Presented By Dan Larcamp Peter Glaser Chris Jones Troutman Sanders LLP 401 9 th Street, NW

EPA Power Sector Rules and Electric Grid Reliability: A Primer for PUC CommissionersTroutman Sanders LLP WebinarFebruary 1, 2012 Presented By Dan Larcamp Peter GlaserChris Jones Troutman Sanders LLP 401 9th Street, NW Suite 1000 Washington, DC 20004 202.274.2950 www.troutmansanders.com

Topics • Status of EPA Power Sector Rules. • UMACT: What’s in the rule and supporting materials on compliance time period and grid reliability. • FERC/State PUC Issues

EPA Power Sector Rules • Cross-State Air Pollution Rule (CSAPR) – issued but stayed • Mercury and Air Toxics Standards (MATS, aka UMACT) – issued but not yet in Federal Register • Coal Combustion Residuals (aka Coal Ash) – proposed • 316(b) water intake rule – proposed • Greenhouse Gas New Source Performance Standards for new and modified units– proposal expected in February • Greenhouse Gas permitting rules – on appeal

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. • Important related problem in that a large number of units will have to be temporarily pulled out of service in order to install controls.

EPA View “The EPA believes that all affected sources will be able to comply with the MATS within the 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.”

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.

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.

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.

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. • “EPA reserves the right to act at variance with these policies and to change them at any time without public notice.”

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. • Request an AO from OECA at least 180 days before the end of the four-year compliance period. • Simultaneously notify the Planning Authority, relevant state public utility commission, and relevant environmental permitting agency.

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.

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.

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 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.”

FERC Staff Whitepaper on Advice to EPA • 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 accepting comments on proposed process (Docket No. AD12-1)

Implications for Reliability Regulation • FERC, DOE, and state commissions have traditionally held the regulatory cards on reliability. • FPA Sections 201, 202, 215, 307 • State authority over resource adequacy and IRP (Order 888 - “This Final Rule will not affect… administration of integrated resource planning”) • Under UMACT, EPA has sole discretion to determine whether a unit is “reliability critical” but EPA will seek input from various entities. • Shift of authority?

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

FERC/NERC/RTOs/Planning Authorities • EPA OECA policy appears to have grown out of RTO/ISO proposal, but did not incorporate much of the detail. • Will FERC and RTOs/ISOs develop further procedures to manage retirements and retrofits to ensure grid reliability? • Who will take the lead in non-RTO regions?

What Role Will State PUCs Play? • 7 state PUCs submitted petitions to FERC to establish “joint boards” to study grid reliability impacts of EPA rules. FERC denied the petition. • FERC and NARUC agree to “forums” to discuss the effect of the EPA rules on grid reliability beginning 2/8/12. • Intersection with Integrated Resource Planning. • Impact on retail rates.

Questions • What will FERC do as a Commission – FERC has issued no public orders. • FERC/NARUC collaborative • What has FERC committed to do? • What have the states committed to do? • Where do we go from here? • Will the “process” per the President’s memo promote predictability and certainty? • How will EPA engage and coordinate with relevant entities? • Who are the other stakeholders and how will they participate? • Will RTOs change retirement notification procedures to require more advance notice? • How will information provided to EPA and others be protected? • Are there concerns about protecting retirement information from being used for market manipulation purposes?

Contacts • Peter Glaser • Peter.Glaser@troutmansanders.com • (202) 274-2998 • Dan Larcamp • Daniel.Larcamp@troutmansanders.com • (202) 274-2841 • Chris Jones • Chris.Jones@troutmansanders.com • (202) 662-2181

Presented By Dan Larcamp Peter Glaser Chris Jones Troutman Sanders LLP 401 9 th Street, NW