
8 marketed. The cost per ton to control its
HAPs
9 and
VOMs are thereby reduced and the environment
10 benefits.
11 MR. SAINES: I didn't quite understand
12 the answer to that. You're saying that the
13 sources that have to comply with MACT, the ERMS
14 rules gives an incentive for them to channel
15 additions beyond the HAP?
16 MR. BECKSTEAD: Yes. Any VOM laden
17 stream, it would be to their advantage to run it
18 through the same control device, thereby reducing
19 their cost to control, and if they exceed 12
20 percent, they have something to market off.
21 MR. SAINES: We withdraw question No. 5
22 being asked and answered.
23 Question 6, would compliance with
24 the MACT standards by these sources prior to 1999
L.A. REPORTING - (312) 419-9292
1432
1 obtain reductions in VOM emissions?
2 MR. BECKSTEAD: Yes. The agency
3 anticipates that compliance with MACT standards
4 will also obtain VOM reductions as well as
HAPs
5 reductions. The ERMS rule allows the VOM
6 reductions obtained from meeting a MACT standard
7 to be creditable toward the facility's 12 percent
8 requirement.
9 MR. SAINES: Question D7, has the agency
10 determined what reductions would be achieved by
11 these sources by complying with MACT rules before
12 1999?
13 MR. BECKSTEAD: As previously answered,
14 the agency estimates that reductions resulting
15 from the
MACTs that have compliance dates falling
16 between 1997 and 1999 will be approximately 1 to
17 1.5 tons per day for the entire population of ERMS
18 sources. The estimated maximum MACT reductions
19 from the eight sources of alternative 2 is eight
20 hundredths of ton per day, and from the 12 sources
21 of alternative 3, is .57 tons per day.
22 MR. SAINES: Let me ask one follow-up to
23 that. Has the agency calculated the reductions
24 that would be achieved post 1999? You mentioned
L.A. REPORTING - (312) 419-9292
1433
1 there were six additional sources that would be
2 subject to MACT.
3 MR. BECKSTEAD: We don't know the level
4 of control those
MACTs will have so we cannot make
5 those estimations.
6 MR. SAINES: Question E, how many
7 Chicago area companies will the ERMS rules cause
8 to shut down operations completely or relocate
9 from the
Chicagoland area?
10 MS. DUNHAM: First in response to that,
11 the agency believes that the ERMS program is
12 better than any other alternative control program
13 for the participating sources, and the second
14 point is that the analysis we ran does not
15 specifically predict shutdowns. The only
16 indicator of that that we have is the job decrease
17 indicator which we discussed earlier. So that
18 neither the model nor the agency can necessarily
19 predict individual business decisions which are
20 based on a lot of other factors besides just the
21 effects of this emission reduction program.
22 MR. SAINES: I'll ask question F. How
23 many sources with emissions under 50 tons per
24 season will be forced to shut down as a result of
L.A. REPORTING - (312) 419-9292
1434
1 the ERMS rules?
2 MS. DUNHAM: Again, the model does not
3 predict an individual company's decision. We can
4 only look at the predicted job decreases.
5 MR. CASE: If I might add to that, thank
6 you. The whole issue of shutdowns is -- again
7 it's apples and oranges comparisons. We have to
8 compare this choice via emissions trading against
9 what other, more stringent controls are going to
10 be required under command and control arrangement,
11 and the theory predicts and their modeling shows
12 that under those more stringent command and
13 control arrangements, more people lose their jobs,
14 and we can extrapolate from that that there would
15 be more shutdowns. This program is a job-saving
16 program.
17 Another thing that's not considered
18 is the fact that trading makes those resources
19 available for someone else. If there's any
20 reduction in emissions, those are potentially
21 available on the market for someone else, which
22 means that new firms can find it easier to locate
23 in the Chicago area. So I just -- it's probably
24 not appropriate to go static isolated comparison
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1435
1 of this program with relation to job losses and
2 shutdowns. You have to look at the bigger
3 picture.
4 MR. TREPANIER: If I could follow up on
5 that. In your theory where you're figuring out
6 the job losses versus command and control, are you
7 considering the effect of opportunity costs
8 influencing firm's behavior, opportunity costs of
9 being granted these pollution allotments?
10 MR. CASE: I think the answer is in
11 general yes. I'm not sure to what extent the REMI
12 model includes those opportunity costs, but I
13 think the theory does include them.
14 MS. DUNHAM: To respond to that, I think
15 the REMI model does not take into account the
16 opportunity cost.
17 MR. TREPANIER: It does not?
18 MS. DUNHAM: No.
19 MR. TREPANIER: Quick follow-up to my
20 question. When you say you understand the theory
21 does include firms reacting to opportunity costs
22 of having a pollution allotment, do you understand
23 that that theory is that this opportunity cost
24 gives the firm an incentive to partially shut down
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1436
1 or fully shut down their operations?
2 MR. CASE: I think I disagree with that
3 aspect because there are opportunity costs
4 involved in command and control devices as well,
5 and I believe -- and I think the theory tells us
6 and their modeling shows this -- that you're more
7 likely to shut down under command -- I think
8 nobody's modeling so far has looked at shutdowns,
9 but we did look at job reductions.
10 Clearly everything that was looked
11 at shows that there are more jobs lost under every
12 type of command and control arrangement, and yes,
13 those firms do realize opportunity costs under
14 command and control as well as under trading.
15 MR. TREPANIER: When you say that under
16 command and control a firm has an opportunity, are
17 you referring to the opportunity cost that is
18 affecting economic behavior because the
19 corporation has now been given an asset that they
20 either utilize or let sit idle?
21 What are you saying when you say
22 there's an opportunity cost with command and
23 control similar to an opportunity cost here? How
24 are you defining the opportunity cost to say
L.A. REPORTING - (312) 419-9292
1437
1 that?
2 MR. CASE: When we do a barely static
3 analysis of a firm complying with command and
4 control, we need to realize that a firm doesn't
5 have to comply with the command and control
6 regulation by installing the add-on control
7 equipment. The firm may shut its operations down
8 or not produce that particular good that was
9 getting them in trouble through that reduction
10 process. Those are opportunity costs that the
11 firm realizes in the command and control
12 scenario.
13 MR. TREPANIER: If there would be an
14 opportunity at the end for questions from the
15 audience.
16 HEARING OFFICER FEINEN: Yes, there will
17 be. Mr.
Saines.
18 MR. SAINES: We'll withdraw question G
19 as asked and answered.
20 Question H, if the agency required
21 only the 8 or 12 sources to control emissions to
22 the extent necessary to meet the 1999 goals, would
23 any of the 8 or 12 sources be forced to shut down
24 operations?
L.A. REPORTING - (312) 419-9292
1438
1 MS. DUNHAM: Again, the model that we
2 used doesn't predict specific source shutdowns,
3 and as a further point, we used aggregate control
4 costs by SIC for this analysis, not cost data
5 specific to these sources. So we can't
6 necessarily predict that.
7 MR. SAINES: I'm sorry, the last?
8 MS. DUNHAM: So we can't predict whether
9 any of these specific 8 or 12 sources would shut
10 down.
11 MR. SAINES: We'll withdraw question
12 H1.
13 Question H2 is, if not, why not,
14 and I assume that's the answer you just gave.
15 MS. DUNHAM: (Nodding head.)
16 MR. SAINES: So thank you.
17 MS. DUNHAM: Yes.
18 MR. SAINES: Question I, how did the
19 agency calculate the total statewide cost of $3.2
20 million set forth in paragraph 2(a) of the
21 agency's analysis of economic and budgetary
22 effects of proposed rulemaking?
23 MS. DUNHAM: I'll just walk through how
24 we did that trading simulation, and if you have --
L.A. REPORTING - (312) 419-9292
1439
1 if you have follow-up questions to this one, I
2 think this is where I was trying to -- where I was
3 going to answer your earlier question.
4 Step one was we took the 1994
5 annual emission reports, and the agency identified
6 the set of sources likely to be participating
7 sources under the ERMS program. These sources and
8 their emissions were then aggregated by two-digit
9 SIC code.
10 Second step, air quality planning
11 staff estimated average annualized control costs
12 for each SIC code using accepted USEPA
13 methodology. The SIC categories were then listed
14 in order of increasing control costs. Third step,
15 we simulated trading, and emitters with low
16 control costs were assumed to over comply, when
17 possible, and sources in categories with higher
18 control costs were assumed to purchase
ATUs for
19 compliance.
20 The trading scenario produced
21 sufficient total reductions from sources in SIC
22 with estimated control costs at or below $2850 per
23 ton. We then assumed that sources in categories
24 above that value and for a couple of the sources
L.A. REPORTING - (312) 419-9292
1440
1 in categories below that value who did not reduce,
2 they would all purchase
ATUs at a price of $2850
3 per ton. We then had total control costs by SIC.
