COMMUNITIES FOR A BETTER ENVIRONMENT v. SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT

Filed 12/18/07 Modified and Certified for Partial Publication 1/16/08 (order attached)

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION TWO

APPEAL from a judgment of the Superior Court of Los Angeles County.

Andria K. Richey, Judge. Affirmed in part and reversed in part and remanded.

Communities for a Better Environment, Adrienne L. Bloch and Shana Lazerow for Plaintiffs and Appellants Communities for a Better Environment.

Adams Broadwell Joseph & Cardozo, Marc D. Joseph, Richard T. Drury for Plaintiffs and Appellants Carlos Valdez et al.

Woodruff, Spradlin & Smart, Bradley R. Hogin, Edward L. Bertrand; South Coast AQMD, Kurt R. Wiese and Barbara Baird for Defendant and Respondent South Coast Air Quality Management District.

Weston Benshoof Rochefort Rubalcava & MacCuish, Ward L. Benshoof, Jocelyn D. Thompson; Cox Castle & Nicholson and Michael H. Zischke for Real Party in Interest and Respondent.

Center on Race Poverty and the Environment and Luke Cole for Amici Curiae, in support of Plaintiffs and Appellants Communities for a Better Environment and Carlos Valdez et al.

Bill Lockyer and Edmund G. Brown, Jr., Attorneys General, Dane R. Gillette, Chief Assistant Attorney General, Pamela C. Hamanaka, Assistant Attorney General, Sally Magnani Knox, Lisa Trankley and Susan L. Durbin, Deputy Attorneys General, for Amicus Curiae State of California, in support of Defendant and Respondent South Coast Air Quality Management District.

* * * * * *

Plaintiffs and appellants Communities for a Better Environment, Carlos Valdez, Southern California Pipe Trades District Council No. 16 and Steamfitters and Pipefitters Local 250 appeal from a judgment entered against them in their actions against defendant and respondent the South Coast Air Quality Management District (SCAQMD) and real party in interest and respondent ConocoPhillips Company (ConocoPhillips). The dispute concerned the potential environmental impacts resulting from a project enabling ConocoPhillips to produce ultra low sulfur diesel. Appellants primary contentions are that the SCAQMD abused its discretion in allowing a permit for the project to be issued without the preparation of an environmental impact report and without review pursuant to a regulation implementing a federal level of review.

We affirm in part and reverse in part. We conclude that the SCAQMD abused its discretion in issuing a negative declaration for the diesel fuel manufacturing project at issue because appellants offered substantial evidence supporting a fair argument that the projects nitrogen dioxide emissions may have a significant effect on the environment. In finding no significant effect, the SCAQMD improperly relied on a baseline level of permitted emissions which did not reflect existing physical conditions. In all other respects, the SCAQMD properly exercised its discretion in concluding that the project would not have a significant adverse environmental impact. The SCAQMD also properly declined to apply a local regulation to evaluate the projects permit, as the regulation was ineffective at the time the SCAQMD issued its permit.

FACTUAL AND PROCEDURAL BACKGROUND

The Parties.

Appellant Carlos Valdez resides in Wilmington near the ConocoPhillips refinery. Appellants the Southern California Pipe Trades District Council 16 and the Steamfitters & Pipefitters Local 250 are labor organizations who have many members who live and/or work in Wilmington and throughout the South Coast Air Basin. Appellant Communities for a Better Environment is a nonprofit membership organization with two offices in California. For approximately 25 years, it has been active in California air quality issues; its goals include protecting and enhancing the environment and public health by reducing air pollution in Californias urban areas.

Respondent the SCAQMD is the agency principally responsible for comprehensive, non-vehicular air pollution control in the South Coast Air Basin, an area that includes Orange County and the non-desert portions of Los Angeles, Riverside and San Bernardino Counties. (Health & Saf. Code, 40000, 40410; Cal. Code Regs., tit. 17, 60104.) Pursuant to federal and state law, the SCAQMD is responsible for adopting an air quality management plan (AQMP) that identifies the air pollution control measures and emission reductions from existing sources that are necessary for compliance with federal and state ambient air quality standards. (See 42 U.S.C. 7410; Health & Saf. Code, 40460.) The SCAQMD is authorized to adopt rules and regulations to carry out the AQMP. (Health & Saf. Code, 40440.)

Respondent and real party in interest ConocoPhillips is the largest petroleum refiner in the United States. ConocoPhillips Los Angeles Refinery (Refinery) operates at two different sites in the South Coast Air Basinthe Wilmington plant and the Carson plant. The Wilmington plant consists of approximately 400 acres bordering commercial, recreational and residential areas. It produces a variety of products including gasoline, jet fuel, diesel fuel, petroleum gases, sulfuric acid and sulfur.

Diesel Fuel Regulations.

In January 2001, the United States Environmental Protection Agency (EPA) published rules on diesel fuels standards requiring that by June 1, 2006 refiners must begin selling highway diesel fuel meeting a maximum sulfur standard of 15 parts per million by weight (ppmw). (40 C.F.R. 80.) This deadline corresponded with the EPA requirement that by 2007 all on-road, diesel-fueled vehicles be equipped to run on Ultra-Low Sulfur Diesel (ULSD) fuel. Before the adoption of these rules, most California diesel fuel contained an average of 140 ppmw of sulfur.

Even before the adoption of the EPA rule, the SCAQMDs Rule 431.2 (Sulfur Content of Liquid Fuels) was amended on September 15, 2000 to require a reduction in diesel fuel sulfur content to 15 ppmw by mid-2006.^[1] Subsequently, in 2003 the CARB amended Californias diesel fuel regulations to comport with the low sulfur limit imposed by federal and local rules. The 15 ppmw requirement was also reflected in the states AQMP. The diesel fuel sulfur content changes were designed to reduce the harmful environmental effects resulting from emissions of sulfur oxides (SOx), particulate matter (PM), nitrogen oxides (NOx) and other toxins from diesel-fueled motor vehicles.

