Future Outlookfor the
Power Sector
David Owens Executive Vice President
Changing Electric Utility Landscape
Utility industry has embarked on a major investment cycle, driven by the need to address: Generation, Transmission, and Distribution to ensure reliability Energy Efficiency and deploying new technologies (SG,
renewables) Significant Environmental CAPEX
Increasing concerns about the Environment has Changed our Power Supply Mix Short –term: Rely on Energy Efficiency, Renewables, and Natural
Gas Medium-term: Targets should be harmonized with the
development and commercial deployment of advanced technologies and measures (e.g., Nuclear Energy, Advanced Coal Technologies with Carbon Capture and Storage, Plug-in Electric Vehicles, and Smart Grid)
We are no longer a declining cost industry
Changing Electric Utility Landscape (2)
An Increasing Amount of Rate Cases to Pay for Investments
Our Workforce is Aging and our Children are Less Educated
The Utility Role for Driving New Technology has become increasingly complicated Current combination of low economic growth, flat
electricity demand growth, deficit concerns and sustained high unemployment is slowing down the deployment of smart technologies including Smart Grid
New Congress with vastly different priorities
Electricity Game Changers
Public Policy Public Policy EnvironmentalEnvironmental
Energy Source Energy Source Shale GasShale Gas
TechnologyTechnologySmart Grid Smart Grid
Japan Nuclear Disaster?
Divergent Forces
Markets/
Technology
Public
Sales/Economic
Recovery
Environmental
Regulations
Congress/States/
FERC
Overview of the Federal Political Landscape
August 10, 2011Brian Wolff
Senior Vice President
2012 Election
2012 election features both the Presidential race and races for control of the Senate
Current Senate ratio: 51 Democrats, 47 Republicans, and 2 Independents who usually vote with Democrats
2012 Election
Democrats must defend 23 seats 15 are solid, likely , or lean Democrat; 8 are toss-ups or
likely Republican
Republicans must defend 10 seats 8 are solid or likely Republican; 2 are toss-ups
Key issues remain the economy and jobs
Political Environment
Jockeying for 2012 election = partisan gridlock in Congress
Public response to Congress:
6% of likely voters rate Congress’ job performance as good or excellent
61% of likely voters think Congress is doing a poor job
(7/26/11 Rasmussen poll )
Political Environment
Public response to President Obama:
23% strongly approve of President Obama’s performance
42% strongly disapprove
Overall, 44% at least somewhat approve and 55% at least somewhat disapprove
(8/1/11 Rasmussen poll)
Debt Ceiling Package
House passed debt ceiling bill by 269-161 vote on August 1; Senate passed bill by 74-26 vote on August 2
Raises debt limit by $400 billion initially; establishes procedures for additional increases (limit eventually raised by at least $2.1 trillion)
Establishes caps on discretionary spending through 2021
Requires House and Senate to vote on balanced budget amendment by end of year
Debt Ceiling Package (cont’d)
Creates a congressional joint committee to propose additional budget savings of at least $1.5 trillion over 10 years
Establishes automatic procedures for reducing spending by as much as $1.2 trillion if legislation by joint committee does not achieve sufficient savings by January 15, 2012
Energy Legislation Outlook
Focus on deficit reduction and increased partisanship makes it unlikely this Congress will consider major energy legislation
House passed several controversial environmental provisions to limit EPA authority – but they won’t get 60 votes in Senate
Senate Energy Committee approved several bills on efficiency, EVs, clean energy development, oil and gas development – unclear whether full Senate will consider
Cyber Security Legislation Outlook
Bipartisan support for cyber security legislation – despite gridlocked Congress
