Divide and Conquer

The utility Maximum Achievable Control Technology (MACT) rule scheduled to take effect in December 2011 will have a three-year timetable for compliance, with a possible one-year extension. A fifth year is available with presidential approval. The options for utilities are two: either comply or shut down your plant.

The time schedule is impossible to achieve given physical constraints: the need for a sufficiently large and trained construction workforce, the lack of experienced contractors, and limited manufacturing capacity—none of which were adequately considered by the EPA when setting its timeline. Rather than delving into these details, my recent interview with Quin Shea, vice president, environment for the Edison Electric Institute, clearly presents the industry’s concerns. In sum, the concern is not the availability of the technology for compliance but rather the schedule for compliance.

Unfortunately, the industry is not speaking with a single voice opposing the MACT rule hyper-compressed schedule requirements. Christine Tezak, senior energy and environmental policy analyst at Robert W. Baird & Co., noted in a recent interview published in the Wall Street Journal that "The fact that the utility industry is not unanimous on this issue makes it easier for EPA to stick to its guns."

This divide and conquer tactic has been used repeatedly by the Obama administration when rule making. A good example was the debate over carbon allowances, where half were to be distributed based on historical emissions and the other half were to be distributed based on historical generation. Nuclear power is 20% of historical generation, so 10% of all the carbon allowances would have been provided to the nuclear industry—the payoff for its support of the ill-fated American Clean Energy and Security Act of 2009 (ACES) and the Waxman-Markey Climate Change Bill in 2009.

Different Points of View

The wedge between principally gas-fired and nuclear utilities on one side and coal-fired utilities on the other remains in place, as you will see from the following utility executive statements regarding MACT compliance. The first three quotes are from executives whose companies will not be severely impacted by the MACT rule because prior air emissions rules requiring new air quality control systems (AQCS) to be added their plants (either state mandates or the Clean Air Interstate Rule issued in March 2005) allowed implementation over a much longer period. The second group of three executives see things differently:

• Jim Rogers, President and CEO of Duke Energy, said: "[T]he anticipation of more stringent environmental rules has long been part of our business plan. . . . We have really mitigated a lot of the risk and the cost associated with this program by the early steps that we took" (May 3, 2011, Duke Energy 1st Quarter 2011 Earnings Call). Later, in an interview in the Wall Street Journal, Rogers said, "I think three years is doable," when asked about the MACT rule schedule. Duke has almost completed adding AQCSs to its entire fleet, shutting down uneconomic coal plants, and building gas-fired facilities. Why Rogers believes others can comply in three years when Duke took over a decade to complete the conversion of its fleet is a mystery to me.
• Benjamin G.S. Fowke, III, President and CEO of Xcel Energy, said: "Our proactive steps to reduce emissions through the MERP project in Minnesota and our plans for the Clean Air-Clean Jobs Act in Colorado put us in good position to comply with these rules" (April 28, 2011, Xcel Energy Inc. 1st Quarter 2011 Earnings Call). Xcel Energy’s Minnesota Metro Emissions Reduction Project (MERP) project shut down three coal plants that were either rebuilt or repowered with gas-fired equipment and AQCS upgrades to a coal plant. The MERP project formally began in 2003 and was completed in late 2009. You can read about two of those conversion projects here and here.
• Mauricio Gutierrez, Executive Vice President and Chief Operating Officer of NRG reports that: "The proposed [Utility Toxics Rule] provides flexibility in that compliance can be achieved through facility averaging and company selected control technology. . . . The key takeaway is that we do not expect at this time any additional environmental CapEx beyond what we have previously announced" (May 5, 2011, NRG Energy 1st Quarter 2011 Earnings Call). Natural gas fires the large majority of NRG’s plants, and the coal-fired plants along the East Coast have already been updated with modern AQCS equipment, over a period much longer than three years.
• Thomas Fanning, President of Southern Company, said: "In summarizing our position on the EPA MACT, we have 4 key concerns: First, no matter how you look at it, the timeline for this rule is unreasonable both for providing comments and for complying. Second, its accelerated 3-year timeline for compliance could put the reliability of the nation’s electric generating system at risk. My third point is that the rushed timeline will also impact electricity affordability. My fourth and final point is that the industry needs a realistic compliance schedule, a schedule that is based on historical experience, a schedule that allows us to retrofit existing units and begin work on additional capacity at the same time" (April 27, 2011, Southern Company 1st Quarter 2011 Earnings Call).
• Tom Voss, President and CEO of Ameren, said: "These rules are expected to impose additional costs on our company and our customers and these additional costs could be substantial. . . . We are still evaluating the rules proposed by the EPA in March and their impact on each of our generating units" (May 5, 2011, Ameren Corp. 1st Quarter 2011 Earnings Call).
• Nick Akins, the new chief executive of American Electric Power (AEP) called the proposed compliance period "ridiculous." Given the billions of dollars AEP has spent on AQCS equipment over the past decade, it should know how long it really takes to design, procure, and install AQCS equipment. If fact, AEP’s view of the new EPA rules is enlightening.

Why the Divide?

I can’t explain why the first group of three utilities executives don’t stand firm with second group of three and push together for a reasonable implementation period. Perhaps it is lingering animosity over the failure of ACES and Waxman-Markey, which Duke and Exelon strongly supported. I do not see a competitive benefit given the diverse utility geographic locations and the fact that the firms do not bid into the same competitive markets, although that might be the case in some locations. Perhaps the attitude of the chief executive is "if one set of customers must pay for AQCS upgrades, then all ratepayers should." Maybe, but the discussion is not about "if" upgrades will be required but rather "how fast" the upgrades can be completed.

The scale of costs and number of simultaneous projects these upgrades will require is enormous. According to the EPA, this rule will affect 24% of the nation’s electricity generation—1,350 individual coal- and oil-fired units at 525 power plants. Today, about 45% of U.S. coal-fired plants have a flue gas desulfurization scrubber; those installations were made over a 30-year period.

To expect the industry to retrofit 24% of its plants in three, possible four years, is absurd and is destined to fail. If the EPA had instead developed reasonable compliance plans that carefully considered all the external influences, such as manufacturing and contractor capacity, then the power industry would have no other option but to comply.

Instead, the EPA decided to set physically impossible schedules and, after 960,000 comments to the draft rules, is expected to stick with the original compliance schedules. Instead of breaking ground, numerous utilities (with the support of many public utility commissions) have already decided to fight it out in Federal Court. That seems to be the only course of action most utility executives can agree upon.

—Dr. Robert Peltier, PE, is COAL POWER’s editor-in-chief.