The Project.

In order to comply with federally and state mandated ULSD specifications, the Refinery proposed to modify its existing Diesel Hydrotreating Unit U-90 at the Wilmington plant (ULSD project). The ULSD project involved physical modifications primarily to the process facility at the Wilmington plant, which already produced low sulfur diesel, and minor control system improvements at the Carson plant. The two major components of the ULSD project were to: (1) revamp the Mid-barrel Hydrotreater Unit 90 [(hydrotreater)] to decrease the hydrotreating reaction space velocity to meet the required diesel sulfur level; and (2) modify the mid-barrel handling and logistics to segregate diesel from higher sulfur jet fuel.^[2] The proposed modifications did not increase the Refinerys diesel production.

Refinery Permit.

Beginning in 1994, the SCAQMD developed the Regional Clean Air Initiative Market (RECLAIM) program, a market-based system of controlling the emission of NOx and SOx, and the Refinery has operated pursuant to a RECLAIM permit since that time. (See Health & Saf. Code, 39616.) In contrast to traditional command-and-control regulations which set specific limits on each piece of equipment and each process emitting air pollution, the RECLAIM program set a factory-wide pollution limit for each business and permitted the business to determine what equipment, processes and materials it would employ to meet that limit. (See generally Alliance of Small Emitters/Metals Industry v. South Coast Air Quality Management Dist. (1997) 60 Cal.App.4th 55, 5760 [describing the RECLAIM program].) The RECLAIM program also permitted businesses that reduced emissions more than required to sell their excess emissions reductions to other businesses. Importantly, the RECLAIM program required that allowable emissions from all participating businesses be reduced each year.

The Refinerys RECLAIM permit specified annual allocations of NOx and SOx that were established on the basis of actual historical emissions and thereafter declined each year. It covered the combined emissions from the hundreds of pieces of Refinery equipment that emitted or had the potential to emit or control air contaminants. Issued in 1994, the Refinerys RECLAIM permit allowed the Refinery to emit up to 8,318 pounds per day (ppd) of NOxa figure based on the Refinerys 1994 emission level. As of 2003, the Refinerys NOx emission allocation had declined to 2,343 ppd. But under the RECLAIM program, the Refinery was still allowed to emit up to its initial allocation of 8,318 ppd so long as it purchased a corresponding amount of RECLAIM trading credits from another facility that had reduced its emissions below its permitted RECLAIM level.

The SCAQMDs Environmental Review of the Project.

Negative Declaration.

As required by law, in December 2003, ConocoPhillips submitted its application for a permit to the SCAQMD. It requested that the permit be handled in accordance with a rule providing for express permit processing to enable a permit to be issued by August 2004. As required by the California Environmental Quality Act (CEQA), after receiving the permit application the SCAQMD undertook an initial study to determine the environmental impacts of the ULSD project. (Pub. Resources Code, 21080(a).)

In January 2004, the SCAQMD, as the lead agency for the ULSD project,^[3]issued a draft negative declaration for the project, finding that it would have no significant impact on the environment and that mitigation measures were not required. The document was circulated for public comment. Appellants and others asserted there was a fair argument that the ULSD project may have adverse environmental impacts and that an environmental impact report (EIR) was required. Appellants submitted extensive comments prepared by environmental engineer J. Phyllis Fox, Ph.D., and hydrologist Matthew Hagemann in support of their position. The Los Angeles City Attorney also expressed concern about whether an EIR was necessary to analyze the ULSD project, given that the negative declaration uses the level of emissions that ConocoPhillips is allowed to emit under existing permits as the baseline, even though ConocoPhillips may not have released that level of emissions in the past.

Concluding that there was no substantial evidence that the ULSD project would have a significant effect on the environment, the SCAQMD issued its final negative declaration (FND) in June 2004. Responding to specific public comments, the FND indicated that the baselinethe existing physical environmental conditionsutilized for the ULSD project was appropriate, as it took into account emission levels allowed by existing permits. Thus, [f]or the ULSD proposed project, the emissions associated with increased utilization of this existing equipment were considered baseline as opposed to proposed project because the Refinery holds valid permits to operate this equipment, and the equipment will continue to operate within their existing permit conditions and limits. The existing equipment operation, as well as increased utilization of the equipment (e.g., for increased steam generation) could, therefore, occur even if the proposed project did not commence (exist).

Applying this baseline, the FND further concluded that the increased NOx emissions were less than significant. The SCAQMD calculated that during operation the ULSD project would cause an increase in NOx emissions of 8.9 ppd, which was below the CEQA significance threshold of 55 ppd. Appellants estimated the emission increases associated with increased utilization of steam generating equipment for the ULSD project at 237 to 456 ppd. This increase, too, was found to be less than significant when measured against the thresholds set by a combination of the RECLAIM programs initial emission allocation limit for the Refinery (8,318 ppd of NOx) and CEQA (55 ppd of NOx). Applying these thresholds, the FND provided that even emissions from increased capacity utilization from existing permitted equipment would remain less than significant at 2,799 ppd of NOx.

Further, the FND found that the ULSD project had no significant cumulative impact when considered together with emissions resulting from the Selective Catalytic Reduction (SCR) project at the Carson plant and other refineries in the South Bay area. In view of these conclusions, on June 18, 2004, the SCAQMD issued a notice of determination for a permit to construct the ULSD project.

On July 14, 2004, appellants filed petitions for hearing before the SCAQMDs Governing Board (Governing Board) and submitted additional comments from Dr. Fox and Mr. Hagemann in support of their request. The Governing Board declined to hold a hearing on the issuance of a permit.