President Obama’s proposal in May provided additional guidance and push for Congress to act
Challenges include navigating 14 committees in House and Senate with jurisdiction
House Speaker John Boehner appointed GOP task force to develop a framework for comprehensive, multi-sector bill
Senate Majority Leader Harry Reid will use a draft bill with language from Commerce and Homeland Security Committees as base for new bill - and use President’s proposal to arbitrate differences among other committees involved
Cyber Security Legislation Outlook
If Congress cannot produce a comprehensive bill, a sector-by-sector approach may be taken Most likely to move would be utility-only bill focused on
electric grid security EEI supports a comprehensive approach due to the
interdependent nature of critical infrastructure
Strong cyber security legislation should: Limit scope of any new federal emergency to imminent
threats against truly critical assets Ensure emergency orders come from only one government
entity Include all critical infrastructure sectors in a cyber security
regime Encourage more information-sharing between gov’t and
industry
Generation Update
August 10, 2011Richard McMahon
Vice President, Energy Supply and Finance
Capital Expenditures
August 10, 2011Aaron Trent
Manager, Financial Analysis
Industry Capital Expenditures
p = projected
($ Billions)
Source: SNL Financial, company reports and EEI Finance Department
Investment by Category
Industry committed to reliability, making needed investments in generation, transmission, smart grid/distribution and environmental controls
Prospective EPA rules could increase total capex by 30% annually
2010 Capital Expenditures
41%
6%14%
24%
11%4%
Generation Environment TransmissionDistribution Gas-Related Other
By 2030, the electric utility industry will need to makeinfrastructure investments of $1,830 Billion
This level of investment is nearly triple the US Shareholder –OwnedElectric Utilities’ current net plant value of roughly $650 billion (3/3 1/11 =$748 B)
951
298
582
0
500
1,000
1,500
2,000
2009 Projected
Distribution
Transmission
Generation
$654B
$1,830B
Source: Transforming America’s Power Industry, The Brattle Group, November 2008
Capex - Looking Out 20 Years
Rate Case Volume Remains High
* 2011 includes activity through June 30, 2011.
Awarded ROEs Remain Low
0%
20%
40%
60%
80%
100%
1970 1980 1990 2000 2010
US Electric IOUs Rating History
1970 – 2010
S&P Credit Ratings Distribution, U.S. Shareholder-Owned Electric Utilities
AAA AA+, AA, AA-
A+, A, A- BBB+, BBB BB+, BB, BB-, B+, B, B-, CCC+
BBB-
4%
22%
46%
27%
1%
Source: Standard & Poor’s, Macquarie Capital
Changing M&A Trends
Prior mega mergers focused on increasing scale and scope of competitive generation operations, with a multi-regional focus
Recent merger announcements: Focus on creating a larger regional footprint for regulated utility
operations Upsize the balance sheet to aid with future environmental compliance,
allow for larger capex projects such as nuclear, transmission, etc.
Local economy and Jobs impact remain as key factors
Complementary generation fleets, renewable mandates
Ratings agency reactions will be watched closely
M&A Themes in 2010-11
Feb. 11 – FE-AYE: Improve generation mix, operating performance, transmission growth, financial strength
Apr. 28 – PPL-E.ON U.S.: Increase regulated focus March ’11 – announces purchase of E.ON AG’s U.K. Power Grid
Oct. 18 – NU-NST: Leverage NSTAR’s financial strength into Northeast Utilities’ transmission growth ops
Jan. 10, 2011 – DUK/PGN – greater financial strength for environmental capex, need greater efficiency
Apr. 28, 2011 – EXC/CEG – combine generation and customer-facing businesses; improve generation mix and financial strength
Tax Reform and Electric Utilities
Potential Trade-off – Lower corporate rate with less industry specific tax incentives.
