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## : B u s i n e s s C a s e f o r P o w e r C o m p a n y P a r t

i c i p a t i o n

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Prepared for:

Electric Power Research Institute 1 661 Page Mill Road, Suite 175 Palo Alto, California 94304

Prepared by:

19909 120 th Avenue NE, Suite 101 Bother, Washington 98011

- 8233

and

536 E. Michigan Avenue, Suite 300 Kalamazoo, Michigan 49007The services described in this report were performed consistent with generally accepted professional consulting principles and practices. No other warranty, express or implied, is made. These service s were performed consistent with our agreement with our client. This report is solely for the use and information of our client unless otherwise noted. Any reliance on this report by a third party is at such party's sole risk. EPRI understands that Shaw En vironmental, Inc. is not licensed to practice environmental (or other) law, and EPRI should consult with an environmental lawyer of its choice concerning interpretation of and compliance with environmental laws or regulations. The content contained in this report applies to conditions existing when services were performed and are intended only for the client, purposes, locations, time frames, and project parameters indicated. Shaw Environmental, Inc. is not responsible for the impacts of any changes in envi ronmental standards, practices, or regulations subsequent to performance of services. We do not warrant the accuracy of information supplied by others, nor the use of segregated portions of this report.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation ES

- 1

## Executive Summary

A preliminary feasibility analysis presents a strong business case for power company participation in the development and promotion of a Water Quality Trading (WQT) program in the Ohio River Basin. This business case has been prepared for the use and consideration of the
Electric Power Res earch Institute (EPRI) and the EPRI Water Quality Advisory Group. The use of WQT can be shown to yield substantial benefits for management of nitrogen discharges associated with more restrictive wastewater discharge permit limits anticipated within the nex t five years in this basin. Specifically, the business case identifies potential opportunities for reducing costs associated with National Pollutant Discharge Elimination System (NPDES) permit compliance.

An Ohio River WQT pilot project was selected follo wing a review of three potential candidate locations including the Ohio River, the Chesapeake Bay and the Catawba River Basin (in North Carolina and South Carolina). The three pilot opportunities were presented to EPRI and the Water Quality Advisory Work G roup at their meeting in Ashville, NC on June 27, 2007. Based on a consensus opinion, the Ohio River presented the greatest opportunity for a WQT pilot program involving power companies. However, meeting participants emphasized the need for a
clear assessm ent of the business case for power company involvement in the more detailed review and feasibility assessment embodied by this document. With several American Electric Power (AEP) and Duke Energy power facilities in the basin, a particular focus on WQT ben efits for these Ohio River facilities was made in this analysis.

Historically in the Ohio River Basin, as in most other water bodies of the United States, effluent limits for nitrogen have not been included in power company permits, or have been largely

un restrictive. Most nitrogen related effluent limits have typically been specified for ammonia as related to dissolved oxygen and aquatic toxicity in receiving waters. Moreover, nitrogen discharges from power plants were generally quite low in the past. Howe ver, these conditions are changing. Nitrogen discharges to surface waters from power plants are increasing as technologies such as selective catalytic reduction (SCR) units, electrostatic precipitators and flue gas desulfurization (FGD) systems are install ed to comply with more stringent air emission requirements. The nitrogen generated by these processes is being transferred to surface water discharges. Concurrently, water quality impairments by nitrogen, new instream nutrient criteria and anticipated effl uent limitations on total nitrogen (TN) discharges are now actively being pursued by regulatory agencies. Although only a few power plant NPDES permits reviewed during this feasibility assessment contain nitrogen limits (or monitoring requirements), promul gation of nutrient criteria, (which will be followed by effluent limitations), is anticipated for Ohio in 2008, Kentucky and along the main stem of the Ohio River by 2010 and for West Virginia by 2011.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation ES

- 2This combination of stricter permit limitations on nit rogen and increasing nitrogen concentrations in power plant discharges will ultimately translate to increased wastewater treatment costs for most power companies. For example, AEP must install SCR units and FGD systems in many of their plants within the pr oject area. Of the ten AEP facilities in the pilot project area, five already have FGD systems installed on at least one unit, and by 2010 five AEP plants will be installing additional FGD systems on one or more units. In addition, five AEP and
two Duke En ergy plants within the pilot project area will be installing SCRs within the next five years. The Amos, Mountaineer and Muskingum plants will begin operating SCRs year

- round. The reductions in air emissions will result in greater nitrogen loadings in waste water discharges coincident with forecasted establishment of nutrient criteria in the region. Ironically, with nitrogen criteria only a few years away, the potential regulatory and compliance issues associated with nitrogen in power plant discharges are ju st emerging for some companies.

Under the current regulatory conditions, the only option power companies on the main stem of the Ohio River have for complying with stricter water discharge limitations will be investment in

on

- site treatment capacity. WQT o ffers another option; purchasing wastewater effluent discharge offsets to maintain NPDES permit compliance. This involves making equivalent or greater discharge reductions at another location to offset the plant’s discharges that are in excess of their

wat er quality based permit limits.

As with other “make vs. buy decisions” for business, the potential gains to a power company by purchasing credits via a WQT program rather than investing in treatment capacity will depend on relative costs and risks. A WQT program must provide assurances for a reliable supply of cost

effective credits. The potential uncertainty in a WQT program regarding credit supply may be considered too risky for a power company to depend on WQT for compliance. Thus, whether a

power compa ny will benefit from WQT depends on their wastewater treatment discharge restrictions, in

- house wastewater treatment costs, the expected cost of WQT offsets and supporting conditions of the WQT market.

This report presents preliminary findings that support the business case for power companies to promote the development of WQT because of the potential to reduce costs of complying with water discharge restrictions. The five key scenarios identified in this analysis that encourage power companies to participa te in WQT program development and its use are based on providing

cost

- savings and flexible compliance options. These five scenarios include:

1. Long

- term Participation in WQT

– A power facility could engage in long

- term compliance options using the WQT option when the cost is significantly less than up treatment upgrades.

2. Short

- term Participation in WQT

– A power company could choose to participate in WQT for a short duration to provide permit compliance schedule fulfillment for

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation ES

- 3sites when upgrade facility pla nning and construction schedules are longer than otherwise might be stipulated in a NPDES compliance schedule.

3. Partial Compliance Use of WQT

– A WQT program provides the opportunity to avoid upgrading a power facility for permit compliance when only maximu m concentrations are discharged, despite average effluent concentration discharges being in compliance.

4. TMDL Allocations

– A WQT program can provide allocation capacity for new or expanding power facilities in areas with fully allocated TMDLs for nitrogen that would otherwise preclude the permitting of new loads.

5. Generating Credits

– A WQT program can provide economic opportunities for selling surplus nitrogen reductions when a power company’s facility provides nitrogen treatment beyond permit requirements.

Treatment Cost Differences in the Ohio River Basin The actual discharges of nine power plants within the project area, plus a base case (representing average nitrogen discharges from a facility with FGD and SCR) were used to estimate future

treatment cost s associated with NPDES permit compliance. The estimated unit cost (dollars per pound) for some power companies to remove nitrogen from their discharges at concentration
limits of 5 milligrams per liter (mg/L) and then 8 mg/L (at typical discharge volumes) , is much higher than equivalent treatment costs for non

- point sources (NPSs) and wastewater treatment plants (WWTPs) (Figure E

- 1).

From a treatment cost perspective, Figure E

- 1 suggests that power plants would benefit from purchasing discharge credits fro m NPS dischargers that can make equivalent discharge reductions for $4 per pound. Assuming a 2:1 trading ratio in a potential WQT program, credits selling for $8 per pound are still more cost

- effective than a power facility minimally spending $14.41 per po und via in

- house treatment upgrades. A potential savings of $6.41 per pound of nitrogen could be realized even with these relatively conservative (i.e., high) costs of NPS credits. Other administrative costs associated with executing a trade will reduce su ch savings, however, this is a good first approximation of the potential savings from trading between NPSs and power facilities.

The limitations with this first conservative approximation of power company benefits will be critically influenced by decisions made over the initial years of WQT program development regarding: the units of exchange; the geographic range where trading can occur; who is allowed to trade; and, how transaction costs, trade risks and liabilities are allocated among buyers and
sellers. Notably, power companies are not the only point sources to potentially benefit from a WQT program in the Ohio River Basin (Figure E

- 1). Municipal wastewater treatment plants will also benefit, representing a much larger potential market demand than power companies, and

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation ES

- 4especially considering that WWTPs will be faced with significant effluent limitations for both nitrogen and phosphorus.

Figure E

- 1 Overview of Potential Power Facility Cost Savings from WQT in the Ohio River Pilot Project Area

NP1 Estimate d Ohio River Agricultural NPS Credit at a 2:1 trading ratio
NP2 Conservative Ohio River Agricultural NPS credit cost
NP3 Actual GMR Agricultural NPS credit cost based on the Miami Conservancy District (MCD) WQT program results in the Great Miami River (G MR) watershed (for a combined TN+TP credit)
WT1 Estimated Average Unit TN treatment cost for WWTP below 0.1 million gallons per day (mgd) in the GMR
WT2 Estimated Average Unit TN treatment cost for WWTP between 0.1 and 1 mgd in the GMR
WT3 Estimated Avera ge Unit TN treatment cost for WWTP between 1 and 10 mgd in the GMR
EP1 Estimated Average Unit TN treatment cost for Base Case power plant
EP2 Estimated Average Unit TN treatment cost for AEP Muskingum River Plant
EP3 Estimated Average Unit TN treatment cos t for AEP Mitchell Power Plant
EP4 Estimated Average Unit TN treatment cost for AEP Mountaineer Power Plant

Regulatory Flexibility and Risk Management Regulatory flexibility associated with WQT offers a NPDES discharger cost saving and risk
management opt ions. Often, the most cost

- effective timing to participate in WQT is the period

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation ES

- 5just prior to implementing fixed cost treatment upgrades. Long

- term controls through on

- site treatment are an attractive risk management option. However, even when upgrading th ere sometimes exist economic advantages in providing for longer upgrade periods than regulatory upgrade compliance schedules might dictate. Typical compliance schedules establish limits within the first five years of a new permit cycle (most often during t he third year of the permit). For facilities planning to upgrade but needing more time to accommodate capital development, design and installation, WQT can be used as an interim compliance mechanism. WQT can also
be used for short

- term compliance for facil ities with scheduled upgrades for other purposes.

