oversight

EPA Regulations and Electricity: Better Monitoring by Agencies Could Strengthen Efforts to Address Potential Challenges

Published by the Government Accountability Office on 2012-07-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to the Chairman, Committee on
             Commerce, Science, and
             Transportation, U.S. Senate


July 2012
             EPA REGULATIONS
             AND ELECTRICITY

             Better Monitoring by
             Agencies Could
             Strengthen Efforts to
             Address Potential
             Challenges




GAO-12-635
                                            July 2012

                                            EPA REGULATIONS AND ELECTRICITY
                                            Better Monitoring by Agencies Could Strengthen
                                            Efforts to Address Potential Challenges
Highlights of GAO-12-635, a report to the
Chairman, Committee on Commerce, Science,
and Transportation, U.S. Senate




Why GAO Did This Study                      What GAO Found
EPA recently proposed or finalized four     It is uncertain how power companies may respond to four key Environmental
regulations affecting coal-fueled           Protection Agency (EPA) regulations, but available information suggests
electricity generating units, which         companies may retrofit most coal-fueled generating units with controls to reduce
provide almost half of the electricity in   pollution, and that 2 to 12 percent of coal-fueled capacity may be retired. Some
the United States: (1) the Cross-State      regions may see more significant levels of retirements. For example, one study
Air Pollution Rule; (2) the Mercury and     examined 11 states in the Midwest and projected that 18 percent of coal-fueled
Air Toxics Standards; (3) the proposed      capacity in that region could retire. EPA and some stakeholders GAO interviewed
Cooling Water Intake Structures             stated that some such retirements could occur as a result of other factors such
regulation; and (4) the proposed            as lower natural gas prices, regardless of the regulations. Power companies may
Disposal of Coal Combustion                 also build new generating units, upgrade transmission systems to maintain
Residuals regulation. Power                 reliability, and increasingly use natural gas to produce electricity as coal units
companies may retrofit or retire some       retire and remaining coal units become somewhat more expensive to operate.
units in response to the regulations.
EPA estimated two of the regulations        Available information suggests these actions would likely increase electricity
would prevent thousands of premature        prices in some regions. Furthermore, while these actions may not cause
deaths and generate $160-$405 billion       widespread reliability concerns, they may contribute to reliability challenges in
in annual benefits. Some stakeholders       some regions. Regarding prices, the studies GAO reviewed estimated that
have expressed concerns that these          increases could vary across the country, with one study projecting a range of
regulations could increase electricity      increases from 0.1 percent in the Northwest to an increase of 13.5 percent in
prices and compromise reliability—the       parts of the South more dependent on electricity generated from coal. According
ability to meet consumers' demand.          to EPA officials, the agency’s estimates of price increases would be within the
FERC and others have oversight over         historical range of price fluctuations, and projected future prices may be below
electricity prices and reliability. DOE     historic prices. Regarding reliability, these actions are not expected to pose
can order a generating unit to run in
                                            widespread concerns but may contribute to challenges in some regions. EPA and
certain emergencies.
                                            some stakeholders GAO interviewed indicated that these actions should not
GAO was asked to examine: (1)               affect reliability given existing tools. Some other stakeholders GAO interviewed
actions power companies may take in         identified potential reliability challenges. Among other things, it may be difficult to
response to these regulations; (2) their    schedule and complete all retrofits to install controls and to resolve all potential
potential electricity market and            reliability concerns associated with retirements within compliance deadlines.
reliability implications; and (3) the
extent to which these implications can      Existing tools could help mitigate many, though not all, of the potential adverse
be mitigated. GAO reviewed agency           implications associated with the four EPA regulations, but the Federal Energy
documents, selected studies, and            Regulatory Commission (FERC), Department of Energy (DOE), and EPA do not
interviewed stakeholders.                   have a joint, formal process to monitor industry’s progress in responding to the
                                            regulations. Some tools, such as state regulatory reviews to evaluate the
What GAO Recommends                         prudence of power company investments, may address some potential price
GAO recommends, among other                 increases. Furthermore, tools available to industry and regulators, as well as
things, that FERC, DOE, and EPA take        certain regulatory provisions, may address many potential reliability challenges.
additional steps to monitor industry’s      However, because of certain limitations, these tools may not fully address all
progress in responding to the               challenges where generating units needed for reliability are not in compliance by
regulations. DOE and EPA agreed with        the deadlines. FERC, DOE, and EPA have responsibilities concerning the
this recommendation, and FERC               electricity industry, and they have taken important first steps to understand these
disagreed with this and another             potential challenges by, for example, informally coordinating with power
recommendation. GAO continues to            companies and others about industry’s actions to respond to the regulations.
believe that it is important for FERC to    However, they have not established a formal, documented process for jointly and
take the recommended actions.               routinely monitoring industry’s progress and, absent such a process, the
View GAO-12-635. For more information,      complexity and extent of potential reliability challenges may not be clear to these
contact Frank Rusco at (202) 512-3841 or
ruscof@gao.gov or David Trimble at (202)
                                            agencies. This may make it more difficult to assess whether existing tools are
512-3841 or trimbled@gao.gov.               adequate or whether additional tools are needed.
                                                                                      United States Government Accountability Office
Contents


Letter                                                                                        1
               Background                                                                     5
               Power Companies Are Expected to Retrofit or Retire Units and
                 Take Other Actions                                                         24
               Actions Taken by Power Companies Will Likely Increase
                 Electricity Prices and May Contribute to Reliability Challenges
                 in Some Regions                                                            31
               Existing Tools Could Mitigate Many Adverse Implications, but
                 Agencies Do Not Have a Formal Process to Monitor Industry
                 Progress Toward Compliance                                                 46
               Conclusions                                                                  62
               Recommendations for Executive Action                                         63
               Agency Comments and Our Evaluation                                           64

Appendix I     Scope and Methodology                                                        67



Appendix II    List of Stakeholders                                                         70



Appendix III   List of Studies                                                              72



Appendix IV    Additional Information on Coal-Fueled Electricity Generating
               Units                                                                        74



Appendix V     Comments from the Federal Energy Regulatory Commission                       82



Appendix VI    Comments from the Department of Energy                                       92



Appendix VII   Comments from the Environmental Protection Agency                            94




               Page i                                 GAO-12-635 EPA Regulations and Electricity
Appendix VIII   GAO Contacts and Staff Acknowledgments                                       99



Tables
                Table 1: Major Milestones, Benefits and Costs of Four Key EPA
                         Regulations                                                           8
                Table 2: EPA Estimates of Potential Average National and Regional
                         Retail Electricity Price Increases Due to Compliance with
                         Four Key EPA Regulations                                            39
                Table 3: Selected Concerns about RTO Market Rules Arising from
                         the EPA Regulations and Other Industry Factors                      61
                Table 4: Summary of Air Pollution Control Equipment Used at
                         Coal-Fueled Electricity Generating Units                            76


Figures
                Figure 1: Percentage of Electricity Generated from Coal by State,
                         2010                                                                 7
                Figure 2: States Covered by CSAPR                                            12
                Figure 3: U.S. Regional Transmission Organizations                           19
                Figure 4: Sample Layout of Controls at a Coal-Fueled Power Plant             28
                Figure 5: Capacity of Actual and Planned Coal-Fueled Generating
                         Unit Retirements, 1990-2020                                         30
                Figure 6: Installation of a Scrubber at the Cardinal Plant in
                         Brilliant, Ohio                                                     36
                Figure 7: Location and Capacity of Planned Coal-Fueled Generating
                         Unit Retrofits and Retirements through 2020, as of April
                         9, 2012                                                             43
                Figure 8: Capacity and Share of Total Capacity from Coal-Fueled
                         Electricity Generating Units by Region, as of April 9, 2012         74
                Figure 9: Capacity of Coal-Fueled Generating Units Retrofitted
                         with Select Air Pollution Controls, 2000-2011                       77
                Figure 10: Percentage of Coal-Fueled Generating Capacity with Air
                         Pollution Controls Installed by Region, as of April 9, 2012         78
                Figure 11: Percentage of Coal-Fueled Generating Capacity with Air
                         Pollution Controls Installed by Region, as of April 9, 2012         80




                Page ii                                GAO-12-635 EPA Regulations and Electricity
Abbreviations

ACI               activated carbon injection unit
CAIR              Clean Air Interstate Rule
CCR               Coal Combustion Residuals Regulation
CSAPR             Cross-State Air Pollution Rule
DOE               Department of Energy
EIA               Energy Information Administration
EPA               Environmental Protection Agency
ERCOT             Electric Reliability Council of Texas
ESP               electrostatic precipitator
FERC              Federal Energy Regulatory Commission
ISO               Independent System Operator
MATS              Mercury and Air Toxics Standards
MISO              Midwest Independent Transmission System Operator, Inc.
MW                megawatt
NERC              North American Electric Reliability Corporation
NO x              nitrogen oxides
PJM               PJM Interconnection
RFF               Resources for the Future
RTO               Regional Transmission Organization
SCR               selective catalytic reduction unit
SNCR              selective non-catalytic reduction unit
SO 2              sulfur dioxide




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Page iii                                       GAO-12-635 EPA Regulations and Electricity
United States Government Accountability Office
Washington, DC 20548




                                   July 17, 2012

                                   The Honorable John D. Rockefeller IV
                                   Chairman
                                   Committee on Commerce, Science,
                                      and Transportation
                                   United States Senate

                                   Dear Mr. Chairman:

                                   Coal is an abundant and widely used fuel source in the United States,
                                   producing about 42 percent of the nation’s electricity supply in 2011.
                                   Coal-fueled power plants have historically been among the least costly
                                   sources of electricity in the country. However, burning coal and other
                                   fossil fuels (i.e., natural gas and oil) to produce electricity is associated
                                   with human health and environmental concerns. For example, fossil fuel
                                   electricity generating units are among the largest emitters of sulfur dioxide
                                   (SO2) and nitrogen oxides (NOx), which have been linked to respiratory
                                   illnesses and acid rain and which may travel great distances and affect air
                                   quality in states downwind from generating units—downwind states. 1 In
                                   2008, the last year for which EPA has such comprehensive information,
                                   coal-fueled units emitted about 48 percent of the nation’s mercury, a
                                   hazardous air pollutant and heavy metal linked to neurological disorders
                                   in children and harm to wildlife. In addition, coal-fueled generating units
                                   emit large quantities of carbon dioxide, the primary greenhouse gas
                                   contributing to climate change, and can use significant quantities of water
                                   and create large amounts of waste products that require disposal.

                                   To address concerns over air pollution, water resources, and solid waste,
                                   several environmental laws, including the Clean Air Act, Clean Water Act,
                                   and Resource Conservation and Recovery Act, were enacted. As
                                   required or authorized by these laws, the Environmental Protection
                                   Agency (EPA), the primary federal agency responsible for implementing
                                   many of the nation’s environmental laws, recently proposed or finalized



                                   1
                                    An electricity generating unit consists of any combination of an electricity generator,
                                   reactor, boiler, combustion turbine, or other equipment operated together to produce
                                   electrical power. A power plant is a facility with one or more generating units, together with
                                   other equipment used to produce electric power.




                                   Page 1                                           GAO-12-635 EPA Regulations and Electricity
four key regulations that will affect coal-fueled units. 2 These four
regulations are: (1) the Cross-State Air Pollution Rule (CSAPR), which
prohibits certain emissions of air pollutants in 28 states because of the
impact they would have on air quality in other states; (2) the National
Emissions Standards for Hazardous Air Pollutants from Coal and Oil
Fired Electric Utility Steam Generating Units, also known as the Mercury
and Air Toxics Standards (MATS), which establishes emissions
limitations on mercury and other toxic pollutants; (3) the proposed Cooling
Water Intake Structures at Existing Facilities and Phase I Facilities
regulation, which we refer to as 316(b), which would establish
requirements for water withdrawn and used for cooling purposes that
reflect the best technology available to minimize adverse environmental
impact; and (4) the proposed Disposal of Coal Combustion Residuals
from Electric Utilities regulation (CCR), which would govern the disposal
of coal combustion residuals, such as coal ash, in landfills or surface
impoundments.

These four regulations have potentially significant implications for public
health and the environment. In particular, EPA projects that, among other
benefits, CSAPR would reduce SO2 emissions by 73 percent and NOx
emissions by over half in covered states, reducing asthma and related
human health impacts. In addition, EPA projects that MATS would reduce
mercury emissions by 75 percent from coal-fueled electricity generating
units, reducing the impacts of mercury on adults and children. In 2016,
EPA estimates that the final versions of MATS and CSAPR could
generate $160 billion to $405 billion in monetized annual benefits (in 2011
year dollars), preventing tens of thousands of premature deaths and
reducing pollution-related illnesses. 3

These four regulations could also have significant implications for the
electricity industry. Generating units fueled by coal—which comprise a



2
 On April 13, 2012, EPA proposed new source performance standards for greenhouse
gas emissions from certain new fossil fuel electricity generating units, but the standards
would not apply to existing units. We do not discuss this proposed regulation in this report.
3
 Unless otherwise noted, all dollar estimates presented in this report have been converted
to 2011 year dollars using the gross domestic product deflator based on the calendar
year. EPA’s estimates of the benefits of the regulations presented here refer to monetized
benefits. As not all benefits can be monetized, these may represent a subset of overall
benefits of the regulations. We did not independently assess EPA’s estimates of the
benefits of these regulations.




Page 2                                          GAO-12-635 EPA Regulations and Electricity
large portion of the national electricity supply—are expected to be
affected by the four proposed regulations. Power companies might retrofit
some generating units with controls to reduce pollutants 4 and, when it is
not economic to retrofit, may retire some generating units, according to
EPA. 5 Several representatives from power companies and officials from
federal and state regulatory agencies have expressed concerns that, as
companies incur additional costs in responding to these regulations, and
as the electricity supply is affected by generating unit retirements,
electricity prices could increase and reliability—the ability to meet
consumers’ electricity demand—could be compromised. 6

Federal agencies and other stakeholders have some responsibilities for
overseeing actions power companies take in response to the regulations
and have a role in mitigating some potential adverse implications. The
Federal Energy Regulatory Commission (FERC) is generally responsible
for ensuring that certain electricity and transmission prices are “just and
reasonable,” as well as approving and enforcing standards for reliability in
the bulk power system––the interconnected transmission system
combined with the electric power from generating units needed to
maintain the system. The Department of Energy (DOE) works to
modernize the electricity system, enhance the security and reliability of
the nation’s energy infrastructure, and facilitate recovery from any
disruptions. DOE also has authority to compel generating units to produce
electricity in certain emergency situations. Other stakeholders also play
key roles, such as state environmental and electricity regulators and
system planners that coordinate planning decisions regarding
transmission and generation infrastructure to maintain the reliable supply



4
 Compliance with the four key regulations may involve using various technologies. It may
also include making infrastructure changes to reduce environmental impacts; for example,
installing liners at facilities used to store coal combustion residuals to minimize leaching of
contaminants into groundwater. We refer to all of these as controls.
5
 Multiple types of power companies exist in the electricity industry, including owners of
electricity generating units and owners of transmission systems, as well as integrated
companies that own both generation and transmission. In addition, some companies sell
electricity directly to customers; these companies may or may not own any generating
units or transmission systems. We generally use the term power company to refer to those
companies that own generation and may or may not also own transmission.
6
 We use the term “responding to the regulations” to refer to such actions as installing
controls, retiring units, and other actions such as building new generating capacity to
replace that lost in retirements.




Page 3                                           GAO-12-635 EPA Regulations and Electricity
of electricity to consumers. 7 In a December 2011 memorandum, the
President directed EPA to, among other things, promote early,
coordinated, and orderly planning and execution of the measures needed
to implement MATS while maintaining electricity reliability, including
coordination with DOE, FERC and others.

In this context, you asked us to provide information on the implications of
the four key recently proposed or finalized EPA regulations. Our
objectives were to examine: (1) what available information indicates about
actions power companies may take at coal-fueled generating units in
response to the four key EPA regulations; (2) what available information
indicates about these regulations’ potential implications on the electricity
market and reliability; and (3) the extent to which EPA, FERC, DOE, and
other stakeholders can mitigate adverse electricity market and reliability
implications, if any, associated with requirements in these regulations.

To examine what available information indicates about actions power
companies may take in response to these regulations and their potential
market and reliability implications, we (1) selected for review 12 studies of
companies’ projected responses to the regulations and the potential
impacts of these responses and (2) analyzed data from Ventyx Velocity
Suite on electricity generating units. We considered several factors in
selecting studies, including how closely they reflect the four regulations,
and we assessed the reasonableness of the studies’ assumptions and
methodologies. The studies we selected were carried out by EPA, the
Energy Information Administration (EIA), system planners, research
organizations, and a consulting firm. 8 In some cases, we identified
differences between study assumptions and the regulations, which we
note in the text where appropriate. The actual pricing and reliability
implications of these regulations will depend on various uncertain factors,
such as future market conditions and the ultimate regulatory
requirements, but we determined that these studies were reasonable for
describing what is known about the range of potential implications of the


7
 In this report, we use the term “system planner” to refer to those entities with
responsibility for advance planning to ensure there are adequate transmission and
generation resources to meet demand while operating the grid reliably. This usage does
not directly align with planning terminology used by the North American Electric Reliability
Corporation (NERC).
8
 EIA is a statistical agency within DOE that collects, analyzes, and disseminates
independent information on energy issues.




Page 4                                          GAO-12-635 EPA Regulations and Electricity
             four regulations. We used data from Ventyx Velocity Suite, as of April 9,
             2012, to describe coal-fueled generating units and to provide information
             on historic and planned retrofits and retirements of such units. Ventyx
             Velocity Suite is a proprietary database containing consolidated energy
             data from EIA, EPA, and other sources. Information regarding planned
             retrofits and retirements reflect publicly reported plans as identified by
             Ventyx. As plans may change, actual future retrofits and retirements may
             differ from the data in these plans. To examine the extent to which
             agencies and other stakeholders can mitigate any adverse implications,
             we interviewed officials at the EPA, FERC, and DOE, and reviewed
             relevant documents. To address all three objectives, we summarized the
             results of semistructured interviews with a nonprobability sample of 33
             stakeholders, including officials from EPA, FERC, and DOE;
             representatives of power companies; regional transmission system
             operators; state regulators; and researchers. We selected these
             stakeholders to be broadly representative of differing perspectives on
             these issues based on recommendations from EPA, FERC, DOE,
             industry associations and such factors as the percentage of companies’
             generating capacity that is coal-fueled. We provided a preliminary list of
             the stakeholders we intended to interview to FERC and EPA, and we
             incorporated their suggestions in considering stakeholders where
             appropriate. Because we used a nonprobability sample, the views of
             these stakeholders are not generalizable to all potential stakeholders but
             they provide illustrative examples. Appendix I provides additional
             information on our scope and methodology, appendix II lists the
             stakeholders we interviewed, and appendix III lists the studies we
             reviewed.

             We conducted this performance audit from July 2011 to July 2012 in
             accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             This section describes the role of coal in generating electricity, the four
Background   key EPA regulations, actions involved in maintaining electric reliability,
             and federal and state government roles in electricity markets.




             Page 5                                   GAO-12-635 EPA Regulations and Electricity
Role of Coal in Electricity   Because of the abundance of coal and its historically low cost, many coal-
Generation                    fueled electricity generating units were built and these provide a large
                              share of the electricity produced in the United States. In 2010, there were
                              1,396 coal-fueled generating units in the United States, 9 with a total
                              316,800 megawatts (MW) of net summer generating capacity—about 30
                              percent of the total generating capacity in the United States. 10 In addition
                              to coal, electricity is produced by burning other fossil fuels, particularly
                              natural gas and oil; using nuclear power through nuclear fission; and
                              using renewable sources, including hydropower, wind, geothermal, and
                              solar.

                              Coal is the largest source of electricity generation, but the percentage of
                              electricity produced using coal has declined––from 53 percent in 1990 to
                              about 42 percent in 2011—and coal’s role in the electricity system is
                              changing due to a number of factors. According to some stakeholders we
                              interviewed, several broad trends are affecting the use of coal and
                              contribute to the retirement of coal-fueled generating units. First, in some
                              areas of the country, it has become less economically attractive to use
                              coal to produce electricity, as the regional prices of coal have increased,
                              and prices for natural gas have fallen and the availability of natural gas
                              has increased. Second, demand for electricity is projected to grow slowly
                              in some areas, limiting the need for new power plants. Third, a portion of
                              coal-fueled generating units are old—73 percent of coal-fueled capacity
                              was 30 years or older at the end of 2010—and less efficient than other
                              sources. Despite these trends, coal is expected to continue to be a major
                              fuel source in the future, with the EIA recently projecting coal to account
                              for about 39 percent of the United States’ electricity by 2035 with current
                              policies. We are examining these issues and expect to report later this
                              year on how the use of coal in electricity production is expected to
                              change.