Addendum to the Final Negative Declaration.

In July and August 2004, Refinery workers participating in the excavation and site preparation work for the cooling tower replacement encountered petroleum-impacted soils on two occasions. Although the levels of benzene in the impacted areas did not by law require any special health and safety protections or procedures, the Refinery responded in accordance with applicable Occupational Health and Safety Administration (OSHA) regulations; the SCAQMDs approved Rule 1166, which is the soil mitigation plan governing the excavation, grading, handling and treatment of soil contaminated by petroleum and other volatile organic compounds; and its internal Industrial Hygiene Management Plan. As an additional protection, the Refinery employed the procedures required when contamination exceeds a certain safety threshold, requiring that workers use organic vapor respirators (gas masks) as a precaution within the sites perimeter.

On September 21, 2004, the SCAQMD certified an Addendum to the FND (Addendum) to present updated fugitive component counts.^[4] The updated figures (17.2 ppd of VOCs) remained below the CEQA level of significance (55 ppd of VOCs). With respect to the discovery of contaminated soil, the Addendum concluded that the Refinerys compliance with OSHA regulations and its internal institutional controls rendered the contamination insignificant. The Addendum also responded to issues raised in two petitions filed before the Governing Board, including whether the RECLAIM program emission allocation should be used as the baseline for measuring emission significance, whether increased utilization of existing permitted steam generation equipment should be included as part of the ULSD project rather than the baseline and whether the cumulative impacts from the ULSD project would be significant. Concurrently with the Addendum certification, the SCAQMDs executive officer (Executive Officer) issued a notice of determination approving a permit for the ULSD project as revised.

Phase I Proceedings.

Pleadings.

On July 16, 2004, appellants filed two verified petitions for writ of mandate against the SCAQMD which alleged causes of action for violation of CEQA for the failure to prepare an EIR, the adoption of an illegal CEQA significance threshold, illegal approval of a negative declaration and issuance of findings, and illegal issuance of notice determination prior to project approval. Each petition sought a writ of mandate setting aside the SCAQMDs approval of a negative declaration for the project and directing the SCAQMD to comply with CEQA. The trial court consolidated the actions.

The SCAQMD answered in September 2004. Appellants filed amended petitions and complaints in September 2004 and again in October 2004 adding allegations pertaining to the level of permit review, contaminated soil and additional CEQA violations. In January 2005, appellants moved for a peremptory writ of mandate to direct the SCAQMD to set aside its decision approving the FND and all other permits relating to the ULSD project and to enjoin the Refinery from taking further action on the ULSD project until the SCAQMD fully complied with CEQA. Also in January 2005, the trial court denied appellants motions for stay and issuance of a preliminary injunction. The Refinery answered the amended petitions in March 2005.

Trial Court Ruling.

The trial court held a bifurcated trial on the matter in March 2005 and March 2006. The March 2005 trial involved the alleged CEQA violations, while the March 2006 proceedings involved the non-CEQA issues that were a part of the original litigation.

On August 1, 2005, the trial court filed a statement of decision and order adjudicating the first phase. It ruled that the SCAQMD properly determined there was no substantial evidence supporting a fair argument of significant adverse impacts stemming from the ULSD project. It concluded that appellants estimates of NOx emissions during construction failed to demonstrate a significant impact because they were improperly premised on emissions from off-road vehicles, not the on-road vehicles that would actually be used during construction. With respect to the significance of NOx emissions during operation, the trial court framed the question as to whether emissions from preexisting and already permitted equipment should be attributed to the existing environmental settingi.e., the baselineor should be characterized as project increases. The trial court ruled that SCAQMD properly calculated the baseline for the ULSD project as including emissions from existing equipment, so long as those emissions remained within previously permitted levels. It found that the SCAQMD properly applied the significance threshold 55 ppd of NOx emissions to levels above the baseline emissions allowed by the Refinerys RECLAIM permit. Utilizing the same baseline, the trial court further concluded that the impact of the NOx emissions was not a cumulatively considerable contribution. Addressing soil contamination, the trial court found no evidence that the level of contamination found at the ULSD project site may cause any significant adverse impacts. Finally, the trial court ruled that the Addenduma document which does not require the same level of public review as an EIR or a negative declarationwas the proper means to address certain clarifications to the ULSD project.

Phase II Proceedings.

Regulation XVII.

The Prevention of Significant Deterioration (PSD) program, created under the federal Clean Air Act, required preconstruction review and permitting for major air pollution sources that had attained federal ambient air quality standards. (42 U.S.C.  7475.) The programs goal was to ensure that new or modified sources of air pollution not cause areas with relatively clean air to degrade in quality. The EPA adopted regulations allowing states to adopt their own PSD programs. (40 C.F.R. 52.21.) Though not specifically listed in the regulations, NOx was among the criteria pollutants subject to the federal PSD program. (40 C.F.R. 52.21(b)(23)(i); see also 40 C.F.R.  81.305.) Those regulations further enabled the EPA to delegate its permit review authority to the states. (40 C.F.R. 52.21(u).)

In 1988, the SCAQMD adopted Regulation XVII, entitled Prevention of Significant Deterioration, to obtain a delegation from the EPA to administer the PSD program. According to Rule 1701(b) contained within Regulation XVII, the Regulation was effective upon delegation from the EPA. The EPA did not delegate PSD authority to the SCAQMD until January 1997, when it determined that Regulation XVII met the requirements of the federal program and signed a written delegation agreement with the SCAQMD delegating authority from the EPA to the SCAQMD to implement the provisions of the federal PSD program.