Similarly, costly upgrades can potentially be avoided using WQT in partial fulfillment of a permit condition to provide relief only during the period when the facilities discharge at a
maximum concentration . When maximum discharge concentrations are above an effluent limit, and atypical for average operating conditions within compliance, it may be more cost

- effective to purchase offset credits than to upgrade. To assess these potential conditions, average an d maximum discharges were compared to four, progressively more stringent discharge concentration limits for TN: 10, 8, 5, and 3 mg/L. As shown in Table E

- 1, average TN discharges of many facilities are below one or more of the discharge concentration limit s evaluated. However, maximum discharges of most facilities are above even the highest limit. Without trading, facilities would need to invest in treatment to manage these maximum discharges. Alternatively, if a facility does upgrade, they may have the cap acity to produce surplus credits (reductions in excess of their permit limitations and beyond a previous level of discharge) that
could be used for intra

- plant compliance or sold to other facilities.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation ES

- 6Table E

- 1 Current Discharges from Select Power Plants in the Ohio River WQT Pilot Project Area

Facility NPDES Permit Number Calculated Average TN Concentration (mg/L) Calculated Maximum TN Concentration (mg/L) Actual Discharge

(mgd) Size vs. Base Case

Base Case Not Applicable 47.65 97.3 0.5 N/A
FirstEnergy RE Burger Plant OH0011592 1.85 5.60 6.89 13.8
AEP Muskingum River Plant OH0006149 5.38 15.00 4.93 9.9
Orrville Municipal Power Plant OH0064025 25.05 38.57 0.27 0.5

Orion Power Midwest LP Niles Plant OH0011533 3.73 16.00 3.73 7.5

AEP

– Gavin OH00287 62 1.39 6.47 8.19 16.4

Pleasants Willow Island Power Stations WV0000761 2.77 41.30 0.0005 N/A

AEP

- Kammer WV0005291 2.30 14.90 0.007 N/A

AEP

- Mitchell WV0005304 5.35 48.00 26.006 52.0

AEP

- Mountaineer WV0048500 6.60 10.00 3.32 6.6

Source: US Envi ronmental Protection Agency (USEPA) Permit Compliance System Discharge data, downloaded into USEPA’s BASINS (Better Assessment Science Integrating Point and Nonpoint Sources) platform.

Early Participation of Power Companies in WQT Development and Use

If the provisions of a WQT system in the Ohio River Basin are determined primarily by a combination of credit sellers (e.g., agricultural interests) and the largest potential buyers of credits (e.g., WWTPs), a trading framework may be developed that is not fa vorable to power companies absent their involvement. The influence that the power companies could assert as a participant in early WQT program development will shape the companies collective abilities to benefit from trading in all five of the key trading scenarios identified in this analysis. Additionally, the power industry should engage in the development of WQT now to ensure credits are available if and when they decide to exercise the option to buy.

Active participation in WQT program development while the Ohio River Valley Water
Sanitation Commission (ORSANCO), Ohio, West Virginia, and Kentucky are developing discharge concentration limits for TN, will also enable power companies to potentially influence regulatory decisions. Resulting benefits could i nclude greater flexibility in implementation schedules and compliance options.

Potential cost

- savings, reduced compliance risks and increased compliance flexibility all justify the relatively low cost of pursuing a WQT strategy in the Ohio River Basin. Wit hout investment in its development now, the power industry is allowing others, including sellers and regulators,

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation ES

- 7to develop WQT rules. The resulting program is less likely to favor the power industry, making it less likely for individual power companies to garner potential benefits with trading.

Stakeholder Readiness and Adequate Credit Supply Successful development of a functioning WQT program in the Ohio River Basin will hinge upon the willingness of buyer, seller and regulatory participation. A prelimina ry analysis of stakeholder readiness revealed that WWTPs, agricultural representatives, regulatory authorities (including ORSANCO and several states), as well as other non

- profit organizations are both willing and able to support program development and ac tively participate in such an effort. A preliminary credit supply analysis targeting low cost reductions generated by agriculture suggests ample credits would be available for all power facilities facing future nitrogen permit limitations in the pilot proj ect area. Credits generated from just ten percent of agricultural lands in select watersheds in the pilot area (assuming conservative safety factors addressing NPS loading uncertainty) would be sufficient to meet even the additional demand of certain munic ipal and industrial facilities also seeking to use WQT for NPDES compliance.

In total, there appears to be substantial benefits and rationale for power company participation in an Ohio River WQT pilot program. There is robust and diverse stakeholder intere st and willingness to participate in program development. High demand for WQT credits is anticipated from several sectors of NPDES dischargers including the power companies with the forthcoming nutrient criteria. An ample supply of low cost credits appears achievable. Other existing WQT successes at the local scale in the basin portend immediate opportunities to move forward with regional trading as most of the traditional roadblocks to trading have been overcome. Regulatory agencies find trading attractive for informing key decision

- making processes in the next five years, along with the ability to achieve water quality goals through flexible permitting options. These attributes are the necessary and foundational elements for advancing a regional WQT

progra m in the Ohio River Basin.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation ES

- 8

## Table of Contents

________________________________ ________________

List of Figures

................................ ................................ ................................ ................................ ............. 1

- 1 List of Tables

................................ ................................ ................................ ................................ .............. 1

- 2 List of Appendices

................................ ................................ ................................ ................................ ...... 1

- 2

Executive Summary

................................ ................................ ................................ ................................ ....... 2 1.0 Introduction

................................ ................................ ................................ ................................ ..... 1

- 1 1.1 O verview of the WQT Pilot Setting

................................ ................................ ....................... 1

- 3 1.1.1 Water Quality Issues in the Pilot Project Area

................................ ......................... 1

- 6 1.1.2 Nutrient Criteria as a Regulatory Driver for WQT

................................ .................... 1

- 7 1.1.3 Regiona l Interest in WQT

................................ ................................ ........................ 1

- 8 1.1.4 Power Plants in the Pilot Project Area

................................ ................................ ..... 1

- 9 1.1.5 Potential Implications of Nutrient Criteria on Power Plants

................................ .... 1

- 10 2.0 Economic Case for Po wer Companies to Promote and Develop WQT

................................ ........... 2

- 1 2.1 Potential Cost Savings with WQT

................................ ................................ ......................... 2

- 1 2.1.1 Marginal Cost Curves

................................ ................................ .............................. 2

- 3 2.2 Summary of Likely Scenarios for Power Plant Pa rticipation in WQT

................................ .... 2

- 8 2.2.1 Scenario 1

– Long

- term participation in WQT

................................ .......................... 2

- 8 2.2.2 Scenario 2

– Short

- term participation in WQT

................................ ......................... 2

- 8 2.2.3 Scenario 3

– Partial Complia nce Use of WQT

................................ ......................... 2

- 9 2.2.4 Scenario 4

– Total Maximum Daily Load Allocations

................................ ............. 2

- 11 2.2.5 Scenario 5

– Generating Credits

................................ ................................ ........... 2

- 11 2.3 Projected Demand for other WWTPs in the Great Miami and Muskingum Basins

............. 2

- 11 3.0 Non

- point Source Credit Generation Potential

................................ ................................ ................ 3

- 1 4.0 Stakeholder Readiness in the Ohio River Basin

................................ ................................ ............. 4

- 1 4.1 Agricultural Int erests

................................ ................................ ................................ ............. 4

- 1 4.2 Regulatory Agencies

................................ ................................ ................................ ............ 4

- 1 4.3 Point Sources

................................ ................................ ................................ ....................... 4

- 2 5.0 Summary and Conclusions

................................ ................................ ................................ ............. 5

- 1 5.1 Conclusions

................................ ................................ ................................ .......................... 5

- 3 5.2 Next Steps For Developing a WQT Program

................................ ................................ ........ 5

- 4 6.0 References

................................ ................................ ................................ ................................ ..... 6

- 1



## List of Figures

________________________________ __________________

Figure 1

- 1 Ohio River Basin WQT Pilot Project Focus Area

................................ ............................... 1

- 3 Figure 1

- 2 Nitrogen Loading from Various Sources within the Ohio River Basin

................................ 1

- 5 Figure 1

- 3 Ohio River Basin WQT Pilot Project Focus Area

................................ ............................... 1

- 6 Figure 2

- 1 Treatment Costs for Various Sour ces of Nitrogen in the Ohio River Pilot Project Area

......... 2

- 2 Figure 2

- 2 Overview of Potential Power Facility Cost Savings from WQT in the Ohio River Pilot Project Area

................................ ................................ ................................ ............... 2

- 3

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 1

- 1

## List of Tables

________________________________ ___________________

Table 1

- 1 Anticipated Timeline for Development of Nutrient Criteria in the Ohio River Basin

............ 1

- 7 Table 1

- 2 Power Plants in the Pilot Project Area

................................ ................................ ............. 1

- 10 Table 2

- 1 Current Discharges for a Base Case and from Select Power Plants in the Ohio River WQT Pilot Project Area

................................ ................................ .................... 2

- 4 Table 2

- 2 Current Discharges from Select Power Plants in the Ohio River WQT Pilot Project Area

................................ ................................ ................................ ............... 2

- 5 Table 2

- 3 Analysis of TN Credit Demand and Potential Savings with a 8 or 5 mg/L TN Limit

............ 2

- 7 Table 2

- 4 Magnitude of Excursions Above Set Nutrient Criteria

................................ ...................... 2

- 10 Table 2

- 5 Anticipated WQT Demand Associated with Different Trading Ratios for WWTP Discharges

................................ ................................ ................................ ........... 2

- 14 Table 3

- 1 Estimated Total Load Reductions (pounds per year) from Agricultural BMP Implementation on 10% and 25% of Cultivated Croplands

................................ ....... 3

- 2 Table 3

- 2 Number of Credits Available Considering a 35% Loss Due to Fate and Transport

............ 3

- 2 Table 3

- 3 Number of Credits Available Considering a 50% Loss Due to Fate and Transport

............ 3

- 3



## List of Ap pendices

________________________________ _______________

Appendix A Linear Diagram of Relevant Ohio River Main Stem Features Appendix B Implications of Nutrient Criteria on Duke and AEP Power Plants and Treatment Cost Analysis Appendix C Preliminary Non

- point Source Modeling in Select Watersheds of the Ohio River Basin for Assessment of Potential Agricultural Credit Supply Appendix D Stakeholder Readiness Assessment Appendix E Pilot Project Development Strategy

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 1

- 2

## List of Acronyms

________________________________ ________________

AEP American Electric Power BASINS Better Assessment Science Integrating Point and Nonpoint Sources BMP best management practice BNR biological nutrient removal EPRI Electric Power Research Institute FGD f lue gas desulfurization GMR Great Miami River MCD Miami Conservancy District mg/L milligram(s) per liter mgd millions gallons per day NPDES National Pollutant Discharge Elimination System NPS non

- point source O&M ope ration and maintenance ORSANCO Ohio River Valley Water Sanitation Commission PS point source SCR selective catalytic reduction Shaw Team Shaw Environmental, Inc.; Kieser & Associates, LLC; King and Associates; and Siegel Environmental Dynamics, LLC Shaw S haw Environmental, Inc. TKN total Kjeldahl nitrogen TMDL Total Maximum Daily Load TN total nitrogen TP total phosphorus USDOJ United States Department of Justice USEPA United States Environmental Protection Agency WQT water quality trading WWTP wastewater treatment plant

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation i

## 1.0 Introduction

The Electric Power Research Institute (EPRI) is examining water quality trading (WQT) as a compliance tool for permitted surfac e water discharges of nitrogen by the power industry. Coal

fired power facilities will be facing more stringent discharge compliance limits as regulatory agencies adopt new criteria for nutrients, particularly nitrogen. Where power facilities already
have nitrogen limits for surface water discharges, most appear to be in compliance with the current, less stringent (or non

- existent) limits and find no immediate need for WQT. However, as regulations and permit conditions for power company emissions to air an d water become more restrictive, treatment costs will rise. This will result in the need to examine significant cost tradeoffs as the preferred options for reducing one type of emission (e.g., flue gas desulfurization [FGD] for air) can increase other type s of discharges (e.g., FGD water). The research described in this report addresses how power facilities can manage costs and risks associated with anticipated changes in nutrient discharge restrictions through WQT.