                              9
                               Not all of these coal-fueled units would be subject to each of the four regulations.
                              Additionally, noncoal electric generating units are subject to some of the regulations. Each
                              regulation defines which units will be subject to it. For example, MATS applies to coal- and
                              oil-fueled electricity utility steam generating units that have over 25 MW capacity and meet
                              other requirements. We use the term electricity generating units rather than the specific
                              regulatory definitions to refer to units subject to one or more regulation.
                              10
                                Generating capacity is measured in MW and refers to the maximum capability of a unit
                              to produce electricity. A unit with 1,000 MW of capacity can generate up to 1,000
                              megawatt-hours of electricity in 1 hour, enough to provide electricity for up to 1 million
                              homes.




                              Page 6                                          GAO-12-635 EPA Regulations and Electricity
                                         Reliance on coal varies significantly around the country. As shown in
                                         figure 1, in 2010, coal was used to generate the majority of electricity
                                         produced in several states, particularly in the Midwest, while little of the
                                         electricity generated in states on the West Coast and in New England
                                         was from coal.

Figure 1: Percentage of Electricity Generated from Coal by State, 2010




                                         Page 7                                   GAO-12-635 EPA Regulations and Electricity
The Four Key EPA                          Four recent key EPA regulations address air pollution from electricity
Regulations                               generating units, disposal of coal combustion residuals from certain
                                          generating units, and death of aquatic life as a result of water withdrawal
                                          for use for cooling at certain electricity generating units. As outlined in
                                          table 1, these regulations are at different stages of development, have
                                          different compliance deadlines, and EPA estimates that they will generate
                                          significant monetized benefits and costs.

Table 1: Major Milestones, Benefits and Costs of Four Key EPA Regulations

                                                                                                            EPA estimate of annualized
                                                                                                            benefits and costs (in billions
                                                                                                                         a
Regulation Date proposed Date finalized                Compliance deadline                                  2011 dollars)
                                        b
CSAPR       August 2010     August 2011                First phase was to begin in 2012 but is              $128-$299 in benefits and $0.9
                                                                                                                    c
                                                       uncertain because of a court stay.                   in costs
                                              d
MATS        May 2011        February 2012              April 2015                                           $39-$96 in benefits and $10.2
                                                                                                                    c
                                                       1-year extension (to April 2016) through             in costs
                                                       permitting authorities possible
                                                       1 additional year possible through Clean Air
                                                       Act Administrative Order (to April 2017)
CCR          June 2010      No schedule for            Depends on which option is finalized                 $0.09-$1.3 in benefits and $0.6-
                            finalization                                                                    $1.5 in costs, depending on
                                                                                                                                     e
                                                                                                            which option is finalized
316(b)      April 2011      Scheduled                  As proposed, would be established on a case- $0.02 in benefits and $0.4 in
                            July 2012                  by-case basis by permitting authorities up to 8 costs
                                                       years for impingement controls and
                                                       entrainment controls anticipated to take longer
                                          Source: GAO analysis of EPA information.


                                          Note: The proposed and finalized dates are the regulations' publication dates in the Federal Register,
                                          not the dates EPA signed the regulations and publicly released them. With the exception of CCR, the
                                          costs and benefits reflect actions taken by both coal-fueled units and other sources affected by the
                                          regulations. CCR would only apply to coal combustion residuals generated by coal-fueled units.
                                          a
                                           Cost and benefit estimates were converted to 2011 dollars using the gross domestic product deflator
                                          based on the calendar year. All estimates reflect a 3 percent discount rate except for CCR, where
                                          EPA used a 7 percent discount rate. EPA officials told us that it would be inappropriate to add
                                          together these estimates because of differences in baselines and analysis years. EPA did not provide
                                          an estimate of the overall impact of the four regulations.
                                          b
                                           The regulation and its federal implementation plans have subsequently been amended. On
                                          December 30, 2011, a federal court stayed the regulation while it hears the case challenging the
                                          regulation finalized in August 2011. A lawsuit challenging one of the amendments has also been filed,
                                          but the court put it on hold while it considers the case challenging the August 2011 rulemaking.
                                          c
                                           EPA estimates of the costs and benefits of MATS and CSAPR refer to annualized costs and benefits
                                          in 2014 for CSAPR and 2016 for MATS.
                                          d
                                              Several lawsuits have been filed challenging MATS, but the court has not issued any decisions.
                                          e
                                           Reflects EPA’s estimate of costs and benefits assuming no change in the beneficial use of
                                          combustion residuals.




                                          Page 8                                                 GAO-12-635 EPA Regulations and Electricity
Air Pollution: CSAPR and   Coal-fueled electricity generating units are a major source of air pollution
MATS                       in the United States. Burning coal for electricity production results in the
                           emission of pollutants such as SO2, NOx, mercury and other metals, and
                           acid gases. Coal-fueled electricity generating units are among the largest
                           emitters of these pollutants. This air pollution has adverse health and
                           environmental effects. For example, SO2 and NOx emissions contribute to
                           the formation of fine particulate matter, and NOx contributes to the
                           formation of ozone. Fine particulate matter may aggravate respiratory and
                           cardiovascular diseases and is associated with asthma attacks and
                           premature death. Ozone can inflame lung tissue and increase
                           susceptibility to bronchitis and pneumonia. In addition to affecting health,
                           SO2 and NOx reduce visibility and contribute to acid rain, which can
                           acidify streams and change the nutrient balance in coastal waters and
                           large river basins, affecting their ability to support fish and other wildlife.
                           Mercury is a toxic element, and human intake of mercury, for example,
                           through consumption of fish that ingested the mercury, has been linked to
                           a wide range of health ailments. In particular, mercury can harm fetuses
                           and cause neurological disorders in children, resulting in, among other
                           things, impaired cognitive abilities. Other toxic metals emitted from power
                           plants, such as arsenic, chromium, and nickel can cause cancer. Acid
                           gases cause lung damage and contribute to asthma, bronchitis, and other
                           chronic respiratory diseases, especially in children and the elderly.

                           The Clean Air Act requires EPA to establish national ambient air quality
                           standards that states are primarily responsible for attaining. 11 States
                           generally develop state implementation plans that detail how the
                           standards will be attained and maintained. In addition, the act’s Good
                           Neighbor provision requires state implementation plans to prohibit
                           emissions of air pollutants in amounts that will contribute significantly to
                           nonattainment or interference with maintenance of a national ambient air
                           quality standard in any other state. Electricity generating units contribute
                           to pollution that affects the ability of downwind states to attain and
                           maintain these standards because some of these pollutants may travel in
                           the atmosphere hundreds or thousands of miles from the areas where
                           they originate. If a state fails to develop and submit a state
                           implementation plan that satisfies all Clean Air Act requirements,
                           including the Good Neighbor provision, by specified deadlines, EPA is



                           11
                             EPA has set national ambient air quality standards for carbon monoxide, lead, NOx,
                           ozone, particulate matter, and sulfur oxides.




                           Page 9                                        GAO-12-635 EPA Regulations and Electricity
required to issue a federal implementation plan. 12 EPA issued regulations
interpreting and clarifying the Good Neighbor provisions in 1998 and
2005, but a federal court found the 2005 regulation and its federal
implementation plans to be unlawful. Although the court remanded the
2005 regulation to EPA in 2008, it allowed the regulation and its federal
implementation plans to remain in effect until EPA issued a replacement
regulation. 13

In 2011, EPA finalized CSAPR and its federal implementation plans to
replace the 2005 regulation and its federal implementation plans.
Subsequently, EPA finalized amendments to the regulation and federal
implementation plans and issued federal implementation plans for
additional states. As amended, CSAPR would require emissions
reductions in 28 states spanning much of the eastern half of the United
States to address each state’s significant contribution to nonattainment
and interference with maintenance of the air quality standards in
downwind states. 14 (See fig. 2 for states that would be covered by
CSAPR.) The reductions are to be achieved through the federal
implementation plans that regulate certain electricity generating units by
establishing SO2 and NOx trading programs. Under each trading program,
covered states have SO2 and NOx emissions budgets and receive
emissions allowances equal to the budget, which are distributed to power
companies with generating units in that state. Each emissions allowance
represents the right to emit 1 ton of SO2 or NOx. The allowances may be
bought, sold, or banked for use in later years, but power companies must
own enough allowances at the end of each control period to cover their
emissions. Power companies with insufficient allowances at the end of


12
  States can replace federal implementation plans by developing and submitting for EPA
approval state implementation plans that achieve the required amount of emissions
reductions.
13
  The 2005 regulation—known as the Clean Air Interstate Rule (CAIR)—requires 27
states and the District of Columbia to adopt and submit revisions to their state
implementation plans to eliminate SO2 and NOx emissions that contribute significantly to
downwind nonattainment of certain national ambient air quality standards. The CAIR
federal implementation plans issued in 2006 regulate electricity generating units in the
covered states and achieve CAIR’s emissions reductions requirements. The court allowed
CAIR and its federal implementation plans to remain in effect until replaced because, even
with flaws, they would at least temporarily preserve the environmental values covered by
CAIR.
14
  CSAPR would cover certain fossil fuel electricity generating units with over 25 MW
capacity.




Page 10                                        GAO-12-635 EPA Regulations and Electricity
the control period could be subject to financial penalties and must
surrender two allowances for each excess ton of pollution emitted. EPA
projects that CSAPR would reduce SO2 emissions by 73 percent and NOx
emissions by 54 percent in the covered states and could avoid 13,000 to
34,000 premature deaths, generating $128 to $299 billion in benefits, with
$853 million in costs in 2014. The control periods for some of the trading
programs were scheduled to begin on January 1, 2012, but the U.S.
Court of Appeals for the D.C. Circuit stayed CSAPR on December 30,
2011. 15 Depending on how the court rules, CSAPR may change.




15
  A lawsuit challenging one of the amendments to CSPAR has also been filed, but the
court put it on hold while it considers the case challenging the CSPAR regulation finalized
in August 2011.




Page 11                                         GAO-12-635 EPA Regulations and Electricity
Figure 2: States Covered by CSAPR




                                    The Clean Air Act also requires EPA to study the public health hazards
                                    from electricity generating units’ emissions of mercury and other
                                    hazardous air pollutants and to regulate those emissions under section
                                    112 if it finds that such regulation is “appropriate and necessary.” EPA
                                    made such a finding regarding certain electricity generating units in 2000




                                    Page 12                                GAO-12-635 EPA Regulations and Electricity
but did not issue a regulation under section 112. 16 In 2005, EPA reversed
this finding and finalized a regulation under section 111 of the Clean Air
Act regulating mercury emissions from certain electricity generating units,
which a federal court later struck down. Pursuant to a settlement
agreement to resolve a lawsuit for failing to meet the statutory deadline
for issuing a section 112 regulation, EPA published the final MATS
regulations in February 2012. 17 Among other things, MATS establishes
numerical emissions limitations for mercury, filterable particulate matter
(as a surrogate for all toxic nonmercury metal pollutants), and hydrogen
chloride (as a surrogate for all toxic acid gas pollutants) at certain new
and existing generating units. All of the numerical limitations applicable to
existing units except one are set at the average emissions limitation
achieved by the best performing 12 percent of existing sources. 18
Generating units would have 3 years, until April 2015, to comply with
MATS and could receive up to a 1-year extension from permitting
authorities (typically state or local authorities), if necessary for the
installation of controls. EPA also outlined a mechanism to allow units that
are needed to address specific and documented reliability concerns to
receive Clean Air Act administrative orders to provide up to an additional




16
  Specifically, the finding was regarding coal- and oil-fueled electric utility steam
generating units. EPA also found that regulation of hazardous air pollutants emissions
from natural gas-fueled electric utility steam generating units was not appropriate or
necessary.
17
  The statutory deadline for issuing section 112 regulations for hazardous air pollutants
from coal- and oil-fueled electric utility steam generating units was 2 years from the date
on which the units were listed as sources of hazardous air pollutants subject to regulation,
which was December 20, 2000. In 2008, EPA settled a lawsuit alleging that it had failed to
promulgate emissions standards under section 112 for hazardous air pollutants from coal-
and oil-fueled electric utility steam generating units by agreeing to sign a final regulation
by the end of 2011.
18
  Specifically, MATS applies to electricity utility steam generating units that have over 25
MW capacity and meet other requirements. MATS also establishes work practice
standards in lieu of numerical emissions limitations for organic hazardous air pollutants
and for limited use oil-fueled electric utility steam generating units as defined in the final
regulation.




Page 13                                           GAO-12-635 EPA Regulations and Electricity
                              year to come into compliance. 19 EPA estimates that the final standards
                              would reduce mercury emissions from coal-fueled electricity generating
                              units by 75 percent and reduce hydrogen chloride emissions by 88
                              percent. EPA estimated the benefits of MATS would be $39 to $96 billion
                              with costs of $10.2 billion in 2016. Petitions for review of MATS have
                              been filed in the U.S. Court of Appeals for the D.C. Circuit, but the court
                              has not yet issued a ruling. Depending on how the court rules, MATS may
                              change.

Disposal of Coal Combustion   Burning coal to produce electricity creates combustion residuals, such as
Residuals: CCR                coal ash, which represent one of the largest waste streams in the United
                              States. These residuals contain contaminants like mercury, cadmium, and
                              arsenic that are associated with cancer and various other serious health
                              effects. Coal combustion residuals can be disposed of wet (mixed with
                              water) in large surface impoundments, or dry in landfills. 20 EPA has stated
                              that many landfills and impoundments lack liners and groundwater
                              monitoring systems, and without proper protections, contaminants can
                              leach into groundwater and migrate to drinking water sources, posing
                              significant public health concerns. 21

                              The Resource Conservation and Recovery Act authorizes EPA to
                              establish regulations for the treatment, storage, and disposal of
                              hazardous waste and to establish national minimum criteria for the


                              19
                                EPA’s Office of Enforcement and Compliance Assurance issued a policy memorandum
                              describing its intended approach regarding the use of Clean Air Act Section 113(a)
                              administrative orders for sources that must operate in noncompliance with MATS for up to
                              a year to address a specific and documented reliability concern. See: EPA, “The
                              Environmental Protection Agency’s Enforcement Response Policy For Use of Clean Air
                              Act Section 113(a) Administrative Orders in Relation To Electric Reliability and the
                              Mercury and Air Toxics Standard” (available at
                              http://www.epa.gov/compliance/resources/policies/civil/erp/mats-erp.pdf).
                              20
                                Some coal combustion residuals have beneficial uses; for example, they can be used in
                              the manufacture of such construction materials as concrete or wallboard. According to
                              EPA documentation, about 37 percent of coal combustion residuals are used beneficially.
                              EPA did not propose to regulate the beneficial use of coal combustion residuals, though
                              some industry officials have expressed concerns that designating residuals as hazardous
                              could negatively impact beneficial uses.
                              21
                                Furthermore, accidents—such as the 2008 breach of a dike at a Tennessee Valley
                              Authority coal plant impoundment—can result in large-scale releases of coal combustion
                              residuals. The 2008 accident caused the release of 5.4 million cubic yards of coal ash into
                              a nearby river and covered more than 300 acres with coal ash; it also damaged homes,
                              roads, rail lines, and utilities.




                              Page 14                                        GAO-12-635 EPA Regulations and Electricity
                                 disposal of nonhazardous solid waste to protect human health and the
                                 environment. In June 2010, to address risks from the disposal of coal
                                 combustion residuals generated at electricity generating units, EPA
                                 proposed CCR to regulate coal combustion residuals for the first time. 22
                                 EPA co-proposed two alternative regulations. Under the first, EPA would
                                 list residuals as a special waste and regulate them as a hazardous waste
                                 by establishing requirements for their management from generation to
                                 disposal. Under the second option, EPA would regulate coal combustion
                                 residuals as nonhazardous solid waste and establish national minimum
                                 standards for their disposal in surface impoundments or landfills.
                                 Regulation as a special waste would occur through a federal or
                                 authorized state permitting program with requirements for its storage,
                                 transport, and disposal, among other things. Regulation as a special
                                 waste would also allow for federal enforcement. Regulation as a
                                 nonhazardous solid waste would not require the establishment of a permit
                                 program and would not be federally enforceable. Instead, states or private
                                 parties could bring lawsuits against alleged violators. EPA estimated the
                                 annualized benefits of its special waste option would be $207 to $1,342
                                 million with $1,549 million in annualized costs and that the nonhazardous
                                 waste option would generate annualized benefits of $88 to $596 million
                                 with $606 million in annualized costs. 23 EPA does not have a schedule for
                                 issuing a final CCR regulation.

Damage to Aquatic Life: 316(b)   Coal and other types of electricity generating units often draw in large
                                 volumes of water from nearby rivers, lakes, or oceans to use for cooling,
                                 which can damage aquatic life. Thermoelectric generating units are the
                                 largest water use category by sector, using 201 billion gallons per day in


                                 22
                                   The act exempted waste generated primarily from the combustion of coal or other fossil
                                 fuels—generally known as coal combustion residuals—from regulation as hazardous
                                 waste until EPA conducted a study and determined whether regulation as a hazardous
                                 waste was warranted. After issuing the required study (in two parts, the first in 1988 and
                                 the second in 1999), EPA determined in 1993, and again in 2000, that regulation of coal
                                 combustion residuals as a hazardous waste was unwarranted.
                                 23
                                    These estimates refer to EPA's scenario assuming CCR would not change the beneficial
                                 use of coal combustion residuals. EPA also estimated benefits for two other scenarios.
                                 The scenario EPA considers to be the most likely assumes that CCR would increase
                                 beneficial use, and EPA estimated the annualized benefits of its special waste option
                                 would be $6,526 to $7,646 million and that the nonhazardous waste option would
                                 generate annualized benefits of $2,616 to $3,125 million. In a scenario where CCR
                                 decreases beneficial use, EPA estimated there would be negative annualized benefits for
                                 its special waste option (additional costs) of $17,270 to $16,149 million, and that the
                                 nonhazardous waste option would generate annualized benefits of $88 to $596 million.




                                 Page 15                                        GAO-12-635 EPA Regulations and Electricity
2005, the most recent year for which data were available. Depending on
how a generating unit’s cooling system is designed, drawing in water for
cooling can result in fish and other aquatic life being impinged—trapped—
against intake screens used to filter out solid matter, as well as
entrained—drawn into—the generating unit with the cooling water. 24
According to EPA, generating units kill hundreds of billions of aquatic
organisms in U.S. waters each year, including fish, crustaceans, marine
mammals, and other aquatic life.

Section 316(b) of the Clean Water Act requires EPA to establish
standards for cooling water intake structures that reflect the best available
technology for minimizing adverse environmental impact. To implement
section 316(b), EPA has issued several regulations, including a regulation
in 2004 that governed existing power plants with a large flow water
intake. 25 However, a federal appeals court struck down the 2004
regulation. Following an appeal to the Supreme Court and settlement of
other lawsuits related to the rulemaking, EPA proposed a regulation
covering certain existing power plants and other facilities on April 20,
2011. Regarding impingement, the proposal would establish fish mortality
requirements reflecting the best available technology based on the
performance of either (1) modified traveling screens—which capture and
safely return fish to water bodies—or equivalent technology or (2)
reduction of the facility’s water intake velocity—which would allow fish
and other organisms to move away from the intake structure. Regarding
entrainment, the proposal would require permitting authorities to follow a
process prescribed in the regulation to determine compliance deadlines
and the best available technology for entrainment controls on a site-
specific basis based on consideration of several specific factors. These
factors include the quantified and qualitative social benefits and costs of
available control options and impacts on electricity reliability. EPA
estimates that approximately 45 percent of the nation’s generating




24
  Using water for cooling may also result in significant water use, and the discharge of
cooling water that has been warmed from the plant process can raise the temperature of
receiving water bodies.
25
  EPA first issued a regulation implementing section 316(b) in 1976, but that regulation
was struck down by a federal appeals court in 1979. EPA has issued two other regulations
implementing section 316(b) that are currently in effect: the Phase I regulation that
governs new power plants and manufacturing facilities and the Phase III regulation that
governs new offshore oil and gas facilities.