In 2002, the EPA amended its New Source Review (NSR) rules for the PSD programs, which provided a number of elements that tended to relax the applicability requirements and thereby excluded from review some major modifications to large sources with potentially significant emission increases. (67 Fed.Reg. 80186-80289 (Dec. 31, 2002).) The EPA set March 3, 2003, as the deadline for permitting agencies to implement the revised PSD rules.

At a February 7, 2003 meeting, the Governing Board authorized the Executive Officer to request from the EPA recognition that Regulation XVII was as stringent and therefore equivalent to the EPAs revised PSD regulations; alternatively, in the event that the EPA failed to recognize equivalency, the Governing Board authorized the Executive Officer not to request any further delegation and to allow the EPA to terminate the delegation agreement and become the permitting agency for PSD sources otherwise governed by the SCAQMD. The EPA declined to construe Regulation XVII as equivalent to the amended federal regulations and determined that the SCAQMD could not continue to administer its PSD program without amending its own Regulation XVII to conform to the EPA amendments. (67 Fed. Reg. at pp. 80240-80241.)

The Governing Board declined to amend Regulation XVII. Consequently, on March 3, 2003, the EPA notified the SCAQMD that it was revoking and rescinding its authority to implement the PSD program for issuing and modifying federal permits for new and modified major sources of attainment pollutants. According to the EPA, the delegation agreement was premised on the EPAs determination that Regulation XVII met the requirements of 40 Code of Federal Regulations part 52.21. The EPA stated that, following the amendment of the PSD program, it had determined that your Regulation XVII may no longer generally meet the requirements of 40 Code of Federal Regulations part 52.21 (as revised), and that we cannot ensure District permits issued pursuant to Regulation XVII will fully implement our regulations as revised. According to the federal register, in the area covered by the SCAQMDas well as areas governed by other permitting agencies whose regulations were inconsistent with 40 Code of Federal Regulations part 52.21 as revisedRegion 9 [of the EPA] will resume issuing federal PSD permits as of the date the revisions to 40 C.F.R.  52.21 take effect. (68 Fed.Reg. 19371 (Apr. 21, 2003).)

Thereafter, the California Legislature introduced Senate Bill No. 288 (Sen. Bill No. 288), later codified as the Protect California Air Act of 2003, effective January 1, 2004. (Health & Saf. Code, 42500-42507; Veh. Code, 9250.11.) In order to carry out Sen. Bill No. 288s expressed purpose of preventing federal reforms from exacerbating air pollution challenges, Health and Safety Code section 42504, subdivision (a), provided: No air quality management district or air pollution control district may amend or revise its new source review rules or regulations to be less stringent than those that existed on December 30, 2002. (See also Health & Saf. Code,  42502, subd. (g).)

According to bill analyses of Sen. Bill No. 288, the bill [p]rohibits an air district from changing its new source review rules or regulations that existed on December 30, 2002, if the amendments or revisions would exempt, relax, or reduce the obligations of a stationary source to meet specific requirements. (Sen. Nat. Resources Com., 3d reading analysis of Sen. Bill No. 288 (2003-2004 Reg. Sess.) as amended Sept. 4, 2003, p. 1; accord, Assem. Nat. Resources. Com., analysis of Sen. Bill No. 288 (2003-2004 Reg. Sess.) as amended June 27, 2003, p. 1.) A Senate Rules Committee report further explained: SB 288 would enact the federal program that was repealed by the Administration as a state law. SB 288 will restore the clean air law to [the] same status as existed for 25 years until the end of last year. Section 116 of the Clean Air Act expressly allows the states to adopt clean air requirements more stringent than the federal government. If the federal government will not safeguard Californias air quality, then the state must take this duty upon itself. (Sen. Rules Com., Off. of Sen. Floor Analyses, 3d reading analysis of Sen. Bill No. 288 (2003-2004 Reg. Sess.) as amended April 10, 2003, p. 6.) The Governor approved Sen. Bill No. 288 in September 2003 and it became effective on January 1, 2004. (Stats. 2003, c. 476 (S.B. 288), 1.)

On September 21, 2004, the Executive Officer issued the first permit for the ULSD project. Acting in accordance with the Governing Boards earlier decision and determining that Regulation XVII was ineffective following the EPAs delegation revocation, the Executive Officer did not conduct any PSD review pursuant to Regulation XVII.^[5] In April 2005, the Governing Board confirmed that the EPA had withdrawn its PSD delegation, thereby rendering the state unable to enforce Regulation XVII. It reaffirmed its previous action to relinquish PSD analysis back to the federal government and render Regulation XVII inactive unless the SCAQMD received a new delegation from the EPA or amended Regulation XVII to make it currently effective. It further opined that a PSD review would have had no effect on the ULSD project because it did not involve modifications to any equipment emitting PSD pollutants.

Subsequent Negative Declaration.

In June 2005, the SCAQMD prepared a subsequent negative declaration (SND) to evaluate the additional effects of the installation and operation of SCR technology to a replacement heater. While the FND had evaluated the impacts from installing and operating ultra low NOx burners to control NOx emissions from the heater, the SCAQMD determined during the permit process that the best available control technology (BACT) would instead be SCR technology. The SND concluded that the modification would not have any significant environmental impacts. Appellants submitted comments to the SND, asserting that the SCR technology would have significant impactsparticularly from the use, storage and transport of ammoniaand that the SCAQMD had improperly piecemealed the ULSD project. In October 2005, the SCAQMD certified the final SND and approved the project as revised.

Pleadings.