4 If you add all those up, it came to $3.2 million.
5 MR. SAINES: So to the extent that any
6 source you have identified in your hierarchy of
7 control costs, any source that control cost is
8 below $2,850 per ton decides not to over control
9 but rather to buy from the market which is the
10 choice available to them?
11 MS. DUNHAM: Right.
12 MR. SAINES: That will in effect --
13 won't that offset or affect the price of
ATUs on
14 the market?
15 MS. DUNHAM: Yeah, and we actually in
16 our model did not assume that every source
17 underneath that value would reduce so that there
18 is some room in the model to take into account
19 that concern.
20 MR. SAINES: Anything more specific than
21 that? What percentage of those sources are under
22 2850 per ton?
23 MS. DUNHAM: I'm not sure I can give you
24 a percentage, but we had one entire SIC category.
L.A. REPORTING - (312) 419-9292
1441
1 MR. SAINES: You had one that was below
2 but --
3 MS. DUNHAM: But did not reduce.
4 MR. SAINES: Did not over control?
5 MS. DUNHAM: Right, out of six, I
6 think.
7 MR. SAINES: Question J, is 1,363.4 tons
8 per day the figure from which the agency has
9 determined a 12 percent production is needed?
10 MR. FORBES: I'll answer that. No, the
11 projected 1996 emissions level and the 1999 ROP
12 target level of emissions determine the needed
13 reduction amount. I refer you to table 2 of
14 Bharat Mathur's testimony, Exhibit No. 6, which
15 discusses these emission levels.
16 MR. SAINES: Thank you. Question K, is
17 it possible that upon submission of all
18 participating sources' baseline determinations,
19 less than a 12 percent reduction in emissions will
20 be needed from the overall baseline emissions to
21 obtain the 1999 ROP goals?
22 MR. FORBES: Yes, it is possible, if the
23 total final baseline emissions is much lower than
24 the agency is projecting those baselines to be,
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1442
1 after all adjustments allowed for in the rule are
2 accounted for, including BAT, MACT, and other
3 exempt unit exclusions. However, the agency
4 believes that it's more likely that the baseline
5 would be higher than projected due to these
6 adjustments. This makes the 12 percent reduction
7 goal a little more significant as it provides some
8 contingency for ROP.
9 MR. SAINES: Question K1, if less than
10 12 percent emission reduction is needed, is there
11 a mechanism available by which sources may
12 petition the agency or the board to amend the
13 amount of reductions required by the ERMS rule?
14 MR. FORBES: Yes. Any person may submit
15 a proposal to the board for adoption, amendment or
16 repeal of the board's regulations pursuant to
17 Section 28 of the Environmental Protection Act.
18 MR. SAINES: But there's nothing in the
19 actual ERMS rules or proposal that articulates
20 that availability?
21 MR. FORBES: Not that I'm aware of.
22 MR. SAINES: We withdraw question No. 2,
23 K2, that is.
24 Question K3, if upon the agency's
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1443
1 determination of a participating sources' baseline
2 emissions, less than a 12 percent reduction is
3 needed overall, will the agency modify the 12
4 percent further reduction requirement?
5 MS. SAWYER: Object to this question.
6 It's overly speculative.
7 MR. SAINES: I disagree. I mean, I
8 think it's a proposed rulemaking. Everything
9 we're discussing is speculative. The economic
10 analysis is speculative.
11 MS. SAWYER: Well, obviously if we
12 didn't think a 12 percent reduction is needed,
13 this wouldn't be the rule we were putting forth.
14 We've come up with estimates which are to the best
15 of our ability to justify the 12 percent
16 reduction. To suggest -- I don't think we could
17 -- I mean, we're basing this whole proposal on
18 the 12 percent reduction being required.
19 MR. SAINES: That's true. I'm just
20 saying if it turns out that it's not required once
21 you look at the data, are you going to modify the
22 rule?
23 MS. SAWYER: Well, it's speculative
24 because we think it is required.
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1444
1 HEARING OFFICER FEINEN: I think there's
2 been prior testimony stating that there's going to
3 be a review of the whole program and whether or
4 not reductions are being met, and at that time the
5 agency may require further reductions. I believe
6 this question can be answered by the agency. I
7 don't think it's speculative. I think it's a
8 simple question that can be answered here.
9 MR. FORBES: I'll try to answer that, I
10 guess. As explained in the agency's previous
11 testimony, significant uncertainty exists at this
12 time as to what the ultimate attainment level will
13 be for Chicago and what this will require in terms
14 of additional VOM reductions.
15 However, the previous testimony
16 indicated that it does appear that additional
17 reductions will be needed beyond the 12 percent
18 reduction included in the proposed rule. This
19 circumstance, along with the degree to which the
20 baseline emissions are lower than projected, will
21 be taken into consideration in any decision the
22 agency makes regarding modification to the ERMS
23 rule.
24 MR. SAINES: Thank you. We'll withdraw
L.A. REPORTING - (312) 419-9292
1445
1 question No. K4.
2 Question K5, if less than a 12
3 percent reduction is needed and hence less control
4 would be necessary to achieve the required
5 reductions, would less command and control be
6 needed to obtain these reductions?
7 MR. FORBES: As explained in previous
8 agency testimony, command and control requirements
9 would take existing controls and extend them
10 further. The agency did this in its review and
11 application of California emission control
12 standards to Chicago sources. Obviously applying
13 half a control device does not make any sense, and
14 the degree of control cannot be backed off to a
15 level that would be less than that required by
16 current regulations.
17 Consequently, the more likely
18 scenario would be to reduce the number of sources
19 affected by the tighter command and control
20 requirements in such a way as to achieve the
21 desired emission reductions. The agency would not
22 view this as a lessening of command and control
23 requirements.
24 MR. SAINES: In 5A, if there are less
L.A. REPORTING - (312) 419-9292
1446
1 sources subject to command and control, would less
2 cost be incurred in obtaining the reductions via
3 traditional regulatory control methods?
4 MR. FORBES: No. Based on my previous
5 answer, since command and control would not be
6 lessened, the costs of command and control would
7 not be lessened. Only the number of sources
8 impacted would be lessened.
9 MR. SAINES: Just so I understand, when
10 you say the cost of control, you're speaking
11 specifically to the cost of control the facility
12 required to control?
13 MR. FORBES: Yes.
14 MR. SAINES: So you're not discussing
15 the overall costs on the industry affected
16 generally in the
Chicagoland non-attainment area?
17 MR. FORBES: No.
18 MR. SAINES: The total costs of the
19 program limitation.
20 MR. FORBES: No.
21 MR. SAINES: Question L, I believe this
22 question has been asked and answered. I withdraw
23 it.
24 Question M, why has the agency
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1447
1 dismissed all of the programs identified on page
2 139 of the technical support document to obtain
3 reductions in emissions?
4 MR. NEWTON: These programs have been
5 dismissed for the purpose of achieving the 1999
6 ROP target level because, as it says on that page
7 there, extremely unpopular like the employee
8 commute option. They are rather expensive and
9 they fall far, far short of the necessary
10 reductions.
11 MR. SAINES: When you say they're
12 politically unpopular, would you just elaborate on
13 that? Does that mean that they are fatally
14 flawed, or do you mean that people don't like to
15 get out of their cars?
16 MR. NEWTON: Well, I think in the case
17 of the employee commute option, I think -- I'm not
18 an expert on that, but I think the federal
19 government was kind of pushing for it, and it was
20 so unpopular that they dropped it completely, I
21 think, or at least temporarily.
22 MR. SAINES: Question N on the last page
23 of our questions, the agency has stated that
24 "further reductions" beyond 12 percent may be
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1448
1 needed. If so, will the agency have to conduct a
2 new economic impact analysis?
3 MS. SAWYER: This question has been
4 asked. The question was asked and answered, the
5 entire section N at page 587 of the transcript
6 beginning at line 7 and continuing through 588,
7 line 12.
8 MR. SAINES: Okay. So you're saying
9 that includes N1, 2A, B and C.
10 MS. SAWYER: Yes.
11 MR. SAINES: Well, then we will withdraw
12 questions 1, 2A, B and C as asked and answered.
13 There are a couple of more questions from our
14 original
prefiled questions that we have
15 deferred. I have them here, just a couple.
16 HEARING OFFICER FEINEN: Can we go off
17 the record for a second.
18 (Discussion off the record.)
19 MR. SAINES: It's starting on page 8 of
20 our section 5, pertaining to Section 205.140,
21 general system description.
22 MS. SAWYER: Can we go over which ones
23 they are just to make sure we're on the same page
24 with this?
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1449
1 MR. SAINES: Yeah.
2 (Recess taken.)
3 HEARING OFFICER FEINEN: Go back on the
4 record. Mr.
Saines, please describe the section
5 and the question number from your earlier ones.
