EPA Power Sector Rules and Electric Grid Reliability EEI Legal Committee Amelia Island 2012

1. EPA Power Sector Rules and Electric Grid Reliability EEI Legal Committee Amelia Island 2012 Presented By Dan Larcamp Peter Glaser Troutman Sanders LLP 401 9th Street, NW Suite 1000 Washington, DC 20004 202.274.2950 www.troutmansanders.com

2. Topics • Status of EPA Power Sector Rules • Reliability Issues and Process • Risk Management Issues / Potential Strategies

3. Litigation Status • GHG case (endangerment finding, auto rule, tailoring and timing rules) – Oral argument 3/28-29. Decision expected May-July. • Cross-State Air Pollution Rule (CSAPR) – Oral argument 4/13. Decision expected June or July. • Mercury and Air Toxics Standards (MATS) – case just getting underway. Sources subject to new-source standards have asked for expedited treatment. Briefing proposals in main case expected early June.

4. GHG NSPS Major Points • Applies to new units only (really?). • Existing unit standards still required by settlement agreement and coming. • Super source category for coal and CCGT plants for GHG emissions only. GHG limit = 1,000 lbs CO2/MWh, or what a CCGT emits. • EPA projects no costs and no benefits since it says no new coal plants will be built for 20 years. • If commit to CCS now, can average emissions over 30 years, so long as do 1,800 lbs. CO2/MWh in first 10 years. • Grandfather for already permitted plants that begin construction within one year from proposal.

5. Impact on Grid Reliability • A large number of EGUs are expected to retire in the coming years. Multiple reasons why, with disagreement on how much of a role each factor is playing: EPA rules, low gas prices, RPS, other • NERC: 1,350 EGUs at 525 stations will be required to install controls or retire in the next several years. “Environmental Regulations are shown to be the number one risk to reliability over the next 1 to 5 years.” • EPA disagrees with NERC as to the extent of retirements and reliability caused by EPA rules. • Although retirement estimates vary, broad agreement that retirements will happen and need to be managed. Roughly 25-30 GW already announced. • Important related problem in that a large number of units will have to be temporarily pulled out of service in order to install controls.

6. Impact on Grid Reliability • History • RTO Safety Valve Proposal • FERC Technical Conference • FERC – NARUC Collaborative • EPA MACT Rule and Enforcement Policy Statement

7. EPA View “The EPA believes that all affected sources will be able to comply with the MATS within the [three year] compliance period specified by Section 112(i)(3) of the CAA (including, as applicable, any extensions permitted under Section 112(i)(3)(B)….The EPA’s analysis projects only a modest level of retirements, and the Agency does not anticipate that such retirements will lead to resource constraints that would adversely affect electric reliability.”

8. MATS Compliance Time Period • Three years. • Fourth year from state permitting agencies when “necessary for the installation of controls.” EPA said fourth-year option should be “broadly available” from state permitting agencies. Presidential memo affirms that message. • Possibility of EPA enforcement forbearance for an additional one-year period.

9. What is the “Installation of Controls”? • CAA authorizes 4th year if “necessary for the installation of controls.” • EPA: States have discretion to grant 4th year for, in addition to installation of controls at the complying source, and if necessary to maintain grid reliability: • Construction of replacement unit at site of retiring unit. • Generation from a retiring unit is needed to while other units install controls. • Construction of transmission upgrades. • Construction of new off-site generation to replace a retiring unit.

10. Possible Fifth Year • EPA’s Office of Enforcement and Compliance Assurance (“OECA”) Statement of Policy issued concurrently with the rule. • Using CAA Section 113 authority to issue an Administrative Order (“AO”), OECA says it may issue an AO to EGUs that are unable to comply within 4 years but which are critical to the reliability of the electric grid. • If an AO is issued to an EGU, EPA will not initiate enforcement action against that unit for up to one additional compliance year.

11. Enforcement Policy Statement • “[T]here may be isolated instances in which the deactivation or retirement of a unit or a delay in installation of controls… could have an adverse, localized impact on electric reliability.” • Intended to address “specific and documented” reliability concerns. • Does not address what happens after 5 years. • EPA will determine whether a unit is “reliability critical” but will seek “advice and counsel” of FERC, NERC, RTOs/ISOs, PUCs, and Planning Authorities. • Unit will be in violation of the CAA before 5th year is granted. • “EPA reserves the right to act at variance with these policies and to change them at any time without public notice.”

12. Obtaining an AO to Replace a Retiring Unit • Notify Planning Authority within a year after the effective date of the rule of intention to retire – by April 16, 2013. • Request an AO from OECA at least 180 days before the end of the four-year compliance period, by October 6, 2015. • Simultaneously notify the Planning Authority, relevant state public utility commission, and relevant environmental permitting agency.

13. Obtaining an AO to Install Controls • Available if there is a “delay due to factors beyond the control of the owner/operator.” • Utility must submit request to OECA for AO within a “reasonable period” after learning of the delay. • Notify Planning Authority, public utility commission, and environmental permitting agency.

14. AO Application 1. Copy of early notice to Planning Authority (or explanation why early notice not possible). 2. Written analysis of the reliability risk if the unit is not in operation showing (a) a violation of a reliability standard or (b) drop of a reserve requirement below regional requirement. 3. Written concurrence with (2) by Planning Authority or separate analysis by Planning Authority or written explanation why such analysis not possible and analysis by party. 4. Comments from third parties favoring or opposing continued operation. 5. Plan to comply with MACT within one year and, where practicable, a plan to resolve underlying reliability problem. 6. Identification of level of operation of unit to prevent reliability problem.