The Shaw Team, comprised of Shaw Environm ental, Inc. (Shaw), Kieser and Associates, LLC, King and Associates, and Siegel Environmental Dynamics, LLC, was contracted by EPRI to identify and research the feasibility of a WQT pilot program for the power industry. The analysis
was to include at least one electric power company as either a credit buyer or seller to determine how power industry participants in a pilot project might benefit from WQT. A mid

- project decision was made to select a pilot area that included multiple power companies, other poin t source (PS), and non

- point source (NPS) nutrient dischargers (primarily agricultural) to examine both PS to PS and PS to NPS trading.

The objective of this research was to focus on the benefits for power company participation in a
self

- sustaining, robust WQT pilot program rather than in a trading demonstration involving a single bi

- lateral trade. A WQT program that sustains itself in a given region has inherent advantages. Such advantages include: cost

- savings with distributing administrative overhead of
market

- related educational and support needs across many credit buyers and sellers; market

based competition among credit generators; and, minimizing compliance risks by optimizing market opportunities for access to multiple sellers (ensuring ample credit availability). Bi

- lateral trades, sometimes referred to as, “regulator approved offsets,” will have varied outcomes regarding cost

- effectiveness of engaging in an individual National Pollutant Discharge Elimination System (NPDES) permit

- based water qualit y trade. Costs of an individual PS to NPS trade, for example, will depend heavily on local environmental conditions at the credit generating site, and the final effluent restrictions on the buyer. In addition, a small number of WQT credits exchanged typica lly increases the administrative overhead per credit. Thus, water quality trades on a permit

- by

- permit basis are typically more expensive than trading programs with multiple buyers and sellers.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Compan y Participation 1

- 1With the possibility of stricter water discharge restrictions, limited compliance options currently available to power companies will likely dictate in

- house discharge treatment facility upgrades. WQT offers a cost

- effective alternative with the purchase of wastewater effluent discharge offset
credits. This would inv olve the power company paying another discharger to make an equivalent or greater reduction to offset the plant’s discharged load that is in excess of their water quality based permit limit.

Results from localized WQT programs in the Ohio River Basin sugge st that typically, there are numerous sources of low cost water discharge credits that could supply necessary offsets for power companies (or other buyers) in a WQT program. Adequate supply of low cost credits would further suggest there is a potential to reduce power company compliance costs. The ability to meet discharge restrictions with WQT instead of in

- house treatment upgrades provides a potentially useful basis for power companies to flexibly manage regulatory compliance risk in deciding when to inve st in treatment capacity upgrades.

As with other “make vs. buy decisions” for businesses, the financial benefits of power companies purchasing credits via a WQT program rather than investing in additional in

- house treatment, depend on relative costs and ri sks. A power company may prefer to meet permit obligations by engaging in WQT if it is less expensive than expanding in

- house treatment capacity. However, the WQT program must provide assurances for a reliable supply of cost

- effective credits. The potentia l uncertainty in a WQT program regarding credit supply may be considered too risky for a power company to depend on WQT for compliance. Thus, whether a power company will benefit from WQT depends on their wastewater treatment discharge restrictions, in

- hou se wastewater treatment costs, the expected cost of WQT offsets and supporting conditions of the WQT market.

Following a review of three potential pilot opportunities focused on development of a robust WQT program (Shaw, 2007), a pilot project in the Ohio River Basin was selected for this feasibility assessment. This assessment therefore focuses on:

• The feasibility of a regional WQT program; and

• A business case for power company participation in promoting the development and participation in such a program.

Drawing from established WQT programs and the Project Team’s cost

- benefit analyses, this report argues the business case by examination of:

• Reduced costs of complying with wastewater discharge restrictions;

• Reduced risk in compliance excursions; and

Ohio River Water Quality Trading Pilot Program: Business Case for Power Compan y Participation 1

- 2• Incre ased flexibility in terms of deciding when and how to invest in additional in

house treatment capacity.



### 1.1 Overview of the WQT Pilot Setting
The proposed WQT pilot project focuses on sections of the Ohio River Basin including segments
that form a border betwe en Ohio, West Virginia and Kentucky, stretching from the Pennsylvania border in the east to the Indiana border in the west (see Figure 1

- 1). The decision to pursue this geographic area stems from a previous analysis of WQT opportunities (Shaw, 2007).

Figur e 1

- 1 Ohio River Basin WQT Pilot Project Focus Area

The focus area for the Ohio River Basin WQT Pilot project is outlined in red. The watersheds outlined in white are watersh eds identified for more detailed analysis through WARMF modeling, which is being completed as a separate EPRI project.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Compan y Participation 1

- 3The primary factors considered by the Shaw Team when selecting the focus area for this pilot project included:

• High nutrient loading wher e pending regulatory programs will create potential WQT credit demand

• The presence of multiple types and sources of discharged nitrogen

• A regulatory climate favorable to WQT

• The presence and distribution of numerous coal

- fired power plants

Nitrogen loading and nutrient inputs from various sources provide an indication of the dynamics of nitrogen in the system and the relative balance of inputs among various sources. This balance will dictate the viability of PS to PS or PS to NPS trading programs. Along the reach of the Ohio River selected for this pilot project, nitrogen loading continues to build in concentration. Despite high nitrogen inputs to the river from Indiana tributaries, the river system starts losing nitrogen
east of the border between Ohio and Indiana. The schematic provided in Appendix A shows the location of monitoring stations, power plants and major tributaries in relation to available water quality data for total nitrogen (TN) in these regards.

Most reaches in this segment of the river show TN concentrations at or above 1.5 milligrams per liter (mg/L). Figure 1

- 2 illustrates the relative nitrogen inputs of various sources (PSs, agriculture, urban, etc.) within the study area. These maps show that the second highest nitrogen load from agricul ture occurs in Ohio (Indiana is the highest), while loading from PSs and urban areas is relatively evenly distributed throughout the basin.

Based on this information, the pilot project efforts have focused on the following areas of the
Ohio River Basin for a more robust analysis of a regional WQT program:

• Ohio River main stem including a wide range of power company facilities (see Appendix A and Section 2.0)

• Two major tributaries to the Ohio River including the Great Miami and Muskingum Rivers to additional ly examine potential WQT credit demand from other types of nutrient dischargers (primarily municipal wastewater treatment plants[WWTP]) (see Section 3.0)

• Four major tributaries including the Licking River (Kentucky), and the Great Miami, Scioto, and Muskin gum Rivers in Ohio to assess potential WQT credit availability generated by agriculture (see Appendices C and D)

Ohio River Water Quality Trading Pilot Program: Business Case for Power Compan y Participation 1

- 4Figure 1

- 2 Nitrogen Loading from Various Sources within the Ohio River Basin

Ohio River Water Quality Trading Pilot Program: Business Case for Power Compan y Participation 1

- 5

### 1.1.1 Water Qua lity Issues in the Pilot Project Area Potential drivers for trading include both localized and systemic water quality issues. On the local level, water quality issues in various reaches of the Ohio River and its major tributaries include local eutrophicati on (related to phosphorus), algal blooms (taste and odor problems), ammonia (local toxicity), bacteria (localized Combined Sewer Overflow discharges and background NPSs), temperature (aquatic life and ammonia), flow (urban stormwater, hydraulics), and acid mine drainage (US Environmental Protection Agency [USEPA], 2004; Kentucky Division of Water, 2006).

On a systemic level, the Ohio River is a considerable source of flow to the Mississippi River and contributor to Gulf of Mexico hypoxia issues related to n itrates, total Kjeldahl nitrogen (TKN) and total phosphorus (TP) loading ( Ohio River Valley Water Sanitation Commission [ORSANCO], 2003). Both nitrogen and phosphorus are parameters that are readily traded in WQT programs. Figure 1

- 3 shows the location and type of water quality impairments within the project area.

Figure 1

- 3 Ohio River Basin WQT Pilot Project Focus Area

Ohio River Water Quality Trading Pilot Program: Business Case for Power Compan y Participation 1

- 6

### 1.1.2 Nutrient Criteria as a Regulatory Driver for WQT The primary water quality issues that will drive regional WQT within the Ohio River Basin are development of instream nutrient criteria for Gulf of Mexico Hypoxia and protection of aquatic life in local reaches. Both issues will involve setting nitrogen and phosphorus reduction goals
that will direct impact regulated (permitted) PS discharges with more stringent effluent limits.

Current considerations by the USEPA Science Advisory Board indicate the need for greater nitrogen reductions, and now phosphorus reductions, than in past Gulf Hypoxia n utrient loading projections. Also introduced is an emphasis on PS load reductions of both nutrients and on atmospheric deposition of nitrogen (Tennant, 2007; USEPA, 2004). These new reduction goals will translate to more stringent permit restrictions via p romulgation of nutrient standards and thus, represent a primary driver for WQT.

The congressionally designated interstate compact, ORSANCO, coordinates activities for the Ohio River Basin to implement an action plan to reduce the extent of Gulf Hypoxia and address localized main stem impairments. This will largely be accomplished with ORSANCO’s development of nutrient criteria. ORSANCO will be developing these criteria for the main stem of the Ohio River by 2008/2009 with incorporation into NPDES permits li kely within five years (Table 1

- 1). Efforts to establish nutrient criteria are underway within all states covered by ORSANCO except Illinois. Both local and interstate opportunities may therefore exist for PS to PS and PS to NPS trading within the pilot pr oject area.

Table 1

- 1 Anticipated Timeline for Development of Nutrient Criteria in the Ohio River Basin

Milestones for Ohio River Nutrient Criteria Development (Expected)
Authority/ Coverage 2007 2008 2009 2 010 2011

ORSANCO Ohio River Nitrogen driver gulf hypoxia

Illinois Tributaries Not currently embracing USEPA criteria approach

Indiana Tributaries On track
Kentucky Tributaries Already underway; desire more data

Ohio Tributaries On track
Pennsylvania Tributaries Already underway; desire more data
West Virginia Tributaries In early stages

Of particular note in forecasting potential nitrogen criteria, the USEPA (2000) has established guidance for developing nutrient criteria whereby a frequency distribution approach is recommended. In highly altered settings such as the Midwest, an upper percentile would be used

Ohio River Water Quality Trading Pilot Program: Business Case for Power Compan y Participation 1

- 7to set numeric criteria. This approach is desirable since some of the streams in a random selection process are degraded. U SEPA guidance also recommends that the percentile be set
somewhere between the 5 th and 25 th percentile of all streams randomly selected in a stream class. For the Ohio River, this could potentially result in a 1.2 mg/L TN instream standard. Most
reaches of the Ohio River within the Pilot Project area show a TN concentration ranging from 1.5 to 3.0 mg/L with a few tributaries having concentrations above these values (see Appendix A). If ORSANCO were to follow USEPA guidance, the instream standards for TN cou ld be approximately 1.2 mg/L. While NPDES effluent limits may still be higher than instream nutrient standards, these data are a strong indication that lower, single

- digit TN effluent limitations are likely.