During the pendency of the superior court action, appellants separately appealed the SCAQMDs issuance of a permit for the ULSD project to the SCAQMDs Hearing Board (Hearing Board), specifically challenging the SCAQMDs failure to apply Regulation XVII. Following a hearing lasting several days and spanning November 2004 to April 2005, the Hearing Board issued a written decision ruling that Regulation XVII was effective only so long as the PSD delegation by the EPA to the SCAQMD was valid; that Regulation XVII became ineffective on March 3, 2003 when the EPA withdrew its delegation of PSD permitting authority from the SCAQMD; and that the SCAQMD did not violate Sen. Bill No. 288 by allowing Regulation XVII to become ineffective upon the withdrawal of the delegation. The Hearing Board found, as a matter of law, that Regulation XVII did not apply to the SCAQMDs permit decisions relating to the ULSD project. One Hearing Board member issued a written dissent, concluding that nothing rendered Regulation XVII inactive at the time of permitting and that the EPAs withdrawal of delegation to implement the federal PSD program did not inactivate Regulation XVII as a matter of local law.

Following the issuance of the trial courts ruling in Phase I, appellants filed third amended petitions challenging both the Hearing Boards decision denying their administrative appeal on the PSD issue and SCAQMDs failure to prepare an EIR to address the impact of the SCR technology.^[6] Pursuant to a stipulation and order, appellants filed verified fourth amended petitions in November 2005.

Trial Court Ruling.

Following a March 2006 trial, the trial court issued an order denying appellants petition for peremptory writ of mandate and a statement of decision in June 2006. Addressing Regulation XVII, it concluded that the Hearing Board did not abuse its discretion in upholding the Executive Officers decision that Regulation XVII was ineffective when he issued the ULSD project permit in September 2004. It further found that a determination that Regulation XVII became ineffective upon the EPAs delegation revocation was not contrary to Sen. Bill No. 288, as the revocation occurred before Sen. Bill No. 288 became effective in January 2004 and the revocation did not violate Sen. Bill No. 288s prohibition against amending or revising new source review rules and regulations. (See Health & Saf. Code, 42504, subd. (a).) With respect to the propriety of the SCAQMDs preparation of the SND as opposed to an EIR, the trial court ruled that substantial evidence supported the conclusion that there would be no significant impacts from the modified ULSD project and, specifically, from the addition of SCR technology. The trial court also found that the ULSD project had not been improperly segmented because the SCAQMD prepared multiple CEQA documents to analyze the project.

The trial court entered judgment on June 29, 2006. This appeal followed.

DISCUSSION

Appellants two primary contentions are: (1) An EIR was required to evaluate the ULSD project because substantial evidence supported a fair argument that the project would have significant environmental impacts; and (2) the SCAQMD should have applied Regulation XVII in evaluating the ULSD project. We agree with appellants that the FND did not adequately analyze the potential significant impacts stemming from the ULSD projects NOx emissions, but conclude that the SCAQMD properly evaluated other potential impacts and properly declined to apply Regulation XVII in issuing a permit for the ULSD project.

I. The SCAQMD Abused Its Discretion in Concluding There Was No Substantial Evidence to Support a Fair Argument That the ULSD Project Would Have a Significant Environmental Impact.

A. CEQA Requirements and Standard of Review.

CEQA is a comprehensive scheme designed to provide long-term protection to the environment. [Citation.] In enacting CEQA, the Legislature declared its intention that all public agencies responsible for regulating activities affecting the environment give prime consideration to preventing environmental damage when carrying out their duties. [Citations.] CEQA is tobe interpreted to afford the fullest possible protection to the environment within the reasonable scope of the statutory language. [Citation.] (Mountain Lion Foundation v. Fish & Game Com. (1997) 16 Cal.4th 105, 112.)

The heart of CEQA is the EIR, whose purpose is to inform the public and government officials of the environmental consequences of decisions before they are made. [Citations.] In general, an EIR must be prepared on any project a public agency intends to approve or carry out which may have a significant effect on the environment. [Citations.] (San Franciscans Upholding the Downtown Plan v. City and County of San Francisco (2002) 102 Cal.App.4th 656, 687688, fn. omitted.) As opposed to an EIR, [a] negative declaration is a written statement that briefly explains why a project will not have a significant environmental impact and therefore will not require an EIR. [Citation.] A negative declaration is proper only if the agency determines based on an initial study that there is no substantial evidence that the project may have a significant effect on the environment. [Citations.] (Mejia v. City of Los Angeles (2005) 130 Cal.App.4th 322, 330 (Mejia); see also Snarled Traffic Obstructs Progress v. City and County of San Francisco (1999) 74 Cal.App.4th 793, 797 [In an obvious sense, an EIR and a negative declaration are the two sides of the same coin, the either/or options available to a public agency considering a project].)

Under CEQA and its related administrative regulationsgenerally referred to as Guidelines (Guidelines) (Cal. Code Regs., tit. 14, 15001 et seq.)a significant effect on the environment means a substantial, or potentially substantial, adverse change in the environment. (Pocket Protectors v. City of Sacramento(2004) 124 Cal.App.4th 903, 927 & fn. 17 (Pocket Protectors); Pub. Resources Code, 21068; see Guidelines,  15382.) The determination of whether a project may have a significant effect on the environment calls for careful judgment on the part of the public agency involved, based to the extent possible on scientific and factual data. An ironclad definition of significant effect is not always possible because the significance of an activity may vary with the setting. For example, an activity which may not be significant in an urban area may be significant in a rural area. (Guidelines, 15064, subd. (b).)

Generally, an EIR is required when substantial evidence supports a fair argument that a proposed project may have a significant effect on the environment. [Citations.] . . . . (Pocket Protectors, supra, 124 Cal.App.4th at p. 927; accord, Sierra Club v. California Dept. of Forestry & Fire Protection (2007) 150 Cal.App.4th 370, 381.) Substantial evidence under CEQA includes fact, a reasonable assumption predicated upon fact, or expert opinion supported by fact. (Pub. Resources Code,  21080, subd. (e)(1).) (Mejia, supra, 130 Cal.App.4th at p. 331.) The Guidelines define substantial evidence as enough relevant information and reasonable inferences from this information that a fair argument can be made to support a conclusion, even though other conclusions might also be reached. Whether a fair argument can be made that the project may have a significant effect on the environment is to be determined by examining the whole record before the lead agency. Argument, speculation, unsubstantiated opinion or narrative, evidence which is clearly erroneous or inaccurate, or evidence of social or economic impacts which do not contribute to or are not caused by physical impacts on the environment does not constitute substantial evidence. (Guidelines, 15384, subd. (a).) (Mejia, supra, at p. 332; accord, Pocket Protectors, supra, at p. 927.)