Page 16                                        GAO-12-635 EPA Regulations and Electricity
                          capacity would be affected by the proposed regulation. 26 As a result of
                          regulating cooling water intake structures, EPA estimates increased
                          harvests in recreational and commercial fisheries, improved ecosystem
                          function, and reduced harm to threatened and endangered species,
                          among other benefits. EPA estimated the annualized benefits of its
                          proposed regulation to be $18 million with costs of $397 million. EPA is
                          required by a settlement agreement to sign a final regulation no later than
                          July 27, 2012.


Planning and Day-to-Day   Electric reliability refers to the ability to meet the needs of end-use
Actions Involved in       customers even when unexpected generating equipment failures or other
Maintaining Electric      factors affect the electricity system. 27 Reliability challenges can arise in
                          multiple ways:
Reliability
                          •    Resource adequacy challenges. These arise when there are
                               inadequate resources—generation, transmission, and others—to
                               meet the electricity needs of end-use customers. To avoid resource
                               adequacy challenges, system planners typically take steps to ensure
                               that generating capacity exceeds the maximum expected demand by
                               a certain margin, referred to as a “reserve margin.”

                          •    System security challenges. These arise because of a disturbance,
                               such as an electrical short, or the loss of a system component, such
                               as a generating unit that is needed at a specific location to maintain
                               the electricity grid’s voltage and frequency or to help restart the
                               electricity system in the case of a blackout. To avoid system security
                               challenges, system operators make real-time changes in the
                               operation of the electricity system, for example, by increasing or
                               decreasing the amount of electricity generated in particular locations




                          26
                            This proposed regulation applies to existing power generating and manufacturing
                          facilities, as well as new units at existing facilities, which have a design intake flow of more
                          than 2 million gallons of water per day and use at least 25 percent of the water withdrawn
                          exclusively for cooling purposes. The proposed regulation would also apply to oil-fueled,
                          gas-fueled, and nuclear generating units that meet those requirements. EPA estimated
                          that 559 fossil fuel electricity generating facilities would be subject to this regulation.
                          27
                            We use the term electricity grid to refer to an interconnected regional network of
                          transmission lines and the term electricity system to refer to the electricity grid together
                          with generating units used to provide electricity to customers.




                          Page 17                                           GAO-12-635 EPA Regulations and Electricity
     or by changing power flows on the transmission system in order to
     maintain suitable operating conditions.

System planners attempt to avoid reliability problems through advance
planning of transmission and, in some cases, generation resources. The
role of a system planner can be carried out by individual power
companies or regional entities called Regional Transmission
Organizations (RTO). 28 Figure 3 shows the territories of the seven RTOs
in the United States. System planners’ responsibilities include analyzing
expected future changes in generation and transmission assets, such as
the retirement of a generating unit; customer demand; and emerging
reliability issues. For example, once a system planner learns that a power
company intends to retire a generating unit, the system planner generally
studies the electricity system to assess whether the retirement would
cause reliability challenges and identify solutions to mitigate any impacts.
The solutions could be in the form of replacement capacity (generation or
demand-side resources) and new transmission lines or other equipment,
each with its own associated permitting and construction timelines.




28
  Independent operators of the transmission system can be referred to as RTOs or
Independent System Operators (ISO). RTOs and ISOs have similar functions, including
operating the transmission system and longer-term regional planning, but ISOs tend to be
smaller in geographic size or—for the ISOs in Texas and Canada—not subject to FERC
jurisdiction over rates and tariffs. For the purposes of this report, we use the term RTOs to
refer to both RTOs and ISOs.




Page 18                                         GAO-12-635 EPA Regulations and Electricity
Figure 3: U.S. Regional Transmission Organizations




                                        When reliability challenges cannot be avoided through prior planning,
                                        system operators take measures to resolve the problem by rebalancing
                                        supply and demand. The role of the system operator is also fulfilled by
                                        different entities, including individual power companies and RTOs. In the
                                        event of an urgent reliability challenge, system operators may take
                                        immediate steps to lower demand through public appeals to reduce use;
                                        interrupting or lowering electricity supply to customers who have
                                        negotiated prior agreements with the power company, which are referred


                                        Page 19                               GAO-12-635 EPA Regulations and Electricity
                      to as reliability-driven demand-response programs; as well as rotating
                      blackouts of limited duration. For example, during a period of sustained
                      high summer temperatures in 2011, the system operator in Texas called
                      upon the public to reduce electricity use during hours of peak demand to
                      prevent the need for rotating blackouts. When reliability challenges
                      cannot be adequately managed by system operators, unplanned,
                      uncontrolled interruption of customer’s electricity use can occur. These
                      interruptions may be confined to a localized area or widespread. For
                      example, in August 2003, an electricity blackout affected millions of
                      people across eight U.S. states and parts of Canada when, among other
                      things, system operators were unable to keep outages in northern Ohio
                      from cascading to interconnected portions of the electric grid. In some
                      areas, power was lost for several days.


Federal and State     The potential impact of retrofits and retirements on electricity prices and
Government Roles in   reliability is generally overseen by the federal regulator, FERC; state
Electricity Markets   regulators, including state public utility commissions; and others. 29

Prices                At the federal level, among other things, FERC is responsible for ensuring
                      that the rates, terms and conditions of services for wholesale electricity
                      sales and transmission in interstate commerce—which includes
                      wholesale electricity prices—are just and reasonable and not unduly
                      discriminatory or preferential. 30 In some parts of the country, FERC does
                      this by overseeing the design and operation of organized electricity
                      markets—markets for electricity and other services intended to promote
                      the reliable management of the grid—to ensure these markets are
                      competitive and will result in just and reasonable electricity prices. 31


                      29
                       Others involved in power company oversight may include municipal city councils for
                      municipal power companies and boards of directors for cooperative power companies.
                      30
                        For the purposes of this report, we use “prices” to refer to the price of both wholesale
                      and retail electricity consumed by businesses and households. Wholesale prices are
                      generally determined in organized markets by the balance of supply and demand or may
                      be negotiated directly between a seller and a buyer. Though FERC has a role in regulating
                      wholesale prices for much of the electricity industry, it does not set wholesale prices or
                      transmission rates charged by entities such as municipal utilities or most electric
                      cooperatives. Furthermore, retail prices—also referred to as electricity rates—are
                      generally determined by regulators, such as public utility commissions. FERC does not
                      regulate or set retail electricity prices.
                      31
                        The Public Utility Commission of Texas, rather than FERC, regulates the design and
                      operation of the electricity markets in much of Texas.




                      Page 20                                        GAO-12-635 EPA Regulations and Electricity
Organized markets are administered by RTOs, the same independent
entities that serve as system planners and operators in some regions.
These electricity markets are designed to ensure an adequate supply of
electricity at reasonable prices, and the markets are routinely examined
by independent entities and FERC to ensure they are competitive and
free of manipulation.

As a part of its responsibility for ensuring just and reasonable rates,
FERC has broad authority to oversee RTO rules related to electricity
transmission, markets, and other areas. These rules may include
requirements about how the transmission planning process is managed,
the terms and conditions under which transmission service is provided,
when and how the operator of a generating unit should notify the RTO of
a planned retirement, and steps the RTO will take in scheduling outages,
among other things. For example, RTOs typically require power
companies to notify them when the companies plan to retire a generating
unit. The time frame for this notification generally varies from 45 days to
approximately 180 days. 32 RTOs have an internal process in which
stakeholders review, modify, and may vote on proposed changes to rules.
If changes are agreed upon by the RTO’s stakeholders—power
companies, transmission owners, and users of electricity, among others—
the RTO may propose them to FERC for approval. 33 FERC conducts its
own review of proposed changes to RTO tariffs and market rules to
ensure they promote just and reasonable rates including, where relevant,
reliability requirements. In some cases, FERC may also proactively
review RTO market rules and order any changes to ensure they are just,
reasonable, and not unduly discriminatory or preferential. FERC is also
responsible for examining whether reliability must-run agreements—
agreements to provide nonmarket based payments to power companies
with generating units that are not economical to operate but are critical to
the reliability of the electricity grid—are at reasonable rates. These



32
  Some RTOs have developed markets, called capacity markets, which provide them with
information about what resources are expected to be available in the future so they can
plan accordingly. For example power companies seeking to retire a generating unit in ISO
New England—an RTO that operates in a six-state region in the Northeast—submit a
retirement request during the forward capacity market 3 years in advance of their
requested retirement date. According to ISO New England officials, the region does not
have a separate retirement notification process for power companies.
33
  According to FERC, RTOs have some authority to propose rule changes at FERC
without broad stakeholder approval.




Page 21                                       GAO-12-635 EPA Regulations and Electricity
payments would cover the cost of keeping such units operational past
when companies were planning to retire them.

The role of state governments in overseeing electricity prices varies
across the country. In some areas, referred to as “traditionally regulated
markets,” state public utility commissions—which generally aim to ensure
retail electricity rates are just and reasonable—review power companies’
requests to recover the costs of investments in new generating units,
distribution lines and other system upgrades. 34 Once a state public utility
commission approves a power company’s request, consumer retail prices
are adjusted to recover the power companies’ costs plus a rate of
return. 35 For companies in traditionally regulated markets, their
investments in controls to comply with EPA regulations would have to be
approved by public utility commissions for the companies to adjust their
rates to include these costs. In other parts of the country, referred to as
“restructured markets,” electricity is sold by multiple companies
competing with each other. In these areas, public utility commissions play
a more limited role in overseeing generation. Consumers pay competitive
retail electricity rates based on the price of electricity as determined in
FERC-regulated wholesale markets. 36 Many electricity generating
companies have received authority from FERC to sell power at market-
based rates and, in restructured markets, these companies would aim to
recover the costs of any investments made to comply with EPA
regulations through wholesale sales of electricity, but their ability to do so
depends on overall supply and demand conditions, which determine the
prices they can receive.




34
  About 40 percent of the population lives in states and the District of Columbia that EIA
classifies as having restructured their retail markets: Connecticut, Delaware, Illinois,
Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York,
Ohio, Oregon, Pennsylvania, Rhode Island, and Texas. The remaining population lives in
states that, according to EIA, have suspended their restructuring activities or have not
restructured. We did not examine how EIA determined the status of restructuring in these
states.
35
  Rates set by commissions may vary by customer classes (e.g., residential, commercial
and industrial), as well as by the amount of electricity consumed.
36
  In addition to the market-determined generation component of their electric bill,
consumers in these areas also pay a regulated rate for transmission and distribution.




Page 22                                        GAO-12-635 EPA Regulations and Electricity
Reliability   Under the Energy Policy Act of 2005, FERC is responsible for approving
              and enforcing standards to ensure the reliability of the bulk power system.
              FERC certified NERC to develop and enforce these reliability standards,
              subject to FERC review. 37 These standards outline general requirements
              for planning and operating the bulk power system to ensure reliability. For
              example, one reliability standard requires that system planners plan and
              develop their systems to meet the demand for electricity even if
              equipment on the bulk power system, such as a single generating unit or
              transformer, is damaged or otherwise unable to operate. With respect to
              MATS, EPA has stated that it will rely on the advice and counsel of
              reliability experts, including FERC, to identify and analyze reliability risks
              when owners request a Clean Air Act administrative order to provide units
              with up to an additional year for compliance with MATS. FERC recently
              issued a policy statement detailing how it intends to provide advice to
              EPA on such requests. 38

              In general, neither FERC or NERC, nor the system planners can require
              companies to build generation or compel existing generation to operate,
              but DOE can order the generation of electricity in limited circumstances.
              Specifically, in certain emergencies, section 202(c) of the Federal Power
              Act authorizes DOE to order, among other things, the generation of
              electricity that in its judgment will best meet the emergency and serve the
              public interest. DOE has used this authority in the past to, among other
              things, ensure electricity could be provided to the District of Columbia in
              the event of a transmission line failure, as well as to provide electricity to
              customers during the California energy crisis. Furthermore, some state
              public utility commissions may require power companies to ensure they
              can provide adequate levels of generation to meet the demand of
              customers in their service territory.




              37
               For standards to be legally enforceable, FERC must approve them.
              38
                See FERC "Policy Statement on the Commission's Role Regarding the Environmental
              Protection Agency's Mercury and Air Toxics Standards," Docket No. PL12-1-000 (May 17,
              2012).




              Page 23                                     GAO-12-635 EPA Regulations and Electricity
                            According to available information, there is uncertainty regarding how
Power Companies Are         power companies will respond to the four key EPA regulations, though
Expected to Retrofit        companies are expected to retrofit most coal-fueled generating units with
                            controls, retire other units, and take additional actions.
or Retire Units and
Take Other Actions

It Is Uncertain How Power   It is unclear how power companies will respond to the four key EPA
Companies Will Respond      regulations, in part because there is uncertainty about the regulations
to Key EPA Regulations      themselves and other factors affecting the industry, including future
                            natural gas prices. Analysts that have studied how power companies may
                            respond to the regulations have made different assumptions regarding
                            these factors, which affect power companies’ assessments of whether to
                            make additional investments in coal-fueled generating units such as
                            investments that may be needed to respond to the four key regulations. 39

                            Regarding the regulations, the requirements and deadlines they may
                            establish for generating units are somewhat uncertain, especially for the
                            proposed regulations. This is because the final CCR and 316(b)
                            regulations might differ from the proposed regulations and because of
                            current and potential future legal challenges. For example, CSAPR and
                            MATS—the two regulations that have been finalized—face legal
                            challenges and may change depending on how the court rules. In
                            addition, some of the regulatory requirements, such as some aspects of
                            316(b), will not be specified until the relevant permits are issued.
                            Furthermore, several bills have been introduced in Congress that would
                            affect some or all of the regulations. Some power companies may delay
                            taking actions to respond to these regulations until there is additional
                            certainty about their final regulatory requirements.

                            Several other factors also contribute to the uncertain environment in
                            which power companies will respond to the new regulations. Among
                            these is uncertainty about the future demand for electricity. EIA projects
                            that demand for electricity will grow slowly over the next few years. This
                            means power companies may be less inclined to make, and state
                            electricity regulators may be less willing to approve of, investments in



                            39
                              GAO has ongoing work on the views of stakeholders of factors that may affect the future
                            use of coal to generate electricity.




                            Page 24                                       GAO-12-635 EPA Regulations and Electricity
electricity generating units that may not be needed as often. On the other
hand, if the economic recovery is more robust, there could be more
electricity demand than expected, which might increase the need for
additional generating capacity in some areas. Another factor that
contributes to uncertainty is the price of fuels. Natural gas prices have
decreased in recent years, and coal prices have increased, narrowing the
historical cost advantage of using coal to produce electricity in some parts
of the country. As a result of these changing prices, among other things,
the use of natural gas to produce electricity has increased and is
expected to continue to increase. For example, EIA recently projected
that the use of natural gas to produce electricity in 2012 could increase by
24 percent, and that, in turn, electricity generation from coal could decline
by 15 percent. 40 However, some stakeholders we interviewed raised
concerns about the prospects for continued low natural gas prices, citing
the potential increased future use of natural gas for electricity or more
strict regulation of natural gas production that could affect the long-term
outlook for domestic natural gas production and prices.

Another factor that contributes to uncertainty is the increased focus on
renewable energy production and other potential future regulations. In
recent years, there have been federal and state efforts to encourage the
development of renewable energy sources—particularly wind and solar—
to produce electricity. For example, 30 states have laws or regulations
requiring power companies to increasingly rely on renewable sources for
electricity. 41 These and other policies may contribute to generation from
renewable sources increasing from 10 percent in 2010 to 16 percent of
total electricity generation by 2035, potentially diminishing the demand for
electricity from fossil fuels, including coal, in the future. Some
stakeholders we met with noted that there is uncertainty about future
environmental requirements, in particular those aimed at reducing carbon
dioxide emissions to address climate change. 42 Such future requirements


40
 U.S. Energy Information Administration, Short-Term Energy Outlook (May 2012).
41
  These states are: Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Illinois,
Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana,
Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio,
Oregon, Pennsylvania, Rhode Island, Texas, Washington, West Virginia, and Wisconsin.
42
  Under the terms of a settlement agreement, EPA was required to propose and finalize
new source performance standards for greenhouse gas emissions from existing electricity
generating units. In April 2012, EPA proposed standards for certain new electricity
generating units and stated that it would propose standards for existing units at an
appropriate time.




Page 25                                        GAO-12-635 EPA Regulations and Electricity
                            could affect the attractiveness of additional investments by power
                            companies in existing coal-fueled generating units because coal-fueled
                            units are more carbon intensive than other forms of generating electricity.
                            As we have previously reported, on average, coal-fueled units produced
                            twice as much carbon dioxide as natural gas units in 2010. 43


Power Companies Are         According to available information, power companies are projected to
Expected to Retrofit Many   retrofit many coal-fueled generating units with environmental controls and
Generating Units, Retire    retire some other units, as well as take additional actions to respond to
                            the four key EPA regulations.
Others, and Take
Additional Actions          •    Retrofit many coal-fueled generating units. All 12 of the studies we
                                 reviewed suggest that power companies may retrofit many coal-fueled
                                 generating units with new or upgraded controls to respond to the four
                                 key regulations. EPA’s analyses and two other studies we reviewed
                                 report national projections of how companies may reduce emissions
                                 of air pollutants to meet the finalized MATS and CSAPR
                                 requirements. Projections in these studies suggest that one-third to
                                 three-quarters of all coal-fueled capacity could be retrofitted or
                                 upgraded with some combination of controls, including the following:
                                 (1) fabric filters or electrostatic precipitators to control particulate
                                 matter; (2) dry sorbent injection or flue gas desulfurization units—also
                                 known as scrubbers—to control SO 2 and acid gas emissions; (3)
                                 selective catalytic reduction or selective non-catalytic reduction units
                                 to control NO x ; and (4) activated carbon injection units to reduce
                                 mercury emissions. 44 Appendix IV describes these controls, how they
                                 operate, and the extent of their use among coal-fueled generating


                            43
                              GAO, Air Emissions and Electricity Generation at U.S. Power Plants, GAO-12-545R
                            (Washington, D.C.: Apr. 18, 2012).
                            44
                              Specifically, EPA projects that MATS will lead to the installation of fabric filters on an
                            additional 102,000 MW of capacity; upgraded electrostatic precipitators on 34,000 MW;
                            new dry sorbent injection units on 44,000 MW of; new scrubbers on 20,000 MW (and
                            scrubber upgrades on 63,000 MW); and activated carbon injection units on 99,000 MW
                            2015. EPA also projected that CSAPR will lead to retrofitted dry sorbent injection units on
                            3,000 MW and scrubbers on 5,900 MW by 2014. NERC (2011) projected that 576 units
                            with 234,371 MW of capacity would retrofit by the end of 2015. A study by staff of the
                            Bipartisan Policy Center (which we refer to as Bipartisan Policy Center, 2011) projected, in
                            2015, fabric filters on 516-541 units; dry sorbent injection units on 181-199 units (24,000
                            MW of capacity); scrubbers on 84-85 units (51,000 MW); selective catalytic reduction units
                            on 28-34 units; and activated carbon injection units on 368-392 units. (Full citations for
                            selected studies are listed in app. III.)




                            Page 26                                         GAO-12-635 EPA Regulations and Electricity
     units. Two of the studies we reviewed include estimates of how power
     companies may respond to CCR, projecting that some companies
     would convert power plants from wet ash handling to dry ash
     handling, which uses conveyor belts or trucks to gather and transport
     coal combustion residuals to storage sites, since wet ash
     impoundments may effectively be phased out under the final CCR
     regulation. 45 These two studies projected that companies could
     convert 96-98 and 158 power plants to dry ash handling
     respectively. 46 For power companies to respond to the proposed
     316(b) regulation, EPA estimates that approximately 224 generating
     units may install intake screens called modified traveling screens—
     screens or buckets that collect fish from the cooling intake water and
     return them safely to the source water body—or reduce the facility’s
     water intake velocity to meet impingement requirements. In addition,
     two studies estimated how many power plants may install cooling
     towers to meet the proposed 316(b) entrainment requirements,
     projecting that 46 and 92-93 plants may do so. 47 These projections
     are uncertain since the proposed regulation gives permitting
     authorities the responsibility to set entrainment requirements on a
     case-by-case basis. 48 Figure 4 shows where some of these controls
     would be installed at a coal-fueled power plant.