Accelerated Depreciation
Dividend Tax Rates
Expire at end of 2012
Maintaining parity with Capital Gains remains key
FERC Update
James Fama Vice President, Energy Delivery
Overview of Presentation
Transmission Transmission Incentives and Investment Transmission Planning & Cost Allocation
Order
Reliability
Transmission Incentives and Investment
Current Policy Implementing Section 219 of the FPA
Articulated in 2006 in Order No. 679
Companies can seek incentives for projects that improve reliability or reduce congestion
FERC evaluates incentive requests on a case-by-case basis and determines whether resulting rates are J & R
Companies must show that:
Project improves reliability or reduces congestions
That there is a nexus between incentives sought and risks and challenges of the project
EEI Response
Transmission is hard to build and provides societal benefits
Incentive policy has resulted in transmission development which in turn ensures reliability, reduces congestion, facilitates renewable and other generation
Incentives or sufficient ROE are necessary to obtain capital necessary for development
Notice of Inquiry
Promoting Transmission Investment Through Pricing Reform NOI issued May 19, 2011
Comments due August 25, 2011 NOI states that FERC has received over 75
applications for incentives for investment in over $50 billion in proposed transmission infrastructure
Purpose of NOI to seek comment on what steps the FERC could take to ensure that incentives encourage development of transmission policy consistent with statutory obligations
Transmission Investment on the Rise
Actual and Planned Transmission InvestmentBy Shareholder-Owned Utilities (2004-2013)
Transmission Projects: At A Glance
Represents $61.2 Billion (nominal dollars) in transmission investment: 2010 - 2021
Highlights 26 EEI Member Companies and over 100 projects
$39.5 Billion in Transmission Supporting the Integration of Renewable Resources
$41.1 Billion in Interstate Transmission
Transmission Planning & Cost Allocation
Final Rule – Order 1000
Issued July 21, 2011
Addresses – Transmission Planning
o Public Policy Considerationo Regional o Inter-regionalo Right of First Refusal Provisions (“ROFR”)o Reliability
Cost Allocation
Highlights
Applies to all regions
Requires regional planning and inter-regional coordination
No requirement for interregional transmission plan
Establishes broad criteria. Allows regions the flexibility to meet the criteria through regionally developed plans
Allows non-incumbents to submit proposals and receive cost recovery on same basis as incumbents if project selected through regional planning process
Highlights – Transmission Planning
Emphasis on regional planning and identifying least cost solutions
Require consideration of public policy goals reflected in state or federal law
Federal ROFR provisions must be removed from tariffs for facilities selected in a regional plan for cost allocation purposes
Protections to assure: Needs met Delays avoided Reliability protected
Highlights – Transmission Planning cont.
Incumbent public utilities retain ROFR for: Local upgrades for which regional cost allocation not
sought Upgrades to existing assets Projects on existing right of way
Requires adoption of “backstop” mechanism to ensure that delays in development of transmission facilities will not prevent incumbents from complying with reliability needs and service obligations.
Not impact state authority (e.g. siting, construction)
Highlights - Cost Allocation
Regional and inter-regional cost allocation method must meet six principles Costs allocated “roughly commensurate” with benefits No involuntary cost allocation to non-beneficiaries If benefit-cost ratio is used, must not be so high to exclude
facilities with significant net benefits Costs allocated solely within region or regions unless those
outside voluntarily assume costs Method and data requirements must be transparent Different method may be chosen for different types of
facilities ( e.g., reliability, congestion relief, public policy)
EEI Thoughts
Support flexibility and emphasis on allowing regions to develop their own plans
Support retention of the ROFR
Avoid making planning process longer
Still evaluating reliability impacts
Reliability
Highlights: NERC and Section 215 implementation
NERC continues to reflect strong industry commitment to bulk power system reliability
Changes in mandatory standards are a significant cost driver
Managing compliance is focus of senior management
Challenging issues ahead Balancing reliability risks and costs to address those risks
Critical Infrastructure Protection standards and implementation
Building effective government-industry relationships
Redesigning compliance and enforcement
Smart Grid and Technology Update
David Owens Executive Vice President
Smart Grid
Why Do We Need A Smarter Grid?
(Grid Modernization)
Smart Grid Implementation Challenges There is tremendous and growing
pushback from customers and regulators to the smart meter. It focuses on Accuracy of meters Health concerns: Radio Frequency Exposure Who decides whether a meter should be installed? Cost of installation Access to information: privacy intrusion Impact “at risk” customers Dynamic pricing Customers are not seeing immediate benefits
Smart Grid Implementation Challenges (Cont’d)
We need to get ahead of the resistance to shape and change the discussion
Collaboration and customer engagement initiatives are crucial Critical Consumer Issue Forum EEI /CenterPoint Member Workshop, “Transforming the
Utility Customer Relationship: The New Paradigm” Smart Grid Communications Campaign Advisory
Committee
Smart Grid Interoperability Standards
Background
Per EISA, Congress and the Administration stress urgent need for interoperability protocols and standards to ensure smart grid functionality and interoperability in interstate transmission and wholesale electricity markets
EISA defined responsibilities for two Federal Agencies:
NIST was directed to coordinate development of communication protocols and standards to achieve an interoperable smart grid; and
FERC was charged with instituting a rulemaking to adopt the standards necessary to ensure smart grid functionality and interoperability once it determined “sufficient consensus” had been achieved in the standards identification and development process
Current Activity
October 2010, NIST identified five families of standards that help to enable efficient and secure exchanges of information within and across smart grid domains.