The fair argument test imposes low threshold for requiring the preparation of an EIR and reflects a preference for resolving doubts in favor of environmental review. (No Oil, Inc. v. City of Los Angeles (1974) 13 Cal.3d 68, 84; Mejia, supra, 130 Cal.App.4th at p. 332; Pocket Protectors, supra, 124 Cal.App.4th at p. 928; Architectural Heritage Assn. v. County of Monterey (2004) 122 Cal.App.4th 1095, 1110.) Application of the fair argument test is a question of law for our independent review. [Citations.] We review the trial courts findings and conclusions de novo [citations], and do not defer to the agencys determination [citation], except on legitimate, disputed issues of credibility [citations]. (Bowman v. City of Berkeley (2004) 122 Cal.App.4th 572, 580581; accord, Bankers Hill, Hillcrest, Park West Community Preservation Group v. City of San Diego (2006) 139 Cal.App.4th 249, 257; Gentry v. City of Murrieta (1995) 36 Cal.App.4th 1359, 13991400.)

As explained in more detail in Sierra Club v. County of Sonoma (1992) 6 Cal.App.4th 1307, 13171318: A court reviewing an agencys decision not to prepare an EIR in the first instance must set aside the decision if the administrative record contains substantial evidence that a proposed project might have a significant environmental impact; in such a case, the agency has not proceeded as required by law. [Citation.] Stated another way, the question is one of law, i.e., the sufficiency of the evidence to support a fair argument. [Citation.] Under this standard, deference to the agencys determination is not appropriate and its decision not to require an EIR can be upheld only when there is no credible evidence to the contrary. [Citation.] (Accord, Sierra Club v. California Dept. of Forestry & Fire Protection, supra, 150 Cal.App.4th at p. 381.)

In reviewing an agencys decision, we emphasize that the task of the judiciary is not to question the wisdom of proceeding with a project. Our purpose in reviewing environmental decisions is not to pass upon the correctness of a public entitys conclusions, but only upon the sufficiency of an EIR or negative declaration as an informative document. [Citations.] In so doing, we look to see whether policymakers have been adequately informed of the consequences of their decisions, and whether the public has sufficient information to evaluate the performance of their elected officials. [Citation.] As a result, we must be satisfied that the particular governmental agency involved has fully complied with the procedural requirements of CEQA, because only in this way can a subversion of the important public purpose of CEQA be avoided. . . . [Citation.] (Long Beach Sav. & Loan Assn. v. Long Beach Redevelopment Agency (1986) 188 Cal.App.3d 249, 259.)

With these principles in mind, we turn to appellants contentions.

B. There Was Substantial Evidence That NOx Emissions from the Project May Exceed the CEQA Significance Threshold.

Appellants first contend that an EIR was required because they presented a fair argument that the ULSD project would have a significant impact on air quality, as there was substantial evidence the project would generate operational NOx emissions exceeding the CEQA threshold.^[7] The SCAQMD and the Refinery have consistently and successfully asserted that any increase in NOx emissions did not constitute a significant impact because the evidence showed that any estimate of projected increases fell within the level of NOx emissions allowed by the Refinerys RECLAIM permit. But the undisputed evidence in the FND demonstrated that the Refinerys NOx emission levels have never approached the over 8,000 ppd set by the RECLAIM permit. By utilizing the RECLAIM permits maximum figure as the baseline for the ULSD project, the SCAQMD improperly calculated the baseline environmental setting on the basis of merely hypothetical conditions as opposed to realized physical conditions on the ground. (San JoaquinRaptorRescueCenter v. County of Merced (2007) 149 Cal.App.4th 645, 658 (San JoaquinRaptorRescueCenter).) Accordingly, the SCAQMD abused its discretion by reaching its conclusion of no significant impact from NOx emissions in a manner contrary to law.

1. Facts relating to NOx emission level calculations.

In the draft negative declaration, the SCAQMD concluded that the ULSD project would generate no increase in operational NOx emissions.^[8] The draft negative declaration did not include any information about the Refinerys existing level of NOx emissions; rather, it stated only that the ULSD project would result in a net reduction of NOx emissions. On appellants behalf, Dr. Fox submitted comments to the draft negative declaration in which she concluded that the ULSD project would generate approximately 560 ppd in NOx emissions from an increase in utilities necessary to support the increase in hydrotreating to reduce the diesel sulfur content. Relying on Dr. Foxs analysis, appellants further commented that the SCAQMDs conclusion that the ULSD project would generate no NOx emissions employed an erroneous baseline, premised on the improper assumption there would be no impact from the Refinerys generating anything below the maximum permitted level of NOx emissions.