45
  Coal combustion residuals can be gathered and transported with dry handling systems
or with wet systems—such as when ash and water form a slurry that flows into an ash
impoundment.
46
 See Bipartisan Policy Center (2011) and EPA-CCR (2010).
47
 See NERA (2011) and Bipartisan Policy Center (2011).
48
  Some researchers have observed that studies that examined the potential implications
of the four key regulations that were conducted before EPA proposed 316(b) assumed
that EPA would require closed-cycle cooling towers. While acknowledging that closed-
cycle cooling towers reduce impingement and entrainment mortality to the greatest extent,
the proposed regulation concludes that it is not the best technology available for
minimizing adverse environmental impacts on a national basis because of the following
key factors: (1) potential adverse consequences to the reliability of energy delivery on the
local level during the installation of cooling towers; (2) increased air emissions of various
pollutants because of the additional fuel that would be burned to compensate for the
energy required to operate the cooling towers and the slightly lower generating efficiency;
(3) feasibility concerns and lack of land availability for placement of the cooling towers;
and (4) the limited remaining useful life of some generating units. None of the study
results that we cite here assumes that EPA would require closed-cycle cooling towers for
all units.




Page 27                                         GAO-12-635 EPA Regulations and Electricity
Figure 4: Sample Layout of Controls at a Coal-Fueled Power Plant




                                        Note: This figure is intended to be illustrative, though not exactly representative, of the controls used.


                                        •    Retire some units. Ten of the studies we reviewed include projections
                                             of how much coal-fueled capacity power companies might retire, with
                                             three of these studies reporting national projections corresponding to
                                             all four regulations. The projections in these three studies range from
                                             power companies retiring 2 to 12 percent of coal-fueled capacity in




                                        Page 28                                                 GAO-12-635 EPA Regulations and Electricity
     response to the four regulations rather than installing controls. 49 Some
     regions may see more significant levels of retirements. For example, a
     study by the Midwest Independent Transmission System Operator,
     Inc. (MISO), an RTO that covers all or parts of 11 U.S. states and a
     Canadian province, projected that 18 percent of the coal-fueled
     capacity in the U.S. portion of its region could retire. EPA and some
     stakeholders we interviewed pointed out that some of these projected
     retirements may have occurred at some point even without the new
     regulations. As discussed previously, several industry trends may be
     contributing to the retirement of coal-fueled generating units, including
     relatively low natural gas prices, increasing prices for coal, and low
     expected growth in demand for electricity. For example, officials at an
     investment analysis firm highlighted a financial analysis they had
     conducted that found that 7 to 11 percent of coal-fueled capacity may
     not be economic to operate in 2012 to 2014 at expected coal and
     natural gas prices. 50 This capacity could be at risk of retirement
     unless economic conditions change. In addition, one of the studies we
     reviewed found that changes in expectations regarding future natural
     gas prices and electricity demand have an impact on projected
     retirements that is comparable to the effect of CSAPR and MATS. 51 At
     the same time, some stakeholders told us that the regulations may
     accelerate retirements because power companies may not want to
     invest in controls for units they expect to retire soon for other reasons.
     Several stakeholders highlighted that the units power companies may
     retire early are likely to be smaller, older, and less efficient units.
     Consistent with stakeholder views about the regulations accelerating
     retirements, power companies have announced their plans to retire
     units representing about 9 percent of coal-fueled capacity with the
     bulk of these retirements occurring by MATS’s 2015 compliance




49
  See North American Electric Reliability Corporation (2011), Bipartisan Policy Center
(2011), and NERA (2011). EPA expressed concerns about some of the NERA study's
assumptions and said its modeling was not sufficiently transparent. Power companies are
planning to retire generating units in the absence of the four regulations, but the
projections we cite here attempted to distinguish retirements in response to the
regulations from those that would occur in their absence.
50
  Hugh Wynne, et al. “Bernstein Commodities and Power: The Forward Prices for Coal
and Gas Can’t Both Be Right—How Utilities Will Arbitrage Fuel Prices in 2012” (Dec. 16,
2011).
51
 See RFF (2012).




Page 29                                       GAO-12-635 EPA Regulations and Electricity
                                             deadline. 52 (See fig. 5.) These planned retirements include
                                             retirements for any reason, including in response to the four
                                             regulations, and would correspond to almost twice as much coal-
                                             fueled capacity as retired in the 22 years from 1990 through April
                                             2012.

Figure 5: Capacity of Actual and Planned Coal-Fueled Generating Unit Retirements, 1990-2020




                                        Note: Data on generating unit capacity refers to units with over 25 MW of net summer capacity—the
                                        generating unit’s capacity to produce electricity during the summer when electricity demand for many
                                        electricity systems and losses in efficiency are generally the highest. Net capacity figures exclude
                                        output used internally for plant operations.


                                        •    Other actions. The studies we reviewed cited several other actions
                                             that power companies may take in response to the new regulations,
                                             including building new generating units, upgrading transmission



                                        52
                                         Information on planned retirements reflect publicly reported plans as identified by
                                        Ventyx. As plans may change, actual future retirements may differ from these plans.




                                        Page 30                                             GAO-12-635 EPA Regulations and Electricity
                             systems to ensure reliability, and changing how they operate their
                             units. First, several of the studies we reviewed project that power
                             companies may increasingly use natural gas to produce electricity as
                             they retire coal-fueled units and because remaining coal units may
                             become somewhat more expensive to operate. Increased generation
                             from natural gas could come from a combination of existing natural
                             gas units being used more often and new natural gas units being built.
                             Second, power companies may also upgrade transmission systems to
                             address reliability issues that arise due to units’ retirements, which
                             may include relatively straightforward incremental upgrades to
                             existing transformers or circuit breakers, as well as more significant
                             enhancements such as new transmission lines. Third, EPA projects
                             that power companies may also change how they operate their
                             universe of generating units in response to the regulations. This is
                             particularly likely in response to CSAPR, which would give power
                             companies flexibility in deciding how to meet emissions limitations,
                             including by running more polluting units less often or purchasing
                             emissions allowances.

                         Available information suggests the actions power companies take to
Actions Taken by         respond to the four key regulations will have costs, and some may be
Power Companies          challenging to complete by the regulations’ compliance deadlines. In
                         addition, these actions may have varied implications across the country—
Will Likely Increase     increasing electricity prices in some regions and contributing to some
Electricity Prices and   potential reliability challenges.
May Contribute to
Reliability Challenges
in Some Regions




                         Page 31                               GAO-12-635 EPA Regulations and Electricity
Estimated Costs of Power   Two of the studies we reviewed reported national estimates of the total
Companies’ Actions in      costs of actions power companies may take in response to the four key
Response to Four EPA       EPA regulations, projecting from $16 billion to $21 billion in additional
                           annual costs. 53 EPA analyzed each regulation individually and projected
Regulations
                           annual compliance costs of $10.2 billion for MATS, $853 million for
                           CSAPR, $600 million to $1.5 billion for CCR depending on which option is
                           finalized, and $397 million for 316(b). 54 According to EPA reports, in
                           addition to operating and maintenance costs, a typical coal-fueled unit
                           with a capacity of 700 MW could incur costs from $287 million to $351
                           million to install a scrubber, from $116 million to $137 million to install a
                           selective catalytic reduction unit, and from $97 million to $114 million to
                           install a fabric filter. 55 Other controls are less expensive, and a 700 MW
                           unit could incur $22 million to $43 million to install a dry sorbent injection
                           unit or $4 to $5 million for an activated carbon injection unit, according to
                           EPA reports. 56

                           Additional costs could be incurred to build or acquire new generating
                           capacity or to upgrade transmission systems due to unit retirements. For
                           example, MISO estimated that building new generating capacity in its



                           53
                             Specifically, the Bipartisan Policy Center study projected annualized costs of $16 billion
                           in 2015 and $20 billion in 2025. NERA Economic Consulting estimated additional annual
                           costs of $21 billion on average over the 2012-2020 period, with a total net present value of
                           $130 billion. EPA expressed concerns about some of the NERA study's assumptions and
                           said its modeling was not sufficiently transparent. It is important to note that these studies
                           made different assumptions about the regulations that can affect their findings. For
                           example, while EPA has stated that it expects power companies to comply with 316(b)
                           over a 15-year period from 2013-2027, NERA assumed costs were incurred in 2015.
                           NERA's assumption may overstate costs. At the same time, both NERA and the Bipartisan
                           Policy Center’s analysis assumed that EPA would finalize the solid waste option for CCR.
                           Costs may be higher if EPA instead finalizes the special waste option.
                           54
                             EPA officials said that it would be inappropriate to add together its cost estimates from
                           these regulations because of differences in baselines and analysis years. EPA did not
                           provide an estimate of the overall impact of the four regulations.
                           55
                             EPA, Documentation for EPA Base Case v.4.10 Using the Integrated Planning Model,
                           EPA#430R10010 (Washington, D.C.: August 2010)
                           (http://www.epa.gov/airmarkets/progsregs/epa-ipm/BaseCasev410.html) and EPA,
                           Documentation Supplement for EPA Base Case v4.10_PTox-Updates for Proposed
                           Toxics Rule, EPA#430-R-11-006 (Washington, D.C.: March 2011)
                           (http://www.epa.gov/airmarkets/progsregs/epa-ipm/docs/suppdoc.pdf).
                           56
                             These costs do not include costs that may be associated with retrofitting or upgrading
                           particulate matter controls that may be needed for dry sorbent or activated carbon
                           injection units.




                           Page 32                                          GAO-12-635 EPA Regulations and Electricity
                          region to offset capacity lost from unit retirements could cost from $2
                          billion to $10 billion and that an additional $580 to $880 million in
                          transmission upgrades could be required to maintain reliability criteria
                          after potential unit retirements in net present value terms. MISO’s study is
                          the only one we identified that estimated potential transmission
                          investments needed to maintain reliability.


Some Actions May Be       Assessments by EPA and DOE suggest that much of the electricity
Challenging to Complete   industry may be able to complete actions by the compliance deadlines. In
by Compliance Deadlines   their assessments, EPA and DOE compared past coal-fueled generating
                          unit retrofits to the MATS compliance deadline. DOE found that,
                          assuming prompt action by regulators and generators, the timelines
                          associated with retrofits and new construction are generally comparable
                          to EPA’s regulatory deadlines. 57 EPA reported that a reasonable,
                          moderately paced effort would result in the majority of needed retrofits
                          being installed by 2015 with the possibility of some retrofits needing up to
                          an additional year for completion. 58 In addition, EPA’s analysis stated that
                          past experience may not reflect industry’s ability to deploy controls at a
                          faster pace in the future using overtime, additional off-site modularization
                          and prefabrication. 59

                          At the same time, power company representatives and other stakeholders
                          suggested that it might be challenging to complete retrofits or retirements
                          by the compliance deadline for MATS in some cases. In this regard, an
                          analysis by the Utility Air Regulatory Group, a voluntary group whose
                          members include power companies, found that about 30 percent of
                          projects to install fabric filters might be completed by the 2015 MATS
                          compliance deadline and almost 70 percent of projects might be



                          57
                            DOE, Resource Adequacy Implications of Forthcoming EPA Air Quality Regulations
                          (December 2011).
                          58
                            EPA’s analysis examined the overall capacity of the industry to design, supply, and
                          install equipment but did not examine the availability of specific resources or when retrofit
                          projects may begin. EPA found that, given past experience deploying controls and building
                          new generating capacity, sufficient engineering and other capacity would be available to
                          meet these needs. See: EPA, An Assessment of the Feasibility of Retrofits for the Mercury
                          and Air Toxics Standards Rule (Dec. 16, 2011).
                          59
                            Modularization and prefabrication refers to assembling individual components of
                          complex controls off-site and combining and attaching these assemblies to the generating
                          unit to reduce on-site construction times.




                          Page 33                                         GAO-12-635 EPA Regulations and Electricity
completed by the 2016 deadline, with the 1-year extension available from
permitting authorities. 60 EPA's study of the final MATS regulation
indicates that fewer fabric filters may be needed than were assumed by
the Utility Air Regulatory Group, and the group's results suggest that it
may be possible to complete these by the 2016 deadline with the 1-year
extension. Similarly, actions to mitigate capacity loss and other
challenges due to generating unit retirements could take time as they
could involve building new generating units or upgrading transmission
systems. If these actions cannot be completed before compliance
deadlines, a reliability challenge could arise unless steps are taken to
keep generating units that are critical for the reliability of the electricity
system from retiring. There have been examples of efforts to conduct
transmission upgrades to address reliability challenges that have taken
longer than the 4 years that may be available to meet the MATS
compliance deadline assuming a 1-year extension. For example,
transmission upgrades were necessary to allow several generating units
with total capacity of 790 MW to retire at the Benning Road and Buzzard
Point power plants on the Potomac Electric Power Company system,
which serves 788,000 customers in Maryland and the District of
Columbia. In 2007, the plants’ owner notified the system planner of its
desire to retire the units by mid-2012. The needed transmission
upgrades, including new transformers and circuits, are expected to be
completed in mid-2012.

Retrofits of generating units, transmission system upgrades, and the
construction of new generating units can be major engineering
undertakings, and several power company representatives and other
stakeholders we interviewed said that completing some of these
undertakings by compliance deadlines may be challenging in some
cases. Stakeholders expressing concerns highlighted the following three
reasons meeting these deadlines could be challenging, particularly for
MATS compliance:

•    Regulatory approvals can take time. Retrofits, transmission line
     upgrades, and construction of new generating units will require



60
  The analysis assessed the rate at which fabric filters can be deployed for MATS
compliance, assuming fabric filters may be required on 533 generating units representing
166,000 MW of capacity. See: Utility Air Regulatory Group, Attachments to the Comments
of the Utility Air Regulatory Group, Volume 4, Docket EPA-HQ-OAR-2009-0234,
(Washington, D.C.: Aug. 4, 2011).




Page 34                                       GAO-12-635 EPA Regulations and Electricity
     various state and local regulatory approvals, which may include
     construction permits and modifications of air pollution permits, which
     can extend the completion time of such projects. 61 In traditionally
     regulated markets, power companies that decide to undertake a
     retrofit or new construction may also need to obtain a review by the
     state utility commission in order to include associated costs in
     electricity rates. Some of these approvals can be pursued
     concurrently with or be obtained after design, construction, and start-
     up, but some may extend completion times. 62

•    Site-specific concerns for retrofits. In addition, some of the power
     company representatives we interviewed told us that power plants
     may have site-specific physical constraints that can slow completion
     of work. For example, according to representatives at one company, it
     took the company about 5 years to install fabric filters on four units at
     one plant, in part because the site did not have space to place the
     needed controls. The fabric filter for one of the units had to be
     constructed 1,200 feet away and connected via ductwork. Figure 6
     illustrates another power plant with site-specific concerns, constrained
     by a river on one side and a highway and mountain on the other.
     Officials from the power company owning this plant told us that they
     generally construct a separate new stack for retrofitted scrubbers, but
     this was not possible due to space constraints at this site. Instead, the
     power company is installing ductwork from the scrubber through the
     cooling tower in order to use the cooling tower as a stack.




61
  The construction of new generating units and certain retrofits on existing units may
require various types of air permits. For example, power companies may need to go
through New Source Review, a preconstruction permitting process that establishes
emissions limits and requires the use of certain emissions control technologies. Power
plants will only need a major New Source Review permit if the retrofit is a major
modification—a physical or operational change that would result in a significant net
increase in emissions of a regulated pollutant—which is determined on a case-by-case
basis. States may require minor New Source Review permits for retrofits that are not
major modifications.
62
  An examination of over 100 recent preconstruction pollution control retrofit approvals
before public utility commissions in 10 states found that the average approval time across
all cases was 7 months, though it took over a year for six cases. M.J. Bradley &
Associates LLC, “Public Utility Commission Study,” Prepared for SRA International, Mar.
31, 2011.




Page 35                                        GAO-12-635 EPA Regulations and Electricity
Figure 6: Installation of a Scrubber at the Cardinal Plant in Brilliant, Ohio




                                            •   Supply chain concerns. Some power company representatives and
                                                other stakeholders stated that, because of the large number of
                                                potential retrofits, they had concerns about the availability of specific
                                                skilled laborers or equipment needed to install some controls. The
                                                installation of some controls could entail significant retrofit efforts
                                                industry-wide. For example, according to EPA, companies could
                                                install fabric filters on an additional 102,000 MW of coal-fueled
                                                capacity in response to MATS. This is almost double the coal-fueled
                                                capacity that currently has fabric filters. The simultaneous installation
                                                of air pollution controls has strained supply chains in the past. For
                                                example, EPA stated that, from 2007 to 2008, when a significant
                                                number of power plants installed scrubbers, delays as long as 18


                                            Page 36                                  GAO-12-635 EPA Regulations and Electricity
                               months occurred for plants to obtain such key engineered equipment
                               as large pumps, motors, and chimneys that were needed. (See app.
                               IV for additional information on the controls installed on coal-fueled
                               units.) Some other stakeholders have said that there are sufficient
                               resources available and did not identify concerns related to supply
                               chain issues. EPA has stated that the controls needed to meet
                               CSAPR and MATS are much simpler and will take significantly less
                               time to plan, design, install, and commission than the controls that
                               caused strains in the past.

Impacts Are Expected to   The actions power companies take to respond to the four EPA regulations
Vary Across the Country   are expected to affect some parts of the country less than others. First,
                          some areas of the country, such as California, Washington, Oregon, and
                          Maine, have little coal-fueled generation and, therefore, are expected to
                          see little impact. In addition, CSAPR would cover 28 states in the eastern
                          half of the United States, so generating units in the remaining states
                          would not be affected. Second, power companies in certain areas may
                          have already installed some of the needed controls on their coal-fueled
                          units for a variety of reasons. For example, at least 18 states have
                          enacted laws or regulations to limit mercury emissions from electricity
                          generation. 63 To satisfy these state requirements, power companies with
                          coal-fueled generating units in these states may have already installed, or
                          be planning to install, controls that are also capable of meeting MATS
                          limits. These states may not see many additional changes in their
                          electricity systems. In addition, some regions have coal-fueled generating
                          units that were built more recently, and such newer units, as we reported
                          in April 2012, are more likely to have installed some controls that could be
                          helpful in meeting MATS and CSAPR requirements. 64 In contrast, other
                          areas, including the Midwest, Mid-Atlantic, and South, have higher
                          concentrations of coal-fueled generating units that do not have control
                          equipment needed to respond to the four key regulations. These areas
                          are more likely to be affected by the key EPA regulations.




                          63
                           These 18 states are Colorado, Connecticut, Delaware, Georgia, Illinois, Maryland,
                          Massachusetts, Michigan, Minnesota, Montana, New Hampshire, New Jersey, New
                          Mexico, New York, North Carolina, Oregon, Utah, and Wisconsin.
                          64
                            Under the New Source Review provisions of the Clean Air Act, generating units built
                          after August 7, 1977 must obtain a preconstruction permit that establishes emission limits
                          and requires the use of certain pollution control technologies. See GAO-12-545R.




                          Page 37                                        GAO-12-635 EPA Regulations and Electricity
Actions Would Likely          The actions power companies may take in response to the four key EPA
Increase Electricity Prices   regulations would likely increase electricity prices in some regions. Of the
in Some Regions               12 studies we reviewed, EPA and three other entities––Resources for the
                              Future (RFF), 65 NERA Economic Consulting, and MISO––conducted
                              studies that project price impacts, but their results are not directly
                              comparable because they considered different sets of the four
                              regulations, report results differently, and examined different
                              configurations of states in their regional analysis. EPA’s analyses suggest
                              that MATS, by itself, may increase average retail electricity prices in the
                              contiguous United States by 3 percent in 2015 and 2 percent in 2020 and
                              have the most significant potential price impact of the four regulations.
                              EPA estimated that the potential impact of MATS on average retail
                              electricity prices in 13 regions could range from about a 1 percent
                              increase in a region covering most of California to about a 6 percent
                              increase in a region covering Kansas, Oklahoma, and parts of New
                              Mexico, Texas, Louisiana, Arkansas, and Missouri. Table 2 summarizes
                              the results of EPA’s studies. 66 Electricity prices are influenced by a
                              number of other factors, including changing prices of fuels and demand
                              for electricity. According to EPA officials, the projected price increases
                              associated with CSAPR and MATS are within the historical range of price
                              fluctuations, and projected future prices overall may be below historic
                              electricity prices. EPA officials also said that the regions of the country
                              most likely to experience larger price increases have historically had
                              lower than average prices and that they project that postimplementation
                              prices in these regions will remain below the national average.




                              65
                                RFF is a nonprofit and nonpartisan organization that conducts independent research on
                              environmental, energy, natural resource and environmental health issues.
                              66
                                EPA officials told us that it would be inappropriate to add together its price increase
                              estimates from these regulations because of differences in baselines and analysis years.
                              EPA did not prepare an estimate of the overall impact of the four regulations.