Commission found on July 19, 2011 that there was insufficient consensus on the five standards and declined to open a rulemaking.
Smart Grid Interoperability Panel (SPIG) will continue to identify gaps and make recommendations to Standards Development Organizations to ensure any standards utilized to implement the Smart Grid are interoperable. Regardless of whether the standard impacts the transmission, distribution, consumer or other domains
EEI’s Involvement
Participate in SPIG process to ensure that standards that impact the development and implementation of the Smart Grid are workable.
Educate consumers and regulators (both federal and state) on the benefits of implementing Grid modernization technologies and the economic feasibility of enabling Smart Grid applications.
Investigate, evaluate and implement Grid modernization technologies to ensure the reliability of the Grid that maintains customer satisfaction levels and enables them to be more energy efficiency and to better utilize alternative energy solutions.
Update on EPA Regulation and
Implications for the Utility Industry
Quinlan Shea Vice President, Environment
and
Daniel ChartierDirector, Environmental Markets and Air Quality
Programs
Outline
I. Overview
II. EPA rules – status and next steps Utility HAPs MACT NAAQS Cross-State Air Pollution Rule 316(b) Coal ash GHGs
III.Implications
Overview
*Includes generation by agricultural waste, landfill gas recovery, municipal solid waste, wood, geothermal, non-wood waste, wind, and solar.
** Includes generation by tires, batteries, chemicals, hydrogen, pitch, purchased steam, sulfur, and miscellaneous technologies.
Sum of components may not add to 100% due to independent rounding.
Source: U.S. Department of Energy, Energy Information Administration, Power Plant Operations Report (EIA-923); 2009 preliminary generation data.
May 2010
© 2010 by the Edison Electric Institute. All rights reserved.
Different Regions of the Country Use Different Fuel Mixes to Generate
Electricity
58
Coal Units by Age, Capacity and Emissions
U.S. Generating Units, 10 Year Increments
Age of Units*
Generating Units
Total Nameplate Capacity
Total Net Generation Year 2008
Total CO2 Emissions Year 2008
Total SO2 EmissionsYear 2008
Total NOX
Emissions Year 2008
#Percent of Total
GWPercent of Total
GWHPercen
t of Total
MTonsPercen
t of Total
TonsPercent of Total
TonsPercent of Total
0-10 Years 16 1.4% 5.3 1.6% 19,788 1.1% 28.7 1.4% 18,083 0.2% 13,779 0.5%
11-20 Years 64 5.8% 14.9 4.5% 78,261 4.2% 78.1 3.8%137,80
31.9%
108,115
3.8%
21-30 Years 186 16.7% 86.1 26.1%541,40
829.0% 615.0 29.6%
1,336,033
18.0%763,20
726.9%
31-40 Years 238 21.4% 122.5 37.1%724,20
638.8% 780.7 37.6%
2,750,025
37.1%1,053,2
5937.1%
41-50 Years 270 24.3% 60.8 18.4%316,02
916.9% 352.2 16.9%
1,879,152
25.4%533,03
818.8%
51-60 Years 304 27.3% 39.3 11.9%187,47
310.0% 220.7 10.6%
1,265,388
17.1%356,90
212.6%
61-70 Years 30 2.7% 0.9 0.3% 1,166 0.1% 2.5 0.1% 19,223 0.3% 6,554 0.2%
> 70 Years 4 0.4% 0.0 0.01% 50.0003
%0.1
0.004%
87 0.001% 484 0.02%
Coal Unit Totals 1,112 100.0% 329.95 100.0%
1,868,336
100.0% 2077.9100.0
%7,405,7
94100.0%
2,835,339
100.0%
Source: Ventyx, Inc.—EV Suite MTon = million tons * Does not include units that came online in 2009
Power Plants Reduce Emissions Despite Increasing Electricity Demand
Power Sector Objectives
Minimize economic impacts to consumers
Continue environmental improvements
Maintain system reliability
Maintain fuel diversity options
Develop and deploy new technologies
Obtain access to capital and cost recovery
Negotiate myriad political landscapes
Update on EPA Regulations
Possible Timeline for Environmental Regulatory Requirements for the Utility Industry
