A New Rule for Clean Air
Jul 13 - Electric Perspectives
The rule is "interstate" because it aims to address the problem of
long-range emission transport from sources within 28 upwind states and
Washington, DC, to downwind states, where nonattainment- that is, not meeting
the National Ambient Air Quality Standard (NAAQS) for EPA criteria pollutants-is
occurring. According to Sam Napolitano, director of the clean air markets
division at EPA, the rule's goal is to help states bring about attainment with
the new NAAQS for ozone and fine particles between 2010 and 2015. NO^sub x^ and
SO^sub 2^ contribute to fine particulate matter and ozone pollution.
CAIR uses a phased approach that sets emission cap levels for SO^sub 2^ at
3.9 million tons of allowable emissions in 2010. By 2015, that would drop to 2.7
million tons. For NO^sub x^, the cap would be 1.6 million tons in 2010, dropping
to 1.3 million tons in 2015.
EPA proposes to model the program after the successful Acid Rain (also known
as Title IV) program, which used a cap-and-trade approach to achieve reductions
and allow companies flexibility in making them.
Complex stuff. Add to that the issues of timing, industry flexibility, and
measures of what one considers environmental progress, and you can generate a
host of opinions. Is the timing to make the reductions sufficient? Does
cap-and-trade offer the environmental progress, flexibility, and certainty
everyone seeks? Will states, which stand to lose federal funding if they can't
meet EPA mandates, be able to handle the timing issues? As Napolitano says,
"We want to maintain fuel diversity. We want to maintain affordable
electricity. We want to maintain a reliable power grid. We will focus on all
those things for a sense of balance while we strive to get very large
reductions." Can this happen?
At this roundtable, a group of industry stakeholders representing electric
generating units, environmentalists, state regulators, manufacturers, and EPA
discussed how CAIR will affect industry, the economy, and environmental quality.
Building on Proven Success
EP: There have been 40-percent reductions in NO^sub x^ and SO^sub 2^ since
1980. Taking that into account, how do you view the effectiveness of that
program?
Bernard Melewski: Our basic observation on the SO^sub 2^ cap-and- trade
program, adopted in 1990, is that it has been very cost- effective. It's been
very efficient. For years, EPA had 100-percent compliance, which you can't say
about any other federal program.
We felt the problem was that the emission targets chosen in 1990 were too
high at the time. Congress even required several reports that indicated that
lower caps not only would yield the health benefits that we're all hoping for
with this new rule, but also would significantly benefit the acid rain problem
throughout the Northeast.
Vicki Sullivan: We view the new rule's reliance on the cap-and- trade program
as a positive thing. Definitely, cap-and-trade has worked.
John McManus: The acid rain program has been very successful. Early on there
were concerns about where the reductions would be and whether hot spots would
occur. EPA did a lot of analysis on that question and found that the reductions
occurred where you really wanted them and where you would expect them to occur,
in the Midwest and Southeast.
CAIR is going to accomplish essentially the same thing. It still tends to
focus on where most of utility sector emissions are, which is where the
reductions will occur. Being able to do it with a flexible trading program is
important for a company like AEP. We have coal generation in nine states
affected by this rule. Being able to comply as a system is important.
EP: On a state level, does EPA'S plan seem to work?
Chuck Mueller: We've got a lot of information that shows that we have a
definite impact from long-range transport. This is a rule that will help us
develop plans for our nonattainment areas. And we think that a cap-and-trade
approach is the most cost-effective way to go about it.
We have some concerns with the recent designations for the eight- hour ozone
standard [EPA's new standard measuring ozone over an eight-hour period, rather
than the previous one-hour period]. The nonattainment areas have target dates
that do not comport with CAlR's schedule, so we're wrestling with how to ensure
that those reductions are incorporated into our plans. The devil's always in the
details.
Cathy Woollums: One of the things to consider, at least from a cap-and-trade
perspective, is the importance of allowing companies the flexibility to keep
some small, very viable units. While our coal-fired generation is limited to
Iowa, without cap-and-trade, some smaller facilities may have to shut down
because they couldn't afford the controls anticipated in the rulemaking. This
definitely makes it a supply and reliability issue.