                              Page 38                                        GAO-12-635 EPA Regulations and Electricity
Table 2: EPA Estimates of Potential Average National and Regional Retail Electricity
Price Increases Due to Compliance with Four Key EPA Regulations

                                                Range of estimated          Estimated national
    Regulation                             regional price increases     average price increase
              a
    CSAPR                                                -0.2-3.1%                         0.8%
          a
    MATS                                                     1.3-6.3%                      3.1%
    316(b)                                                0.0- 0.4%                        0.1%
    CCR–Solid Waste Option                                   0.0-1.2%                      0.2%
    CCR–Special Waste Option                                 0.0-5.6%                      0.8%
Source: GAO analysis of EPA information.


Note: Estimates refer to impacts for different years—2014 for CSAPR, 2015 for MATS and 316(b),
and incremental regulatory costs compared with electricity prices in 2009 for CCR.
a
Estimates are for regions in the contiguous United States.

NERA examined all four regulations and estimated that average electricity
prices from 2012 to 2020 may be only slightly affected in the Northwest
(0.1 percent increase), although they could increase by an average 13.5
percent in Kentucky and Tennessee—states more dependent on
electricity generated from coal. 67 The RFF study examined the combined
impact of MATS and CSAPR and projected a 0.6 percent increase in
electricity prices in 2020. The RFF study also estimated that other factors,
including falling natural gas prices and other trends, may be contributing
to declining future electricity prices that may offset some or all of the price
increases due to the EPA regulations. 68 MISO looked at the price
implications of all four regulations in its region, projecting a 7 to 7.6
percent retail price increase.

Electricity prices may increase because the investments associated with
the actions power companies take to respond to the EPA regulations, and
any increases in the costs of generating electricity, would be passed on to
customers to varying extents. In traditionally regulated markets, power
companies would submit rate cases to their public utility commissions



67
 EPA expressed concerns about some of the NERA study's assumptions and said its
modeling was not sufficiently transparent.
68
  While EIA’s study does not estimate the impact of the EPA regulations on prices, it
projects that average retail electricity prices may decline from 9.8 cents per kilowatt-hour
in 2010 to 9.2 cents per kilowatt-hour in 2019, in part due to declines in the prices of
natural gas.




Page 39                                              GAO-12-635 EPA Regulations and Electricity
requesting approval to increase prices to cover costs associated with
responding to the regulations. If a state public utility commission finds
these costs are prudent, prices would be increased accordingly to recover
these costs. For example, the public utility commission in Kentucky
approved environmental compliance plans for two power companies to
install controls and convert to dry ash handling related to CSAPR, MATS,
and CCR, among other actions. 69 The public utility commission of
Kentucky stated that these plans may increase residential electricity bills
by 18 percent for one company and by 10 percent for another—about $16
and $7 per month for an average customer, respectively, by 2016.
However, increased costs may not be fully passed on to consumers in
restructured markets where generating units are not owned by a state-
regulated utility. This could occur because prices paid for electricity
generation are set by FERC-overseen competitive markets. In these
instances, power companies, rather than consumers, may absorb some,
or all, of these costs. In such markets, power companies bid to provide
electricity at a certain price. These bids are accepted from lowest to
highest until all demand for electricity is met. The price of the last bid
accepted to meet demand generally establishes the market price. If this
price-setting bid is from a coal-fueled unit that is more expensive to
operate because of controls or from a unit that is more expensive to
operate than a retired coal-fueled unit, electricity prices are likely to rise. If
the price-setting bid is from a generating unit that is not affected by the
regulations and that would have set the price in the absence of the
regulations, then prices are likely to remain the same.

Likewise, other investments to address any potential reliability challenges
could also increase prices. For example, as a power company retires
generating units, the relevant system planner identifies whether the
retirements would cause reliability challenges. If there are reliability


69
  The approved plans also include other changes that affect price implications of these
investments, such as a reduction in the rate of return the companies may earn on their
investments and a 1 cent increase in a monthly charge to fund a home energy assistance
program. See: Commonwealth of Kentucky Public Service Commission, "PSC Accepts
Settlement in KU and LG&E Environmental Compliance Cases," (Frankfort, KY: Dec. 15,
2011); Commonwealth of Kentucky Public Service Commission, "Order: Application of
Kentucky Utilities Company for Certificates of Public Convenience and Necessity and
Approval of its 2011 Compliance Plan for Recovery by Environmental Surcharge," Case
No. 2011-00161; and Commonwealth of Kentucky Public Service Commission, "Order:
Application of Louisville Gas and Electric Company for Certificates of Public Convenience
and Necessity and Approval of its 2011 Compliance Plan for Recovery by Environmental
Surcharge," Case No. 2011-00162.




Page 40                                        GAO-12-635 EPA Regulations and Electricity
                           challenges, the system planner would identify actions to mitigate the
                           challenge, and costs incurred to build or acquire new generating capacity
                           or to upgrade transmission systems could result in costs to consumers. In
                           general, costs associated with transmission system upgrades would be
                           passed on to consumers through regulated prices.


Actions May Not Cause      The actions power companies take in response to the four key EPA
Widespread Reliability     regulations are not likely to cause widespread reliability challenges,
Concerns but May           according to the high-level studies we reviewed. Four of the studies we
                           reviewed and an analysis by DOE assessed resource adequacy, one
Contribute to Challenges   aspect of reliability, by analyzing regional reserve margins––high-level
in Some Areas              comparisons of projected electricity demand to the projected capacity—
                           after taking into account potential increases in retirements and other
                           changes associated with the EPA regulations. These analyses show how
                           much flexibility there is for power companies to meet peak demand and
                           serve as an important high-level indicator of one aspect of reliability. 70 In
                           general, the studies found that capacity is expected to continue to exceed
                           demand by the amount needed to maintain resource adequacy, in some
                           cases substantially. However, in one study, the reserve margins of Texas
                           and New England are projected to fall below levels needed by 2015
                           according to some metrics. 71 Narrow reserve margins in Texas and New
                           England are generally expected regardless of actions associated with the
                           EPA regulations and may be attributed to a number of factors such as
                           electricity demand growth exceeding electricity generating capacity.
                           Officials from the system planner in New England told us that they expect
                           to have sufficient capacity available. They noted that at least some of the
                           study results may not have taken into account mechanisms in their region
                           to ensure sufficient capacity is available in the future.




                           70
                              Electricity demand varies significantly with the time of day and year, generally reaching
                           its peak, or highest levels on hot summer afternoons. As demand grows, power
                           companies increase output from the generating units already supplying electricity and
                           begin generating electricity at additional units as needed to meet the rising levels of
                           demand. The last units used to meet rising demand, so-called “peak demand” units, are
                           generally much more expensive to operate and operate the equivalent of only a few days
                           per year. As a result, the costs of generating electricity can vary dramatically, becoming
                           more expensive during periods of peak demand than during periods of average demand.
                           71
                            NERC (2011).




                           Page 41                                         GAO-12-635 EPA Regulations and Electricity
A few more detailed studies that examined local reliability and some
stakeholders we interviewed identified the potential for local reliability
challenges associated with the four key regulations. Furthermore,
representatives from some power companies, RTOs, and other
stakeholders told us that the combination of retrofits and retirements in an
area could raise system security challenges, for example, if they affect a
generating unit needed at a particular location to maintain the electricity
system’s voltage or to perform other highly technical services to ensure
the availability of electricity. Retirements and retrofits could contribute to
such concerns if generating units have not been able to retrofit on time or
because efforts to mitigate reliability effects are not completed in time.
According to EPA documents and some stakeholders we interviewed,
there are expected to be few such situations, and existing tools should be
sufficient to address issues that do arise. Figure 7 below shows how
planned retrofits and retirements through 2020 are distributed nationwide
and how these are concentrated in certain areas.




Page 42                                  GAO-12-635 EPA Regulations and Electricity
Figure 7: Location and Capacity of Planned Coal-Fueled Generating Unit Retrofits and Retirements through 2020, as of
April 9, 2012




                                         Note: Planned retrofits include units with planned SO 2 , NO x , particulate matter, or mercury controls.
                                         Includes units with over 25 MW of net summer capacity—the generating unit’s capacity to produce
                                         electricity during the summer when electricity demand for many electricity systems and losses in
                                         efficiency are generally the highest. Net capacity figures exclude output used internally for plant
                                         operations.

                                         Specifically, available information and stakeholders identified three
                                         potential reliability challenges that could occur at a local level. (For such
                                         situations, regulatory or other tools may provide flexibility for resolving
                                         challenges. These are discussed in the following section.)




                                         Page 43                                                 GAO-12-635 EPA Regulations and Electricity
•    Retrofits. Two aspects of retrofits can cause potential reliability
     challenges. First, in certain cases, generating units will need to be
     temporarily shut down to connect new controls, and some
     stakeholders said that scheduling these shutdowns while maintaining
     reliability could be challenging in certain areas. According to DOE,
     shutdowns for the types of controls that may be undertaken in
     response to MATS and CSAPR usually take less than 8 weeks. In
     addition, these shutdowns can often be scheduled during regular
     maintenance periods, and therefore may not require units to be shut
     down for additional time. 72 More time may be needed for some units,
     however, because of site specific conditions—such as when a single
     control device must be connected to multiple generating units—or
     because installation involves the types of controls that take longer to
     connect. For example, connecting activated carbon or dry sorbent
     injection units may require less than a 1-week shutdown. Installing
     scrubbers, which are more complex, typically requires a 3- to 8-week
     shutdown, and these installations can sometimes take longer
     according to information presented by DOE. Scheduling a large
     number of these longer shutdowns may pose challenges. For
     example, one system planner told us that companies typically try to
     schedule such shutdowns during periods of normally low demand,
     such as the spring and fall, but it may be difficult to schedule all of
     these longer shutdowns during those periods between now and the
     compliance date for MATS. Second, if power companies cannot install
     controls in time to respond to MATS and CSAPR regulations, they
     may have to shut some units down until such installations are
     completed, also potentially posing reliability challenges. EPA officials
     said that large numbers of air pollution controls were installed in
     response to past regulatory requirements without raising major
     reliability issues. However, NERC and two of the RTOs we
     interviewed have expressed concerns about having sufficient
     generating capacity as companies undertake retrofits that require
     short-term shutdowns.

•    Retirements. It is not certain what portion of the 2 to 12 percent of
     coal-fueled generating units expected to retire could cause reliability
     challenges that would need to be addressed. Several stakeholders
     said it could be difficult to resolve all potential reliability challenges



72
  Power companies take generating units off-line for regularly scheduled maintenance that
often lasts about 4 weeks.




Page 44                                       GAO-12-635 EPA Regulations and Electricity
     that may arise because of retirements before the 3-year MATS
     compliance deadline established by statute. There have been
     examples in the past of efforts to resolve reliability issues as a result
     of retirements that have taken multiple years to resolve, and two of
     the RTOs we spoke with have identified similar challenges going
     forward. For example, PJM Interconnection (PJM), an RTO system
     planner in the Mid-Atlantic and Midwest, received 116 requests from
     power companies to retire units, as of May 30, 2012—representing
     16,184 MW of capacity and almost 9 percent of capacity under PJM’s
     authority. 73 PJM has identified reliability concerns with 101 of these
     retirement requests because they may cause violations of reliability
     standards. PJM has identified solutions to these potential violations,
     including transmission upgrades and operational changes, and stated
     that it expects the resolution of its reliability concerns with 16 of these
     retirements to take past April 2016—the MATS compliance deadline
     for units with a 1-year extension. 74 Similarly, as of May 3, 2012, MISO
     has identified reliability challenges with 8 of the 62 unit retirement
     notifications it has received and completed evaluations on. MISO
     expects 5 of these to take until 2018 to resolve.

•    Increasing reliance on natural gas. Several stakeholders said that
     increasing dependence on natural gas to produce electricity could
     pose potential reliability challenges because there could be
     interruptions in the delivery of natural gas to generating units. In
     particular, one stakeholder said that there can be other natural gas
     users on pipelines, such as homeowners in regions of the country
     where natural gas is used as a home heating fuel, who may also
     consume natural gas during periods of peak demand. In these areas,
     constructing pipelines to improve the supply of natural gas to existing
     or new natural gas-fueled generating units could take time because of
     a range of financial and regulatory steps that must be taken. Without
     such upgrades, there may be inadequate natural gas supply in certain
     locations where it is needed for electricity generation. While pipeline


73
    States served by PJM include all or parts of Delaware, District of Columbia, Indiana,
Illinois, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania,
Tennessee, Virginia, and West Virginia.
74
  See PJM, “Future Deactivations (as of May 30, 2012),”
http://pjm.com/planning/generation-retirements/gr-summaries.aspx. In many cases, it may
be possible for these units to retire before 2016 without affecting reliability if, for example,
new demand response or substitute generation can be put in place or if operational
changes can be used while permanent solutions are developed.




Page 45                                           GAO-12-635 EPA Regulations and Electricity
                                  capacity is being expanded in some regions of the country to
                                  accommodate rising demand, several stakeholders raised concerns
                                  about gas-electric coordination in the industry. To better understand
                                  and prepare for these challenges, MISO recently completed a study
                                  on the availability of natural gas pipeline infrastructure to support
                                  increased use of natural gas-fueled capacity. The study found that
                                  some of the region’s pipelines that deliver natural gas to power plants
                                  may be close to capacity and that further investments in pipeline
                                  capacity and additional natural gas storage may be needed to ensure
                                  the delivery of reliable natural gas supplies.

                              Various tools available to industry and regulators could help mitigate
Existing Tools Could          potential adverse electricity market implications, including some price
Mitigate Many                 increases, associated with requirements in the four key regulations.
                              Various tools could also address many, but not all, potential reliability
Adverse Implications,         challenges associated with these regulations. In addition, FERC, DOE,
but Agencies Do Not           and EPA have begun taking steps to monitor industry’s progress in
Have a Formal                 responding to the regulations but have not established a formal,
                              documented process for jointly and routinely doing such monitoring, and
Process to Monitor            FERC has not taken steps to proactively assess RTO rules in the context
Industry Progress             of the EPA regulations.

Toward Compliance

Available Tools May Help      Various tools available to industry and regulators could help mitigate
Mitigate Some, but Not All,   some, but not all, potential increases in the prices consumers pay for
Price Increases               electricity. In traditionally regulated markets, in order to determine
                              whether to allow power companies to recover the costs of responding to
                              the regulations, public utility commissions will hold proceedings to review
                              whether power companies’ investments in response to the four key EPA
                              regulations are prudent. These proceedings could involve consideration
                              of whether a power company’s compliance strategy—whether to invest in
                              controls, modify a unit to produce electricity using a different fuel source,
                              retire a unit, or build a new unit—is defensible. They could also include a
                              review of the actual costs involved in installing controls. Once approved
                              by the regulator, ratepayers in these markets primarily bear the risk
                              associated with actions to comply with the regulations. State public utility
                              commissions may also review longer-term resource plans developed by
                              power companies to identify when new capacity is needed to
                              accommodate unit retirements and, if appropriate, approve power
                              companies’ proposed approaches for obtaining that capacity—building



                              Page 46                                 GAO-12-635 EPA Regulations and Electricity
new units, entering into long-term power contracts, or other steps. 75 For
example, in 2012, the Georgia Public Service Commission reached a
decision in its proceedings to review Georgia Power Company’s plans to
retire certain generating units and purchase power from other sources to
address, among other things, state pollution regulations and MATS. In
addition to its other rulings, the Georgia commission approved three of
the four power purchase agreements, indicating that such a decision
represented the best balance of increased cost to consumers with the
benefits of having additional capacity. 76

In restructured markets, where the prices consumers pay for electricity
are influenced by prices set in competitive, organized wholesale markets,
the competitive nature of these markets provides an incentive for power
companies to ensure that their investment decisions are cost-effective. In
these markets, investors in the power company bear the risk associated
with these decisions—the installation of any controls that turns out to
have been unnecessary or too costly may not yield the additional revenue
needed to pay for the investment. In addition, to ensure these markets
remain competitive and that prices reflect the cost of producing electricity,
FERC officials told us that RTOs and FERC have processes in place to
identify, investigate, and prosecute manipulative behavior in wholesale
electricity markets, as well as to ensure that prices are set in well-
functioning markets representing the interplay of supply and demand.
Several stakeholders we spoke with said these processes should be
effective at keeping power companies from using actions they may take in
response to the EPA regulations as an opportunity to manipulate the
electricity markets.

However, these tools in traditionally regulated and restructured markets
do not limit power companies from passing on to consumers any
legitimate costs they incur in responding to the EPA regulations, such as



75
  There is considerable variation in the tools employed by state public utility commissions
to oversee the electricity industry. For example, integrated resource planning, generally a
feature of traditionally regulated markets, is not uniformly used in all traditionally regulated
states and may also be used in restructured states.
76
  Georgia Power Company also sought approval for initial expenditures related to the
installation of fabric filters on some of its units. The Georgia commission approved
expenditures associated with the initiation of construction of the fabric filters and required
monthly compliance reports on the fabric filter installations until the matter can be
reconsidered in Georgia Power’s 2013 Integrated Resource Plan.




Page 47                                           GAO-12-635 EPA Regulations and Electricity
the costs of installing controls, procuring CSAPR allowances, constructing
transmission lines to address reliability challenges, and acquiring power
from other sources to compensate for retiring generating units. Two of the
state public utility commission representatives we spoke with from
traditionally regulated markets said it would be unlikely for a public utility
commission to deny cost recovery for prudent investments needed to
respond to these EPA regulations. In restructured markets, power
companies will attempt to recover the costs they incurred in responding to
the regulations through the electricity markets. To the extent that price
increases are the result of prudent steps in response to the EPA
regulations rather than market manipulation, federal or state regulators
may have little authority to mitigate them.

EPA has designed the regulations with some provisions that provide
flexibility and allow power companies to minimize the costs of responding
to them, which may reduce consumer electricity price increases. For
example, by making CSAPR allowances tradable rather than requiring all
generating units to individually meet a particular emissions threshold,
EPA may enable power companies to achieve overall emissions limits at
a lower cost. 77 Additionally, EPA requested public comment on several
regulatory provisions in the proposed CCR regulation which, according to
EPA officials, could help lower industry compliance costs and reduce
price increases.

In addition, some tools could lower demand for electricity, which may
offset potential price increases. For example, some states have provided
incentives for consumers to purchase more energy efficient household
appliances as part of an effort to avoid constructing additional generating
units. Furthermore, electricity pricing and other programs can encourage
customers to adjust their usage in response to changes in prices or
market conditions, which can affect reliability. These programs are
collectively referred to as “demand-response” programs, and two types—
”market-based pricing” and “reliability-driven”—are in use. Market-based
pricing programs enable customers to adjust their use of electricity in
response to changing prices. Reliability-driven programs, on the other
hand, enable system operators to request that customers reduce


77
  According to EPA’s estimates of the proposed CSAPR regulation, allowing allowance
trading may lower the costs of achieving emission levels required by CSAPR by over 23
percent compared to a scenario where each generating unit is required to meet its own
emissions targets.




Page 48                                      GAO-12-635 EPA Regulations and Electricity
                             electricity use when needed, such as if hot weather or system
                             malfunctions mean that demand will probably exceed supply and cause a
                             blackout. In August 2004, we reported that demand-response programs
                             promote greater efficiency in supplying electricity by postponing the need
                             to construct new generating units and reducing the need to use the
                             generating units that are the most costly to operate. We recommended
                             that FERC consider the presence or absence of demand response when
                             making key decisions about electricity markets, including whether to allow
                             some buyers to participate in wholesale markets. 78 In response to our
                             recommendation, FERC has taken steps to facilitate broader use of
                             demand-response programs among RTOs.


Available Tools Could        Tools available to industry and regulators may also help address many,
Address Many, but Not All,   but not all, potential reliability challenges. For example, planning, market,
Reliability Challenges       and operational tools used by system planners and operators to ensure
                             the availability of adequate transmission and generation will help address
                             many potential reliability challenges associated with these regulations.
                             System planners and operators, whether RTOs or individual power
                             companies, manage the electricity system in accordance with NERC
                             reliability standards. With respect to transmission, system planners
                             compare the long-term demand for electricity at various points throughout
                             the system to the location, capacity, and operating limits of generation
                             and transmission resources. These activities require timely information
                             on, among other things, planned retirements and new additions. EPA
                             provided one mechanism through which system planners may receive
                             this information in a more timely way when it instructed power companies
                             seeking Clean Air Act administrative orders—orders to give units up to an
                             additional year to come into compliance with MATS—to provide
                             compliance plans to system planners. In addition, some RTOs have
                             begun requesting that power companies in their regions voluntarily
                             provide early information on their plans to respond to the regulations,
                             including planned retirements, retrofits, and operational changes. With
                             respect to generation, system planner activities vary, with some areas of
                             the country planning their future investment in generation and others
                             using market-based approaches to encourage the development of new
                             generation. System operators take more immediate actions to ensure the



                             78
                              GAO, Electricity Markets: Consumers Could Benefit from Demand Programs, but
                             Challenges Remain, GAO-04-844 (Washington D.C.: Aug. 13, 2004).