6 MR. SAINES: Sure. These are questions
7 that were contained in our original
prefiled
8 questions. It is Section 5 pertaining to Section
9 205.140 of the rules entitled general system
10 description on page 8 of the
prefiled questions
11 and it starts at Section B which pertains to
12 Section 205.140 (b)(2) entitled new participating
13 sources.
14 Question 1, has the agency
15 conducted any analysis as to how many -- excuse
16 me, as to the ERMS -- how the ERMS rules will
17 impact new business entering into the
Chicagoland
18 area?
19 MS. DUNHAM: The agency feels that the
20 ERMS rules will make it easier for new sources to
21 enter the area because of the market
22 infrastructure that will develop. Under the
23 existing federal requirements for new sources,
24 they have to get offsets within a system that
L.A. REPORTING - (312) 419-9292
1450
1 doesn't have that market infrastructure supporting
2 the ability to get offsets. Under ERMS sources
3 will have an incentive to provide
ATUs to new
4 sources.
5 MR. SAINES: You stated -- sorry, you
6 stated that the agency feels it will be easier,
7 and has the agency conducted an analysis, is that
8 what the analysis is or is that just a feeling?
9 MS. DUNHAM: Well, if you want a sort of
10 analytical answer to it, the REMI model does show
11 impacts from the baseline case which does take
12 into account new sources entering the area or
13 predictions on how many new sources will enter the
14 area, so that impact is taken into account. It
15 doesn't specifically link the impact on new
16 sources with the outcome of the model, but they
17 are taken into account.
18 MR. SAINES: What were the conclusions
19 that the REMI model came to?
20 MS. DUNHAM: The same conclusions I
21 presented earlier in that it's a lot less impact
22 under the ERMS program than it would be under any
23 of the command and control scenarios studied.
24 MR. SAINES: I don't mean to push the
L.A. REPORTING - (312) 419-9292
1451
1 point. It seemed that you were saying that it
2 would provide an incentive for new business to
3 come into Chicago, and I'm wondering whether or
4 not the REMI model actually predicted that there
5 would be an influx of new business entering
6 Chicago as a result of the ERMS rule or any other
7 regulation for that matter or whether it's just
8 less of a negative impact by the ERMS rules.
9 MS. DUNHAM: I don't think the model can
10 predict that there will be more new sources
11 entering the market or at least you can't
12 differentiate that.
13 MR. CASE: I think that's kind of beyond
14 what the model is capable of showing. The key
15 here is that we're going to have a program where
16 it now becomes more flexible to site a new
17 facility because the market will provide the
18 ability to make
ATUs available, and that's not
19 available now. So this program can only make it
20 easier to put new facility, new business, and for
21 that matter, new jobs in Chicago.
22 MR. ROMAINE: Let me introduce some
23 other thoughts as well. I think it's perhaps
24 misleading to think that emissions from new
L.A. REPORTING - (312) 419-9292
1452
1 businesses don't have to be offset if they're
2 minor. We have a budget in the Chicago area. We
3 have to make reductions to get to attainment. If
4 a source is excused from new source review and
5 doesn't have to make its own emission reductions
6 under the current program, that means other
7 sources have to make up the difference.
8 What the trading program does by
9 establishing a budget for this particular
10 population is to make sure that those things are
11 considered so that a new source coming into the
12 area doesn't get a free ride at the expense of
13 existing sources. What the economic analysis
14 shows that in fact by forcing sources to consider
15 that, it is better for the overall area.
16 MR. SAINES: Question 2, by not
17 allotting
ATUs to "new participating sources,"
18 isn't the agency significantly restricting the
19 expansion of business in the
Chicagoland area?
20 MR. CASE: Your name is on this.
21 MR. ROMAINE: No. When a business
22 expands, it has many considerations that it has to
23 work through. The Clean Air Act establishes
24 certain requirements for new major sources that
L.A. REPORTING - (312) 419-9292
1453
1 have to be addressed and establishes requirements
2 that have to be established for rate of progress,
3 and the approach that has been taken to allocation
4 of
ATUs provides a reasonable approach to make
5 sure that the ERMS is effective in meeting the
6 rate of progress obligations.
7 MR. SAINES: Question No. 3, by not
8 allotting
ATUs to "new participating sources," is
9 the agency prohibiting fair competition in the
10 Chicagoland area?
11 MR. ROMAINE: No, it is certainly not.
12 If the Chicago area is at a disadvantage, it's
13 because it's a severe ozone non-attainment area.
14 What the ERMS program does is allow the Chicago
15 area sources to compete as effectively as possible
16 with other areas that are in fact attainment or
17 have better air quality for ozone.
18 MR. SAINES: The next questions are
19 located on page 10 of the
prefiled questions in
20 what is our --
21 MS. SAWYER: Just to clarify, you are
22 withdrawing questions 4 and 5?
23 MR. SAINES: Oh, yes, we are withdrawing
24 questions 4 and 5 from that previous section.
L.A. REPORTING - (312) 419-9292
1454
1 The next questions are located on
2 page 10 under our section 6 pertaining to Section
3 205.150 entitled emissions management periods
4 starting at question 8.
5 Isn't it true that Illinois'
6 current regulations do not require sources making
7 non-major modifications to offset emissions at any
8 ratio?
9 MS. SAWYER: I'm not sure we are on the
10 same page at this point. I thought we were.
11 Could I see the questions again.
12 Could you repeat where you are
13 exactly.
14 MR. SAINES: Sure, we are on page 10,
15 question C8. It's under Section 205.150 C and D,
16 new major sources and major modifications.
17 MS. SAWYER: And you're on 8?
18 MR. SAINES: Question No. 8.
19 MR. CASE: We don't have the lead-in to
20 that.
21 MS. SAWYER: We should be able to go
22 ahead.
23 MR. ROMAINE: I think it's pretty
24 obvious that there's no explicit requirement under
L.A. REPORTING - (312) 419-9292
1455
1 Illinois' new source review requirement at the
2 present time that non-major modifications provide
3 offsets. The point is that there are other
4 requirements in terms of rate of progress -- and
5 in fact we have an overall budget -- that do
6 require that there be compensating emission
7 reductions for non-major modifications.
8 So the change that's occurring here
9 is to make facilities that are subject to this
10 program to be responsible for their emissions, and
11 if they want to increase emissions, they have to
12 obtain sufficient
ATUs to cover those emissions.
13 They can either do that through reductions
14 elsewhere at their own plant or by going to the
15 marketplace.
16 MR. SAINES: If I could ask a follow-up,
17 when you say you have a budget that allows you to
18 address the ROP goals, are you saying that you
19 have been allocated money for the purposes of
20 establishing a new rule that requires sources
21 making non-major modifications to offset?
22 MR. ROMAINE: No. When I'm using the
23 term budget, we're using that term to refer to the
24 fact that we only can tolerate so many emissions
L.A. REPORTING - (312) 419-9292
1456
1 in the Chicago area. I'm not using budget in a
2 monetary sense. I'm doing it in a resource
3 management sense, that we only have so many VOC
4 emissions that we should allow into the area, and
5 those can go to different places.
6 Now, as certain relationships to
7 having a household budget, we only have so much
8 income and you have to do certain things, you have
9 to allocate it to different operations. If you
10 spend more for entertainment, you may have less to
11 spend for food. So many people don't make those
12 choices. So it's similar here. If you have new
13 sources coming in that emit more that haven't been
14 accounted for by their own actions in terms of our
15 rate of progress demonstration, we'll have to get
16 further emission reductions somewhere else.
17 MR. SAINES: Somewhere else meaning
18 sources other than those sources making non-major
19 modifications under the currently existing rules?
20 MR. ROMAINE: That's correct.
21 MR. SAINES: Question 8A --
22 MR. ROMAINE: I'm sorry, that is at
23 least initially correct. There is always the
24 possibility that as part of those further
L.A. REPORTING - (312) 419-9292
1457
1 evaluations of rate of progress plan, we decide to
2 revisit that source and require it to retrofit and
3 roll back its emissions.
4 MR. SAINES: Irrespective of the ERMS
5 rule?
6 MR. ROMAINE: That's correct.
7 MR. SAINES: Question 8A, has the agency
8 conducted an analysis on the impact to existing
9 business by requiring all emissions from any
10 modification be offset?
11 MS. DUNHAM: The ERMS program is
12 indifferent between emission increases for
13 modifications or emission increases due to any
14 other cause. So the analysis that we ran does
15 take into account the fact that those emission
16 increases have to be covered by
ATUs.
17 MR. SAINES: Question 8B, has the agency
18 conducted an analysis on how the requirement for
19 offsetting all emissions from changes at an
20 existing source regardless of whether the change
21 is major will impact an existing source's ability
22 to compete in the market outside of Chicago,
23 particularly against other companies not subject
24 to the same requirements?