We all need to keep this in the back of our minds as we try to meet customer
needs. Customer needs continue to grow regardless of the environmental
requirements.
Jeff Marks: Any multi-emissions rule that reduces compliance costs and
achieves necessary reductions is a good rule from the standpoint of our members.
The NAM has about 14,000 members-10,000 of them are small and medium-sized
companies-and many of their facilities are located in the states covered by the
rule. Although this rule is primarily targeted at the utility industry, it does
affect our members if the state chooses to seek emissions reauctions from
nonelectric generating units when establishing the emissions budgets. If some of
our traditional manufacturer members want to be part of the cap-and- trade
program, they are allowed to opt into the program, and that's a good thing from
our standpoint.
In an indirect way, this rule also is of consequence to manufacturers because
of its potential impact on electricity and natural gas prices. Energy prices and
supply are top issues for the NAM.
A Matter of Time
EP: Everybody here is trying to achieve environmental progress; they're also
trying to have enough flexibility. In that regard, what are the challenges from
the environmental, customer, economic, and utility sides?
Napolitano: Our challenge is to provide a substantial amount of NO^sub x^ and
SO^sub 2^ reductions, in a timely way, in the 28 states and DC. By starting the
program in 2010 and allowing cap-and- trade with banking, we believe we're
setting up a program that will maintain fuel diversity and keep electricity
prices down while achieving important reductions..
As we forecast it-and we're very sensitive to this-over the next 20 years, we
see at most a 2.5percent rise in electric prices and no more than a 3-percent
rise in gas prices. We see a very small impact when we look at it from a
macroeconomic level.
To us, the central challenge is getting the right balance, so that we're
sensitive to the economy, the power sector, and our fuel needs as a country, but
also sensitive to the nation's environmental needs and the states' challenges to
bring about attainment with the new NAAQS.
Melewski: Two concerns keep coming up in the Northeast. The first is the
timing, as in when states are supposed to have a plan to come into compliance
with the NAAQS program goals. Many are concerned that the benefits of the CAiR
rule won't be there in time to help states come into compliance. The other
question is similar: Does the rule go far enough and could it allow many more
counties, if not all counties, to come into compliance?
Napolitano: You raise a good issue. From the start, we've thought of the CAIR
program as a complement, not a replacement, for what the states need to do for
attainment-a complement that deals with the transport problem from the power
sector and that also works in conjunction with what we're doing on mobile
sources, which is substantial. We just announced the nonroad diesel rule. We
also have the onroad diesel rule and the Tier Two car standards [making cars and
light trucks subject to the same emission control program], which radically
reduces our NO^sub x^ levels and, to a lesser degree, direct particulate matter
and SO^sub 2^.
We think it would be too much of a burden if we grossly reduce pollution at
high levels without having some sense that states themselves can lead to a more
cost-effective overall result. We've never thought we were supposed to go so far
that you would force nonattainment.
There are labor limitations in terms of the people who can build these units
for the power sec tor. We can't do things too quickly, and we can't ask the
power sector to do what's not possible. In addition to acquiring labor and
materials, the power sector has got to get through a set of state processes,
which could take no less than 18 months after we get done with our rule. The
utilities can take three years to get a lot of capital equipment into place.
McManus: There's no question that sulfates and nit\rates from powerplant
emissions are a piece of it. But in the states in which we operate, we
contribute about half of total particulates. You can achieve a lot toward
attainment with powerplant reductions and still not come into attainment
everywhere-there are other significant sources, especially in urban areas, that
need to be adjusted. And transportation is one.
Look at the eight-hour ozone standard. NO^sub x^ emissions from the power
industry are less than 20 percent of U.S. NO^sub x^ emissions, due to reductions
that have occurred under the Clean Air Act Amendments and the state
implementation plans for NO^sub x^. For eight-hour ozone in particular, we need
to start looking at other source categories: You're potentially getting to a
point of diminishing returns from the power sector, at least in the highpeak
summer.