### 1.1.3 Regional Interest in WQT

A successful climate fo r WQT requires willing buyers, willing sellers and a willing regulatory community. There is a history of WQT within the region which provides a reasonable setting for an Ohio River Basin pilot project. The state of Ohio is home to one of the most robust WQ T programs for nitrogen and phosphorus in the United States (i.e., the Great Miami River [GMR] program). In addition, promulgated trading rules in Ohio, trading policy in Pennsylvania and trading pilot projects in West Virginia provide a template upon whic h a regional pilot program
can be constructed in the Ohio River Basin.

Another strength for this potential pilot project is that public, private and environmental/ conservation groups have participated in WQT as buyers, sellers and aggregators. Specificall y, there has been participation in WQT by public sector buyers in Ohio and Pennsylvania; private sector buyers in Illinois and Pennsylvania; and, WQT aggregators/brokers in Illinois, Ohio, and Pennsylvania. PS to NPS trades have occurred in Illinois, Ohio, West Virginia and Pennsylvania, while PS to PS trades have occurred in Pennsylvania. The agricultural sector has been involved in generating credits in Ohio, West Virginia and Pennsylvania. West Virginia University and Ohio State University agricultural d epartments are directly engaged in WQT pilot projects. Although Kentucky has not participated in WQT to date, their has been strong interest from state regulatory personnel to do so. Moreover, ORSANCO has expressed interest in a program that involves poten tial interstate trades in advance of standards.

The background and experience with trading within these states and among these stakeholders would benefit a regional program in the Ohio River Basin. Typically, it takes significant time
and resources to educ ate participants and stakeholders on WQT. A program in the Ohio River Basin would be able to build on an already well

- developed foundation.

Additional support for the development of an Ohio River pilot project comes with the 2008 Draft Gulf Hypoxia Action Plan released on November 9, 2007. In this updated plan, current progress and next steps are outlined for correcting Mississippi River eutrophication impacts on the Gulf of

Ohio River Water Quality Trading Pilot Program: Business Case for Power Compan y Participation 1

- 8Mexico. A current nutrient loading assessment estimated PSs contributing 22 percent of the nitrogen and 34 percent of the phosphorus loads to the Gulf. NPSs, which include atmospheric deposition, are estimated at 78 percent phosphorus and 66 percent nitrogen. Approximately 54 percent of the nitrogen from NPSs is attributed to fertilizer practices in the basin. The report outlines a high level strategy to achieve an approximate 45 percent reduction in both nutrients.

The plan acknowledges that the Science Advisory Board no longer believes that reduction goals are obtainable by 2015; instea d the Board stresses using an adaptive management implementation strategy and strengthening existing programs. The plan combines voluntary and existing regulatory approaches.

The Action Plan identifies six principles as guidance to reach the three major go als of the plan. One in particular is germane to an Ohio River WQT pilot project: “Identify opportunities for, and barriers to, innovative and market

- based solutions”. As an example of implementing progress now by using existing programs, the report goes o n to state that:

“..., under the purview of USEPA, [efforts] may involve the adoption of numeric water quality standards. Numeric water quality standards for nitrogen and phosphorus are essential for achieving the necessary reductions in nitrogen and phosph orus loading in the basin. Water quality standards provide the formulation for development of NPDES permit limits, TMDLs, and trading.”

This report repeatedly stresses the need for innovative and adaptive applications of existing and
new government program s to fully address the hypoxia issue. It provides a strong regulatory underpinning for a regional WQT pilot program in the Ohio River Basin.



### 1.1.4 Power Plants in the Pilot Project Area The Ohio River Basin pilot project area includes several coal

- fired power pl ants (Table 1

- 2). The linear diagram presented in Appendix A illustrates the relative position of these power plants along the main stem of the river. Most are located within proximity of the four major tributaries examined in this report for NPS potential credit generation. This is relevant to WQT considerations whereby pollutant loads will likely be offset by credits generated either upstream or within reasonable downstream proximity of the buyer. Although the Wabash River, which joins the Ohio River near the Indiana

- Illinois border, contributes a substantial nutrient load to the Ohio River from agriculture, there are few power plants and no Duke or American Electric Power (AEP) facilities along this segment of the main stem. Thus, NPS loading reductions i n the Wabash would not likely be saleable to power companies on the main stem. Other WWTPs within the Wabash or on the main stem below its confluence with the Ohio, could potentially engage in such trades. Since such opportunities are beyond the scope of t his effort, they are not
considered here.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Compan y Participation 1

- 9Table 1

- 2 Power Plants in the Pilot Project Area AEP Facilities (on main stem): 1. Cardinal 2. Krammer 3. Mitchell (scrubber already) 4. Philip Sporn 5. Mountaineer (scrubber alread y) 6. Gavin (scrubber already) 7. Kyger Creek

AEP Facilities (off main stem): 8. Conesville 9. Muskingum 10. Amos Duke Facilities:

• W.C. Beckjord

• Miami Fort

• Zimmer

Allegheny Facilities:

• Pleasants

• Willows



### 1.1.5 Potential Implications of Nutrient Criteria on Power Plants

There are three primary sources of nitrogen in wastewater discharges from coal

- fired power plants: s elective catalytic reduction (SCR) units; electrostatic precipitators; and, FGD systems (EPRI, 2006). As more attention is paid to nitrogen in power plant discha rges, it is also likely that other sources may be identified. For example, TKN may be present in the chlorine purge stream (Lohner, 2007). An analysis of FGD wastewater treatment by CH2M Hill (2005), including analysis of the actual wastewater discharged b y eight different FGD systems, found TN concentrations between 2.0 mg/L and 97.3 mg/L. Discharge rate from FGD depends on chlorine content in coal, and the concentration of inert materials in limestone. A flow rate of 100

- 500 gallons per minute is typical (Pariseau, 2007).

As more stringent air emissions control requirements are applied to the power industry, more air pollution control systems will likely be installed. In particular, AEP will be required to install SCRs and FGD systems in many of their plan ts within the project area. They will also be required to comply with a system

- wide cap on nitrogen oxides and sulfur dioxide emissions. These will become more restrictive following rulings by the District Court for the Southern
District of Ohio Eastern Di vision [USDOJ], 2007)

.
Based on information provided by representatives from AEP and Duke Energy, the number of plants in the project area with SCRs and FGD systems will increase over the next five to seven years. Currently, five of the ten AEP power plant s operate FGD systems on at least one unit. Seventy percent of AEP plants and 67 percent of Duke Energy plants have installed SCRs on at least one unit. Five additional AEP plants will be installing FGD systems on one or more units,
the bulk of which will be operational by 2010. In addition, five AEP and two Duke Energy plants will be installing SCRs within the next five years and the Amos, Mountaineer and Muskingum

Ohio River Water Quality Trading Pilot Program: Business Case for Power Compan y Participation 1

- 10plants will begin operating SCRs year round. (Appendix B includes additional details on the AEP and Duke facilities within the pilot project area).

Given the air pollution control technology currently operating and planned for AEP and Duke Energy plants, nitrogen discharges from these power plants alone will increase on approximately
the same tim eline as the schedule for Ohio, West Virginia, Kentucky and ORSANCO’s instream nutrient criteria development (Table 1

- 1). To date, ammonia in power plant discharges has received more attention from individual plants and regulators than TN discharges. Ammon ia monitoring requirements and discharge limits are geared towards aquatic toxicity rather than eutrophication issues. However, permits from several facilities refer to nitrogen requirements that can be expected in the next permit cycle. The NPDES permits of three AEP facilities and one Duke Energy facility, for example, contain TN limits or monitoring requirements. In light of nitrogen criteria only a few years away, it is noteworthy that potential regulatory issues associated with nitrogen in power plant surface water discharges are not yet seen as compliance priorities for some companies. For an industry that depends on managing operational risk, some companies may be faced with very limited surface water compliance options that carry a high price.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Compan y Participation 1

- 11

## 2.0 Economic Case for Power Companies to Promote and Develop WQT

A preliminary economic analysis for a WQT program in the Ohio River Basin for power facilities has been complet ed for the cumulative number of plant discharges in the pilot project area. A detailed business case for individual facilities to participate as buyers or sellers of water quality credits was not possible. This would have required disclosure of confidentia l and detailed cost information regarding the facilities of interest, or broad speculation due to the variability between characteristics with individual plant needs. Based on the more generalized economic analysis, a strong case can still be made for powe r company participation (specifically AEP and Duke Energy) in promoting and participating in the development of an Ohio River Basin WQT program. In this chapter, potential cost savings and opportunities for risk management as examined in this regard. Risk management opportunities considered herein range from compliance alternatives to market positioning and community relations. Appendix B provides greater details and the methodology for the economic analysis presented herein.



### 2.1 Potential Cost Savings with WQT
Identifying potential treatment costs in a WQT market is essential for determining the potential value and viability of a trading program. In this section, treatment costs for several types of dischargers are described for electric power facilities in the pilot study area as well as for typical wastewater treatment facilities. These treatment costs are compared to NPS nitrogen reduction costs in Figure 2

- 1. Point source treatment costs are based on assumed discharge concentration limits ranging from 5 to 8 mg/L of TN, and typical volumes of discharge water treated for the various PSs shown. Cost differentials here suggest there is merit in specifically examining how each group may benefit from WQT, either as a buyers or sellers.

If opportunities to benefit from trading are based purely on cost differentials, Figure 2

- 1 indicates that agricultural NPS dischargers, (who can reduce nitrogen discharges for $4 to $8 per pound, assuming a 2:1 trading ratio), would benefit from selling credits. Power facilities may spend at least $14.41 per pound to reduce their discharges with end of pipe treatment, and would likely benefit from purchasing even the more expensive NPS WQT credits yielding potential savings of $6.41 per pound.

In a functioning WQT program, transactio n costs and other administrative fees related to verifying the basis of credit trades and managing trade risks, can be expected to absorb some of these potential gains. At this time, however, it is reasonable to assume that such costs would not necessarily eliminate all the potential gains from trading between NPSs and power facilities. The portion of these potential gains that will accrue to power company buyers and NPS sellers will also depend on the rules of the WQT program, suggesting that power company participation in

Ohio River Water Quality Tr ading Pilot Program: Business Case for Power Company Participation 2

- 1early program development would be vital to assuring they can maximize their benefits through trading.

Figure 2

- 1 Treatment Costs for Various Sources of Nitrogen in the Ohio River Pilot Pro ject Area

NP1 Estimated Ohio River Agricultural NPS Credit at a 2:1 trading ratio
NP2 Conservative Ohio River Agricultural NPS credit cost
NP3 Actual GMR Agricultural NPS credit cost based on the Miami Conservancy District (MCD) WQT program
results in the Great Miami River (GMR) watershed (for a combined TN+TP credit)
WT1 Estimated Average Unit TN treatment cost for WWTP below 0.1 million gallons per day (mgd) in the GMR
WT2 Estimated Average Unit TN treatment cost for WWTP between 0.1 and 1 mgd in the GMR
WT3 Estimated Average Unit TN treatment cost for WWTP between 1 and 10 mgd in the GMR
EP1 Estimated Average Unit TN treatment cost for Base Case power plant
EP2 Estimated Average Unit TN treatment cost for AEP Muskingum River Plant
EP3 Estimated Avera ge Unit TN treatment cost for AEP Mitchell Power Plant
EP4 Estimated Average Unit TN treatment cost for AEP Mountaineer Power Plant

Ohio River Water Quality Tr ading Pilot Program: Business Case for Power Company Participation 2

- 2

### 2.1.1 Marginal Cost Curves Another way to examine potential cost savings for power companies from WQT is illustrated in Figure 2

- 2 . The cost curve for power industry compliance with increasing nitrogen discharge limitations in NPDES permits reflects increases in incremental power facility wastewater treatment costs in dollars per pound for a “Base Case” power facility. The Base Case assumes that a facility is operating an FGD system and SCR unit as allowable discharge concentration limits are tightened from 10 mg/L to 3 mg/L. Also shown on Figure 2

- 2 is a hypothetical credit price of $8 per pound, reflecting actual NPS nitrogen reduct ion costs multiplied by a factor of two to account for a 2:1 trading ratio. Similar trading ratios are used in many other U.S. trading programs to address uncertainty and provide net environmental benefits.