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1458
1 MS. DUNHAM: The agency believes and the
2 analysis supports that this program cost
3 effectively achieves the necessary level of
4 reductions relative to any other emission control
5 scenario. Therefore, every source in this program
6 is better off under our market system than it
7 would be under any other scenario.
8 MR. SAINES: Let me ask a follow-up to
9 that. The agency's alternatives that they've
10 identified as being representative alternatives to
11 their ERMS program identify 8 -- command and
12 control in 8, command and control in 12 sources.
13 So the statement that all sources are better off
14 under ERMS than they would be under the
15 alternatives to ERMS, I don't understand that
16 statement.
17 A source that is not one of the 8
18 sources, wouldn't that source be better off under
19 the alternatives than having to comply with ERMS
20 because under the alternative they wouldn't have
21 to comply with anything?
22 MS. DUNHAM: I think this alternative
23 referred to was the 12 percent without trading.
24 So for these sources subject to the requirements,
L.A. REPORTING - (312) 419-9292
1459
1 they are all better off when trading is allowed
2 compared to when it's not.
3 MR. SAINES: When you say that all firms
4 are better off under ERMS, you're only making that
5 statement with respect to alternative 1 which is
6 the 12 percent reductions across the board, no
7 trading?
8 MS. DUNHAM: Well, you can go beyond
9 that and say that the Chicago region is better off
10 under trading than it is under any other scenario.
11 MR. SAINES: That's a different
12 question. The question about ERMS, does that only
13 relate to the first alternative?
14 MS. DUNHAM: Well, you're asking whether
15 a specific facility is better off versus the
16 regional economy as a whole, and I would argue
17 that if the regional economy as a whole is better,
18 then the individual sources in that economy are
19 better off. But if you're comparing whether a
20 source is subject to control requirements versus
21 whether it's not, I mean, that's not the analysis
22 that we did.
23 MR. SAINES: The next questions -- did I
24 ask question 8B? I don't remember if I did or
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1460
1 not.
2 MS. MC FAWN: Yes.
3 MR. SAINES: Thanks. I'm on top of
4 things. The next question is on page 15. It's
5 under section 12. Specifically it is section 12
6 B5.
7 Isn't it possible that if a lesser
8 amount of reductions in emissions is actually
9 needed, that it may be less costly than the cost
10 estimates provided in the economic impact study to
11 control a limited number of sources than requiring
12 reductions from all sources in the
Chicagoland
13 area?
14 MS. DUNHAM: Two points. The first one
15 is if a lesser amount of reductions in emissions
16 is actually needed, it probably would be less
17 costly than the cost estimates provided in the
18 economic impact study. However, the reduction in
19 cost would not come from reducing the number of
20 sources but from lowering the reduction target.
21 In fact, with more sources the opportunities for
22 cost savings increase under a market system.
23 MR. SAINES: The next question is under
24 Section C. It is C-5A and B, and I believe we
L.A. REPORTING - (312) 419-9292
1461
1 have decided to defer this.
2 MS. SAWYER: Those questions were not
3 ones we had on our list as being deferred at this
4 point.
5 MR. SAINES: We'll defer them till after
6 lunch, is that sufficient?
7 MS. SAWYER: Yeah.
8 MR. SAINES: That is questions 5A, B,
9 and C. That concludes the
prefiled questions.
10 MS. SAWYER: We have a couple of
11 prefiled questions from
Sonnenschein, Nath &
12 Rosenthal and also one from
Karaganis & White. I
13 do not believe that they are present, but I
14 believe their question has been answered already,
15 and then a question that was
prefiled from Tenneco
16 Plastics and one question that was
prefiled from
17 Mr.
Trepanier.
18 HEARING OFFICER FEINEN: Why don't we
19 start out with Cynthia
Faur and go to Tenneco and
20 go to
Trepanier.
21 MS. FAUR: Cynthia
Faur, Sonnenschein,
22 Nath & Rosenthal, and we have one question. It's
23 from our
prefiled questions filed on January 16th
24 and it's No. 4. How exactly was the $2,850
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1462
1 pretend value determined? Was it by median means
2 or otherwise?
3 MS. DUNHAM: That 2850 figure was the
4 first of the estimated equilibrium price under the
5 trading scenario simulated by the agency. The
6 agency found that sufficient reductions could be
7 achieved by sources from SIC categories with
8 control costs either equal to or less than that
9 figure.
10 Therefore, this price was derived
11 from the point where the supply of
ATUs equaled
12 the demand under the agency's trading simulation.
13 MS. FAUR: Thank you.
14 HEARING OFFICER FEINEN: Question 5
15 sounds like a follow-up. Is that asked and
16 answered?
17 MS. FAUR: That was either asked and
18 answered or crossed off for some reason.
19 Withdrawn.
20 HEARING OFFICER FEINEN: We'll show it
21 withdrawn for now. Thank you.
22 MS. SAWYER: For Tenneco Plastics, we
23 had the final question deferred to the economic
24 section from your January 23rd filing.
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1463
1 MR. FORCADE: Bill
Forcade with Jenner &
2 Block for Tenneco Plastics. We are talking about
3 our January 27th, 1997, submittal. Our final
4 question is located on page 47.
5 A central aspect of the ERMS
6 proposal is that a participating source may enter
7 into a long term contract with another
8 participating source or an emissions reduction
9 generator to purchase
ATUs for future years. Will
10 the agency assure participating sources that it
11 will not adopt new regulations which fundamentally
12 alter the ERMS or change the value of
ATUs without
13 which assurances sources will not be able to make
14 financially sound decisions?
15 MR. KANERVA: First of all, since we
16 have the chairwoman of the board here today, I
17 think we're going to make it clear that the agency
18 wouldn't be the one adopting these regulations.
19 MR. FORCADE: We'll agree that's
20 proposed instead of adopted
21 (Laughter.)
22 MR. KANERVA: I thought I would hear
23 this for quite awhile if I didn't respond to
24 that. The agency has no intention of changing the
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1464
1 basic program structure that we're putting in
2 place for this market system. It would obviously
3 be a tremendous disruption, for instance, to
4 suddenly change and devalue the amount of tons
5 that were associated with
ATUs or what have you.
6 So I mean, those fundamental components will stay
7 the same.
8 What we've said in presenting our
9 explanation of the system is that we fully expect
10 to probably do some improvements to the system as
11 we go along, and I would characterize those as
12 fine tuning the system. For instance, the exact
13 ACMA charges in later years or the way we allow
14 access for new sources to the ACMA, or for that
15 matter, the access compensation rate. We will
16 learn things about some of those aspects of the
17 program that may cause us to want to make some
18 refinements, but that should not change the basic
19 economic structure that's going to be in place.
20 MR. FORCADE: Thank you.
21 HEARING OFFICER FEINEN: Okay, before we
22 move on to Mr.
Trepanier's prefiled questions, I'm
23 just going to read into the record the
prefiled
24 question that was skipped Dart Container, I
L.A. REPORTING - (312) 419-9292
1465
1 believe it was question No. 35.
2 MS. SAWYER: Right.
3 HEARING OFFICER FEINEN: On page 6 and
4 that is, does the agency expect the burdens of the
5 proposed ERMS to put some participating sources
6 out of business? If so, has the agency estimated
7 how many participating sources may have to close
8 due to the burdens of ERMS?
9 I agree with the agency's
10 statements earlier that it's been asked and
11 answered. I wanted to get it in the record so
12 people know what the question was, we're not just
13 leaving it out. Let's move on then to
14 Mr.
Trepanier's questions or question that's been
15 prefiled.
16 MS. SAWYER: Do you know which question
17 I'm referring to?
18 MR. TREPANIER: No, I don't. I've got
19 one that I could ask.
20 (Laughter.)
21 MS. SAWYER: Has the agency considered
22 or have any forecast how or if to what degree the
23 market system would tend to drive low profit VOM
24 emitters out of business to serve the pollution
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1466
1 emission requirements of wealthy or high profit
2 VOM emitters? That's the question we're referring
3 to.
4 HEARING OFFICER FEINEN: I think it's
5 question 19 of the printed, typed out questions
6 that were
prefiled on January 31st, 1997, with
7 some handwritten additions to that. Do you want
8 to ask that question?
9 MR. TREPANIER: Has the agency
10 considered or have any forecast how or if to what
11 degree the market system would tend to drive low
12 profit VOM emitters out of business to serve the
13 pollution emission requirements of wealthy or high
14 profit VOM emitters?
15 MR. CASE: The ERMS proposal will permit
16 firms to comply with environmental requirements in
17 the least cost manner as possible. I think the
18 firms that are most likely to benefit, at least to
19 benefit the most perhaps, are those firms in which
20 their control costs are the cheapest.