Ozone (O3)
PM/PM2.5
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17
Begin CAIR Phase I
Seasonal NOx Cap
HAPs MACT Proposed
Rule
Revised Ozone NAAQS
Begin CAIR Phase I Annual
SO2 Cap
-- Adapted from Wegman (EPA 2003) Updated 05-31-2011
Proposed PM-2.5 NAAQS
Revision
PM Transport
Rule
SO2 Primary NAAQS
SOX/NOxSecondary
NAAQS
NO2
Primary NAAQS
SOx/NOx
CAMR & Delisting
Rule vacated
Hg/HAPS
Transport Rule Proposal Issued (CAIR Replacement)
HAPs MACT Final Rule Expected
CAIR Vacated
HAPS MACT Compliance 3 yrs After Final Rule
CAIR Remanded
CAIR/Transport
Begin CAIR Phase I
Annual NOx Cap
316(b) Proposed
Rule
316(b) Final Rule
Expected316(b) Compliance1-8 yrs After Final rule
Effluent Guidelines
Proposed RuleExpected
Water
Effluent GuidelinesFinal Rule Expected
Effluent GuidelinesCompliance 0-5+ yrs
After Final Rule
Begin Compliance Requirements
Under Final CCB Rule (ground
water monitoring, double liners,
closure, dry ash conversion)
Ash
Proposed Rule for CCBs
Management
Final Rule for CCBs
Mgmt
Final Transport Rule Expected
(CAIR Replacement)
CO2
CO2 Regulation
(PSD/BACT)
Ozone NAAQS
Revision
Transport Rule Phase I
Reductions
Transport Rule Phase II
Reductions
Ozone Transport
Rule
GHG NSPS Proposal
GHG NSPS Final
Expected Final PM-2.5
NAAQS Revision
Utility MACT Proposal
Proposed rule published in Federal Register May 3, 2011; comments due August 4
Final rule published by November 16, 2011 (required by consent decree)
Rule will require most coal plants to upgrade existing controls and/or install additional controls: Acid gases: wet or dry scrubbers; DSI (trona, etc.) Mercury: activated carbon injection (ACI) Non-mercury metals: fabric filters (baghouses)
As a result, some plants will close or re-power
Affected Facilities
Approximately 1,350 EGUs at 525 facilities
Approximately 1,200 coal-fired boilers at approximately 450 facilities Coal-fired EGUs include units that burn coal, coal refuse, or a synthetic gas
derived from coal either exclusively, in any combination together, or in any combination with other supplemental fuels (e.g., petroleum coke, tire-derived fuels)
Bituminous coal ~ 50% of coal generation Subbituminous ~45% of coal generation Lignite ~ 5% of coal generation
Approximately 150 oil-based boilers at approximately 75 facilities Approximately 1% of nationwide net generation
EPA expects most facilities would install technologies to comply
Utility MACT Proposal
Normal MACT timing: 3 years after final rule effective date (~January 2015)
EPA Administrator (or approved State Program) can grant 1-year extension if more time “necessary for the installation of controls” Extensions granted on case-by-case basis
Presidential exemption: not more than 2 years if:1) technology to implement standard is not available
and
2) in national security interests to do soo Additional 1-year extensions available
EEI Utility MACT Comments: Key Messages
EEI commends EPA for incorporating some flexibility in the proposal—such as the use of surrogates, work practice standards and emissions averaging—to help companies meet the proposed standards.
There are a number of areas where the proposed standards (including many of the compliance, testing and monitoring requirements) are unduly restrictive or inconsistent with § 112 of the CAA, or could benefit from additional flexibility afforded to EPA under the CAA.
Our overarching concern is the limited timeframe for implementation of, and compliance with, the proposed rule.
EEI Unity MACT Comments: Substantive Concerns
EPA should establish a single, category-wide filterable particulate matter (PM) emissions standard and designate filterable PM—not total PM—as a surrogate for the non-mercury metals standard.