Figure 2

- 2 Overview of Potential Power Facility Cost Savings from WQT in the Ohio River Pilot Project Area

The incremental cost of reducing nutrient discharges for power companies increases as a facility attempts to meet stricter nutrient discharge targ ets. Stricter nutrient discharge restrictions increase the potential for a facility to gain from paying into a WQT program rather than treating discharge water. The numerous other factors considered when a facility evaluates whether to participate in tradi ng or treat discharges in

- house, will influence compliance strategies. These

Ohio River Water Quality Tr ading Pilot Program: Business Case for Power Company Participation 2

- 3will include a variety of risk factors. However, given that the characteristics of these factors are largely facility

- dependant, and are also related to specific WQT program desig n elements, the analysis presented here focuses solely on cost differentials and potential demand based on current and potential future power company discharges.

Treatment cost estimates for complying with five different levels of potential nutrient criter ia were developed for an average facility Base Case, and for current actual discharges from nine facilities within the pilot project area. These facilities were selected based on the availability of monitoring data for TN in the Permit Compliance System da tabase (which stores monitoring data that facilities submit as part of NPDES permit compliance reporting). Table 2

- 1 provides a summary of the average and maximum TN discharge concentrations and flow rates of these facilities used for the economic analysis

.

Table 2

- 1 Current Discharges for a Base Case and from Select Power Plants in the Ohio River WQT Pilot Project Area

Facility NPDES Permit Number Calculated Average TN (mg/L) Calculated Maximum TN (mg/L) Aver age Discharge

(mgd) Size vs. Base Case

Base Case N/A 47.65 97.3 0.5 N/A
FirstEnergy RE Burger Plant OH0011592 1.85 5.60 6.89 13.8
AEP Muskingum River Plant OH0006149 5.38 15.00 4.93 9.9
Orrville Municipal Power Plant OH0064025 25.05 38.57 0.27 0.5

Orion Power Midwest LP Niles Plant OH0011533 3.73 16.00 3.73 7.5

AEP

- Gavin OH0028762 1.39 6.47 8.19 16.4

Pleasants Willow Island Power Stations WV0000761 2.77 41.30 0.0005 N/A

AEP

- Kammer WV0005291 2.30 14.90 0.007 N/A

AEP

- Mitchell WV0005304 5 .35 48.00 26.006 52.0

AEP

- Mountaineer WV0048500 6.60 10.00 3.32 6.6

Source: USEPA Permit Compliance System discharge data, downloaded into USEPA’s BASINS (Better Assessment Science Integrating Point and Nonpoint Sources) platform.

The Base Case was d eveloped in consultation with internal Shaw wastewater treatment experts and a study on treating wastewater from FGD systems by CH2M Hill (2005). Wastewater of eight operating FGD systems was averaged from TN concentrations that ranged from less than
2.0 m g/L to 97.3 mg/L (CH2M Hill, 2005).

Ohio River Water Quality Tr ading Pilot Program: Business Case for Power Company Participation 2

- 4The first critical and informative cost analysis based on more detailed annual operating treatment cost differentials from Appendix B is presented in Table 2

- 2. This analysis assumes that capital
investments and annual o perating costs do not change regardless of the daily discharge rate. According to Shaw wastewater treatment system design experts, capital and annual operating costs generally increase by 7/10 as discharge rates increase. Thus, if the discharge rate double s, the capital and operating costs will increase 70 percent. This constitutes a very conservative assumption given that the key objective of this analysis is to determine whether WQT offers power companies the opportunity to reduce costs. This assumption l ikely results in an underestimate of cost savings. Despite this conservative assumption, it is apparent that Duke and AEP could realize substantial cost savings by opting for WQT. It is also important to note that AEP experience with biological treatment t o remove selenium from FGD wastewater requires an additional step to reduce the selenite to elemental selenium. This adds additional costs not
reflected here.

Table 2

- 2 Current Discharges from Select Power Pl ants in the Ohio River WQT Pilot Project Area

TN Treatment Levels (effluent limits) (mg/L)

10 8 5 3

Base Case
Capital costs $4,569,455 $5,180,258 $6,096,463 $9,903,536
Total annual operating and debt $769,235 $835,914 $935,933 $1,441,961

Total annua l nitrogen removed (pounds) 57,352 60,398 64,968 68,015
Cost per pound nitrogen removed ($/pound) $13.41 $13.84 $14.41 $21.20

1. FirstEnergy RE Burger Plant
Total annual operating and debt $769,235 $835,914 $935,933 $1,441,961
Total annual nitrogen rem oved (pounds) Note a Cost per pound nitrogen removed ($/pound)

2. AEP Muskingum River Plant
Total annual operating and debt $769,235 $835,914 $935,933 $1,441,961
Total annual nitrogen removed (pounds) Note a 5,707.49 35,746.91
Cost per pound nitrogen removed ($/pound) $163.98 $40.34

3. Orrville Municipal Power Plant
Total annual operating and debt $769,235 $835,914 $935,933 $1,441,961
Total annual nitrogen removed (pounds) 12,379.83 14,025.00 16,492.74 18,137.90
Cost per pound nitrogen removed ($ /pound) $62.14 $59.60 $56.75 $79.50

Ohio River Water Quality Tr ading Pilot Program: Business Case for Power Company Participation 2

- 5TN Treatment Levels (effluent limits) (mg/L)

10 8 5 3

4. Orion Power Midwest LP Niles Plant
Total annual operating and debt $769,235 $835,914 $935,933 $1,441,961
Total annual nitrogen removed (pounds) Note a 8,295.57
Cost per pound nitrogen removed ($/pound) $173.82

5

. AEP

– Gavin
Total annual operating and debt $769,235 $835,914 $935,933 $1,441,961
Total annual nitrogen removed (pounds) Note a Cost per pound nitrogen removed ($/pound)

6. Pleasants Willow Island Power Stations
Total annual operating and debt Low

- flow or passive treatment option may be possible.
Total annual nitrogen removed (pounds) Note a Cost per pound nitrogen removed ($/pound)

7. AEP

– Kammer
Total annual operating and debt Low

- flow or passive treatment option may be possible.

Total annu al nitrogen removed (pounds) Note a Cost per pound nitrogen removed ($/pound)

8. AEP

– Mitchell
Total annual operating and debt $769,235 $835,914 $935,933 $1,441,961
Total annual nitrogen removed (pounds) Note a 27,730.40 186,189.85
Cost per pound ni trogen removed ($/pound) $33.75 $7.74

9. AEP

– Mountaineer
Total annual operating and debt $769,235 $835,914 $935,933 $1,441,961
Total annual nitrogen removed (pounds) Note a 16,183.51 36,412.89
Cost per pound nitrogen removed ($/pound) $57.83 $39.60

Note: Sizing: as discharges increase, facility and treatment costs generally increase by 7/10. Average and maximum TN concentrations and flow rates are based on monthly monitoring data submitted to the applicable permitt ing agency.

a If nitrogen criteria fall into this range, average discharges from this facility are below this limit. However, facility would need to invest in treatment or make other arrangements to offset discharges above nutrient criteria because maximum discharges are above the potentia l criteria evaluated here.

The variation in treatment cost per pound of TN removal clearly illustrates how discharge rates and initial concentrations affect unit treatment costs. The lower the discharge rates and initial

Ohio River Water Quality Tr ading Pilot Program: Business Case for Power Company Participation 2

- 6concentrations, the higher the per pound treatment costs. For facilities such as Muskingum and Mountaineer, the ability to participate in WQT could provide a great cost advantage. It would
also be more cost

- effective for a facility that is similar to the Base Case to participate in WQT
tha n to invest in on

- site treatment.

The experience from the Miami Conservancy District (MCD) WQT program in the GMR basin in southern Ohio has been that the average cost per pound for a combined TN and TP credit generated by agricultural best management prac tices (BMP) has been about $2. (Payment to a farmer for BMP implementation yields both TN and TP reductions. Since both reductions are needed by municipal WWTP buyers, a combined TN/TP credit is calculated in the MCD program. Surplus credits, however, can be disaggregated and sold separately.) Trades in the MCD program require a trading ratio of 1:1, 2:1 or 3:1. The increasing trade ratio is dependent on: a) if the participant is a founding participant of the WQT program; b) WQT is to comply with a TMDL; an d, c) is a facility entering the WQT program after the program is up and running.

It is conservatively assumed here that TN credit costs are double (i.e., $4 per pound) those in the MCD program. Even with a conservative 2:1 trading ratio (making TN credits $8 per pound), it
would still be more cost

- effective for Base Case facilities and the Orrville plants to engage in trading if the nutrient criteria were 8 mg/L. Here the Orville Plant would save over $700,000/year. As shown in Table 2

- 3, the benefits and savings from trading would rise with more stringent nutrient criteria.

Table 2

- 3 Analysis of TN Credit Demand and Potential Savings with a 8 or 5 mg/L TN Limit

Concentration Limits

- Based on Actual Flows

Fa cility 8 mg/L TN 5 mg/L TN

Unit Cost Pounds Reduced Potential Annual Savings Unit Cost Pounds Reduced Potential Annual Savings
TN ($/pound) TN TN ($/pound) TN

Base Case $ 13.84 603,989 $352,724.76 $14.41 64,969 $416,184.07

1. Fir stEnergy RE Burger Plant N/A 0.0 N/A 0.0

2. AEP Muskingum River Plant N/A 0.0 $ 163.98 5,708 $890,273.09

3. Orrville Municipal Power Plant $ 59.60 14,025 $723,714.61 $ 56.75 16,493 $803,991.11

4. Orion Power Midwest LP Niles Pla nt N/A 0.0 N/A 0.0

Ohio River Water Quality Tr ading Pilot Program: Business Case for Power Company Participation 2

- 7Concentration Limits

- Based on Actual Flows

5. AEP

- Gavin N/A 0.0 N/A 0.0

8. AEP

- Mitchell N/A 0.0 $ 33.75 27,730 $714,089.78

9. AEP

- Mountaineer N/A 0.0 $ 57.83 16,183 $806,464.95
Resulting Demand for Credits 74,424 credits 131,083 Cre dits

Assuming a $4.00 per pound TN reduction cost credit and a 2:1 Trading Ratio.

Those facilities with average discharges below one or all of the potential nitrogen criteria considered in this analysis, (but with maximum discharge concentrations above t he criteria) would still need to make arrangements to treat their discharges to avoid periodically violating NPDES permit limits. Without WQT, these facilities would have little choice but to install additional treatment systems at a high unit treatment co st.