21 However, firms with higher control
22 costs are also going to be able to benefit from
23 having the option to purchase
ATUs on the market
24 at a lower price than their own control costs.
L.A. REPORTING - (312) 419-9292
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1 Therefore, the trading is going to allow capital
2 flows.
3 Trading will allow capital to flow
4 to firms having the most control potential
5 regardless of the profit picture, and there's no
6 reason to think that high profit firms are going
7 to benefit more than low profit firms or vice
8 versa. I don't think there's any ability to be
9 able to say that.
10 MR. TREPANIER: I'd follow up on that.
11 Would you say that -- are you familiar with the
12 economic assessment that was done for the regional
13 clean air initiatives market emissions trading
14 program for Los Angeles. That was the -- that was
15 the economic study or the study they did of their
16 development by Mr. Johnson and Mr.
Pecolade
17 (phonetic).
18 MR. CASE: You know, I've looked at that
19 study, but I think it was more than a year ago.
20 Which part are you referring to?
21 MR. TREPANIER: I'm referring to that
22 part of the study where they expound on the
23 opportunity costs of granting these allotments
24 free to the polluters, that this -- my
L.A. REPORTING - (312) 419-9292
1468
1 understanding of this study from California that
2 this translates to the firm into a cost of doing
3 business.
4 MR. CASE: I'm not aware of that
5 particular aspect of that study. I can't recall
6 it, but I don't necessarily disagree with what
7 you're saying.
8 MR. TREPANIER: I didn't hear the end of
9 your answer.
10 MR. CASE: I don't disagree with the
11 conclusions that you have mentioned.
12 MR. TREPANIER: So you would agree that
13 freely allocating pollution allotments to firms is
14 going to increase their cost of doing business?
15 MR. CASE: No. I would argue there are
16 different -- there are different ways this program
17 could be developed. They all have
distributional
18 aspects and political economy aspects that are
19 very different. For example, economists will tell
20 you that you really can have three choices, that
21 you can tax firms for their emissions or you can
22 auction to everybody their
ATUs or whatever we
23 want to call it so that everybody has to pay for
24 all of them from day one, or you can do something
L.A. REPORTING - (312) 419-9292
1469
1 like a CAAPP and allocate based on a baseline
2 approach which is basically what we're doing
3 here.
4 The
distributional impacts of those
5 may be somewhat different, but all those programs
6 will lead to an efficient outcome and will be
7 efficient. Economists can't say very much about
8 which one you should use, but I think the
9 political world has said very clearly that if I've
10 been in business for a lot of years and that I
11 should be allowed to remain in business and then
12 allocating the ability to use the environmental
13 resource, society should recognize that I've been
14 in business for a lot of years.
15 That's sort of a different
16 question. We can take all of these allotments and
17 give them to one person and the outcome could be
18 efficient in the end after the market works to
19 translate them to the right places, you will still
20 get a good deal. It's very political where we
21 start out.
22 MR. TREPANIER: I'm not asking you for
23 the political provision. The question I'm looking
24 for is a comparison between trading and not
L.A. REPORTING - (312) 419-9292
1470
1 trading, not between different trading schemes. I
2 mean, you see, I understand you were agreeing with
3 the conclusion from California that by freely
4 allocating the
ATUs --
5 MR. CASE: And not allowing trading,
6 sir?
7 MR. TREPANIER: Excuse me.
8 MR. CASE: Would you allow trading or
9 not allow trading after you allocate the emissions
10 levels?
11 MR. TREPANIER: You do agree that the
12 opportunity cost that's involved in receiving the
13 ATU is because the ATU has a value on the market.
14 MR. CASE: But only in a trading
15 scenario, right?
16 MR. TREPANIER: Right, that's correct.
17 MR. CASE: Yes, sir, I think I agree
18 with you.
19 MR. TREPANIER: So my question is if you
20 forecasted to what degree the market system is
21 going to tend to drive out low profit VOM emitters
22 out of business to serve the needs of the high
23 profit or wealthy emitters?
24 MR. CASE: You see, I don't see a
L.A. REPORTING - (312) 419-9292
1471
1 connection between the first part and the second
2 part. In fact, I think if we are to, for example
3 -- I just don't see a connection at all. There's
4 no evidence that low profit firms have higher
5 control costs, for example, and in fact if the
6 problem under low cost, low profit firms has been
7 a shortage of capital, now the market will work to
8 provide capital for control technology, and that's
9 good, and that can help them stay in business.
10 MR. TREPANIER: Are you familiar in
11 Illinois with the process of a firm seeking a
12 waiver to a command and control rule?
13 MR. CASE: Not specifically, no.
14 MR. TREPANIER: So you wouldn't be able
15 to compare the impact of the trading system on a
16 firm in Illinois versus the impact -- a firm in
17 Illinois who has the opportunity to seek a waiver
18 of command and control?
19 MR. CASE: I don't think so.
20 MR. TREPANIER: So would it be fair to
21 say that you wouldn't have an ability to forecast
22 what degree this market system would tend to drive
23 out low profit VOM emitters?
24 MR. CASE: Excuse me. Sir, I'm not
L.A. REPORTING - (312) 419-9292
1472
1 saying that at all. I think that there's no way
2 to say one way or the other what the impact's
3 going to be. One thing we can say is that to the
4 extent that these are capital short firms, they
5 need capital to implement a control technology,
6 this market can provide that capital. I'm not
7 trying to compare this process of emissions
8 trading to a process where there might be a waiver
9 that releases them from all regulation.
10 That would be a great thing. We'd
11 all like to be released from all regulation, but I
12 don't think you can do that, and I don't think
13 it's appropriate to compare emissions trading
14 against a non-controlled situation. What we have
15 to compare is emissions trading against the
16 requirements that would be required. If all these
17 firms that you're speculating on received waivers,
18 maybe that's different, but I imagine some do and
19 some don't, and there's waivers that go to other
20 people for reasons, but I'm not an expert on
21 waivers.
22 HEARING OFFICER FEINEN: Any more
23 follow-up to that question 19, or is this just
24 general questions?
L.A. REPORTING - (312) 419-9292
1473
1 MR. TREPANIER: I followed up question
2 19. I've completed the follow-up.
3 HEARING OFFICER FEINEN: I was thinking
4 we could take lunch right now and come back and
5 have general questions from people unless -- let's
6 go off the record for a second
7 (Discussion off the record.)
8 (Lunch recess taken.)
9 HEARING OFFICER FEINEN: We will go back
10 on the record. I think we will start with
11 Mr.
Saines' questions and finish up his and go to
12 Mr.
Trepanier. I believe you said that you had
13 one follow-up possibly. Is that --
14 MS. FAUR: I don't need to follow up.
15 HEARING OFFICER FEINEN: Thank you. So
16 whenever Mr.
Saines is ready, we'll start out with
17 his questions. If the agency wants to answer
18 those two, we can start out with those, I guess.
19 MR. SAINES: We reviewed the
prefiled
20 questions that I was intending on asking, and
21 those were -- upon review of those have already
22 been asked and answered based on February 3rd
23 transcript so we will withdraw the
prefiled
24 questions we were intending on asking, and I
L.A. REPORTING - (312) 419-9292
1474
1 believe those are pertaining to Section
2 205.400(b). It is our section 12, C-5A, B and C,
3 we will withdraw those as being asked and
4 answered.
5 HEARING OFFICER FEINEN: Thank you.
6 That's page 15 and 16.
7 MR. SAINES: That's correct, 15 and 16.
8 HEARING OFFICER FEINEN: Then I believe
9 you had one or so non-
prefiled question.
10 MR. SAINES: I had one follow-up to
11 Ms.
Dunham's testimony. This refers to Exhibit 53
12 which was provided as part of her testimony this
13 morning.
14 HEARING OFFICER FEINEN: Example --
15 Exhibit No. 53 was example rubber and plastics
16 facility was the title of the slide.
17 MR. SAINES: If you would be so kind,
18 I'd like to just kind of walk through it so we can
19 get an understanding of what it's all about here.
20 The first is ozone season emissions of 30.2 tons?
21 MS. DUNHAM: Right.
22 MR. SAINES: And that is a figure that
23 pertains to the particular facility, is that
24 correct?
L.A. REPORTING - (312) 419-9292
1475
1 MS. DUNHAM: Yes, yes.
2 MR. SAINES: And then all the other
3 examples under that also apply to that particular
4 facility?
5 MS. DUNHAM: Right.
6 MR. SAINES: If I could direct your
7 attention to the last example on the page that
8 reads potential cost savings in range of $243,300
9 to $279,300. If you could explain what potential
10 cost savings as compared to what?
11 MS. DUNHAM: Right. That's a good
12 question. The cost savings to that individual
13 facility. So if they do not have to install the
14 control technology, they are saving $279,300.
15 That's the cost of that equipment.
16 MR. SAINES: So it's the cost savings of
17 either A, installing add-on control or versus
18 buying
ATUs?