The timing and implementation issues are valid concerns as we look at our
system. In the last couple of months, AEP announced it would install SO^sub 2^
scrubbers on 3,500 megawatts of capacity, and an additional 600 MW at a plant
that we own with another company. That's in large part because of requirements
currently on the books. But we're looking forward to programs like CAIR (or
Clear Skies, had the legislation ever gotten any traction). Still, we have some
concerns about the ability to do everything by 2010.
Sullivan: Timing is definitely our number-one challenge with this rule. In
the last three or four years, we've put in 10 selective catalytic reduction
systems (SCRs, which oxidize NO^sub x^]. We've managed to do it, but we ran into
some labor shortage issues then. Now, we're looking at 24 scrubbers, plus a good
number of other SCRS- more than 30 projects-that we're going to have to install
by 2010. If we had trouble with 10 SCRs, we're definitely going to have trouble
with labor issues for the scrubbers. And even if we started today, there are
only so many projects that can proceed at the same time. Each project takes
about four years by the time you look at permitting the landfill (a huge issue),
engineering, design, and construction. It's an issue of basic construction
management: We're going to have more than 30 projects ongoing for this rule in
late 2008.
Woollums: Timing is always a concern. We have not yet had to put significant
controls on our facilities. We don't have any nonattainment areas in Iowa, yet
we're being asked to make reductions of pollutants-very significant reductions,
like 65-70 percent-for a 1-percent impact on another state. That's very
difficult to sell, especially to our state regulators, who are going to
scrutinize whether expenditures appropriately balance energy, environment, and
the economy.
After all, we're trying to bring certainty to our customers about rates.
We've agreed to hold our rates as they are today until 2010. Where's the benefit
to Iowa customers of installing significant controls when we have only a small
contribution to another state's nonattainment? Don't get me wrong: We're willing
to make reductions. But the question is, what's fair? How do you justify the
economics here?
Certainty also plays into the fact that this is an administrative rule and
not legislation, so it has the potential to be changed. In this type of
environment, certainty isn't necessarily valued in the context of environmental
regulation, but customers value it in their rates. It's difficult to reconcile
that. And it's difficult, likewise, to pass that potential cost to customers, or
have the shareholders (who really didn't anticipate having to buy into such a
program) eat it.
Ozone
EP: Chuck is from a deregulated state. How does that play into the way you
look at it?
Mueller: We're beginning to see that our neighboring states are having an
increased impact on us with regard to the eight-hour ozone standard. While I can
appreciate Sam's position that CAIR will complement the states' planning
activities, and that other federal programs are also coming into place, this
seems to be a situation where the left hand doesn't know what the right is doing
within EPA. Their new eight-hour implementation rules require our two largest
metropolitan areas, Dallas and Houston, to have controls in place by 2009 in
order to meet the 2010 attainment date. The only way we can revise that is if we
reclassify the areas to a higher attainment classification, which will buy us an
additional three years.
The diesel rules Sam points to will not have any significant penetration to
benefit us a whole lot. CAIR will just be getting underway. Yet EPA has
indicated that it's going to remove the ability for states to petition them to
get the reductions from outside of their state.
Napolitano: Ozone is on a faster track than fine particles, and most of what
we're doing is addressing the fine particles standard for the first time in a
collective way with the states. Ozone is a longerterm problem. For some of the
states with those earlier deadlines, this is challenging.
We can't change the provision of the law that gave states the ability to
petition EPA to deal with interstate transport between states. That would have
been, again, one of the good things about Clear Skies legislation. But we hope
we can create an environment where states aren't inclined to do that.
Iowa, for example, gets a benefit if we have a rational, regional trading
scheme allowing compliance flexibility to provide overall lowest costs and keep
rates down-that would be better than Iowa getting a petition from Wisconsin,
Illinois, Indiana, or Missouri that asks for upwind mitigation, since the
petition process is more piecemeal and uncertain.
Woollums: Again, any flexibility we have as a result of the rule is going to
be helpful. But you still have to be involved in the process: You've got to make
reductions. And there are financial implications to that, regardless of whether
you are purchasing allowances or installing controls. Obviously, we'll make the
smart, economic decision as to which is the better option for us.