                             Page 49                                    GAO-12-635 EPA Regulations and Electricity
grid operates in conformance with NERC reliability standards, such as
directing when to bring additional generation online to meet demand or
improve system operating conditions. System planners and operators
must manage changes that power companies make to respond to the
EPA regulations—retiring generating units, changing operating
schedules, or scheduling shutdowns to install controls—in a way that
does not violate NERC’s reliability standards. 79 For example, system
planners must maintain adequate contingency reserves—such as
additional available generation or electricity consumers willing to lower
their demand for electricity—to address any unexpected operational
problems that arise, even when some electricity generating units retire or
are out of service to install controls. Broader initiatives in the electric
power industry, such as activities to promote demand-response and
energy efficiency, may also help mitigate reliability challenges.

Although these planning, market, and operational tools could address
many potential reliability challenges, challenges may still arise if
generating units needed for reliability are not in compliance with the EPA
regulations by the deadlines. For example, local reliability challenges
could occur if generating units that need to operate in a local area to
ensure resource adequacy or system security do not meet these
regulations’ compliance deadlines––either because they have not been
able to retrofit on time or because system planners have not yet
completed efforts to mitigate the reliability effects of the units’ planned
retirement. However, according to EPA officials and documentation, most
units should be able to complete steps to respond to the regulations prior
to their deadlines. Nonetheless, some stakeholders remain concerned
and told us that the loss of reliability-critical units that cannot comply by
the deadlines could have an adverse impact on reliability.

Six additional tools exist that, according to multiple stakeholders, can be
used to address such actual reliability challenges that arise. These tools
are: (1) Clean Air Act section 112 1-year extensions, (2) Clean Air Act
administrative orders, (3) Clean Air Act consent decrees, (4) reliability-
must-run agreements, (5) DOE emergency authority, and (6) Clean Air
Act section 112 presidential exemption authority. However, while these


79
  If the actions power companies take in response to the four EPA regulations violate
NERC standards, FERC or NERC may take enforcement action, such as requiring a
mitigation plan to come into compliance or levying penalties against the power companies,
to ensure that reliability is not compromised.




Page 50                                       GAO-12-635 EPA Regulations and Electricity
tools are likely to address many reliability challenges arising after the
compliance deadlines, as discussed below, there are limitations to using
them, which contribute to uncertainty about their collective breadth and
applicability as a backstop for addressing all reliability challenges.

•      Clean Air Act section 112 1-year extensions. 80 This extension of the
       compliance deadline is a tool through which companies may obtain up
       to an additional year to comply with MATS if needed for the
       installation of controls. 81 According to the final MATS regulation’s
       preamble, these extensions should be broadly available to enable
       power companies to install controls, and permitting authorities—
       generally states and local authorities— will have the discretion to use
       this authority to address a range of situations. For example, according
       to EPA, it may be reasonable for permitting authorities to grant an
       extension to a unit slated for retirement if its continued operation is
       needed to maintain reliability while another unit installs emissions
       controls. An official from one permitting authority we spoke to said,
       pending executive management approval, its organization plans to
       adopt EPA’s interpretation of when to grant extensions even though
       this interpretation departs from EPA’s and its long-standing
       interpretation of “installation of controls.” However, two stakeholders
       raised concerns about the certainty of receiving this 1-year extension,
       with one stakeholder questioning whether permitting authorities would
       approve extensions for generating units that are retiring rather than
       installing controls.

•      Clean Air Act administrative orders. 82 Clean Air Act administrative
       orders are another tool through which reliability challenges resulting
       from actions to comply with relevant regulations, for example, MATS,
       may be addressed. Where necessary to avoid a serious risk to electric
       reliability, and when certain requirements are met, EPA intends to
       issue administrative orders to bring a generating unit that is required
       to run for reliability purposes into compliance with MATS within 1




80
     The extensions are authorized by section 112(i)(3)(B) of the Clean Air Act.
81
  Because the statute limits the extension to 1 year, this tool will not fully address
situations in which units need more than 4 years to comply.
82
 These administrative orders are authorized by section 113(a) of the Clean Air Act and,
by statute, cannot last for longer than a year or be renewed.




Page 51                                           GAO-12-635 EPA Regulations and Electricity
      year. 83 According to EPA’s MATS enforcement memo, EPA does not
      intend to seek civil penalties for violations of the MATS regulation that
      occur as a result of operation in conformance with these
      administrative orders. Power companies that intend to seek these
      orders must, among other things, notify system planners by April 16,
      2013, of their MATS compliance plans, which EPA expects to help the
      system planners better manage possible reliability challenges.
      However, EPA officials told us that such notifications are not required
      if a power company does not intend to seek additional time to
      respond, such as if it plans to retire its generating units. Furthermore,
      some stakeholders have raised concerns that administrative orders do
      not shield power companies from private parties suing them for
      violating the MATS regulation. 84 In addition, this tool would not
      address situations in which units need more than 5 years to comply.
      EPA officials told us that, if generating units need additional time to
      respond, EPA will make case-by-case decisions about how to
      proceed by using, for example, the consent decree process described
      below.

•     Clean Air Act consent decrees. 85 Consent decrees are another tool
      that EPA can use to address situations where a reliability critical unit
      needs additional time to respond to the regulations. In this context,
      consent decrees are agreements between the federal government––
      the Department of Justice, in cooperation with EPA––and power
      companies that generally establish a schedule for bringing a power
      company’s generating units into compliance with an EPA regulation
      and typically impose a civil penalty on power companies. According to
      EPA officials, because these agreements require negotiation and
      must be filed with a federal court, they can take a year or more to
      develop. Therefore, a consent decree may only be effective for
      resolving a reliability challenge if EPA has sufficient advance time to



83
  This policy is described in the EPA MATS enforcement memo, formally titled “The
Environmental Protection Agency’s Enforcement Response Policy For Use of Clean Air
Act Section 113(a) Administrative Orders in Relation To Electric Reliability and the
Mercury and Air Toxics Standard” (the “MATS Enforcement Policy”), which is available at
http://www.epa.gov/compliance/resources/policies/civil/erp/mats-erp.pdf.
84
  According to EPA officials and two stakeholders, provided that EPA establishes a well-
documented record supporting its decision to issue an administrative order, the risk of a
successful citizens’ suit can be minimized.
85
    These consent decrees are authorized by section 113(b) of the Clean Air Act.




Page 52                                         GAO-12-635 EPA Regulations and Electricity
     develop it. In addition, according to EPA officials, power companies
     must be willing to enter into consent decrees. However, in the case of
     a retiring generating unit, it may be the system planner, rather than
     the power company, that wants to keep the unit operating. As a result,
     a power company that wants to retire a reliability-critical generating
     unit may have little incentive to enter into a consent decree,
     particularly if it means paying a penalty to do so.

•    Reliability must-run agreements. Reliability must-run agreements—
     which provide cost-based payments to the owners of reliability-critical
     generating units to cover the cost of operating these units past when
     their owners were planning to retire them—are another possible tool
     for addressing some reliability challenges. These agreements have
     been used in the past to address occasional retirements of individual
     generating units due to changing economic conditions, such as when
     operating a unit became unprofitable. For example, a reliability must-
     run agreement was used to keep Hudson Unit 1, a 383 MW unit in
     New Jersey, operational for reliability reasons for 7 years after the
     Public Service Enterprise Group, the power company that owns the
     unit, had requested to retire it. A reliability must-run agreement was
     needed for so long, in part, because of delays in the construction of a
     transmission line that was being developed to address potential
     reliability violations that could occur without the new line. 86 However,
     these agreements may not be an option for responding to all types of
     reliability challenges that could arise when power companies seek to
     retire reliability-critical generating units in response to the four key
     regulations. According to representatives from some RTOs we spoke
     to, reliability must-run agreements have historically been used to
     reimburse power companies for their operating expenses rather than
     major capital and other expenditures, such as the installation of
     controls to reduce pollution, or financial penalties for violating
     environmental laws and regulations. As such, in situations where a
     power company plans to retire a generating unit, reliability must-run
     agreements may be useful if an administrative order or consent
     decree can be obtained. If not, reliability must-run agreements may be
     less applicable because those units would either have to install
     controls in order to comply or risk financial penalties for


86
  Specifically, the Susquehanna-Roseland transmission line was being developed to
avoid potential reliability violations including some associated with Hudson 1’s potential
retirement. According to representatives from PJM, permitting issues have significantly
delayed the project.




Page 53                                         GAO-12-635 EPA Regulations and Electricity
      noncompliance. 87

•     DOE emergency authority. DOE’s authority under section 202(c) of
      the Federal Power Act to order a power company to generate
      electricity in certain emergencies is another tool through which
      reliability challenges resulting from actions to comply with the four
      regulations may be addressed. For example, DOE could use this
      authority to require a retiring electricity generating unit that emits more
      mercury than allowed by MATS to continue to operate after the MATS
      compliance deadline if the unit was needed to respond to an
      emergency because of an electric shortage. However, DOE officials
      told us that they expect to use their section 202(c) authority to
      address reliability concerns associated with the EPA regulations rarely
      and as a tool of last resort. Further, in some circumstances, this
      authority may not provide for timely resolution of potential reliability
      challenges associated with the four EPA regulations. DOE has used
      its section 202(c) authority six times in the past, and officials told us
      that, in most instances, DOE has been able to issue section 202(c)
      orders quickly. 88 However, DOE officials explained that, in situations
      where it is less obvious whether there is a reliability emergency, it
      could take time for officials to analyze whether the requirements for an
      order are met and issue the order.

      In addition, although DOE may coordinate with EPA and state
      environmental regulators to ensure the section 202(c) order that is
      issued does not result in a violation of environmental requirements,
      some power company representatives expressed concern that
      operating under a section 202(c) order could still result in a potential
      conflict between DOE’s order and environmental laws and
      regulations. This could occur if DOE issued a section 202(c) order
      before agreement could be reached with EPA and state
      environmental regulators on how to operate the unit to adequately
      respond to the emergency and comply with applicable environmental




87
  In the case of CSAPR, the cost of allowances purchased by a power company to
operate its units could be incorporated into applicable reliability must-run agreements.
However, for the reasons described above, an RMR might be less applicable under
CSAPR if sufficient allowances were not available for purchase.
88
    Not all of these orders were for the generation of electricity.




Page 54                                             GAO-12-635 EPA Regulations and Electricity
     laws and regulations. 89 Representatives from two power companies
     told us that, in these situations, it is unclear whether the power
     company would (1) refuse to generate electricity and risk electricity
     reliability or (2) operate in violation of the environmental laws and
     regulations and risk enforcement action and legal liability. A legal
     representative at one power company we spoke with explained that
     he could not advise company officials to operate a unit in violation of
     the Clean Air Act without additional legal protection. Representatives
     from another power company said that power companies in such a
     situation may defer to the courts—a potentially time-intensive
     solution—to avoid legal liability and determine what course of action
     they should take. Moreover, power companies may have to negotiate
     with, or seek approval from, multiple additional parties, including the
     relevant RTO and FERC, for an agreement outlining the payment
     terms for the unit’s operation under the section 202(c) order, as well
     as with EPA and state environmental authorities to avoid financial
     penalties if operation results in violation of environmental laws and
     regulations. Getting these agreements in order can also be time-
     consuming which, if the process is not started well in advance, may
     delay steps to address reliability. EPA staff commented that the
     agency will be closely tracking cases where extensions and orders
     are used.

•    Clean Air Act section 112 presidential exemption authority. The broad
     authority provided to the President to exempt power companies from
     complying with MATS is a potential tool to avoid reliability challenges,
     but this authority has never been used, and uncertainties exist as to
     how this tool would apply to reliability challenges that arise under
     MATS. Section 112(i)(4) of the Clean Air Act authorizes the President
     to exempt any generating unit from compliance with MATS for a
     period of not more than 2 years under certain circumstances. 90


89
  Furthermore, a power company operating under a section 202(c) order may have limited
options when addressing certain circumstances at a power plant that could result in
violations of environmental laws or regulations. For example, if a generating unit’s
environmental controls malfunction or fail unexpectedly, a power company operating
under a section 202(c) order may not be able to take action, such as reducing operation,
to avoid violating federal or state environmental laws or regulations. If a violation occurs,
the power company may be subject to enforcement action or lawsuits brought by private
parties.
90
  An exemption under this subsection may be extended for one or more additional
periods, each period not to exceed 2 years. The President must report to Congress on
each exemption or extension of an exemption made.




Page 55                                         GAO-12-635 EPA Regulations and Electricity
    Specifically, the President must make two determinations to use this
    authority: (1) that the technology to implement the regulation is not
    available and (2) that the exemption is in the national security
    interests of the United States. As of May 2012, this authority has
    never been used, and there is uncertainty about whether these
    conditions could be met. For example, as to the first determination,
    EPA established emissions standards for mercury and other
    pollutants that can be met with technology that has been available for
    a significant time. However, according to EPA staff, EPA’s rulemaking
    was not intended to and did not consider the interpretation of the term
    ‘available’ as used in the presidential exemption provision.
    Furthermore, regarding the second determination, EPA staff explained
    that the record supporting EPA’s rulemaking includes some
    information that others might consider relevant in making any such
    determination. EPA officials also noted, however, that section
    112(i)(4) authorizes the President, not EPA, to act. Regarding these
    determinations, according to one stakeholder, it would be implausible
    to claim that technology to comply with MATS is not available, and
    there is not currently evidence of a sufficient threat to national
    security. Another stakeholder, however, has argued that the statute is
    sufficiently broad to allow the exemption authority to be used in some
    situations when a power company does not have the physical ability
    to obtain, purchase, and install technology by the deadlines and that
    the true extent of reliability challenges' threat to national security
    interests cannot be fully known until specific reliability studies are
    completed based on specific compliance plan proposals. Several
    stakeholders we spoke to during this review indicated that the
    presidential exemption authority can be used, though two said the
    statute establishes a high threshold that must be met.

In addition to these six tools, some provisions in two of the regulations—
CSAPR and 316(b)—help address electric reliability. For example,
CSAPR allows power companies to run existing controls more often,
install additional controls, or acquire allowances by purchasing them from
another source or using allowances saved from prior years. According to
EPA officials, this flexibility can help power companies plan and manage
their operations in a manner that ensures system reliability. With respect
to 316(b), as indicated in the preamble to the proposed regulation,
permitting authorities have flexibility to tailor compliance timelines to
enable installation without negatively impacting the reliability of electric
supply.




Page 56                                 GAO-12-635 EPA Regulations and Electricity
Agencies Have Begun       FERC, DOE, and EPA have begun taking steps to monitor industry’s
Taking Steps to Monitor   progress in responding to the regulations but have not established a
Industry’s Progress but   formal, documented process for joint and routine monitoring, and FERC
                          has not taken steps to proactively assess RTO rules in the context of the
Have Not Documented       regulations. FERC, DOE, and EPA officials said they have taken initial
Their Process, and FERC   steps to understand the status of industry’s plans to respond to the
Has Not Proactively       regulations, and officials from each agency told us they have periodically
Reviewed RTO Rules        met with affected stakeholders—for example, power companies, state
                          public utility commissions, and all of the RTOs, among others—to discuss
                          the regulations’ impact and the status of industry compliance. For
                          example, staff from all three entities said they have had multiple
                          conference calls with RTOs in areas affected by the regulations. In
                          addition, FERC hosted a technical conference in 2011 to discuss policy
                          issues related to the EPA regulations with industry stakeholders, 91 and
                          FERC and state public utility regulators have established a forum to
                          explore reliability challenges related to the EPA regulations. 92
                          Furthermore, according to EPA staff, the agency had multiple meetings
                          with all of the major utility trade associations, as well as a number of large
                          power companies with substantial coal-fueled generating capacity, to
                          discuss compliance plans and issues that are emerging. However, each
                          agency’s efforts are varied in scale and scope, and none of the agencies
                          has developed a formal, documented process for routinely monitoring
                          industry progress, including goals for any monitoring activities, data to be
                          collected and analyzed, and how the agencies will use this information.
                          Officials from FERC and DOE told us they had not formalized their
                          processes for monitoring industry’s progress since power companies
                          were in the process of finalizing their approach for responding to the
                          regulations.

                          As discussed, actions power companies take in response to the four
                          regulations may present potential reliability challenges, or risks. In a
                          December 2005 report on risk management, we reported that monitoring



                          91
                            See FERC, "Technical Conference to Discuss Policy Issues Related to Reliability of the
                          Bulk Power System," AD12-1-000, (Washington, D.C.: Nov. 29-30, 2011)
                          http://www.ferc.gov/EventCalendar/EventDetails.aspx?ID=6053&CalType=%20&Calendar
                          ID=116&Date=&View=Listview.
                          92
                            Specifically, FERC and the National Association of Regulatory Utility Commissioners, a
                          national organization representing State public service commissioners, established a
                          forum on reliability and the environment that first met on February 7, 2012. The next
                          meeting is scheduled for July 25, 2012.




                          Page 57                                       GAO-12-635 EPA Regulations and Electricity
is essential in ensuring that a risk management approach is current and
relevant. 93 Without a formal, documented process that the three agencies
have agreed on for monitoring industry’s progress toward meeting the
compliance deadlines, it is uncertain how comprehensive the agencies’
monitoring efforts will be and whether they will adequately address such
specific issues as the status of required regulatory approvals, the
availability of key materials and skilled workers, the likelihood of potential
reliability challenges, and the adequacy of existing tools for addressing
these challenges. 94 Without a formal, documented process for monitoring,
it is also uncertain whether the agencies’ future monitoring activities will
be sufficiently comprehensive to alert them in advance if a larger than
expected number of reliability challenges arise so they can assess
whether internal agency resources are available to carry out their
responsibilities. For example, if there is a larger than expected number of
local reliability challenges, FERC may be less able to effectively and
quickly manage reviewing (1) applications for cost recovery for
transmission investments, (2) the reliability impacts of electricity
generating units whose owners seek an administrative order from EPA for
compliance with MATS, (3) reliability must-run agreements outlining the
payment terms for the operation of a unit that would otherwise retire, and
(4) whether steps should be taken to require RTOs or market participants
to secure additional demand-response resources. 95

Furthermore, these three agencies have informally collaborated about the
EPA regulations, but they have not developed a formal, documented
process for coordinating their monitoring efforts. Officials from all three
responsible agencies said they have held periodic discussions with
officials from the other agencies. This informal collaboration also involved


93
  GAO, Risk Management: Further Refinements Needed to Assess Risks and Prioritize
Protective Measures at Ports and Other Critical Infrastructure, GAO-06-91 (Washington,
D.C.: Dec. 15, 2005). Risk management is a strategy for helping policymakers make
decisions about assessing risks, allocating resources, and taking actions under conditions
of uncertainty.
94
  Some system planners—including power companies and RTOs—and state regulators
have begun collecting information that may relate to these topics.
95
  FERC officials said they believe they will have adequate staff to address most of these
responsibilities. However, they agreed that a larger than expected number of local
reliability challenges could make it difficult for them to review the reliability impacts of units
whose owners request an administrative order from EPA. FERC recently issued a policy
statement explaining the process it intends to use to provide timely advice to EPA on
requests for administrative orders.




Page 58                                            GAO-12-635 EPA Regulations and Electricity
participation in the FERC technical conference on the EPA regulations
and joint agency participation at meetings with industry stakeholders.
EPA officials told us the agencies have agreed to work together to
monitor the progress of industry’s compliance with the regulations in the
future. However, these agencies have not documented their process for
coordination, including the expected frequency of contact with each other
and industry, key agency responsibilities, and how they will share
information. We have previously reported that by using informal
coordination mechanisms, agencies may rely on relationships with
individual officials, which could end once personnel move to their next
assignments. 96 We reported that agencies can strengthen their
commitment to work collaboratively by articulating their roles and
responsibilities in formal documents—such as memorandums of
understanding or interagency planning documents—to facilitate decision
making. These documents can clarify which agencies will be responsible
for particular activities and how they will organize their individual and joint
efforts. Without more formal coordination mechanisms, any assessment
of whether tools are sufficient to mitigate potential reliability challenges
may not fully leverage the perspective of all three agencies, each of which
has a unique area of expertise and ability to perform different analysis.
Each of the three agencies may have knowledge of whether particular
tools are useful for addressing actual reliability challenges, and DOE and
FERC may be able to provide insight into the magnitude and urgency of
such challenges.