19 MS. DUNHAM: It's versus not installing
20 it. So overall, just looking at this facility, if
21 the facility does not install that equipment, the
22 program's going to save $279,300.
23 MR. SAINES: The way they would do it
24 would be by purchasing 30.6 tons of
ATUs on the
L.A. REPORTING - (312) 419-9292
1476
1 market?
2 MS. DUNHAM: Yeah, right. This range
3 that I put in there reflects the cost of that
4 facility purchasing the
ATUs. It's probably going
5 to be somewhere between zero and $10,000.
6 MR. SAINES: As compared to the
7 different alternatives that have been described by
8 the agency, one being 12 percent reduction on all
9 sources, two being controlling the 8 largest
10 sources and alternative 3 being controlling the 12
11 largest sources where it's most cost effective to
12 do so, would the potential cost savings as
13 compared to alternatives 2 and 3 be the same for
14 this facility?
15 MS. DUNHAM: For that facility? This is
16 the point you asked about earlier. I think
17 relative to no trading, which would be alternative
18 1, it would save that amount. Overall, the
19 program will save more relative to the
20 alternatives 2 and 3, but again you can't look at
21 this particular -- it's a different analysis.
22 MR. SAINES: With respect to this
23 facility that's described here, the ERMS program,
24 does it represent a cost savings for this facility
L.A. REPORTING - (312) 419-9292
1477
1 as compared to alternatives 2 and 3 that the
2 agency has proposed?
3 MS. DUNHAM: If we actually adopted
4 alternatives 2 and 3, this facility probably
5 wouldn't be included.
6 MR. SAINES: So the answer is no? The
7 answer is the ERMS program does not represent a
8 cost savings as to alternatives 2 and 3, is that
9 correct?
10 MS. DUNHAM: You are comparing the wrong
11 things. It's an individual source analysis.
12 Basically, if the source was required to reduce
13 more, it would have to incur the cost of
14 $279,300. Under the ERMS program, it wouldn't
15 incur that. If it were not subject to a
16 reductions program, then it wouldn't incur the
17 cost, but that's a separate issue.
18 MR. SAINES: Alternatives 2 and 3 of the
19 agency's proposed alternatives would not require
20 this particular source to add controls, is that
21 correct?
22 MS. DUNHAM: By the way we define those
23 alternatives, yeah.
24 MR. SAINES: Thank you.
L.A. REPORTING - (312) 419-9292
1478
1 HEARING OFFICER FEINEN: Anything
2 further?
3 MR. SAINES: I have nothing.
4 HEARING OFFICER FEINEN: Any follow-up
5 questions to Mr.
Saines' question? Mr.
Trepanier.
6 MR. TREPANIER: Good afternoon. I'd
7 like to ask a question from -- regarding a table
8 on page 3 of Sarah
Dunham's testimony, and I know
9 a little bit earlier you did address a question
10 regarding the meaning of the words "profit of" in
11 that table. My understanding, taking example 5,
12 my notes say that you responded earlier that they
13 had 27 tons available at that location of over
14 control, is that correct?
15 MS. DUNHAM: Yeah, that's correct,
16 surplus reduction of 27 tons.
17 MR. TREPANIER: Surplus reduction. In
18 examples 1 through 4, when you were able to come
19 up with a dollar figure there, did you use the
20 $2850 figure that comes from page 10 of your
21 testimony?
22 MS. DUNHAM: I did, yes.
23 MR. TREPANIER: Why don't you apply the
24 $2850 figure to examples 5, 6 and 7?
L.A. REPORTING - (312) 419-9292
1479
1 MS. DUNHAM: I do.
2 MR. TREPANIER: What would that number
3 then be? What's the profit?
4 MS. DUNHAM: It's that number of using a
5 price of 2850.
6 MR. TREPANIER: Is the profit
drived by
7 the organic chemical company example by 2850 times
8 27?
9 MS. DUNHAM: It should be.
10 MR. TREPANIER: And then similar for
11 example 6, the organic chemical company, their
12 profit would be 165 times $2,850?
13 MS. DUNHAM: Right.
14 MR. TREPANIER: I have a question
15 regarding the --
16 MS. DUNHAM: Oh, actually the profit
17 represents the difference between what their
18 control would cost and what they're receiving by
19 selling the surplus
ATUs. So the profit number
20 here reflects that difference. I'm sorry.
21 MR. TREPANIER: For example 6, that
22 would be 165 times 2850?
23 MS. DUNHAM: Minus the cost of the
24 control.
L.A. REPORTING - (312) 419-9292
1480
1 MR. TREPANIER: Which is in example 6,
2 that's $70,000, 7950?
3 MS. DUNHAM: Right, right, I'm sorry I
4 confused you on that.
5 MR. TREPANIER: I have a question, and
6 maybe it's on economics, and it's regarding the
7 forecasting for the economic model. What if any
8 impact -- is there an impact from -- scratch that.
9 Do you have a concern for the
10 reliability of the emission data and does that
11 have an impact on the economic forecast?
12 MS. DUNHAM: The emission data that we
13 used was from the 1994 annual emission reports.
14 So while those may not be exactly identical to
15 what the eventual baselines are, I think they are
16 fairly representative of that. If you have a --
17 is your question the sort of data accuracy
18 underlying the annual emission reports, I think
19 somebody else is probably better suited for that.
20 MR. TREPANIER: I wasn't particularly
21 questioning the data but just asking for -- from
22 the persons who are familiar with the model,
23 what's the importance of that, the reliability of
24 that emission data as to how this model has
L.A. REPORTING - (312) 419-9292
1481
1 predicted the results, economic results?
2 MS. DUNHAM: Well, it's important
3 because it gives us a starting level, and then
4 it's what we use to apply the control equipment
5 to, but it doesn't -- if that changes, I don't
6 think that changes the results of the analysis
7 which shows that trading saves money.
8 MR. TREPANIER: So what I'm
9 understanding you saying, the reliability that
10 emissions data used in the model is not really a
11 factor?
12 MS. DUNHAM: I think it's important in
13 it would affect the end result, the actual
14 numbers. The relative numbers would remain the
15 same. The cost savings would still be there.
16 MR. TREPANIER: What impact would there
17 be from, say, if it was the wrong -- say what if
18 for the sources that you used that the number that
19 was reported was actually only half like for a lot
20 of the -- some of the facilities that their
21 numbers from '90 to '94 quadrupled. What if
22 between '94 and '96 again the reports show
23 another doubling in the amount of emissions, what
24 effect would that have on the model, the accuracy
L.A. REPORTING - (312) 419-9292
1482
1 of results?
2 MS. DUNHAM: Again, it wouldn't change
3 the relative results. It might change the absolute
4 numbers.
5 MR. TREPANIER: Maybe I don't understand
6 when you are saying change the relative results.
7 It's making a comparison between two things, I
8 understand, but I don't know two things you are
9 referring to.
10 MS. DUNHAM: Asking for the 12 percent
11 reduction, allowing the trading of the compliance
12 option compared to not allowing trading or any
13 other command and control scenario.
14 MR. TREPANIER: How does the impact of
15 the presence of cyclic emitters affect the market
16 design or operation? I think this is more of a
17 general question about how markets are designed,
18 the economics of them.
19 MS. SAWYER: Could you explain what you
20 mean by cyclic emitters.
21 MR. TREPANIER: We have discussed cyclic
22 emitters earlier when the witness -- agency's
23 witness from Environmental Defense Fund was on,
24 and my recollection and what I am meaning now of
L.A. REPORTING - (312) 419-9292
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1 cyclic emitter is someone say like I read about
2 recently that the oil business, the oil refining
3 business, that this is a cyclic business. They've
4 got years where production and emission levels are
5 real high, and there may be several years in a row
6 when emission levels are low so that would be an
7 example, my example of a cyclic emitter.
8 MR. CASE: So your question then is what
9 -- compare trading versus command and control?
10 MR. TREPANIER: I'm not looking for a
11 comparison now. What I'm asking for is how does
12 the impact of the presence of cyclic emitters
13 within the pool of potential participants affect
14 the market design or operation?
15 MR. CASE: I cannot think of a reason
16 why their presence would affect market design or
17 operations. In fact, virtually all businesses are
18 cyclical to a certain extent, some more than
19 others. I can't think of a reason why there would
20 be special problems with cyclical emitters under a
21 trading program under this design.
22 MR. TREPANIER: So this program there
23 hasn't -- under this program that you assisted in
24 designing, there hasn't been particular measure
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1484
1 taken to address the presence of cyclic emitters.
2 MR. KANERVA: Can I respond to that.
3 One of the ways the program responds to that is
4 through the way the baseline protocol is set, all
5 right. The cyclical emitter will have to make a
6 decision about what years are most representative
7 for their emissions and provide us the
8 justification why they're substituting if they're
9 outside of the '94 to '96 time frame so they're
10 factored in like anybody else. It's their
11 judgment call and our review of what they propose.