But, again, we've got to provide the lowest cost of compliance for our
customers-it's embedded within our state regulations. Otherwise, we run the risk
of disallowance of those costs. And it's difficult to do anything voluntarily,
either-such programs run the risk of disallowance, as well. It's a doubleedged
sword.
Marks: The major concern that our members have collectively-and it's not just
with the interstate rule, but with [EPA's forthcoming] mercury rule as well-is
that we need to make sure that when these rules are finalized they are
consistent with the need for reliable and affordable electric power. That
includes continued use of coal and combined heat and power sources.
The manufacturing sector uses about one-third of the nation's energy,
including a third of its natural gas and almost 30 percent of its electricity.
Energy costs are really killing a lot of our members. We put out a cost study
earlier this year saying that external overhead costs, including regulatory
compliance and rising energy prices, add approximately 22 percent to U.S.
manufacturers' unit labor costs relative to their foreign competitors. So, a
competitiveness issue and an energy issue are tied into both the interstate rule
and the mercury rule.
Measuring the Benefits
Napolitano: If we succeed, we'll be able to bring 28 more counties into
attainment for fine paniculate matter, so that the states won't have to come
after each other for these reductions. We'll get 8 more counties into attainment
for ozone, which is quite an accomplishment, given how challenging ozone has
been over the last 30 years.
We believe that by 2015, there will be around $84 billion worth of public
health and increased visibility benefits to the public at large. On a household
basis, as consumers of environmental quality as well as electricity, you can see
that for every dollar of increased production costs, we'll get $22 of benefits
for the public. It's a good trade.
John Kinsman: Those are big numbers. Does anyone have any reaction to such a
cost-tobenefits ratio?
McManus: This is an area where there's disagreement between the industry and
EPA. On the health effects issue, there's a lot of research done by EPRI [the
Electric Power Research Institute] and others as to whether fine particles from
powerplants are really a health threat. We don't necessarily think they are,
even though that doesn't really get in the way of what we would like to
accomplish to achieve emission reductions. That's for a lot of reasons-not
necessarily fine particle health effects, whether they're there or not. These
are good policy objectives going forward.
On the cost side, we don't project gas prices changing a whole lot, for
instance. But if you have a program that forces early shutdown of coal plants,
natural gas is not really an attractive alternative from an electricity cost
perspective. It also puts huge demand on the gas sector.
We don't want to lose sight of the cost. This is going to be an extremely
expensive program. At one of our larger plants in West Virginia, I am really
struck by the investment we're making in just pollution control, which doesn't
generate any electricity at all. In fact, it reduces output. At that one
powerplant, with the combination of SCRs we've installed and are installing and
the expectation that we'll be scrubbing the units through the CAIR rule, we'll
be investing $1.5 billion.
You take that and you expand it to the sector. The energy implications are
very important. The objective is the greatest reductions of any clean air
program that's ever been put in place. But let's try and achieve those
objectives while being sensitive to these other factors.
CAIR or Clear Skies?
Kinsman: How would you compare CAIR to the Clear Skies legislative proposal?
Many folks hope that Clear Skies will pick up steam in 2005 and become a viable
proposal again.
Sullivan: Clear Skies or other similar legislation would provide the ind\ustry
with certainty that is not inherent in any kind of regulatory program. With the
approach EPA is taking under section 111 of the Clean Air Act, states can opt
out of the program. Under a legislative approach, something could be written
similar to the Clean Air Act Amendments of 1990 so that states wouldn't be able
to opt out.
In the end, the challenges Clear Skies presents for us are similar to CAIR'S
challenges: We have to make the major reductions by 2010. When Clear Skies was
first introduced in 2001, 2010 seemed a little further out than it does now in
2004. If it's considered in 2005, it will be that much closer.
Melewski: The Adirondack Council's objective for the last six or eight years
has been to advance the CAiR proposal in a legislative format. We wanted to
"tweak" the Clean Air Act and change the caps. We're very pleased the
CAiR rules have been advanced because that, frankly, has been our legislative
objective all along.