Moreover, according to agency officials, the agencies do not have a
formal, documented process for how they will provide information from
their monitoring efforts to Congress. Without information on whether
existing tools are sufficiently timely, relevant, and effective for addressing
any adverse implications that arise, Congress may not be sufficiently
informed about whether additional statutory authority is needed. Through
multiple hearings and an information request to FERC, members of
Congress have already sought additional information on these issues.
Legislation has also been introduced to, among other things, extend the



96
  GAO, Live Animal Imports: Agencies Need Better Collaboration to Reduce the Risk of
Animal-Related Diseases, GAO-11-9 (Washington, D.C.: Nov. 8, 2010); GAO, National
Security: Key Challenges and Solutions to Strengthen Interagency Collaboration,
GAO-10-822T (Washington, D.C.: June 9, 2010); GAO, Homeland Defense: U.S. Northern
Command Has Made Progress but Needs to Address Force Allocation, Readiness
Tracking Gaps, and Other Issues, GAO-08-251 (Washington, D.C.: Apr. 16, 2008).




Page 59                                    GAO-12-635 EPA Regulations and Electricity
compliance dates for MATS and CSAPR, to prohibit or invalidate one or
more of the regulations, and establish that compliance with a section
202(c) order cannot be considered a violation of any environmental law or
regulation. Without information such as what could be provided through
EPA, FERC, and DOE’s joint monitoring efforts, Congress will be less
informed when it deliberates these bills about the extent to which actual
reliability concerns arise and whether new statutes are needed to address
them.

Furthermore, FERC has not taken steps to proactively assess whether
RTO market rules and similar rules at non-RTO system planners will be
adequate to ensure timely, cost-effective mitigation of the potential
reliability challenges associated with the multiple generating unit
retirements and outages that may occur over a short period due to the
EPA regulations and other factors. These rules govern such things as
how these entities schedule temporary shutdowns for retrofits, receive
notifications from power companies regarding retirements of generating
units, and address potential reliability challenges, including how
transmission upgrades and demand response are considered and
pursued. These rules affect how cost-effectively reliability challenges are
managed. Table 3 shows examples of RTOs that have begun reviewing
their rules related to electricity transmission, markets, and other areas
and are considering whether changes are needed in light of the EPA
regulations and other industry factors. Changes under consideration
relate to scheduling outages, unit retirements, and planning for
transmission needs. Many are being considered with the goal of avoiding
unnecessary costs or reliability problems. For example, under current
market rules in the MISO region, power company retirement requests are
binding, meaning once a power company has submitted a request to
retire, it cannot change its mind. MISO stakeholders are discussing
whether changes need to be made to market rules to allow power
companies to submit nonbinding requests for unit retirements, so that
MISO can provide these companies with information on the reliability
impacts of their proposed retirements prior to these companies making a
final decision about whether to retire. According to MISO officials, if a
power company received this information prior to making a retirement
decision, the company might be able to make more cost-effective choices
by comparing the cost of steps to address reliability concerns associated
with a potential retirement to the cost of complying with the regulations by
installing environmental controls.




Page 60                                 GAO-12-635 EPA Regulations and Electricity
Table 3: Selected Concerns about RTO Market Rules Arising from the EPA Regulations and Other Industry Factors

Region       Concern about RTO market rule                                                           Potential change and status
         a
ERCOT        The Electric Reliability Council of Texas (ERCOT) manages the         Modify outage rules so ERCOT can deny
             transmission of electricity for most of Texas and does not always     outages that pose reliability challenges. (Concern
             have authority to deny outages that may adversely impact reliability. identified)
MISO         Power companies in the MISO region may not have full information                        Allow power companies to submit nonbinding
             about the reliability and cost implications of retiring a particular                    requests for unit retirements, so that MISO can
             generating unit. According to MISO officials, if a power company                        provide these companies with information on the
             received this information prior to making a retirement decision, the                    reliability impacts of their proposed retirements.
             company might be able to make more cost-effective choices. For                          (Under discussion)
             example, if a power company learned that the cost of actions to
             offset the retirement of a reliability-critical generating unit were more
             expensive than installing pollution controls, it might choose to install
             controls rather than retire the unit.
MISO         Because they have comparatively shorter start-up times than coal        Modify market rules to encourage the
             plants, certain natural gas plants have historically provided “quick    development of additional “quick-start” capacity.
             start” capacity for addressing short-term capacity shortages.           (Under discussion)
             However, because the EPA regulations increase the costs of using
             coal relative to natural gas for electricity production, and because of
             recent lower natural gas prices, natural gas plants previously used
             as quick start capacity may be used more routinely, which could limit
             their availability to provide quick start capacity.
MISO         Power companies are required to notify MISO 26 weeks before                             Keep MISO’s notification time frame at 26 weeks,
             retiring generating units. Because some options to address potential                    but make other modifications to MISO’s process
             reliability challenges can take several years, such as building a large                 for receiving and evaluating notifications of
             transmission line, not having timely information about all planned                      pending retirements, including allowing for
             retirements could limit the options available to MISO and increase                      nonbinding retirement requests. (Under
             the costs of mitigating these challenges. However, earlier notification                 discussion)
             than 26 weeks may not be practical since power companies may not
             know their plans that far in advance.
ISO New      In ISO New England, the transmission planning process and                               Take steps to better align resource adequacy
England      resource adequacy markets are not as well-aligned as possible. As                       markets with the transmission planning
             a result, concerns about resource adequacy and local reliability may                    processes. This proposed change was prompted
             be addressed less efficiently and with higher costs.                                    by multiple events, including environmental
                                                                                                     compliance costs associated with EPA
                                                                                                     regulations and the economics of fuel prices.
                                                                                                     According to an ISO New England document, the
                                                                                                     RTO expects these proposed changes to better
                                                                                                     address reliability needs and mitigate cost
                                                                                                     increases. (Under discussion)
PJM          PJM’s transmission planning process did not include an analysis of                      Revise PJM’s transmission planning process to
             “at-risk” generation or possible future scenarios that are as                           allow it to better manage uncertainty about “at-
             extensive as the RTO would like.                                                        risk” generation due to changes in environmental
                                                                                                     regulations, among other things. The change
                                                                                                     included clarifying that PJM can consider
                                                                                                     proposed public policy initiatives in its planning
                                                                                                     analyses. (Conditionally accepted by FERC)
                                            Sources: GAO analysis of RTO documents, discussions with RTO officials, and other sources.

                                            a
                                             The Public Utility Commission of Texas, rather than FERC, regulates the design and operation of the
                                            electricity markets in the ERCOT region.




                                            Page 61                                                            GAO-12-635 EPA Regulations and Electricity
              FERC officials told us that initial discussions with the RTOs—such as
              through the FERC technical conference—indicated that current market
              rules are adequate and that FERC will review any proposed changes to
              market rules that they receive from RTOs to ensure that the rules
              continue to promote just and reasonable rates and, where relevant,
              address reliability issues. However, the commission does not have plans
              to proactively assess the adequacy of any rules unless RTOs propose
              specific changes. Furthermore, FERC officials said the commission does
              not plan to evaluate whether changes proposed by one RTO may also be
              useful at others. FERC officials said they have also not assessed the
              rules of non-RTO system planners because FERC has more limited
              authority over non-RTO rules. However, FERC officials acknowledged
              that they have the authority to proactively request that RTOs make
              changes to rules if FERC believes a rule change is warranted. Under the
              current approach—wherein individual RTOs consider potential changes
              and request approval from FERC—FERC risks taking a piecemeal
              approach to oversight and may miss opportunities to encourage
              development of market rules in all regions that are adequately designed
              to promote just and reasonable rates in the context of the industry’s
              transition.


              The four key EPA regulations—two finalized and two proposed—would
Conclusions   reduce adverse health or environmental impacts associated with coal-
              fueled electricity generating units, potentially avoiding thousands of
              premature deaths each year. Aspects of these regulations remain
              uncertain, but they, along with other industry trends such as the aging of
              coal-fueled generating units and lower prices for natural gas, are
              expected to contribute to significant changes in electricity systems in
              some parts of the United States in the near future. These potential
              changes, which include retrofitting many coal-fueled units and retiring
              more coal-fueled capacity than has been retired over the past 22 years,
              have implications for electricity prices and reliability. FERC, DOE, and
              EPA each have key responsibilities concerning the electricity industry and
              all three agencies have taken steps to address potential adverse
              implications associated with these regulations.

              Existing tools provide a foundation for mitigating many of the price and
              reliability implications of actions power companies may take in response
              to the regulations. However, these tools may not fully address all potential
              adverse implications in some regions, for example, some reliability
              challenges that arise after the compliance deadlines. Knowledge of the
              severity and extent to which challenges arise will be key to understanding


              Page 62                                GAO-12-635 EPA Regulations and Electricity
                      whether existing tools are adequate or additional tools are needed.
                      FERC, DOE, and EPA have taken important first steps to coordinate with
                      RTOs, other system planners, and state regulators, among others, to
                      better understand these issues. However, without a formal, documented
                      process that the three agencies have agreed upon for jointly, routinely
                      monitoring industry’s progress, it is uncertain whether their activities will
                      be sufficiently comprehensive and fully leverage their unique areas of
                      expertise. FERC, DOE, and EPA can build on their initial monitoring
                      efforts by documenting their process for monitoring, including the
                      expected frequency of their contact, and how they will organize their
                      efforts and share information. Moreover, as shown by multiple hearings
                      and the introduction of legislation that would affect some or all of the
                      regulations, there has been congressional interest in the potential
                      reliability and price implications of these regulations. Information from a
                      coordinated monitoring effort could help inform these ongoing
                      deliberations and make clear whether additional statutory authority is
                      needed to cost-effectively address any reliability challenges that actually
                      arise.

                      In addition, rules at system planners, including RTO market rules and, in
                      some cases, similar rules at non-RTO system planners, govern such
                      details as how these entities schedule temporary shutdowns for retrofits;
                      receive notification from power companies regarding retirements of
                      generating units; and address potential reliability challenges, including
                      how transmission upgrades and demand-response are considered and
                      pursued. These rules matter greatly in terms of whether potential
                      reliability challenges are managed as cost-effectively as possible. FERC
                      has not proactively evaluated whether RTO rules will be adequate to
                      ensure timely, cost-effective mitigation of potential reliability challenges
                      associated with multiple generating unit retirements and shutdowns,
                      which may occur over a short period in light of the EPA regulations. As a
                      result, FERC may miss opportunities to encourage development of rules
                      in all regions that are adequately designed to promote just and
                      reasonable rates in the context of the industry’s transition.

                      We are making the following two recommendations:
Recommendations for
Executive Action      •   To further strengthen agency efforts to understand whether existing
                          tools are adequate, or additional tools are needed, we recommend
                          that the Chairman of FERC, the Secretary of Energy, and the
                          Administrator of the EPA develop and document a formal, joint
                          process consistent with each agencies’ respective statutory
                          authorities to monitor industry’s progress in responding to the EPA


                      Page 63                                 GAO-12-635 EPA Regulations and Electricity
                         regulations until at least 2017. Each agency, to the extent practical,
                         should leverage resources and share the results of its efforts with the
                         other agencies. The agencies should consider providing Congress
                         with the results of their monitoring efforts, including whether additional
                         statutory authority is needed to address any potential adverse
                         implications.

                     •   To ensure that RTO market rules and, to the extent practical, similar
                         rules at non-RTO system planners promote timely, cost-effective
                         mitigation of potential reliability challenges associated with the EPA
                         regulations reviewed in this report, we recommend that the Chairman
                         of FERC assess the adequacy of existing rules for this purpose. In
                         particular, this assessment should cover rules related to scheduling
                         retrofits, retirement notification, and whether more can be done to
                         facilitate demand response. If the FERC Chairman determines that
                         these rules are not adequate, FERC should consider requesting that
                         these entities make changes where appropriate.

                     We provided a draft of this report to FERC, DOE, and EPA for comment.
Agency Comments      In written comments, which are reproduced in appendixes V through VII,
and Our Evaluation   DOE and EPA agreed with the recommendation directed to them, and
                     FERC disagreed with both recommendations directed to it.

                     Regarding our first recommendation that FERC, DOE, and EPA develop
                     and document a formal process to monitor industry's progress in
                     responding to the EPA regulations, DOE and EPA generally agreed.
                     FERC disagreed with the recommendation, stating that we did not take
                     into account a number of actions FERC has taken, including publicly
                     committing to work closely with industry, states, and other agencies to
                     address issues that arise. FERC cited several examples of the actions it
                     has taken, and we made some clarifying changes and, in one case,
                     added language about an example that we had not previously included in
                     the report. FERC also stated that it had taken further steps to implement
                     our recommendation after seeing our draft report. We agree that FERC
                     has taken positive steps, and we are encouraged that FERC has begun
                     to implement our recommendations. However, we do not believe these
                     actions adequately represent the type of formal, documented process
                     needed for EPA, DOE, and FERC to monitor industry's progress in
                     responding to the regulations. FERC also said that, as an independent
                     agency, it cannot dictate the sharing of information with and by other
                     parts of the government. We acknowledge there may be limits on the
                     extent to which the three agencies can collaborate and clarified our
                     recommendation accordingly. All three agencies noted that they are


                     Page 64                                  GAO-12-635 EPA Regulations and Electricity
working to establish a more formalized approach to continued
coordination, outreach, and monitoring. We commend the agencies for
their efforts and believe it is important for them to complete these efforts
in order to establish a more formalized approach.

Regarding our second recommendation that FERC assess the adequacy
of existing RTO market rules, and similar rules at non-RTO system
planners, FERC stated that it continually assesses the rules of entities
over which it has jurisdiction and that it has specifically explored whether
changes are needed to respond to the regulations. In particular, FERC
noted that it asked participants at a 2011 technical conference to address
whether changes were needed in market rules and that the response
from panelists and commenters was that no significant changes were
needed. Our observation from attending this conference is that it fostered
a useful exchange of ideas and perspectives. However, we do not believe
it is a substitute for an assessment by FERC of the adequacy of rules.
FERC also noted that several recent rulemakings may lead to changes in
rules that may be beneficial in the context of the EPA regulations, such as
in how information is gathered regarding retirements and how demand
response is encouraged. These are also positive steps, but they do not
constitute an assessment of whether RTO market rules need to be
modified to ensure timely, cost-effective mitigation of potential reliability
challenges that may be associated with responses to the regulations.

In addition, FERC, DOE, and EPA provided technical comments and
clarifications, which we incorporated as appropriate.


As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies to the appropriate
congressional committees, the Secretary of Energy, Chairman of FERC,
Administrator of the EPA, and other interested parties. In addition, the
report will be available at no charge on the GAO website at
http://www.gao.gov.




Page 65                                 GAO-12-635 EPA Regulations and Electricity
If you or your staff members have any questions about this report, please
contact Frank Rusco at (202) 512-3841 or ruscof@gao.gov or David
Trimble at (202) 512-3841 or trimbled@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made key contributions to this
report are listed in appendix VIII.

Sincerely yours,




Frank Rusco
Director, Natural Resources and Environment




David C. Trimble
Director, Natural Resources and Environment




Page 66                                GAO-12-635 EPA Regulations and Electricity
Appendix I: Scope and Methodology
             Appendix I: Scope and Methodology




             This report provides information on the implications associated with four
             key recently proposed or finalized regulations from the Environmental
             Protection Agency (EPA): (1) the Cross-State Air Pollution Rule (CSAPR);
             (2) the Mercury and Air Toxics Standards (MATS); (3) the proposed
             Cooling Water Intake Structures at Existing and Phase I Facilities
             regulation, also known as 316(b), and (4) the proposed Disposal of Coal
             Combustion Residuals from Electric Utilities regulation (CCR).
             Specifically, this report addresses: (1) what available information
             indicates about actions power companies may take at coal-fueled
             generating units in response to the four key EPA regulations; (2) what
             available information indicates about these regulations’ potential
             implications on the electricity market and reliability; and (3) the extent to
             which EPA, FERC, DOE, and other stakeholders can mitigate adverse
             electricity market and reliability implications, if any, associated with
             requirements in these regulations.

             To provide available information on actions power companies may take in
             response to these regulations and their potential market and reliability
             implications, we (1) selected for review 12 studies of companies’
             projected responses to the regulations, as well as the potential impacts of
             these responses, and (2) analyzed data from Ventyx Velocity Suite on
             electricity generating units. We considered several factors in selecting
             these studies including how closely they reflected the four regulations,
             and we prioritized studies published after significant changes in the
             regulations, and those from independent groups or federal agencies. We
             also selected certain studies that provided information on specific aspects
             of our review, such as those with estimates of price implications and that
             contained regional assessments. The studies we selected were carried
             out by EPA, the Energy Information Administration, system planners,
             research organizations, and a consulting firm. (Selected studies are listed
             in app. III.) We took several steps to evaluate the reasonableness of the
             studies’ assumptions and methodologies, including reviewing descriptions
             of the policy scenarios that formed the basis of the studies’ analysis. In
             some cases, we identified differences between study assumptions and
             the regulations themselves, which we note in the text where appropriate.
             Some of these studies analyze several scenarios, and we report results
             from those scenarios which we felt best reflect the regulations. The actual
             price and reliability implications of these four regulations will depend on
             various uncertain factors, such as future market conditions and the
             ultimate regulatory requirements, but we determined that these studies
             were reasonable for describing what is known about the range of potential
             actions power companies may take and implications of the four
             regulations.


             Page 67                                 GAO-12-635 EPA Regulations and Electricity
Appendix I: Scope and Methodology




We also analyzed data from Ventyx Velocity Suite EV Market-Ops
database to describe characteristics of coal-fueled generating units and to
provide information on historic and planned retrofits and retirements of
such units. We reviewed this data as of April 9, 2012, from all operating
units that had capacity greater than 25 megawatts, making them subject
to MATS and CSAPR. In all, we examined the characteristics of 1,050
coal-fueled electricity generating units, accounting for 99 percent of all
coal-fueled capacity and 75 percent of coal-fueled units. We classified
detailed air pollution controls into control types, and reviewed our
classifications with officials at Ventyx, the Department of Energy (DOE),
and EPA. Information regarding planned retrofits and retirements reflect
publicly reported plans as identified by Ventyx. As plans may change,
actual future retrofits and retirements may differ from the data in these
plans. To assess the reliability of the Ventyx data, we reviewed existing
documentation about the data and the system that produced them,
interviewed Ventyx staff who were knowledgeable about the data,
consulted with EPA and DOE officials and other knowledgeable parties,
conducted some electronic testing, and compared data in Ventyx to
information obtained from several power companies and regional
transmission organizations. We determined the Ventyx data to be
sufficiently reliable for the purpose of this report.

To examine the extent to which industry, regulators, and other
stakeholders can mitigate adverse implications, we interviewed officials at
the Federal Energy Regulatory Commission (FERC), DOE, North
American Electric Reliability Corporation, and EPA to better understand
what steps they had taken to mitigate potential reliability and price
challenges and additional options for doing so. We reviewed relevant
laws, regulations, and agency documentation for information on agency
authorities, responsibilities with respect to the EPA regulations, and
options for mitigating adverse reliability concerns. We conducted multiple
interviews with system planners and operators in both restructured and
traditionally regulated markets that are expected to be significantly
affected by the regulations to understand the tools they had available for
managing electric reliability and prices.

To address all three objectives, we summarized the results of
semistructured interviews with a nonprobability sample of 33
stakeholders. (See app. II for a list of these stakeholders.) We selected
these stakeholders to be broadly representative of differing perspectives
on these issues based on recommendations, including from FERC, DOE,
and industry associations, and other factors. In particular, we obtained
views and information from staff at power companies that may be affected


Page 68                                GAO-12-635 EPA Regulations and Electricity
Appendix I: Scope and Methodology




by these regulations, regional transmission organizations, and officials in
six states—Georgia, Kentucky, Missouri, Ohio, Pennsylvania, and
Texas—to understand the role of these state agencies in addressing the
reliability and price implications of the regulations. To select states and
companies, we considered, among other factors, the amount of state and
companies’ electricity generating capacity that is coal-fueled. We also
sought a balance of states and companies in and out of RTO regions that
were traditionally regulated and restructured. We provided a preliminary
list of the stakeholders we intended to interview to FERC and EPA, and
we incorporated their suggestions in considering stakeholders where
appropriate. Because we used a nonprobability sample, the views of
these stakeholders are not generalizable to all potential stakeholders, but
they provide illustrative examples.