### 2.2 Summary of Likely Scenarios for Power Plant Participation in WQT
Based on the cost analysis presented above, there are five key scenarios that support power plant participation in WQT. These are presented as follows. One or more are likely to apply to Ohio River dischargers pending development and implementation of nutrient criteria.



### 2.2.1 Scenario 1

– Long

- term participation in WQT In this scenario, a facility could opt to participate in WQT as their long

- term method of complying with nutrient criteria. High cost upgrades and effluent nitrogen concentrations that are low, but still above the nutrient criteria, would result in high unit treatment costs. In this instance, a facility could opt to enter into long

- term credit purchase agreements and avoid investme nt and installation of additional wastewater treatment. Program design factors would weigh heavily in a facility’s decision to employ this strategy. Other factors such as fully allocated TMDLs with no room for future growth for new or expanding facilities, or very restrictive effluent limits would also likely be decision factors.



### 2.2.2 Scenario 2

– Short

- term participation in WQT In this scenario, a facility could choose to participate in WQT for a limited duration corresponding with facility planning, construct ion schedules, or other pending scheduled upgrades at a later date. The long

- term control by onsite treatment is an attractive risk management option, however, even when upgrading there sometimes exist economic advantages in providing for slightly longer p eriods then NPDES typical compliance schedules allow. Typical compliance schedule requirements set effluent limit compliance dates within the first five years of a new permit cycle (most often during the third year of the permit). WQT could allow a
facilit y to remain in compliance while addressing short

- term delays in wastewater treatment

Ohio River Water Quality Tr ading Pilot Program: Business Case for Power Company Participation 2

- 8upgrades. For instance, at older facilities there may be conditions that provide easier technology implementation in sequence with other planned upgrades for different pur poses. These facilities may have planning processes in place that may involve a delay not in sync with a NPDES compliance schedule for the newly imposed and stricter nutrient effluent limits. This would be the case where such facilities may in the long run , wish to construct in

- house treatment capacity.



### 2.2.3 Scenario 3

– Partial Compliance Use of WQT A WQT program provides the opportunity to avoid upgrading a power facility when the average effluent concentration is well within permit effluent limit compliance b ut it is necessary for compliance at the maximum concentrations discharged. As shown in Table 2

- 3, current discharges from the AEP Muskingum, Gavin and Mitchell plants are below one or more of the potential TN criteria evaluated in this analysis. However, their maximum discharges are above some or all of the potential criteria. Some of these exceedances are substantial as shown in Table
2

- 4. This table characterizes potential excursions of wastewater discharge concentrations in the upper 50 th and upper 75 t h percentiles (over a one

- day period at average discharge rates). For these facilities, the treatment cost per pound for in

- house treatment would be very high, and without treatment, they would be at risk of violation or administrative penalties for each

e xceedance. This risk would run counter to corporate compliance goals (Lohner, personal communication, 2007). A WQT program would provide facilities with a relief mechanism to ensure compliance. They could assess the projected frequency and duration of excu rsions and purchase credits in advance of the need to offset such excursions. By purchasing WQT credits for risk management (even at a conservative 2:1 trading ratio), power facility managers can avoid costs associated with upgrading treatment on the order of millions of dollars.

Ohio River Water Quality Tr ading Pilot Program: Business Case for Power Company Participation 2

- 9Table 2

- 4 Magnitude of Excursions Above Set Nutrient Criteria

Starting ConcentrationsCalculated MeanTN (mg/L)Calculated MaxTN (mg/L)Actual Discharge(mgd) Pounds TN After 1 Day of Exceeding Nutrient Criteria with Discharges at the 50 th Percentile Above the Mean Pounds TN After 1 Day of Exceeding Nutrient Criteria with Discharg es at the 75 th Percentile Above the Mean

Upper 50 th percentile Nutrient Criteria (TN mg/L) Upper 75 th percentile Nutrient Criteria (TN mg/L)

10 8 5 4 3 4 10 8 5 3

Base Case 47.65 97.3 0.50 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

1. F irstEnergy RE Burger Plant 1.85 5.60 6.89 3.73 N/A N/A N/A N/A 42 5 38 N/A N/A N/A 96
2. AEP Muskingum River Plant 5.38 15.00 4.93 10.19 8 90 214 255 296 13 354 8 90 214 395
3. Orrville Municipal Power Plant 25.05 38.57 0.27 N/A N/A N/A N/A N/A N/A N/ A N/A N/A N/A N/A N/A

4. Orion Power Midwest LP Niles Plant 3.73 16.00 3.73 9.87 N/A 58 151 183 214 13 278 N/A 58 151 309

5. AEP

- Gavin 1.39 6.47 8.19 3.93 N/A N/A N/A N/A 64 5 N/A N/A N/A N/A 150

6. Pleasants Willow Island Power Stations 2.77 41.30 0.0005 22.04 0.05 0.1 0.1 0.1 0.1 32 0.1 0.1 0.1 0.1 0.1

7. AEP

– Kammer 2.30 14.90 0.007 8.60 N/A <0.1 0.2 0.3 0.3 12 0.5 N/A <0.1 0.2 0.5

8. AEP

- Mitchell 5.35 48.00 26.01 26.68 3,620 4,054 4,705 4,922 5,139 37 7,237 5,934 6,368 7,019 7,454

9. AEP

- Mountaineer 6.60 10.00 3.32 8.30 N/A 8 91 119 147 9 143 N/A 32 115 170

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 2

- 10

### 2.2.4 Scenario 4

– Total Maximum Daily Load Allocations A WQT program can provide allocation capa city for new or expanding power facilities in waters with fully allocated Total Maximum Daily Loads (TMDL). As more TMDLs are completed, these constraints will only increase. Fully allocated receiving waters with no room for future growth, or very restrict ive effluent limits will become significant factors in business decisions. There are examples of facilities in other settings that have or may soon enter into long

- term credit purchase arrangements in order to address these issues. For example, power plant s in the Chesapeake Bay watershed in Maryland will be required to offset 100 percent of their nitrogen discharges. The Rahr Malting bilateral PS/NPS WQT trade in Minnesota is an instance of a facility that used WQT to fully offset a new wastewater discharg e into a fully allocated receiving

water.



### 2.2.5 Scenario 5

– Generating Credits Some facilities may have opportunities to upgrade in

- house treatment capacity in ways that reduce the incremental cost of treatment to the point where their reduced discharges are be low their permitted discharge limits. With surplus reductions, these sources could become credit sellers. This could also allow companies such as AEP or Duke with multiple facilities in the pilot project area to develop intra

- or inter

- company trades as lo ng as the facilities are within a reasonable geographic distance. Rules for the WQT program will dictate geographic and other trading restrictions.



### 2.3 Projected Demand for other WWTPs in the Great Miami and Muskingum Basins
Potential demand by other wastewate r sources for WQT credits was evaluated to ascertain the possible robustness of a broad scale trading program in Ohio River watersheds not restricted to power company demand for TN credits. A robust WQT market will yield administrative cost savings and gre ater water quality benefits (assuming trading ratios greater that 1:1). For facilities discharging treated domestic sewage and organic wastes (similar to domestic sewage), both phosphorus and nitrogen effluent limitations are considered here as these will be added to future NPDES permits.

Treatment technologies such as biological nutrient removal (BNR) are capable of achieving the nutrient discharge levels of 1 mg/L TP and 6 to 8 mg/L TN ( Metcalf & Eddy, Inc. , 2003) that will likely appear in WWTP permits o nce nutrient criteria are promulgated. In order for WQT to be of value to WWTPs, the cost of BNR must exceed the cost of buying the number of WQT credits necessary for NPDES compliance. A preliminary analysis in this regard focused on the
GMR and the Muski ngum River 8

- digit HUC code watersheds. The current wastewater load for each facility that would use BNR was compared with the loading goal (i.e., the reduced mass discharge of nutrients) equivalent to effluent limits of 1 mg/L TP and 8 mg/L TN. Any additi onal treatment required beyond these capabilities of BNR would most likely necessitate the use of

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 2

- 11chemical treatment. Though not included in this preliminary analysis, the use of chemical treatment substantially increases the cost of both capital upgrades and operation and maintenance (O&M), thus increasing the potential utility of WQT.

All continuously discharging facilities, small and large, were considered in the GMR based on previously compiled data (Kieser & Associates [K&A], 2004). Within the limited scope of this current effort, only data from facilities with at least 1 mgd capacity were considered in the Muskingum River watershed. Cost ranges are typically higher for smaller facilities lacking the advantage of economies of scale as plant performance often requires chemical backup. There are likely several small facilities in the Muskingum River watershed not considered in this evaluation that would therefore add to potential credit demand. Also not specifically estimated
are the industrial sectors whe re BNR technology may not apply. A detailed description of the analysis conducted here is included in a Technical Memorandum provided to EPRI by the Shaw Team (in process, 2007).

Wastewater treatment plant discharge data were downloaded into USEPA’s BASINS platform for each Muskingum facility. These included current flow values and concentrations of nitrogen and phosphorus species for each outfall and month spanning the period 1998 through 2007. GMR discharge data were taken from K&A (2004). Average dischar ge concentrations were computed for each primary WWTP outfall. Projected load reductions are calculated under different effluent limit scenarios in the Technical Memorandum (Shaw, in process, 2007). Current mass loadings used here assume effluent limits of 1 mg/L TP and 8 mg/L TN. Associated load reductions in the GMR using this approach are 400,030 pounds TP and 3,110,210 of TN. In the Muskingum, these reductions are estimated to be 656,801 pounds of TP and 804,881 of TN.

These reductions are associate d with a wide range of wastewater treatment plants. As such, unit cost per pound of reduction associated with BNR will vary. To assess WQT potential, BNR costs must be compared to the price of WQT credits to determine which facilities may participate. The potential volume of credits needed by participating WWTPs will be dictated by associated load reductions required to meet effluent limits. BNR cost estimations are therefore calculated for units of pounds TN, TP, or both.

BNR costs were derived using a com bination of two empirical methodologies, both of which are based on flow equations that account for economies of scale at each facility. Costs were first estimated according to Doran (1997), as cited by both K&A (2004) and Faeth (2000). Doran (1997) specif ies the capital and O&M costs based on the design flow for facilities above 0.2 mgd. For facilities at or below 0.2 mgd, a fixed annual cost estimate was used to calculate total costs per flow. Annualized capital costs and present worth value assume a 20

- year investment at
a 3.65 percent annual interest rate.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 2

- 12A second set of equations, summarized by USEPA (2007), considers the capital and O&M costs for small facilities of less than 100,000 gallons per day (Foess, 1998). For facilities larger than 0.1 mgd, actual costs for facilities are summarized by the Maryland Department of the Environment (2006) and the Connecticut Department of Environmental Protection (2007). To estimate the range of costs in like terms, small facility costs were converted to total c osts per
flow.

The derived costs for BNR used here are an average of the two empirical cost estimation methods. The unit cost of upgrading to BNR will vary by facility based on flow as described above. Unit costs will also vary based on current loading l evels compared to new permit limits for phosphorus, nitrogen or both. To provide a more conservative estimate of demand for WQT, limits most likely to be achieved by BNR technology were selected; i.e., 1 mg/L TP and 8 mg/L TN. Unit cost of dollars per po und of nutrient reduced were therefore calculated with BNR upgrades based on the number of pounds required for each WWTP in the Great Miami River watershed and the larger facilities in the Muskingum River watershed.