Dry sorbent injection (DSI) will be a useful and cost-effective control tool for many units, but it is not a viable option for all coal-based units for compliance with the acid gas standard.
The mercury standard must be recalculated because it was not established as the average of the best-performing 12% of existing sources, but rather was based on an unrepresentative sample group.
EEI Utility MACT Comments: Substantive Concerns (2)
EPA’s approach to basing new unit standards on a hypothetical “ideal” unit that has never operated is inconsistent with CAA § 112(d)(3).
Many of the proposed measures for demonstrating compliance impose unnecessary burdens and excessive costs in contravention of the President’s recent Executive Order No. 13563.
EEI urges EPA to allow work practice standards to apply during periods of startup and shutdown (SS), as the agency has done in the Boiler MACT rule.
EEI Comments: Substantive Concerns (3)
EEI urges EPA to allow broad emissions averaging as an alternative compliance mechanism to provide regulatory flexibility and decrease costs.
Many of EPA’s proposed compliance, testing and monitoring requirements are confusing, inflexible or costly and would yield little benefit.
EEI encourages EPA to recognize investments made for emissions reductions consistent with state HAPs regulations.
National Ambient Air Quality Standards (NAAQS)
NAAQS continually ratcheted down over time Ozone – 1997, 2008, 2011, 2014 PM 2.5 – 1997, 2006, 2012 “Transport Rule” to address 1997 and 2006 standards
New 1-hour NO2 and SO2 standards in 2010 New ozone and PM standards in 2011 and 2012,
respectively, will drive additional new Transport Rules
State Implementation Plans Interstate transport – state SIP revisions & EPA rules In-state sources
Health vs. "secondary” environment/welfare standards
Cross-State Air Pollution Rule (proposed as Transport Rule,
replaces CAIR) Final rule signed by Administrator July 6, 2011
(expected to be published in Federal Register July 21, 2011) Affects power companies in 27 eastern states Emission budgets for NOX and/or SO2 (both for most states)
Supplemental proposal (July 11) to add NOX ozone season requirements for IA, KS, MI, MO, OK, WI (OK = 28th state)
Reduction requirements must be met in 6 and 30 months (January 1, 2012 and January 1, 2014)
Provides only limited long-term certainty Requirements to be superseded by subsequent “Transport Rules”
addressing 2011 ozone standards and 2012 PM standards
Cross-State Air Pollution Rule (2)
Cross-State Air Pollution Rule (3)
Changes for individual states Final rule includes TX in annual NOX and SO2 program Three states removed in final rule: CT, DE, and MA (plus D.C.) FL and LA removed from annual NOX and SO2 program
“Air quality-assured allowance trading” Allows unlimited in-state and limited inter-state trading Limits on inter-state trading reduced Allowances from previous programs not carried over (as proposed)
Most state emissions budgets reduced, some significantly, from proposed rule
Total region-wide SO2 budgets are about 15 percent lower than proposed
Net impact of less restrictive limits on trading and lower emission budgets – most states have lower allowable emissions
Separate SO2 Control Groups
Cooling Water Intake Structures 316(b)
Proposed rule published on April 20, 2011 Comments due on July 19, 2011
EPA is required to finalize the rule by July 27, 2012
Proposed rule sets separate standards for impingement mortality and entrainment mortality Impingement standard is a national numeric standard – must
be met ASAP or in no more than 8 years (~2020); is not be achievable by EPA recommended technology
Entrainment standard delegated to state permit writers; states will set compliance deadline
Cooling Water Intake Structures (2)
Implications Every facility over 2 MGD withdrawal will likely
have to make modifications Approx 890 steam electric generating facilities
affected Fairly prescriptive rule; with aspects of site-specific
decision-making and cost-benefit analysis for entrainment but no flexibility for impingement
Closed-cycle cooling may not meet all requirements
Other water regulations
Power Plants Affected by Proposed 316(b) Rule
Coal Combustion Residuals
EPA proposed 2 options in June 2010: Subtitle C, “Special” hazardous waste listing
o Beneficial use exempt from regulation Subtitle D regulations
Final Rule expected in 2012; EPA not acting under deadline If regulated under Subtitle C, each state has to
adopt the listing in the hazardous waste regulations before effective (2+ years)
If regulated under Subtitle D, rule goes into effect within 6 months
Coal Combustion Residuals (2)
Once finalized: Have to install groundwater monitors – within 1 year for
existing disposal units; before opening for new units Have 5 years to retrofit surface impoundments with liners or
close pond in 2 years
Must comply by ~2018 if Subtitle D; ~2020 if Subtitle C
Will significantly impact operations: Expedite conversion to dry handling Force closure of older plants where too expensive to comply Facilities with ponds will have to construct wastewater
treatment facilities (which will be impacted by effluent guidelines)
EPA not required to review/revise CCR rule
GHG Regulation
Best Available Control Technology (BACT) reviews Currently in effect for some large sources; EPA issued
guidance in late 2010 Permits issued on case-by-case basis; states are generally
the permitting authority Emission limits based on technologies and efficiency
measures / actions after considering availability, feasibility, cost
Very uncertain as applied for first time to GHGs EPA guidance emphasizes options that improve energy
efficiency
Fuel switching / redefining the source?