The FND presented slightly higher NOx emissions calculations, acknowledging that the ULSD project would generate an increase of 8.9 ppd of NOx emissions from an increase in delivery trucks to deliver additional catalysta figure below the CEQA significance threshold of 55 ppd. Responding to appellants improper baseline argument, the SCAQMD for the first time explained that the Refinery operated pursuant to a RECLAIM permit and that it had relied on the permit conditions to calculate the baseline for the ULSD project. Thus, for NOx emissions from non-RECLAIM sourcese.g., delivery trucksthe baseline focused on the specific equipment to be added or modified: The emissions baseline for new equipment . . . is considered zero, and all emissions associated with such new equipment are considered emission increases resulting from the proposed project. For NOx emissions from RECLAIM sources, the SCAQMD used a baseline setting based on the emissions levels allowed by the RECLAIM permit. The FND summarized: For both RECLAIM sources and non-RECLAIM sources, where the project will simply result in increased utilization of existing equipment, and the equipment will remain within the operating parameters specified in previously issued permits, emission calculations were not presented in the Negative Declaration. This is because no discretionary approval is required for the increased utilization, and because the baseline emissions and the post-project emissions are the same, that is, they are both the permitted emissions.

Addressing the calculations rendered by Dr. Fox, the SCAQMD concluded that even if accurate levels of increased utilization of existing equipment were excluded from the baseline, any increases would remain below the level of significance. More specifically, the SCAQMD calculated that, at worst, the ULSD project would involve increased utilization of the oldest boiler at the Refinery, the existing hydrogen plant and the existing electrical generation equipment, all of which together would result in increased NOx emissions of approximately 456 ppd. Calculating the baseline as the Refinerys initial RECLAIM allocation of 8,318 ppd of NOx added to the CEQA significance threshold of 55 ppd, the SCAQMD reasoned that any emission level below 8,373 ppd would not be considered significant. Because the emissions associated with increased utilization of existing equipment (456 ppd), coupled with the Refinerys existing RECLAIM allocation (2,343 ppd), fell well below the 8,373 ppd level, the SCAQMD concluded that emissions would remain less than significant even under appellants methodology.

2. Legal principles governing the determination of the baseline environmental setting.

Before the impacts of a project can be assessed and mitigation measures considered, an EIR must describe the existing environment. It is only against this baseline that any significant environmental effects can be determined. (Guidelines,  15125, 15126.2, subd. (a).) (County of Amador v. El Dorado County Water Agency (1999) 76 Cal.App.4th 931, 952.) According to Guidelines section 15125, subdivision (a): An EIR must include a description of the physical environmental conditions in the vicinity of the project, as they exist at the time the notice of preparation is published, or if no notice of preparation is published, at the time environmental analysis is commenced, from both a local and regional perspective. This environmental setting will normally constitute the baseline physical conditions by which a lead agency determines whether an impact is significant. The description of the environmental setting shall be no longer than is necessary to an understanding of the significant effects of the proposed project and its alternatives. (See also Fat v. County of Sacramento (2002) 97 Cal.App.4th 1270, 12801281 [addressing the adequacy of the baseline in a negative declaration as opposed to an EIR].)

In San Joaquin Raptor Rescue Center, supra, 149 Cal.App.4th 645, the court highlighted the varying approaches to the determination of a projects baseline, stating: Although the baseline environmental setting must be premised on realized physical conditions on the ground, as opposed to merely hypothetical conditions allowable under existing plans [citations], established levels of a particular use have been considered to be part of an existing environmental setting. [Citations.] Environmental conditions may vary from year to year and in some cases it is necessary to consider conditions over a range of time periods. [Citation.] (Id. at p. 658.) There, the question was whether the impacts from a mine expansion project should be measured against a baseline of a four-year average of mine operations (240,000 tons per year) or against the level of permitted mine operations (100,00 tons per year). (Ibid.) Although the court ultimately concluded that the EIR was inadequate because it failed to identify the baseline assumptions employed for assessing impacts, it reasoned that substantial evidence supported using established mine operations as the baseline. (Id. at pp. 658659.) Reiterating the principle that established usage of the property may be considered to be part of the environmental setting, the court found that evidence of the mines production average established such use, whereas the evidence of the more restrictive permit was not part of the record. (Id. at p. 659.)

Applying established usage to determine a baseline environmental setting is not a new concept. In Environmental Planning & Information Council v. County of El Dorado (1982) 131 Cal.App.3d 350 (EPIC), the court held that two EIRs prepared for the Greenstone and Camino-Fruitridge area plans were inadequate because they compared the environmental impact of those plans to the existing general plan rather than to the existing environment. For example, the Greenstone area plan EIR represented that the plan resulted in a reduction of the population holding capacity from over 70,000 persons to 5,800, and that such a reduction in density would thus result in no unfavorable impact on air quality. (Id. at p. 356.) Similarly, the EIR and supplemental EIR for the Camino-Fruitridge area plan provided: The proposed plan establishes a population holding capacity of 22,440 while the existing plan provides a population holding capacity of 63,600. A substantial population reduction is then realized. . . . . Intutively [sic] a population reduction of 65% would decrease any potential impacts by the same percentage. (Id. at p. 357.) The court explained why the EIRs comparisons to the general plan failed to evaluate the area plans impacts: The comparisons, however, are illusory, for the current populations of those areas are approximately 3,800 for the Camino-Fruitridge area and 418 for the Greenstone area. The proposed plans actually call for substantial increases in population in each area rather than the illusory decreases from the general plan. (Id. at p. 358.) The court concluded that both EIRs were insufficient as informative documents because they failed to consider the impacts that each area plan would have on the environment in its current state. (Id. at pp. 357358.)