We conducted this performance audit from July 2011 to July 2012 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 69                                GAO-12-635 EPA Regulations and Electricity
Appendix II: List of Stakeholders
                            Appendix II: List of Stakeholders




Federal Agencies            1. Department of Energy

                            2. Environmental Protection Agency

                            3. Federal Energy Regulatory Commission


State Electricity and       4. Georgia
Environmental Regulators1
                            5. Kentucky

                            6. Missouri

                            7. Ohio

                            8. Pennsylvania

                            9. Texas


Regional Transmission       10. Electric Reliability Council of Texas
Organizations
                            11. ISO New England

                            12. Midwest Independent Transmission System Operator

                            13. New York Independent System Operator

                            14. PJM Interconnection

                            15. Southwest Power Pool


Power Companies             16. American Electric Power

                            17. Big Rivers Electric Corporation

                            18. Calpine



                            1
                             With the exception of Kentucky, Missouri, and Pennsylvania, we spoke with both
                            electricity and environmental regulators in these states.




                            Page 70                                      GAO-12-635 EPA Regulations and Electricity
        Appendix II: List of Stakeholders




        19. City Utilities of Springfield

        20. Exelon Corporation

        21. First Energy

        22. GenOn Energy

        23. Southern Company

        24. Tennessee Valley Authority


Other   25. Alstom

        26. Bernstein Research

        27. Clean Air Task Force

        28. FBR Capital Markets

        29. International Brotherhood of Electrical Workers

        30. North American Electric Reliability Corporation

        31. Potomac Economics

        32. Prof. Henry Jacoby, Massachusetts Institute of Technology Sloan
            School of Management

        33. Susan Tierney, The Analysis Group




        Page 71                                GAO-12-635 EPA Regulations and Electricity
Appendix III: List of Studies
               Appendix III: List of Studies




               Burtraw, Dallas, Karen Palmer, Anthony Paul, and Matt Woerman (RFF).
               “Secular Trends, Environmental Regulations, and Electricity Markets.”
               Resources for the Future Discussion Paper. DP12-15. Washington, D.C.:
               March 2012.

               Energy Information Administration (EIA). Annual Energy Outlook 2012
               Early Release Overview. DOE/EIA-0383ER. Washington, D.C.: January
               23, 2012.

               Environmental Protection Agency (EPA-316b). Economic and Benefits
               Analysis for Proposed Section 316(b) Existing Facilities Rule. EPA 821-R-
               11-003. March 28, 2011.

               Environmental Protection Agency (EPA-CCR). Regulatory Impact
               Analysis For EPA’s Proposed RCRA Regulation Of Coal Combustion
               Residues (CCR) Generated by the Electric Utility Industry. Washington,
               D.C.: April 30, 2010.

               Environmental Protection Agency (EPA-CSAPR). Regulatory Impact
               Analysis for the Federal Implementation Plans to Reduce Interstate
               Transport of Fine Particulate Matter and Ozone in 27 states; Correction of
               SIP Approvals for 22 States. June 2011.

               Environmental Protection Agency (EPA-MATS). Regulatory Impact
               Analysis for the Final Mercury and Air Toxics Standards. EPA-452/R-11-
               011. Research Triangle Park, NC: December 2011.

               IHS Global Insight. US Energy Outlook. September 2011.

               Macedonia, Jennifer, Joe Kruger, Lourdes Long, and Meghan
               McGuinness (Bipartisan Policy Center). Environmental Regulation and
               Electric System Reliability. Washington, D.C.: Bipartisan Policy Center,
               June 13, 2011.

               Midwest Independent Transmission System Operator. (MISO). EPA
               Impact Analysis: Impacts from the EPA Regulations on MISO. October
               2011.

               NERA Economic Consulting (NERA). Potential Impacts of EPA Air, Coal
               Combustion Residuals, and Cooling Water Regulations. Prepared for the
               American Coalition for Clean Coal Electricity. Boston, MA: September
               2011.



               Page 72                                GAO-12-635 EPA Regulations and Electricity
Appendix III: List of Studies




North American Electric Reliability Corporation (NERC). 2011 Long-Term
Reliability Assessment. November 2011.

PJM Interconnection (PJM). Coal Capacity at Risk for Retirement in PJM:
Potential Impacts of the Finalized EPA Cross State Air Pollution Rule and
Proposed National Emissions Standards for Hazardous Air Pollutants.
August 26, 2011.




Page 73                               GAO-12-635 EPA Regulations and Electricity
Appendix IV: Additional Information on
                                          Appendix IV: Additional Information on Coal-
                                          Fueled Electricity Generating Units



Coal-Fueled Electricity Generating Units

                                          Figure 8 shows the distribution of the nation’s coal-fueled electricity
                                          generating units by the territories of eight regional reliability entities that
                                          set and enforce reliability standards for the electricity industry.

Figure 8: Capacity and Share of Total Capacity from Coal-Fueled Electricity Generating Units by Region, as of April 9, 2012




                                          Page 74                                        GAO-12-635 EPA Regulations and Electricity
Appendix IV: Additional Information on Coal-
Fueled Electricity Generating Units




Note: Capacity is in megawatts and includes units with over 25 megawatts of net summer capacity—
the generating unit’s capacity to produce electricity during the summer when electricity demand for
many electricity systems and losses in efficiency are generally the highest. Net capacity figures
exclude output used internally for plant operations.

a
 The combined area of SERC Reliability Corporation and Southwest Power Pool Regional Entity
refers to overlapping regional area boundaries. For example, some generating unit owners participate
in one region and their associated transmission system owner in another. Generating unit capacity is
accounted for in the region where the generation owner participates.


Various air pollution controls are used at electricity generating units to
reduce emissions of air pollutants by either reducing the formation of
these emissions or capturing them after they are formed. At coal power
plants, these controls are generally installed in either the boiler, where
coal is burned, or the ductwork that connects a boiler to the stack. A
single power plant can use multiple boilers to generate electricity, and the
emissions from multiple boilers can sometimes be connected to a single
stack. The reduction in emissions from a coal-fueled generating unit by
the use of pollution controls can be substantial, as shown in table 4.
Controls may be capable of removing multiple pollutants. For example, a
wet scrubber can control both sulfur dioxide (SO2) and acid gas
emissions.




Page 75                                             GAO-12-635 EPA Regulations and Electricity
                                            Appendix IV: Additional Information on Coal-
                                            Fueled Electricity Generating Units




Table 4: Summary of Air Pollution Control Equipment Used at Coal-Fueled Electricity Generating Units

Primary pollutant
targeted              Equipment name                            How it works                                                         Removal efficiency
                  a
Particulate matter    Electrostatic precipitator                An induced electrical charge removes particles 99.5%
                                                                from flue gas.
                      Fabric filter (commonly referred          Flue gas passes through tightly woven fabric                         99.9%
                      to as a “baghouse”)                       filter “bags” that filter out the particulates.
SO 2 and other acid   Flue gas desulfurization unit             Wet flue gas desulfurization units inject a                          Wet scrubbers – 99%
      b
gases                 (commonly referred to as a                liquid sorbent, such as limestone, into the flue                     removal of SO 2
                      “scrubber”)                               gas to form a wet solid that can be disposed of                      Dry scrubbers – 95%
                                                                or sold.                                                             removal of SO 2
                                                                Dry flue gas desulfurization units inject a dry
                                                                sorbent, such as lime, into the flue gas to form
                                                                a solid byproduct that is collected.
                      Dry sorbent injection unit                An alkaline powdered material is injected into 50% with an electrostatic
                                                                the flue gas (postcombustion) to react with the precipitator, 75% with a
                                                                SO 2 and other acid gases. The resulting        fabric filter
                                                                product is then collected through a particulate
                                                                matter control device.
Nitrogen oxides       Combustion control technologies, Coal combustion conditions are adjusted so                                    45% reduction in the
                                              c
(NO x )               such as low-NO x burners         less NO x is formed.                                                          formation of NO x
                      Post-combustion controls, such            SCRs inject ammonia into flue gas to form                            SCRs – 95% removal of
                      as selective catalytic reduction          nitrogen and water and use a catalyst to                             NO x
                      (SCR) and selective non-catalytic         enhance the reaction.                                                SNCRs –75% removal of
                      reduction (SNCR) units                    SNCRs inject ammonia into flue gas to react                          NO x
                                                                with NO x as well but do not use a catalyst.
        d
Mercury               Activated carbon injection units          Activated carbon is injected into flue gas,                          At least 90% with a
                                                                binds with mercury, and is collected in a                            fabric filter
                                                                particulate matter control device.
                                            Sources: GAO summary of reports by EPA, EIA, National Academies, Electric Power Research Institute, and industry documents.


                                            Note: Removal efficiency figures refer to the highest capacity to remove listed pollutants. Units may
                                            not always achieve these removal rates.
                                            a
                                                The MATS regulation specifically places limits on “filterable” particulate matter.
                                            b
                                             Another approach to reducing SO 2 , mercury, and acid gas emissions from generating units is to
                                            switch from using coals with higher contents of these substances to coals with lower contents, or to
                                            blend coals.
                                            c
                                             Low-NO x burners may also be used in conjunction with postcombustion controls for NO x .
                                            d
                                             Mercury can be removed through various controls. For example, wet scrubbers remove mercury, and
                                            particulate matter control equipment can remove mercury that is bound to the ash.

                                            Figure 9 shows the capacity of coal-fueled generating units that were
                                            retrofitted with select controls from 2000 through 2011, and figures 10
                                            and 11 show the percent of generating capacity with select controls by
                                            region.



                                            Page 76                                                            GAO-12-635 EPA Regulations and Electricity
                                          Appendix IV: Additional Information on Coal-
                                          Fueled Electricity Generating Units




Figure 9: Capacity of Coal-Fueled Generating Units Retrofitted with Select Air Pollution Controls, 2000-2011




                                          Note: Capacity is in thousand megawatts and includes units with over 25 megawatts of net summer
                                          capacity—the generating unit’s capacity to produce electricity during the summer when electricity
                                          demand for many electricity systems and losses in efficiency are generally the highest. Net capacity
                                          figures exclude output used internally for plant operations.
                                          a
                                          Scrubbers include wet, dry, and other types of units.




                                          Page 77                                                 GAO-12-635 EPA Regulations and Electricity
                                          Appendix IV: Additional Information on Coal-
                                          Fueled Electricity Generating Units




Figure 10: Percentage of Coal-Fueled Generating Capacity with Air Pollution Controls Installed by Region, as of April 9, 2012




                                          Page 78                                        GAO-12-635 EPA Regulations and Electricity
Appendix IV: Additional Information on Coal-
Fueled Electricity Generating Units




Note: Includes units with over 25 MW of net summer capacity—the generating unit’s capacity to
produce electricity during the summer when electricity demand for many electricity systems and
losses in efficiency are generally the highest. Net capacity figures exclude output used internally for
plant operations.
a
 In addition, one unit with 85 MW capacity, 0.3 percent of the region’s coal-fueled capacity, has a
different mercury-specific control.




Page 79                                                GAO-12-635 EPA Regulations and Electricity
                                          Appendix IV: Additional Information on Coal-
                                          Fueled Electricity Generating Units




Figure 11: Percentage of Coal-Fueled Generating Capacity with Air Pollution Controls Installed by Region, as of April 9, 2012




                                          Page 80                                        GAO-12-635 EPA Regulations and Electricity
Appendix IV: Additional Information on Coal-
Fueled Electricity Generating Units




Note: Includes units with over 25 MW of net summer capacity—the generating unit’s capacity to
produce electricity during the summer when electricity demand for many electricity systems and
losses in efficiency are generally the highest. Net capacity figures exclude output used internally for
plant operations.




Page 81                                                GAO-12-635 EPA Regulations and Electricity
Appendix V: Comments from the Federal
                            Appendix V: Comments from the Federal
                            Energy Regulatory Commission



Energy Regulatory Commission

Note: GAO comments
supplementing those in
the report text appear at
the end of this appendix.




See comment 1.




                            Page 82                                 GAO-12-635 EPA Regulations and Electricity
                 Appendix V: Comments from the Federal
                 Energy Regulatory Commission




See comment 1.




See comment 2.




See comment 3.




                 Page 83                                 GAO-12-635 EPA Regulations and Electricity
                 Appendix V: Comments from the Federal
                 Energy Regulatory Commission




See comment 4.




See comment 5.




                 Page 84                                 GAO-12-635 EPA Regulations and Electricity
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                 Energy Regulatory Commission




See comment 5.




See comment 6.




                 Page 85                                 GAO-12-635 EPA Regulations and Electricity
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                 Energy Regulatory Commission




See comment 6.




See comment 7.




                 Page 86                                 GAO-12-635 EPA Regulations and Electricity
                  Appendix V: Comments from the Federal
                  Energy Regulatory Commission




See comment 8.




See comment 9.




See comment 10.




                  Page 87                                 GAO-12-635 EPA Regulations and Electricity
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Energy Regulatory Commission




Page 88                                 GAO-12-635 EPA Regulations and Electricity
                          Appendix V: Comments from the
                          Federal Energy Regulatory
                          Commission




               The following are GAO's comments on the Federal Energy Regulatory
               Commission's letter dated July 3, 2012.


               1. We recognize that FERC has taken a number of positive actions
GAO Comments      related to the EPA regulations, and we have described these in our
                  draft and final report. We have made some clarifying changes and, in
                  one case, added language about an example we had not previously
                  described in the report in response to these comments.

               2. The scope of FERC's policy statement is limited to describing how
                  FERC intends to provide advice to EPA on requests for administrative
                  orders to bring a source into compliance with MATS within 1 year. It
                  provides a useful description of FERC's role with respect to this tool
                  for addressing potential reliability challenges, but it does not establish
                  a formal, documented process for FERC's overall monitoring effort or
                  for its coordination with EPA and DOE. We added a description of
                  FERC's policy statement where we describe FERC's role with respect
                  to MATS in response to this comment.

               3. We agree that multiagency coordination can be difficult. When we met
                  with FERC, EPA, and DOE during the course of our audit work, the
                  agencies had not documented a formal process for monitoring. In
                  response to our draft report, these agencies said they are working to
                  establish such an approach. We commend these agencies for taking
                  this step and believe it is important that they complete this effort. We
                  acknowledge there may be limits on the extent to which agencies can
                  collaborate and clarified our recommendation accordingly.

               4. We acknowledge that FERC has gathered views on the potential
                  implications of these regulations from various affected parties,
                  including at formal events such as FERC's 2011 technical conference
                  and the February 2012 forum with state regulators. Our observation
                  from attending these events is that they fostered a useful exchange of
                  ideas and perspectives about the potential implications of the EPA
                  regulations. However, the actual implications will only be known once
                  electricity generating unit owners finalize their plans for responding to
                  the regulations and begin to take steps to retrofit or retire units—which
                  will occur over the next several years. We believe that additional
                  monitoring will be important and that the actions noted by FERC do
                  not represent the type of formal, documented process that will be
                  needed for successfully monitoring industry's progress in responding
                  to the regulations or for FERC’s coordination with DOE and EPA in
                  this effort. We believe there are risks to relying on informal


               Page 89                                    GAO-12-635 EPA Regulations and Electricity
           Appendix V: Comments from the
           Federal Energy Regulatory
           Commission




    mechanisms and that a formal, documented process could help
    strengthen FERC's future efforts at identifying potential problems. As
    such, we made no changes in response to this comment.

5. We believe that the NERC-overseen reliability assessments, plans
   and reports from other stakeholders, as well as conferences and
   workshops, can all be useful in an overall monitoring effort. We
   encourage FERC to work with NERC and other stakeholders in
   monitoring industry progress to the extent that FERC determines such
   activities to be useful. We maintain that FERC should formalize this
   process and document it if the agency intends for this monitoring to
   continue in the future. We made no change in response to this
   comment.

6. We acknowledge that FERC periodically performs various
   assessments of the adequacy of existing RTO market rules and
   similar rules of non-RTO system planners and, where FERC believes
   it is appropriate, encourages changes. However, based on our
   conversations with FERC officials, FERC had not proactively
   assessed the adequacy of system planner rules in light of the EPA
   regulations to determine whether changes are needed or if
   improvements at one system planner could be useful at another. We
   also acknowledge that there was a useful exchange of ideas and
   perspectives about the need for potential changes in market rules at
   FERC's technical conference, but we do not believe that the gathering
   of these views is a substitute for an assessment by FERC of the
   adequacy of these rules. In addition, FERC's recent rulemakings are
   positive steps, but they do not reflect an assessment of whether rules
   need to be modified in light of the EPA regulations to ensure timely,
   cost-effective mitigation of potential reliability challenges that may be
   associated with the regulations. We made no change in response to
   this comment.

7. Neither the draft report, nor the final report recommends that FERC
   consider the presence or absence of demand response when making
   key decisions about electricity markets. FERC’s comment refers to
   text in our draft report that referred to a recommendation in our 2004
   report on demand response. We made this reference to highlight that
   demand response is a tool that could lower demand for electricity to
   mitigate the price or reliability implications of the EPA regulations and
   to note that FERC has taken a number of steps to facilitate broader
   use of demand response among RTOs. As noted in the conclusion of
   this report, we believe that demand response could provide an
   important mechanism that could mitigate potential reliability


Page 90                                    GAO-12-635 EPA Regulations and Electricity
           Appendix V: Comments from the
           Federal Energy Regulatory
           Commission




    challenges, should they arise. As such, it may be useful for FERC to
    consider whether there are certain approaches related to demand
    response at one or more RTOs that could be encouraged elsewhere
    or whether the presence or adequacy of demand response in a
    market should be used when making decisions regarding market
    rules. We made no change in response to this comment.

8. We do not suggest that a one-size-fits-all approach would be best,
   and believe efforts to develop the RTOs and other institutions requires
   leveraging prior entities' experiences. FERC may have the opportunity
   to take a more proactive role in narrowing these differences to the
   benefit of market participants overseen by FERC and the consumers
   who are ultimately served by these markets. We made no change in
   response to this comment.

9. We do not assert that FERC will be unable to meet its statutory
   deadlines for review of transmission investments and reliability must-
   run agreements. Rather, we suggest that information from a formal,
   documented monitoring effort could help alert agencies in advance if a
   larger or smaller than expected number of reliability challenges arises,
   which could be useful for managing its staffing and operations. We
   made no change in response to this comment.

10. We agree that FERC’s policy statement provides clarity about the
    process FERC intends to take to provide timely comments to EPA on
    requests for administrative orders to bring a source into compliance
    with MATS within 1 year. However, we continue to believe that a
    documented, formal monitoring process—by giving FERC insight into
    the extent of potential reliability challenges—could aid FERC in
    managing its process for providing input to EPA. We made no change
    in response to this comment.




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Appendix VI: Comments from the
             Appendix VI: Comments from the Department
             of Energy



Department of Energy




             Page 92                                     GAO-12-635 EPA Regulations and Electricity
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of Energy




Page 93                                     GAO-12-635 EPA Regulations and Electricity
Appendix VII: Comments from the
             Appendix VII: Comments from the
             Environmental Protection Agency



Environmental Protection Agency




             Page 94                           GAO-12-635 EPA Regulations and Electricity
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Environmental Protection Agency




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Environmental Protection Agency




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Appendix VII: Comments from the
Environmental Protection Agency




Page 97                           GAO-12-635 EPA Regulations and Electricity
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Environmental Protection Agency




Page 98                           GAO-12-635 EPA Regulations and Electricity
Appendix VIII: GAO Contacts and Staff
                            Appendix VIII: GAO Contacts
                            and Staff Acknowledgments



Acknowledgments

                  Frank Rusco, (202) 512-3841 or ruscof@gao.gov
GAO Contacts      David C. Trimble, (202) 512-3841 or trimbled@gao.gov


                  In addition to the individuals named above, Jon Ludwigson (Assistant
Staff             Director), Mike Armes, Melinda Cordero, Philip Farah, Quindi Franco,
Acknowledgments   Cindy Gilbert, Paige Gilbreath, Michael Hix, Mitch Karpman, Karen
                  Keegan, Alison O’Neill, Madhav Panwar, Kendal Robinson, Jeanette
                  Soares, and Kiki Theodoropoulos made key contributions to this report.




(361308)
                  Page 99                                 GAO-12-635 EPA Regulations and Electricity
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