2011

June 6, 2011 RECS 2011 Birmingham, AL

Regulatory Developments for Coal Plants and CCS

Fred Eames, Washington, D.C.

Privileged and Confidential Attorney-Client Communication

Hunton & Williams LLP

Founded in 1901, Hunton & Williams has from its founding had a major focus on energy issues 900 attorneys in 19 offices have served clients in over 100 countries around the world Offices
Atlanta, Austin, Bangkok, Beijing, Brussels, Charlotte, Dallas, Houston, London, Los Angeles, McLean, Miami, New York, Norfolk, Raleigh, Richmond, San Francisco, Singapore, Washington

Ranked among the top 30 largest US law firms, The National Law Journal 250 Survey Firm voted Best Law Firm for U.S. emissions markets, Environmental Finance and Carbon Finance

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Hunton & Williams CCS Practice

Founded and represent CCS Alliance (www.ccsalliance.net)
Focus: Identify problems and address solutions for CCS risk management and liability issues

Authored and co-authored CCS legal issues chapter of 2008, 2009, 2010 National Coal Council report to Secretary of Energy Drafted federal and State CCS risk management legislation Lobbied for federal incentives for CCS projects Advocacy on EPA s UIC rule for geologic sequestration of CO2 Guided permitting application for experimental CO2 wells Permitting and rate approval for CCS-ready power plants Pipeline permitting, including CO2 pipeline projects
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Electric Generation Assets are Highly Regulated

Economic Regulation Environmental Regulation

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Economic Regulation
Traditional model: cost-plus rate regulation
Capital cost of generation assets is recovered through customer rates, set by the State Prominent in Southeastern, Mountain West States

Competitive model: market rates

States allow the market to set rates Prominent in East and West Coast States

Significance: Can I get my investment back if I install CCS, other technologies to clean up existing plants or build new clean plants?
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Environmental Regulation
Air emissions Water use and emissions Waste disposal Endangered species, historic preservation, sensitive land preservation and now . . . Climate change

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Air Emissions
Clean Air Act Three categories of regulatory programs
Reviewing new and existing air pollution sources to ensure maintenance of ambient air quality standards Pre-construction review of new pollution sources to ensure continued attainment of air quality standards and application of control technology requirements Programs to address specific pollution problems (acid rain, HAPs, visibility, etc.)

Consider: do any of these work for climate change?

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Major Pending Air Regulatory Efforts

Utility MACT Rule
Plant-specific mercury controls for coal-fired plants at levels attainable by applying Maximum Achievable Control Technology Replaces Clean Air Mercury Rule, which would have established a cap and trade system for mercury, reducing emissions by 70 percent Shaping up for significant legal challenge: industry letter in May noted critical and widespread errors (Ex: EPA off by 1,000 in converting lbs/MWh to lbs/GWh Final rule to be issued by November 16, 2011
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Major Pending Air Regulatory Efforts

Ozone NAAQS Rule
Bush Administration set 8-hour ozone standard at 75 ppb Administration was sued because EPA s scientific advisory committee had recommended 60-70 ppb September 2009 Obama Administration EPA said it would reconsider the standards EPA issued a proposed rule in January 2010 EPA has delayed issuance of a final rule three times; now planning to issue final rule by July 29, 2011

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Major Pending Air Regulatory Efforts

Clean Air Transport Rule
Bush Administration had proposed CAIR (Clean Air Interstate Rule) to address NOx and SO2 so that upwind States would not contribute to pollution in downwind States CAIR set up cap and trade for these pollutants in the Eastern U.S. but was overturned by the courts in 2008 Two-phase proposal; final rules to go active in 2011 and 2012

Boiler MACT Rule

Recently finalized, controls HAPs from industrial boilers Cured version of an invalidated 2004 rule
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Waste Disposal
Resource Conservation and Recovery Act Major pending rule: Coal Ash rule
Congress asked EPA to determine whether coal ash should be regulated as hazardous waste; EPA determined (twice) that it should not RCRA regulates hazardous wastes much more tightly than solid wastes In December, 2008 TVA s Kingston, TN ash impoundment burst, releasing 1.7 million cubic yards of ash EPA has proposed two options for regulating ash: hazardous waste regulation, or more stringent solid waste regulation
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Water Use and Emissions