Napolitano: We would definitely have preferred Clear Skies. There is some
hope that, once we get the CAIR rule out, Congress will reconsider this
legislation. Its passage would provide the high level of certainty many industry
people and EPA, as well as other stakeholders, would like to have, so that we
don't get into contentious litigation and delay.
Marks: The NAM strongly prefers Clear Skies over a regulatory rulemaking, but
we also see the writing on the wall: It's not going forward this year. A
statutory approach that would provide electric generators and manufacturers with
a greater degree of certainty is superior to having to base billions of dollars
of investment on regulations that can be easily altered by future lawsuits or
EPA rulemakings.
Mueller: There is a third program that the EPA is proposing it will address,
and that is the regional haze program. The timing of that actually fits a lot
nicer, and we're very supportive of the fact that EPA is considering looking at
the CAIR rules serving as the first increment toward regional haze programs and
the planning efforts.
Where Does Mercury Fit in All This?
EP: What about mercury regulation with CAIR?
Napolitano: When you put mercury next to CAIR, you have three major
pollutants for the power sector to deal with through two sets of regulations.
Under the existing Clean Air Act, there could be far more regulation, since
there are about 12 different authorities under which to act.
Mueller: One of the benefits the CAIR rule provides is a substantial amount
of cobenefits: Scrubbers and SCRs get some reductions of mercury, which then
makes it easier to move out from the baseline we are at today.
We have a number of lakes in eastern Texas that have mercury fish advisories,
and so we are interested in mercury reduction as a strategy to assist us with
our water planning effort. How we go about that is the challenge. The science is
just now coming in, in terms of mercury deposition, what the sources are, and
how far and how long it stays in the atmosphere before it starts entering
watersheds.
Our experience with the acid rain program has been that if you put that
target out there and you give people enough lead time, the industry working with
the vendors will figure out ways to comply that often are a lot cheaper than
they thought and a lot more effective than they first envisioned.
McManus: When we look at mercury, we have a different set of concerns. For
SO^sub 2^ and NO^sub x^, the technology is there. We have been using it for
years; it works. For mercury, we have questions about how you actually control
it by itself. So, a program that relies on reductions we know will occur from
scrubbers and SCRs while we develop additional technology makes a lot of sense
to us.
Mercury is complicated, and it also is a fuels issue. The type of mercury
emitted depends on the type of coal you're burning. One of our plants in east
Texas burns lignite coal. It has a scrubber installed, and it still has the
highest mercury emission rate of any plant on our system. But when we scrub
Eastern subbituminous coal, we get some significant mercury reductions.
Melewski: The Adirondacks and even our Catskill mountain area where New York
City's reservoirs are have a unique mercury problem. The acidity of the soil and
water complicates the mercury issue and makes the impact more severe than other
areas. That's been borne out with testing. So the Adirondack Council sees the
reductions in acid precipitation as key to our mercury issue as well as direct
mercury regulation.
Kinsman: But we're not starting from ground zero on mercury reductions.
Sullivan: The testing program that was done in 1999 under the Information
Collection Request that EPA sent out showed that if we emitted all the mercury
that's in coal, total U.S. utility emissions would be about 75 tons. We actually
emit about 45 tons. So current control devices capture about 40 percent of the
mercury that comes into the plant.
But we've still got 45 tons. And even if we come up with a technology that
works to control mercury with one type of coal, it may not work on others.
All this needs to be put into the perspective that mercury is a global
pollutant. Most of the mercury emitted by powerplants either is in the form that
joins the global pool or converts to that type shortly after emission. Global
emissions are about 5,000 tons from natural and man-caused sources every year.
We're about 1 percent of that emissions pool. Modeling that EPRI has done shows
that reducing electric utility mercury emissions in the United States will
reduce exposure to mercury in fish for women of childbearing age by less than 1
percent.
We're talking about a small effect here. EPA has set a very ambitious target
of 15 tons in 2018, so mercury will be reduced. But we need to look at it from
an overall environmental and public health standpoint.