Resultant cost estimates for all facili ties considering only the phosphorus limit ranged from $1.47 to $469 per pound. Likewise for facilities needing only to reduce nitrogen, the unit costs ranged from $1.05 to $134 per pound. When considering facilities needing reductions for both
nutrients , unit costs ranged from $0.92 to $104 for combined pounds.

Comparisons between the unit costs per pound of nutrient(s) reduced via a BNR upgrade to those of WQT in Table 2

- 5 allows for an assessment of WQT benefits in lieu of treatment upgrades.
Variable unit BMP costs and trading ratios were used to test the sensitivity of the WQT credit value and thus, market potential. Higher trading ratios reflect potential program design variations while the increase in BMP cost reflects potential program inefficien cies.

Preliminary estimates of WWTP credit demand in Table 2

- 5 suggest that many facilities, other than the power industry, could benefit from WQT thereby increasing the potential support for a regional program in the Ohio River Basin. The demand represen ted in this table is only from those WWTPs whose BNR costs are higher than the WQT credit costs used in this example comparison. Concentration

- based limits are more conservative in terms of estimating demand so WQT credit demand in Table 2

- 5 is only a fra ction of the overall anticipated loading reductions that may need to occur amongst all permitted WWTPs with more stringent effluent limits. Smaller facilities (i.e., less than 1 mgd) represent a more likely source of constant credit demand, particularly if additional chemical treatment is needed to meet more stringent discharge restrictions. Facilities larger than 1 mgd will have greater credit demand when WQT is more

cost

- effective than BNR. This would be achieved by program efficiencies that reduce the
ef

fective WQT credit unit cost potentially below BNR unit costs.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 2

- 13These preliminary results support the premise that there will be robust demand for WQT in the Muskingum and GMR watersheds. Accordingly, just as for power companies, WQT will offer WWTPs poten tial benefits such as: flexibility in the timing of plant upgrades; the ability to manage compliance deviations; and, accommodating future growth that may otherwise be hindered by stringent effluent limits or a cap on new loads under a TMDL.

Table 2

- 5 Anticipated WQT Demand Associated with Different Trading Ratios for WWTP Discharges

Pounds of Potential WWTP Demand with Concentration

- Based Goals

GMR Muskingum Under 100,000 gallons per day BMP = $2/pound a BMP = $4/pound b BMP = $2/pound a BMP = $4/pound b TP pounds 1,187 1,187 TN pounds 5,540 5,540 TN+TP pounds 6,727 6,727 Between 0.1 and 1 mgd TP pounds 26,557 26,557 TN pounds 185,897 185,897 TN+TP pounds 212,454 212,454
Between 1 and 10 mgd TP pounds 209,245 209,245 304,203 199,364 TN pounds 505,321 55,295 273,047 63,497 TN+TP pounds 278,173 33,024 278,897 51,631 Over 10 mgd TP pounds 163,040 163,040 192,996 144,290 TN pounds 162,133 27,275 0 0 TN+TP pounds 31,172 31,172 0 0

a Cost per credit assuming a 1:1 trading ratio.

b Cost per credit assuming a 2:1 trading ratio.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 2

- 14

## 3.0 Non

- point Source Credit Generation Potential

Agriculture in the Ohio River Basin will be a likely source of low

- cost nitrogen and phosphorus credits within any trading program. The baseline performance requirements which agricultural sources must satisfy before they are eligible to generate credits will affect cost and availability. Pennsylvania and Maryland, for example, have nutrient management requirements for agricultural NPSs in the Chesapeake Bay watershed. These requirements set high standards that must be satisfied before nutrient credits may be generated. As a result, one of the more successful methods for generating credits in Pennsylvania has been manure export to the Ohio River Basin and, consequently, NPS credit prices are relatively high (approximately $9 per pound TP) compared to $2/pound in the MCD progra m.

To assess the potential demand identified previously in this section for power companies on the Ohio River main stem, as well as for WWTPs in the Great Miami and Muskingum River watersheds, a rudimentary assessment of potential agricultural credit gener ation was conducted (see Appendix C). Annual nutrient loads for TN and TP were first preliminarily estimated for the Licking, Great Miami, Scioto and Muskingum River watersheds using an empirical loading calculation method. This method calculates pollutant loads using event mean concentrations and imperviousness percent coverage values per land use category. The method provides a very coarse estimate of nutrient loads delivered by surface runoff for each land use category in a
watershed. These calculated lo ads do not consider fate and transport channel processes and are therefore considered coarse estimates of TN and TP delivered to the Ohio River by each tributary.

Two simple scenarios were applied to agricultural load predictions to estimate potential WQT credit volume from agricultural BMP implementation (Table 3

- 1). It was assumed for the purposes of this analysis that BMPs (or a suite of BMPs) with a 50 percent load reduction efficiency were applied to 10 percent (Scenario A) and 25 percent (Scenario B) of the cultivated agricultural land area from each watershed. The associated TP load reduction was calculated using simple proportions. The TN load reduction calculation used the P:N ratio of 1:2.6 calculated from MCD WQT program BMP implementation project s in the Great Miami River.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 3

- 1Table 3

- 1 Estimated Total Load Reductions (pounds per year) from Agricultural BMP Implementation on 10% and 25% of Cultivated Croplands

Watershed Scenario A Scenario B

TN TP TN T P
Licking 67,823 26,086 169,558 65,215

GMR 501,717 192,968 1,254,292 482,420

Scioto 729,174 280,452 1,822,934 701,129
Muskingum 395,282 152,032 988,205 380,079

Scenario A : BMPs are applied to 10% of the agricultural land area.
Scenario B : BMPs are app lied to 25% of the agricultural land area.

Factors to estimate loading reductions attributed to fate and transport losses are often included in trading ratios. These ratios can also account for uncertainty, net environmental benefits to the river and poll utant equivalency. Until an Ohio River trading program is developed, it is speculative to assume any one particular trading ratio here. Alternatively, to calculate the volume of potentially available credits for purchase, two separate fate and transport lo ss factors were applied to loads from Table 3

- 1. These are presented in Table 3

- 2 and Table 3

- 3 under assumptions of 35 percent and 50 percent fate and transport losses from the point of the BMP reduction to the point of credit use (i.e., buyer’s discharge location), respectively. Though no baseline performance expectation was assumed here, this approach yields relatively conservative estimates for the number of potentially available NPS credits from agriculture. Higher trading ratios (i.e., > 2:1), will lik ely account for these fate and transport losses in a trading program.

Table 3

- 2 Number of Credits Available Considering a 35% Loss Due to Fate and Transport

Watershed Scenario A Scenario B

TN TP TN TP

Lick ing 44,085 16,956 110,213 42,390

Greater Miami River 326,116 125,429 815,290 313,573

Scioto 473,963 182,293 1,184,907 455,734
Muskingum 256,933 98,820 642,333 247,051

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 3

- 2Table 3

- 3 Number of Credits Availab le Considering a 50% Loss Due to Fate and Transport

Watershed Scenario A Scenario B

TN TP TN TP
Licking 33,912 13,043 84,779 32,607

GMR 250,859 96,484 627,146 241,210

Scioto 364,587 140,226 911,467 350,564
Muskingum 197,641 76,016 494,102 190,039

These preliminary credit availability estimates suggest there would be ample credits for the projected power company demand in Table 2

- 3 even assuming only 10 percent agricultural participation and 50 percent fate and transport losses within these watershe ds. This most conservative projection of credit supply will also fully cover the additional TN demand from WWTPs in the Great Miami and Muskingum Rivers based on Table 2

- 5 projections for these dischargers. Associated costs of credits projected in Appendix C to be supplied by agriculture in these analysis are consistent with those used in Tables 2

- 3 and 2

- 5. Thus, it would appear there would be an ample supply of cost

- effective credits for power company use in an Ohio River WQT program.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 3

- 3

## 4.0 Stakeholder Readiness in the Ohio River Basin

It has been the experience of many developing trading programs that demand for WQT credits is
often ill

- defined and/or very limited in their early stages. This shortcoming often results in narrowly defined conditions for trading, which become very constraining when the scope and scale of these efforts grow with interest or need. In the Ohio River Basin, it will be prudent to consider large

- sca le attributes for a robust trading program from initial development stages. This requires participation from a broad range of interests. As such, a preliminary assessment of stakeholder readiness has focused on: 1) agricultural considerations in the four p ilot watersheds discharging to the proposed pilot project area in the Ohio River Basin; and, 2) generalized stakeholder/buyer interest and participation in the Ohio River Basin. Targeted agricultural watersheds were identified previously for their NPS cred it production potential. Details of this assessment are included in Appendix D. A summary of this analysis is provided here.



### 4.1 Agricultural Interests
Agricultural participation in WQT programs is typically based on two primary conditions: 1) the ability of a griculture to generate cost

- effective credits in watershed areas with credit buyers; and, 2) their willingness to engage in a trading program. Because agricultural participation in trading programs is voluntary, significant efforts are typically expended i n early program development to actively engage farmers. Concerted and intentional efforts to understand agricultural perspectives are vital to their participation.

Agriculture in targeted Ohio River Basin watersheds appears poised to: 1) engage in the
deve lopment of a trading framework through agricultural agency participation; 2) implement BMPs to generate WQT credits; and, 3) build upon existing watershed or producer programs that would be enhanced by the development of a regional WQT program. The famed p articipation by agricultural agencies and producers in the MCD trading program of the GMR watershed has identified and addressed most barriers likely to be encountered by agricultural participants. Some of these concerns include fear of regulation, transfe rred NPDES permit liability, and inequities associated with WQT programs targeting only “low

- hanging fruit” (i.e., producers with sub

standard farming practices). Applications for WQT credit

- generating projects (with highly competitive pricing) in the GMR that far exceed credit demand are a clear indication that these traditional hurdles with agricultural participation in WQT have largely been addressed.



### 4.2 Regulatory Agencies
The need and opportunity for pursuing a broad scale WQT approach is evidenced by th e potential credit demand reported earlier. As such, several regulatory and/or administering agencies, as well as PS representatives will need to be intimately involved in regional trading

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Part icipation 4

- 1program development. In the Ohio River, this would particularly inc lude stakeholders with relevant jurisdiction, prior trading experience or familiarity, and substantial need for the compliance flexibility offered by WQT.

A developing program in the Ohio River will also need to align with current national, regional
and/or local initiatives, especially considering multi

- state trading options and existing trading rules or policy. This would necessitate the involvement of ORSANCO, the multi

- state compact charged with developing nutrient criteria for the Ohio River main stem. Representatives from ORSANCO were actively engaged in discussions for a regional trading scheme during this feasibility analysis. Key feedback included:

• ORSANCO has interest in interstate trading in advance of nutrient criteria that they will be developing to provide technical feedback and input regarding implementability and feasibility of attainment.

• There is enthusiastic support for the trading framework development and implementation efforts in the MCD WQT program.

• ORSANCO has previously examined WQT op portunities in the basin but did not pursue these due to a lack of funding and uncertainty with nutrient criteria development.

• There is in

- house staff trading experience.

• Water chemistry along the main stem is routinely monitored through existing
programs.

• ORSANCO envisions direct participation in WQT program development and has identified specific contacts in state regulatory agencies that would also directly participate.