Clean Water Act Major pending regulation: 316(b) rule
Power plants that generate electricity through heat need substantial amounts of cooling water Proposed 316(b) rule would apply national standards for cooling water intakes to reduce fish impingements at existing plants (EPA estimates 670 power plants affected) New units at existing plants would need closed-cycle cooling Existing units may require anything from fine-mesh intake screens to fish behavioral deterrents to seasonal shutdowns or seasonal intake flow reductions
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Climate Change
Clean Air Act New Source Performance Standards
EPA entered a consent decree in December 2010 to establish NSPS for electric generating units and oil refineries Proposed rule by July 26, 2011; final rule by May 26, 2012

What will the standards be? Would EPA require CCS? Unit efficiency improvements? PSD Tailoring Rule Starting July 1, applies to:
New projects emitting 100,000 tpy Exiting facilities increasing emissions by 75,000 tpy
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Timeline for Environmental Regulation

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CCS Policy Issues

Five major issues to overcome for CCS:
Cost Regulatory structure Liability/risk management Property rights Public acceptance

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Congress: Focused on Research, Funding

EPACT 2005
Authorized $90 million over 3 years for CCS research/activities

EISA 2007
Authorized $1.2 billion (2008-12 for field testing 7 large (greater than 1 megaton/year) CCS projects Authorize $1 billion for projects demonstrating a variety of CCS technologies (purification, injection, transport, compression, measurement, monitoring, etc.) from 2009-13 DOI must produce framework for CCS on public lands DOI/USGS national assessment of CO2 sequestration capacity Authorized EPA research of public health, safety, environmental impacts of CCS in geologic reservoirs Subjects all CCS activities authorized in the bill to SDWA requirements
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Congressional Enactments, Part 2

2008 Stimulus Package 2009 Stimulus Package
$3.4 billion for clean coal, including $1 billion for fossil R&D $800 million for CCPI Round III $1.52 billion for industrial scale CCS and energy efficiency projects $50 million for site characterization of geologic formations Advanced Energy Investment Tax Credit 30% credit for manufacture of clean energy (including CCS) equipment 10% tax credit for sequestering CO2 for EOR 20% tax credit for sequestering CO2 for permanent storage

Federal budgets are tightening: the funding will be significantly reduced

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CCS Regulatory Structure

Main environmental concerns air emissions (covered above); drinking water (USDWs) Safe Drinking Water Act prevent endangerment of USDWs
EPA issued final rule regulating geologic sequestration facilities in December 2010 Established requirements for site characterization, corrective action, operation, monitoring, financial assurance, post-injection site care, and site closure

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Pending Regulatory Structure Issues Applicability of waste disposal and waste cleanup laws (RCRA and CERCLA)
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Risk Management
If you were making the decision for a company (utility, investor, banker, insurer, other), would you risk capital on CCS? Private market risk management (i.e., insurance, surety, etc.) is available in limited amounts; may grow over time Should the government share the risk, especially if geologic sequestration is mandated? Two competing models for private-public risk sharing:
Trust fund covering post-closure liabilities Limited, layered risk management structure covering risk in all phases, including operation (when most needed)
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Which Risks Matter? Probability vs. Impact

Courtesy of Andy Paterson for the CCS Alliance
Lower Likelihood Higher Impact High Likelihood High Impact

Risks likely need to be shared between public and private sectors

Accidents
(Plant fires, or spikes in feedstock costs or a gas price slump with loss of competitiveness)

Show-Stoppers
(e.g., high capital costs with CCS, or lack of clarity about carbon regs)

Low Likelihood Low Impact

Impact if Event Occurs

Probability of Event

Higher Likelihood Lower Impact

Marketing and Operations

(Workforce issues, coal transport, transmission congestion, etc.) Privileged and Confidential Attorney-Client Communication

Externalities (e.g., pollution)

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Property Rights
Historically a State law issue, but carbon controls are the type of federal government intervention that typically justifies federal exercise of eminent domain authority. See, e.g.,
Natural gas pipelines Electric transmission lines in designated corridors

At least two CCS-related property issues could justify a grant of federal eminent domain authority
CCS pipelines Acquisition of pore space

Congress should make it possible to acquire needed property, at least where States can t or won t act Query from a utility: How do I get permission for sequestration from 40,000 landowners? Privileged and Confidential
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Politics
Federal cap and trade legislation as a driver for CCS is out of gas (at least for now) Massachusetts v. EPA gives EPA discretion to regulate; it takes a willing Administration to exercise the discretion, and the Obama Administration is doing so, with limits (PSD Tailoring Rule, NSPS) Once started down the road, it s difficult to go back Individual States may impose requirements

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