Impending GHG Emission Reduction Requirements EUCI June 17, 2010

1. Impending GHG Emission Reduction RequirementsEUCIJune 17, 2010 PRESENTED BY Peter Glaser Troutman Sanders LLP 401 9th Street, NW Suite 1000 Washington, DC 20004 202.274.2950 www.troutmansanders.com

2. Potential GHG Regulation Congress or EPA or Both?

3. Kerry-Lieberman • Targets and timetables same as Waxman-Markey • 4.75% below 2005 levels by 2013 • 17% below 2005 levels by 2020 • 42% below 2005 levels by 2030 • 83% below 2005 levels by 2050 • Electric power and refinery sectors covered at start (2013, versus 2012 for W-M); transportation sector through fee set at allowance price; manufacturing in 2016.

4. K-L Electric Sector Allowances • 2013: 2.408 billion allowances (compared to sector’s allocation of 2.004 billion in 2012 in W-M) • 2013 through 2015: 51% percent of the allowances created for these years (compared to W-M’s allocation of 43.75% for 2012-13 and 38.89% for 2014-15) • EPA projects allowance prices of $16-$17/mton in 2013 and $23-24 in 2020 (2005 dollars)

5. K-L Electric Sector Allowance Distribution • LDC allocations based on a 75% emissions/25% sales formula (as compared to 50/50 in W-M) • Merchant coal generation: 10% of electric sector allowances (same as W-M) • Long-term contract generation: 4.3% of electric sector allowances (same as W-M)

6. K-L Price Collar • Allowances sold at ceiling price of $25/ton of CO2 in 2013, escalating at 5%/year plus inflation (W-M: $28 start) • Floor price established by sale of allowances from regular auction starting at $12/ton of CO2 in 2013 escalating at 3% a year plus inflation • Cost containment reserve of 4 billion allowances (compared to W-M’s 2.5 billion)

7. K-L Preemption • Bill preempts (or at least seems intended to preempt) CAA regulation except for performance standards for coal-fired EGUs permitted after 2008 • Plus EPA retains the authority to establish GHG performance standards for the existing fleet (!) • Preempts state cap-and-trade programs,but not other state regulation (such as California’s AB 32- Global Warming Solutions Act) • No preemption of ESA, tort lawsuits, NEPA, or CWA regulation

8. K-L Technology Incentives • Incentives for nuclear power • Incentives for CCS development (similar to Rockefeller-Voinovich CCS bill) • Provisions for expanded off-shore drilling and permitting

9. K-L Offsets • Use of up to 2 billion tons/year of offsets allowed • Both domestic and international offsets can be used for compliance on a 1:1 basis through 2017 • Starting in 2018, 1.25 international offset credits will be needed to constitute an emission allowance. • Of the 2 billion tons/year, 1.5 billion tons of offsets must come from domestic sources and 0.5 billion tons from international sources • EPA can allow up to 1 billion tons from international sources if it projects that less than 1.5 billion tons will be available from domestic sources at allowance price levels. • According to EPA, domestic offsets account for 19% of total GHG abatement, and international offsets account for 18-29% of total GHG abatement

10. K-L Phase-Down of Coal Generation • Incentive allowances to encourage retirement of up to 35 GW of merchant coal generation • Coal-Fueled Fleet Transition Program: coal units that agree to retire eligible for tax benefits, exemption from regulation → Neither provision fully developed

11. Prospects • Stand-alone bill seems a long-shot • Attach to energy bill? To BP bill? • Energy only bill? Utility only bill? • One from column A and one from column B? • House has already enacted W-M, so if something passes Senate, it can be conferenced with W-M in lame duck session

12. Endangerment Finding Litigation Auto Rule Johnson Memorandum Reconsideration Tailoring Rule GHG BACT Guidance NSPS EPA GHG Regulation

13. Endangerment Finding Litigation • Finding issued December 7, 2009 • Court challenges from Texas, Alabama, Virginia and numerous industry groups • 17 states on each side • Don’t expect decision in litigation until 2012

14. Auto GHG Rule • Published in Fed. Reg. May 7, 2010 • DOT MPG - EPA gCO2/mi. standard • According to EPA, makes six GHGs “regulated air pollutants” under the PSD and Title V programs • Will subject most of industrial capacity in U.S. to GHG regulation under these programs, yet EPA refuses to do an economic study • Lawsuits 60 days after publication in Fed. Reg. Some already filed

15. Johnson Memo Reconsideration • Reconsideration issued 3/2/10 • GHGs will be deemed to be regulated beginning 1/2/11 when auto rule “takes effect” • Will apply to any PSD permit then in process • Phase in per tailoring rule • Numerous lawsuits filed, including by enviro organization that will continue argument that GHGs already regulated

16. Tailoring Rule • Published in Fed. Reg. 6/3/10 • Phase in of PSD and Title V: - 1/2/11: Sources subject to PSD “anyway” will be required to do GHG BACT if increase emissions by 75,000 tons per year - 7/1/11: New sources above 100,000 tpy and existing sources that increase emissions by 75,000 subject to PSD - EPA will do future rulemaking and future study to determine whether lower emitting sources will be regulated and how, but commits that no source below 50,000 tpy will be regulated for six years • Statutory thresholds are 100/250 tpy, so questionable legal validity…but will anyone challenge?

17. EPA GHG BACT Guidance • Technical guidance will begin rolling out later this summer • Policy guidance by end of year • Stakeholder input, but no commitment to formal notice and comment

18. NSPS • EPA has agreed to promulgate NSPS for coal EGUs that will include GHG standards • Commence rulemaking probably next year • Will apply to new and modified sources and could also apply eventually to existing-unmodified sources

19. Will Congress Preempt EPA GHG Regulation? • Murkowski Resolution to disapprove Endangerment Finding and cut off EPA GHG regulation defeated last Thursday 53-47 • Rockefeller bill to delay regulation for 2 years • Casey-Carper to …?