McManus: One of the concerns about mercury is the hot-spots issue. If much of
the mercury from powerplants goes into a global pool, it would seem to suggest
that, to a great extent, you don't have local hot spots from powerplants.
If you look at data from the government's Mercury Deposition Network, the
areas that tend to have the highest mercury deposition are in the Midwest up
into the Northeast. I would expect to see controls for SO^sub 2^ and NO^sub x^
put in place for the first phase of CAIR in that region. To the extent you get a
cobenefit reduction of mercury with those controls, you're going to see mercury
emission reductions in generally the same area that you have the highest
deposition.
A Different Attitude
McManus: I'd like to pose a question to Bernard. The Adirondack Council took
a position [on Clear Skies] that was almost unique among environmental
organizations. It seemed like you were not letting the desire for perfection get
in the way of trying to accomplish something. A lot of other environmental
groups clearly have a different position. As you talk with some of your
colleagues, what are some of the differences?
Melewski: Well, the primary difference was one of tactics. The Council saw an
opportunity to accomplish substantial reductions in acid rain and control
particulates. Our strategy, both on a state and federal level, has always been
to accomplish what we can accomplish and come back the next year and push for
the remainder.
Unfortunately, the prevailing strategy was more of an all-or- nothing one. If
climate change, for example, couldn't be addressed immediately, then nothing
could happen. We disagree with that strategy.
McManus: I've worked in this area for quite a long time, going back to when
acid rain was a research topic when I was in graduate school in the late 1970s.
I think we're seeing a debate now about how fast and how far we make reductions.
But even five years ago with the NO^sub x^ SIP call, there was a raging debate
from the utility perspective as to whether you should even control powerplants
to address ozone in the summertime.
There's been a significant policy shift in the industry. Now we're looking at
how to achieve these reductions cost-effectively. How do we do it while being
sensitive to other energy and economic issues? That's a major shift in the
industry, one I had not seen before in my career.
Napolitano: That's definitely been noticed by us, especially throughout the
Clear Skies discussions. The industry's been supportive of making reductions for
NO^sub x^ and SO^sub 2^, even though there's a question of how much and how
soon, given the other demands that the industry has to provide reliable,
affordable electricity to everyone. The climate of the debate has changed-and we
think very positively.
Melewski: The debate has gone down to timing and levels of control.
Ultimately, that's what would have happened with the Clear Skies and other
legislative debates if things had progressed. We're very happy that we're at
that point. We join with the other environmental organizations in apparently
most of the northeastern states in urging EPA to look at deeper reductions.
This is a rule that will help us develop plans for our nonattainment areas.
And we think that a cap-and-trade approach is the most cost-effective way to go
about it.
There are other significant sources besides powerplant emissions, especially
in urban areas, that need to be adjusted. And transportation is one.
It's an issue of basic construction management: We're going to have more than
30 projects ongoing for this rule in late 2008.
ERA believes that by 2015, there will be around $84 billion worth of public
health and increased visibility benefits to the public at large.
If you have a program that forces early shutdown of coal plants, natural gas
is not really an attractive alternative from an electricity cost perspective. It
also puts huge demand on the gas sector.
The Adirondacks and even our Catskill mountain area where New York City's
reservoirs are have a unique mercury problem. The acidity of the soil and water
complicates the mercury issue and makes the impact more severe than other areas.
PARTICIPANTS
John Kinsman is director of air quality programs at Edison Electric
Institute.
Jeffrey Marks is director of air quality at the National Association of
Manufacturers.
John McManus is vice president of environmental affairs at American Electric
Power.
Bernard Melewski is legal advisor for the Adirondack Council.
Chuck Mueller is a senior policy analyst at the Texas Commission on
Environmental Quality.
Sam Napolitano is director of the clean air markets division of the
Environmental Protection Agency.
Vicki Sullivan is an environmental issue manager at Southern Company.
Cathy Woollums is vice president of environmental services at MidAmerican
Energy.
Copyright Edison Electric Institute Jul/Aug 2004