12 MR. TREPANIER: Then are you saying that
13 the market -- the market was designed to allow for
14 cyclic emitters by allowing them to take an out
15 year '94, '95, '96?
16 MR. KANERVA:
Yep, I think that's what
17 it is.
18 MR. ROMAINE: I think there's two
19 aspects to this. One is how the program is set up
20 to establish an appropriate allocation of sources
21 going into the program. That's the issue that
22 Mr.
Kanerva described. The other issue is how is
23 this program able to assure adequate reductions
24 year by year, and there the response is that this
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1485
1 program establishes a cap on emissions and at the
2 end of each seasons sources have to have enough
3 ATUs for whatever they emit, and that means if a
4 source doesn't emit very much in one of its low
5 seasons, it may be doing okay.
6 If however it has a boom season,
7 it's going to have to go out and get emission
8 reductions from somewhere else to compensate for
9 that. So cyclical production is also accounted
10 for so far as the program has to meet its air
11 quality levels as well, the back end as well as
12 the front end going in.
13 MR. TREPANIER: When you say that the
14 cyclic emitters are also -- that the market is
15 designed for them in setting the baseline, I heard
16 you just say that a cyclic emitter on one of their
17 higher years would have to go out and purchase
18 allotment.
19 Doesn't -- what Roger just told us
20 that the program provides that the cyclic emitter
21 can choose a year that is actually representative
22 of their high production year, that they wouldn't
23 need to go out and purchase other allotments?
24 Their baseline is set at their high end in that
L.A. REPORTING - (312) 419-9292
1486
1 instance, is it not?
2 MR. ROMAINE: Their baseline is set at a
3 representative level which may in fact go back to
4 a higher operation in their cycle than a lower
5 period, but they still would be required to
6 provide 12 percent emission reduction from that
7 level. That level will still be an average of two
8 years. It will not be just the peak year so there
9 will in fact be an obligation for that source to
10 provide emission reductions.
11 One of the things that the trading
12 program does is facilitate for that type of
13 source. It may in fact allow that source to be
14 able to do very little if in fact there is a year
15 when it's not operating. That's probably another
16 difference between command and control rule and a
17 trading program. Command and control rule doesn't
18 address whether further investment has to be made
19 to reduce emissions in a poor year. If it
20 operates a very low level, it simply says you have
21 to provide a particular level further emission
22 control, invest in certain capital improvements to
23 the plant so that you can provide a particular
24 rate of emissions.
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1 The trading program will allow
2 somebody to factor in exactly what is the amount
3 that I'm contributing to the environment in a
4 particular season and then have them take the
5 appropriate actions to address that.
6 A cyclical emitter could also
7 decide I want to control my emissions. That way
8 they will provide a large surplus of
ATUs and not
9 quite as large a surplus of
ATUs in the years when
10 they are at high production and then a much larger
11 surplus of
ATUs in other years. So this issue of
12 cyclical production I don't think is that critical
13 to whether there's some sort of flaw in the design
14 of the program.
15 HEARING OFFICER FEINEN: Let the record
16 reflect that when people are referring to Roger, I
17 think it's Mr.
Kanerva so we have the record
18 should reflect that. Thanks.
19 MR. KANERVA: I don't mind anonymous
20 status.
21 HEARING OFFICER FEINEN: I do.
22 MR. TREPANIER: I have a question now
23 regarding the economic forecasting model. Were
24 the exempt sources that were listed in agency's
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1 appendix D, how were these treated in the model?
2 Were they treated as exempt sources?
3 MS. DUNHAM: Yes.
4 MR. TREPANIER: When they were modeled?
5 MS. DUNHAM: Yes.
6 MR. TREPANIER: Were the reductions, the
7 9 percent reduction, do you expect that the -- do
8 the exempt sources total about 540 tons in
9 appendix D?
10 MS. DUNHAM: I don't have that number.
11 MR. FORBES: I don't have the appendices
12 with me, but it's totaled at the bottom on the
13 very last page.
14 MR. TREPANIER: I only have six pages,
15 but it doesn't have a total. I would suggest that
16 the actual number is not operative in my question.
17 MR. FORBES: We can get it if that's
18 important.
19 MR. TREPANIER: As a basis of my
20 question, I looked through appendix D and roughly
21 counted up to 540 tons of sources listed there as
22 exempt burner sources. Now, are these sources,
23 this 540 tons, is that 540 tons going to be
24 subjected to a 9 percent reduction?
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1 MR. FORBES: No.
2 MR. TREPANIER: Is the lack of these --
3 this segment of the stationery sources making no
4 reduction, is that made up within the reductions
5 -- the 12 percent reduction that's being required
6 of those sources that are subject to the rule, are
7 subject to the reductions required under the
8 rule?
9 MR. FORBES: The reductions that the
10 agency's asking for, the 12 percent reduction or
11 12. 6 tons per day is made up by the participating
12 sources that are listed in I think it's appendix E
13 and that's -- as we testified earlier that is
14 sufficient along with the other reductions we're
15 getting from area sources and local sources to
16 achieve our 1999 ROP level.
17 MR. TREPANIER: This is a question for
18 -- on economics. Will new facilities coming into
19 the Chicago area have the effect upon the existing
20 sources and even say an existing cyclic emitter to
21 sell their excess
ATUs, get them into use?
22 MS. SAWYER: Do you understand the
23 question?
24 MR. CASE: The question is -- let me
L.A. REPORTING - (312) 419-9292
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1 read it back just slightly different and see if
2 you agree with it. Would the ability for new
3 sources to come into Chicago tend to raise the
4 price basically of
ATUs, is that what you're
5 saying?
6 MR. TREPANIER: Well, I'm following up
7 earlier you had said that as an advantage of this
8 program, it's going to be easier for new sources
9 to come into the area. Now, is that caused --
10 there's these excess
ATUs available?
11 MR. KANERVA: The context that that
12 answer was given in was that by adopting this
13 program, we would be putting in place and having
14 working an existing market people could relate to
15 rather than the current situation where offsets --
16 there is no operating market that's there to
17 encourage participation by people.
18 They've got to basically hunt down
19 offsets in whatever fashion they can manage to do
20 it. There isn't a market they're working for them
21 to relate to. The new source doesn't get a new
22 allotment. They have to find their
ATUs in the
23 marketplace, but the availability and the
24 work-ability of that marketplace is an advantage
L.A. REPORTING - (312) 419-9292
1491
1 over the current situation.
2 MR. CASE: I would agree with that, and
3 I don't quite understand how it should relate to
4 the cyclical firm you mentioned earlier.
5 MR. TREPANIER: Would this be --
6 somebody coming into the market, a new emitter
7 coming into the Chicago area, is there an economic
8 force on the cyclic emitter to sell some of their
9 ATUs in their off years?
10 MR. CASE: Well, they would certainly
11 have that opportunity now that they wouldn't have
12 before. They could only be, of course, temporary
13 as opposed to offsets which tends to be a bit more
14 permanent structure. Yeah, it would allow them to
15 realize some value from that.
16 MR. TREPANIER: When you say they
17 realize some value from that, that they're
18 realizing value because their baseline is set
19 higher than their actual emissions in some years?
20 MR. CASE: I don't understand the
21 connection to baseline because that would be set
22 on past periods. I'm not sure I understand your
23 question with respect to the baseline.
24 MR. KANERVA: The reason they've got
L.A. REPORTING - (312) 419-9292
1492
1 ATUs to trade is because they're in the downside
2 of that fluctuating emission level. It's no
3 different than anybody else.
4 MR. TREPANIER: Thank you.
5 HEARING OFFICER FEINEN: Any other
6 questions from the audience? Any questions from
7 the board?
8 MS. ANN: My name is Elizabeth Ann from
9 the Illinois Pollution Control Board. I have a
10 question that was deferred from earlier in the
11 summary of the technical support documents, and
12 actually in Dr. Case's testimony, the agency
13 states that small businesses are protected by an
14 absolute cap, uncontrolled costs of $10,000 per
15 ton, but it's not actually proposed in the
16 regulation.
17 MS. SAWYER: You referred to that.
18 MR. KANERVA: Well, the reference was
19 made to the thousand dollars per ATU or $10,000 a
20 ton fee that would be charged for accessing and
21 purchasing trading units from the ACMA. So if
22 they're not able to get it in the market, then
23 that's the set price that they would then fall
24 back to
to achieve what they need for their
L.A. REPORTING - (312) 419-9292
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1 compliance.
2 MS. ANN: It has nothing to do with any
3 small business putting in control on their units
4 and they can only spend no more than $10,000?
5 MR. KANERVA: Right, it's not that,
6 right.