Relying on EPIC, the court in City of Carmel-by-the-Sea v. Board of Supervisors (1986) 183 Cal.App.3d 229 (City of Carmel), superseded by statute on other grounds as recognized in People ex rel. Brown v. Tehama County Bd. of Supervisors (2007) 149 Cal.App.4th 422, 450, similarly concluded that whether a project may have a significant impact should be determined by comparing the project to the existing physical environment, not to what is possible under existing zoning. There, a hotel that was subject to a land use plan (LUP) permitting the development of up to 75 residential units on the site (Mission Ranch) sought rezoning of its property to permit continued use of the hotel and future residential development. (City of Carmel, supra, at pp. 233234.) Although the rezoning application generated controversy concerning its scope and its impact on adjacent wetlands, the county prepared a negative declaration to address the impact of the rezoning. (Id. at p. 234.) The appellate court affirmed the trial courts order setting aside the rezoning decision, concluding that there was substantial evidence that the rezoning may have significant impacts. (Id. at pp. 241, 245.) Importantly, in reaching this conclusion the court expressly rejected the argument that no significant impacts could result because the maximum number of units allowed under the rezoning would be 65, which was less than the 75 units already allowed under the LUP. The court explained: In assessing the impact of the rezoning, it is only logical that the local agency examine the potential impact on the existing physical environment. The rezoning designation sought by Mission Ranch includes uses which do not presently exist and which would significantly expand the present resort hotel use. This is the effect which must be analyzed. A comparison between what is possible under the LUP and what is possible under the rezoning bears no relation to real conditions on the ground. (Id. at p. 246.)

Indeed, multiple cases have held that CEQA requires that a proposed project must be evaluated by comparing the impacts of the project to the existing physical environment. (E.g., Woodward Park Homeowners Assn., Inc. v. City of Fresno (2007) 150 Cal.App.4th 683, 693, 707710 (Woodward Park) [EIR for proposed office and retail project held inadequate where it compared impacts of projectincluding NOx emissionsto the office and retail development that could be built under existing zoning, not to the existing physical condition of the property]; Fat v. County of Sacramento, supra, 97 Cal.App.4th at pp. 12801281 [approval of negative declaration for proposed project upheld where impacts measured against actual physical condition of the property, despite that it had developed beyond what was allowed by permit]; Save Our Peninsula Committee v. Monterey County Bd. of Supervisors (2001) 87 Cal.App.4th 99, 118128 (Save Our Peninsula) [EIR for proposed residential development held inadequate where baseline water use figures were based on assumptions about water use that were unsupported by either existing conditions or evidence of historical use]; cf. Christward Ministry v. Superior Court (1986) 184 Cal.App.3d 180, 190 [CEQA review required for amendment to general plan to add a waste management facility even though such a facility may have been allowed under a special use permit; the local agency is required to compare the newly authorized land use with the actually existing conditions, not with hypothetically permitted facilities that did not exist].) Succinctly summarized, these cases stand for the principle that [a] baseline figure must represent an environmental condition existing on the property prior to the project. (Save Our Peninsula, supra, at p. 123.)

Another line of cases, however, appears to hold that permitted conditions constitute an appropriate baseline by which to measure a proposed projects environmental impacts. In Fairview Neighbors v. County of Ventura (1999) 70 Cal.App.4th 238 (Fairview Neighbors), the EIR measured the traffic impacts from proposed modifications to a mining facility against the traffic levels allowed under an existing conditional use permit. Rejecting a challenge that the EIR should have measured the projects impacts against actual, existing traffic levels, the court found that [t]he instant EIR appropriately assumes the existing traffic impact level to be the traffic generated when the mine operates at full capacity pursuant to the entitlement previously permitted by CUP-1328, as extended by the compliance agreement. (Id. at
pp. 242243.) The court added that comparing the effects of the project against actual traffic figures would have been misleading because the mining operations traffic flow fluctuated greatly over time based on varying levels of demand, production and other factors. (Id. at p. 243.) The court in Benton v. Board of Supervisors (1991) 226 Cal.App.3d 1467, 1473, 1476 (Benton), also concluded that the impacts of a modified proposal for a winery should be measured against a winery that had already been approved and permitted. Likewise, in Committee for a Progressive Gilroy v. State Water Resources Control Bd. (1987) 192 Cal.App.3d 847, 863 (Gilroy), the court held that an EIR was not required to evaluate the impacts of restoring a wastewater treatment facilitys capacity to previously permitted levels.

A common and critical feature among the three foregoing cases was prior environmental review. In Benton, supra, 226 Cal.App.3d 1467, the court noted that the project under review was merely a modification of a project which had already been approved following environmental review and expressly distinguished EPIC and City of Carmel on the ground that those cases did not involve projects which had undergone earlier, final CEQA review. (Benton, supra, at p. 1477, fn. 10.) The court in Fairview Neighbors, supra, 70 Cal.App.4th at page 242, cited Bentonin highlighting the fact that the project which constituted the baseline had already undergone environmental review. And in Gilroy, supra, 192 Cal.App.3d 847, the court ruled not only that prior CEQA review was relevant to the determination of the baseline, but also that the reestablishment of a requirement previously approved under CEQA did not constitute a project subject to environmental review. (Id. at p. 863 [The reestablishment of discharge requirements within previously approved levels is merely a separate governmental approval of the original project and does not itself constitute a new project under CEQA].)^[9]

Reconciling the two lines of authority, we conclude that a projects baseline is normally comprised of the existing environmental settingnot what is hypothetically allowed pursuant to existing zoning or permitted plans. Where prior environmental review has occurred, though, the existing environmental setting may include what has been approved following CEQA review. The City of Carmel court clarified this distinction, responding to the argument that an EIR for the proposed development would be duplicative, since the scope of the project was already permitted by the LUP. (City of Carmel, supra, 183 Cal.App.3d at pp. 252253.) The court noted that environmental review was necessary to address the specific effects arising from the proposed project and importantly cautioned that [t]he fact that County was following state law by conforming zoning to the LUP (Gov. Code, 65860) does not by itself excuse preparation of appropriate environmental documents. (Id. at pp. 247, 253.)

3. The SCAQMD abused its discretion by comparing the ULSD projects NOx emissions impacts to the maximum RECLAIM permit emission level.

In the FND, the SCAQMD relied on Benton and Fairview Neighbors in explaining its baseline calculations, stating case law has held that the