15. Presidential Exemption and Memorandum • Industry requested two-year Presidential exemption. • No Presidential exemption included in final UMACT. President issued memo to EPA to: • Work with state and local permitting agencies to make the additional (4th) year for compliance broadly available. • Promote early, coordinated, and orderly planning and execution of measures to implement UMACT while maintaining the reliability of the electric power system. • Make information available to the public concerning the one-year compliance extension option and the possible use of CAA Section 113(a) to provide additional compliance time. • Process should “promote predictability and reduce uncertainty.” • “It is therefore crucial that implementation of the MATS Rule proceed in a cost-effective manner that ensures electric reliability.”  The possibility of a Presidential exemption still exists on a case-by-case basis. Proceed through OMB.

16. FERC Staff Whitepaper on Advice to EPA(Issued Jan. 30, 2012) • Each request for an EPA administrative order would be filed with the Commission Secretary’s Office as an informational filing that includes the same information submitted to EPA. • FERC’s Office of Electric Reliability will be the lead office in processing all such requests. • FERC review would be limited to whether there might be a violation of a Reliability Standard. • FERC would submit written comments on each request to EPA. • There would be no interventions in the FERC process; however, the Commission may consider comments submitted as part of the informational filing in developing its written comments to EPA. • FERC will vote, but include views of dissenting Commissioners? • FERC accepting comments on proposed process (Docket No. AD12-1)

17. Response to FERC Staff Whitepaper Common Themes: • FERC should not conduct de novo of reliability analysis by Planning Authority, but nor should FERC rubber-stamp • Agreement (concern) that EPA is under no obligation to defer to FERC comments or underlying reliability analyses • Standard for reviewing reliability issues should not be limited to expected violation of a Reliability Standard. • NERC = service reliability could be compromised (load shedding) without violating a Reliability Standard • No consensus on process: • Role for states? • Reliability Standard violation or more broad review?

18. EPA / FERC Process File Compliance Plan with EPA State Env. Agencies Copies to: State PUC Develop Reliability Analysis, Concurrence by Planning Authority Request “AO” from EPA for 5th year to comply FERC ? FERC conducts its reliability review per Staff whitepaper Comments? EPA Grants/Denies AO in its sole discretion FERC “votes” on advice to EPA

19. EPA / FERC Process File Compliance Plan with EPA • What to do NOW to manage these processes? • Get early understanding of retirement plans and impacts • Work with State Commissions (hearings, inter-relationship with IRP? Anticipate similar action to WVA PSC) • Work with Planning Authorities? • Work with Regional Entities/NERC? • Work with FERC Office of Electric Reliability Staff? Develop Reliability Analysis, Concurrence by Planning Authority Goal = Develop factual record and consensus about the reliability risks and solutions before filings are made with EPA.

20. Conflict Between Complying with EPA and Reliability Obligations? • Not clear what happens if unit must run for reliability but can’t obtain an AO or Presidential Exemption. • Not clear what happens if unit is needed for reliability beyond five years. • Will “RCU” status protect against citizen suits? • GenOn legislative proposal. • How does state-run Integrated Resource Planning factor in?

21. Conflict Between Complying with EPA and Reliability Obligations? Neither pill tastes good.

22. What are the RTOs Doing? • Refining retirement estimates, accepting retirement notices already • Reviewing retirement procedures, considering tariff changes • Reviewing outage scheduling • Reviewing resource and transmission adequacy to deal with retirements

23. Open Issues / Managing Risks • Confidentiality vs. Transparency • Call for transparent AO process • EPA apparently expects transparency • Tension with FERC confidentiality / CEII regs • Retirement data closely held, and can directly impact market price • Disclosure of retirement data creates risk that FERC Enforcement will look for strategic behavior in release of retirement information (risk of gaming allegations?) • FERC expectation that transmission planning be open and transparent and to consider non-transmission alternatives (Order 1000) vs. non-public nature of unit retirement decisions

24. Open Issues / Managing Risks • Market Manipulation standard: Under Part 1c, it is unlawful for any entity, directly or indirectly: To use or employ any device, scheme, or artifice to defraud, To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity.

25. Open Issues / Managing Risks • Standards of Conduct • New studies, more corporate planning strategy requires more information sharing and coordination • Need transmission information and generation information • May lead to increased SoC risks • Planning functions/personnel may work with transmission function and marketing function, but may not be conduit for non-public transmission function information

26. Open Issues / Managing Risks • Gas-Electric Coordination • “What will be the impact of the expected retirements of coal and oil-fired generation on the need for gas and electricity coordination?” Commissioner Moeller • Companies effectively managing risks of gas supply interruptibility? • MISO estimates $2 billion of more infrastructure needed to firm up gas supplies. • FERC action expected?

27. Managing the Risks • Confidentiality and Privilege • Challenges of maintaining privilege while producing documents for multiple state and federal regulatory agencies • Start addressing how GC must oversee process • Sarbanes-Oxley implications • What do you have to disclose regarding risk?

28. Legislation • Bipartisan House Bill introduced in March • Would provide that a DOE Order under FPA 202 to order a unit to run shall not result in “a violation of such environmental law or regulation, or subject such party to any requirement, civil or criminal liability, or a citizen suit under such environmental law or regulation. • What happens if you don’t have a DOE order? • RTO directs you to run, but no AO from EPA?

29. Contacts • Peter Glaser • Peter.Glaser@troutmansanders.com • (202) 274-2998 • Dan Larcamp • Daniel.Larcamp@troutmansanders.com • (202) 274-2841