7 HEARING OFFICER FEINEN: I have a few
8 questions. In the alternative methods, you talk
9 about the 12 percent reduction by ERMS
10 participating sources with trading. When you are
11 talking about participating sources, that's a
12 certain classification of sources. There's
13 several other sources out there that can actually
14 generate
ATUs for trading, and I'm wondering if
15 that would change the cost estimates for the
16 savings between the trading program and your
17 typical add-on control program. Because if you
18 had people out there generating more
ATUs to cost,
19 raising supply would lower those
ATUs and that
20 would change the analysis between the other
21 methods of meeting the 12 percent.
22 MS. DUNHAM: I think it would magnify
23 the difference. There would be more savings.
24 HEARING OFFICER FEINEN: Was that
L.A. REPORTING - (312) 419-9292
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1 considered in this analysis?
2 MS. DUNHAM: We didn't consider any
3 emission generators -- It is reflected in my
4 testimony as one of the assumptions that might
5 under predict the cost savings associated with the
6 ERMS program.
7 MR. CASE: I think along the same line,
8 trading allows all sorts of different alternatives
9 to meet the same reductions. The process changes
10 altering the production schedule. There's lots
11 and lots of different things that over time should
12 have the exact same effect, driving down the price
13 of
ATUs.
14 HEARING OFFICER FEINEN: My next
15 question is on the table under summary of
16 individual source analysis, example one says
17 "rubber and," and I'm going to say that's rubber
18 and plastics? If you look at your
prefiled
19 testimony, it says "rubber and."
20 MS. DUNHAM: Yeah, it should be rubber
21 and plastics.
22 HEARING OFFICER FEINEN: On the next
23 table, which is summary of regional economic
24 impact analysis, you start talking about this
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1 gross regional product being reduced by the
2 different alternatives in ERMS. Did the agency
3 calculate the reduction of the gross regional
4 product if you just went with a straight 12
5 percent reduction?
6 MS. DUNHAM: That's alternative No. 1?
7 HEARING OFFICER FEINEN: That's
8 alternative No. 1.
9 MS. DUNHAM: Without trading, yes.
10 HEARING OFFICER FEINEN: So that's the
11 $69 million and $46 million?
12 MS. DUNHAM: Yes, correct.
13 HEARING OFFICER FEINEN: On -- well, I
14 wrote down page 9, but it's on the compliance
15 option model, the first bullet point says, sources
16 may comply with the 12 percent reduction without
17 participating in trading.
18 And correct me if I'm wrong, I
19 thought if you were going -- if you're subject to
20 the rule, the way you opt out would be an 18
21 percent reduction?
22 MS. DUNHAM: This isn't necessarily an
23 opt out of the program. It's saying they may not
24 participate in trading. They may still be subject
L.A. REPORTING - (312) 419-9292
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1 to all the provisions in the rule. There's
2 nothing in the rule saying that somebody has to
3 trade.
4 MR. KANERVA: They do their own
5 compliance actions, whatever they are.
6 HEARING OFFICER FEINEN: Both Dr. Case
7 -- I believe both -- I think you said in your
8 testimony today and your
prefiled that achieving
9 the environmental goal is an aspect that has to be
10 part of the trading program for it to work to make
11 it, and one of the assumptions made by the agency
12 or decision rules, made by the agency is that the
13 program must reduce emissions of the ozone ceiling
14 by 1433 tons, and we've heard a lot of testimony
15 about it being off or not exactly meeting the
16 necessary reductions.
17 What aspects of the viability of
18 the trading program will be damaged by the fact
19 that if those environmental controls is a sliding
20 goal, let's say? I guess I'll ask you, Dr. Case.
21 MR. CASE: I certainly understand your
22 point, and it is frustrating to have the data
23 problems that we have, but I don't think that
24 there would be any difference in the data problems
L.A. REPORTING - (312) 419-9292
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1 whereas if you were in a command and control
2 situation and we were trying to evaluate how we
3 did three years from now looking backwards.
4 MR. SAINES: Could you please speak up.
5 MR. CASE: I'm sorry. I was trying to
6 explain that I don't think the data problem is
7 inherent to the fact that we have a trading
8 program. If we were reevaluating a command and
9 control model that we were proposing today, in
10 three years we would have to see how it stood up
11 against the data problems that we have. I do
12 think that one thing we can say about trading is
13 that it is more resilient.
14 It works with a broader range of
15 prices, and it tends to achieve the results at
16 least cost or at a lesser cost than command and
17 control. To the extent that we've gone out there
18 and underestimated emissions by half, for example,
19 that will come back to haunt us in the future just
20 as it would with command and control.
21 HEARING OFFICER FEINEN: One last
22 question. In your testimony you talked about how
23 the ACMA is needed to control prices of the
ATUs.
24 It will give a maybe stabilizing effect on the
L.A. REPORTING - (312) 419-9292
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1 prices of
ATUs. I was wondering if you could
2 expand on that a little bit.
3 MR. CASE: I think ideally I would hope
4 that account would never be used, that the ATU
5 prices are always below that level and no one has
6 an incentive to pay such a high price for an ATU.
7 I think that's probably going to be the case.
8 That's our rough estimate from the numbers that
9 the agency has developed. I guess it may not be
10 true so in that aspect, it's comforting to know
11 that you have that upper bound, if need be, that
12 you can dip into if you have to.
13 HEARING OFFICER FEINEN: Now, the
14 account access to the ACMA, there's a set price
15 for that, and that set price, I think, is based
16 off the market price.
17 MR. CASE: Actually I'm not the best
18 person to talk about that account.
19 MR. KANERVA: I can respond to that.
20 There's a choice there. There's a fixed rate, but
21 there's also an option to use an average from the
22 market price if sufficient trade transactions have
23 happened that we can calculate to a good average.
24 HEARING OFFICER FEINEN: So the fixed
L.A. REPORTING - (312) 419-9292
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1 price would definitely help fix the prices or
2 stabilize the prices.
3 MR. CASE: It gives you have up and
4 down.
5 MR. KANERVA: That gives you some at
6 least certainty of what that is.
7 HEARING OFFICER FEINEN: I think those
8 are all the questions I have at this time. Are
9 there any other questions?
10 I guess while we're still on the
11 record, I'd like to talk about the upcoming
12 hearings that were set in April. I did put a
13 Hearing Officer order out. It did contain
14 prefiling dates for testimony and questions.
15 For all those who don't know, which
16 I think pretty much all of us know, the next
17 hearings are April 21st, 22nd, 23rd and 24th. I
18 set the
prefiled testimony for those hearings for
19 April 4th with no mailbox. It has to be in the
20 offices of the clerk of the board in Chicago on
21 April 4th. It can't be mailed on April 4th. It
22 has to be in the offices by April 4th.
23
Prefiled questions to the
prefiled
24 testimony has to be in my offices similarly by
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1500
1 April 14th. I'm going to ask for an expedited
2 transcript for today's hearings so hopefully we'll
3 have that either Friday or Monday. That gives
4 everyone about two weeks to have the whole entire
5 transcript, prepare for their testimony for that
6 April 4th deadline.
7 The hearings are going to be in
8 this room again for all four days. I'm going to
9 check to make sure I'm correct in that because I
10 have a hard time with these rooms. April 21st,
11 22nd, 23rd, 24th are all in these rooms. We have
12 the room starting at 9:00 o'clock. I think we
13 should start at 9:00 o'clock unless people have a
14 problem starting at 9:00 o'clock on Monday. I
15 think it's a Monday.
16 So we'll start at 9:00 o'clock then
17 on April 21st with the
prefiling dates. Is there
18 any other matters we need to take care of? Board
19 Member
McFawn was wondering if there was going to
20 be any -- if we know anyone is going to be
21 prefiling testimony if we're going to have
22 testimony for those dates. I see a few hands.
23 MS. MC FAWN: I was just curious.
24 HEARING OFFICER FEINEN: About four
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1501
1 hands went up for the record. Then I guess we'll
2 continue it on the record until April 21st
3 starting at 9:00 o'clock in this room with
4 prefiled testimony being due April 4th and
5 prefiled questions of the testimony being due
6 April 14th in the clerk's office. Thank you.
7 (Whereupon, this hearing was
8 continued.)
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1 STATE OF ILLINOIS )
) SS:
2 COUNTY OF COOK )
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5 LISA H. BREITER, CSR, RPR, CRR, being
6 first duly sworn, on oath says that she is a court
7 reporter doing business in the City of Chicago;
8 that she reported in shorthand the proceedings at
9 the taking of said hearing and that the foregoing
10 is a true and correct transcript of her shorthand
11 notes so taken as aforesaid, and contains all of
12 the proceedings had at said hearing.
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17 LISA H. BREITER, CSR, RPR, CRR
License No. 84-003155
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L.A. REPORTING
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