CCS must be considered
GHG Regulation (2)
GHG new source performance standards being developed for fossil power generators, including existing sources
Proposal due in September 2011
New plant standards final by May 2012 Applicable upon proposal
Standards for existing EGU fleet also EPA guidance/procedure for states final by May 2012 States plans due to EPA 9 months later Compliance for EGUs in 2015-16?
Issues: Subcategories (size, type/class), cost, energy efficiency,
CCS, NSR, state programs, etc.
Implications
Clean Air Act & EGUs – Future
The challenge utilities face is unprecedented in terms of: The number of rules
coming due simultaneously The compressed timeframe
for compliance with the near-term rules
The fact that this is continuing – future obligations due to ongoing reviews will result in unknown future reduction obligations
Potential Impacts
Virtually every coal plant will have to be retrofit, retired or repowered Estimates of retirements vary widely Less than half that capacity replaced with new generation Impacts on reserve margins
~34 GW of coal-fired generation retirements have been announced already Take place between 2010 and 2022 Most will be 50-60 years old upon retirement Due to fuel and/or compliance costs, consent decrees,
age, etc. Some will be replaced with natural gas
Potential Impacts (2)
Will require significant amount of investment Impacts on power prices
Key factors and uncertainties: What will final rules look like Litigation Congressional activity Impact of 2012 elections Compliance on or around 2015 Will there be extensions?
What about long-term carbon policy?
Industry’s Predicament
Industry will need to comply with pending EPA regulations on air, water, and coal ash on or around 2015 Will require retrofit, retirement or replacement of substantial
portion of existing coal fleet in short period of time Could impact reliability; need to assess feasibility; regional
differences
Yet, without a long-term carbon policy, industry faces the possibility of uneconomic investments
Need both a satisfactory resolution of the current regulatory challenges and a long-term legislative solution on carbon to allow for the most efficient transition to a cleaner generation fleet
Closing Remarks
David Owens Executive Vice President
Conclusion
THEN… large THEN… large periodic projects periodic projects to support strong to support strong load growth load growth required required infrequent, but infrequent, but major, rate casesmajor, rate cases
NOW… NOW… Ongoing Ongoing investment investment well above well above depreciation depreciation and slower and slower sales growth sales growth requires requires ongoing rate ongoing rate increasesincreases
IllustrativeA Paradigm Shift
CostsCosts
Sales GrowthSales Growth
CostsCosts
Sales GrowthSales Growth
Regulatory LagCapital Investment
Cost of Capital Credit Worthiness
Realized Return
Energy Growth Per Customer
Overview of the Problem
Overview of the Solution:Electric Ratemaking
Innovative regulatory policies and mechanisms: Future test year Tracker/rider mechanisms CWIP in rate base Formula rate plans Decoupling Performance-based rate plans (rate caps, revenue caps)
Strategies to mitigate rate shock, preserve credit worthiness, incent efficient management
Call To Action
New rate regulatory approaches essential to financing needed infrastructure in today’s environment and protecting consumers
There is no standard framework, but there is a fairly standard tool kit of component policies
Rebalancing risk does not mean shifting all the risk to consumers.