• Applying existing collateral, i.e., excess nitrogen credits owned by WWTP buyers in

t he Great Miami, to foster early trades in the main stem of the Ohio River would be an incentive to bring buyers into the program development process.

• MCD trading representatives should also be involved. Ongoing discussions with MCD have confirmed interest in such participation whereby the regional program could leverage first

- hand experience and testimonials.



### 4.3 Point Sources
Point sources in the basin will likely wish to participate in a regional program to be well

informed of opportunities as well as shape p olicy to:

• Address longer compliance schedules and variance procedures

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Part icipation 4

- 2• Include provisions for implementation timing and application of NPDES program transition periods for compliance schedules, and

• Ensure there are economic alternatives for growth and expan sion issues.

Point source now actively involved in credit purchases in the MCD WQT program were intimately involved in local program development. Absent their explicit participation and input, the program would not likely have resulted is the current “buye r’s market” they now enjoy. These PSs have been broadly and openly supportive of trading. Substantial cost

- savings, coupled with ease of program entry have kept some of the largest municipal WWTPs actively promoting the program. ORSANCO has also indicated that participating WWTPs in the MCD WQT program would be instrumental in convincing other regulated facilities to participate in regional trading program development.

In total, there appears to be substantial stakeholder interest and willingness to partici pate in an Ohio River WQT pilot program. Sufficient demand, ample credit supply, existing WQT trading successes at the local scale, regulatory interest, and willing stakeholders appear to be present in this setting. These will be foundational elements for advancing a regional program.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Part icipation 4

- 3

## 5.0 Summary and Conclusions

A preliminary feasibility analysis was conducted to assess the business case for power company participation in the development and promotion of a WQT pilot program for nitrogen in the Ohio River Basin. The analysis was prepared for the use and consideration of EPRI and the EPRI WQT Advisory Group. The study targeted WQT as a means to address surface water discharge compliance options associated with increased nitrogen in wastewater discharges resulting from implementation of air emissions technologies such as FGD systems and SCRs. As water discharge restrictions are expected to become more restrictive over the next few years in the Ohio River Basin, coal

- fired power facilities can expect to face more complicated management decisions as they attempt to meet permit requirements related to both air and water emissions, as well as manage compliance risks and costs.

Curr ently, the only option power facilities have for meeting stricter water discharge limits is investing in more on

- site wastewater treatment capacity. Because of their location and physical constraints, some power facilities may not be able to expand wastewa ter treatment capacity or may face high costs to do so. It may also be costly for some to expand in

- house treatment capacity without including it as part of scheduled plant upgrades. Such upgrades may not coincide with increases in wastewater discharge cap acity that would be required to meet permit
limits.

This study has shown that the use of WQT may yield substantial benefits for management of nitrogen discharges associated with tightening wastewater discharge restrictions. The business case identified pot ential opportunities for reducing costs associated with power company NPDES permit compliance under several conditions. These conditions included:

• Long

- term Participation in WQT

-- A power facility could engage in long

- term compliance options using WQT whe n costs are significantly less than upgrading in

house treatment operations.

• Short

- term Participation in WQT

-- A power company could choose to participate in WQT for a short duration to provide permit compliance schedule fulfillment at locations where up grade facility planning and construction schedules are longer than otherwise might be stipulated in a NPDES compliance schedule.

• Partial Compliance Use of WQT

– A WQT program provides the opportunity to avoid upgrading power facility treatment capacity whe n it is necessary for permit compliance associated with maximum discharge concentration compliance excursions despite average effluent concentrations remaing in compliance.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 5

- 1• TMDL Allocations

– A WQT program provides allocation capacity for new or expanding power facilities in areas with fully allocated TMDLs for nitrogen that would otherwise preclude the permitting of new loads.

• Generating Credits

– A WQT program can provide economic opportunities for selling surplus nitrogen reductions when a power company’ s facility provides nitrogen treatment beyond permit requirements.

WQT would provide an option for power facilities to meet their permit obligations by purchasing discharge offset credits instead of investing in more in

- house treatment capacity. Besides

o ffering potential cost

- savings, trading would also provide compliance flexibility and more capacity to manage compliance risks with the purchase of credits. Even on a temporary basis, WQT would allow for integration of investments for in

- house capacity int o routine equipment upgrade schedules. Opportunities to purchase offset credits would additionally provide a basis for power facilities to manage compliance risks and costs in cases where there was a need to shut
down or reduce in

- house wastewater treatmen t operations in order to maintain or repair equipment.

Preliminary cost comparisons indicate that power facilities facing a range of discharge concentration limits, could have in

- house wastewater treatment costs ranging from $14 to $136 per pound of TN. T hese are approximately 58 to 90 percent higher than municipal wastewater treatment facilities discharging at a 5 mg/L treatment limit, and 71 to 97 percent higher than agricultural source reduction costs. This suggests that power facilities may have the po tential to benefit from participating in a WQT market as regular or occasional buyers of discharge offset
credits.

These differences in discharge treatment costs provide only a first approximation of potential benefits to power facilities from WQT. Their ability to engage in trading and garner such benefits will depend on decisions made over the next few years regarding: the rules and units of exchange that will govern WQT; the geographic range where trading can occur; who is allowed to trade; and, how tra nsaction and administrative costs, trade risks and liabilities are allocated among buyers and sellers. More facility

- specific cost analyses will need to be performed to determine how and if individual power facilities would benefit from the development of a WQT program in the Ohio River Basin. However, it is clear that the range of potential benefits to power facilities with trading will depend upon how a WQT program is constructed.

If the provisions of a WQT pilot program in the Ohio River Basin are deter mined primarily by likely sellers of credits (e.g., agricultural interests), and other potential buyers of credits (e.g., WWTPs) without active involvement of the power industry, the program is likely to favor primary participants. Latecomers to the WQT pr ogram could also be disadvantaged in terms of trading ratios applied to trades and the type of credits available for purchase; the least expensive

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 5

- 2credits having been bought first. It is therefore in the best interest of the power industry to engage in the development of WQT now to protect its interests and reduce the risks associated with trade rules that will give the industry a competitive disadvantage. Furthermore, the WQT demand analysis indicates there would likely be a robust demand for trading credi ts by other buyers (i.e., municipal WWTPs). An analysis of potential low

- cost credit supply (provided by agriculture) suggests ample supply in an early market. Thus, early involvement by power companies could help to ensure cost

- effective credits are avail able if and when power companies decide to exercise the option to buy.

While it may be premature to develop a facility

- by

- facility business case, it is not too soon to more broadly assert that the power industry should promote and engage in the development of WQT in order to ensure optimal benefits. The relatively low costs of pursuing this strategy, as opposed to waiting for others to develop the rules that will govern trading in the region, seem to be justified by the benefits associated with reducing com pliance risks, increasing compliance flexibility and protecting potential cost savings.

Working with other key stakeholders that appear ready for a regional trading program will also reduce political or institutional risks. This will yield dividends to the power industry in terms of goodwill, public relations, and active participation in development of nutrient criteria implementation plans by ORSANCO and state agencies. True to most PS/NPS WQT opportunities, NPS credit generation will also generate ancilla ry environmental benefits such as reductions in other pollutant loads (e.g., sediments), habitat improvements, and carbon sequestration. As active investors in WQT credit generation projects, the industry will also be able to tap into value of the ancillar y benefits as other environmental markets develop.



### 5.1 Conclusions
The necessary elements for a regional WQT pilot program in the Ohio River Basin have been identified. There are willing buyers and sellers at the local scale (as evidenced by other smaller
scal e watershed trading efforts), and interest by key stakeholders for a broader regional trading effort. Supporting evidence from this report suggests there will be at least some power facilities that will realize substantial economic benefits from participat ion in WQT. Estimated costs to the power industry for supporting and engaging in the development of WQT are relatively low in relation to future compliance costs without trading. Potential benefits to power companies in terms of reducing and controlling co sts and risks, as well as generating goodwill within their local service areas may be substantial.

The potential benefits of WQT will vary from one power company to another. Benefits will ultimately depend on how the rules and units of exchange (credits) a re established, and on what economic incentives are built into the program that promote trading. Power facility managers are likely to benefit from a properly constructed WQT program. Thus, there is an economic

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 5

- 3incentive for the power companies to protect their interests through WQT by actively participating in the development of the regulatory framework and administrative structures that will govern trading. The magnitude of potential benefits will be heavily influenced by early and consistent power compan y support for an Ohio River regional WQT pilot program.



### 5.2 Next Steps For Developing a WQT Program
If a trading program in the Ohio River Basin is pursued, multiple stakeholders and trading partners will need to be involved. Trading partners would likely incl ude power companies, other buyers (e.g., WWTPs), regulators and NPSs. Other key stakeholders will include, but not be limited to conservation and environmental organizations as well as constituent interest groups.

Program design will require intensive stak eholder involvement over three to five years. Critical design considerations for a properly constructed program will involve crafting a wide range of elements that govern all aspects of program administration, execution of transactions between credit buyer s, credit sellers, third

- party aggregators and interactions of all parties with regulators. The design of the trading framework will be shaped by several attributes that will constrain the overall program. These will include consistency with EPA policy, av oiding hot spots, and developing trading ratios or other factors to account for the position of the buyers and sellers over a large project area as well as for pollutant equivalency. In addition, arrangements will need
to be made between states and ORSANCO to address whether and how interstate trading may occur. Development of trading zones (or districts) and rules governing where buyers may purchase credits are two possible methods that will need to be developed to account for geographic scale. The design of the Ohio River Pilot program will also need to consider existing Ohio trading rules, Pennsylvania trading policy the MCD WQT program in the GMR watershed. Interactions and interrelationships between these programs will need to be carefully developed
and established.

The immediate next steps to develop and institute a viable trading program in the Ohio River Basin should include two primary efforts: 1) engagement of high level regional, state and selected local participants to identify and secure support for a regional trading scheme; and, 2) a broader regional trading analysis of supply and demand in the basin focusing on both nitrogen and phosphorus. These two steps will not address all of the necessary efforts to develop such a trading program, but will serve to solidify the need for trading and secure high level commitments necessary at the buyer, seller and regulator levels. These preliminary efforts would
be conducted over a 10

- month period of time.

With buy

- in from key constituents (including power c ompanies), subsequent and substantial efforts with broader stakeholder involvement would be undertaken. These steps would focus on program design elements that would take two to four years to develop. They would primarily

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 5

- 4include: broad stakeholder program promotion; d evelopment of trading framework elements; and, construction of t rading program infrastructure to facilitate trades.

As with most trading programs in the U.S., funds for pilot program development will likely come from a variety of sources inclu ding contributions from potential buyers, non

- profits, foundations,

non

- governmental organizations, in

- kind contributions and potential state or federal grants. It is unlikely that any one source will be sufficient to fund the entire development and start

- up of an Ohio River trading program. It will be useful, however, to identify one recipient and/or fiduciary agent to manage and distribute funds to construct the program. It is envisioned that the core group of stakeholders established in the recommended i mmediate next steps will guide the overall process. This supports the needs for and benefits of early power company participation.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 5

- 5

## 6.0 References

CH2M Hill, 2005, Analysi s of FGD Wastewater Treatment: Lessons Learned , Higgins, Givens, and Sandy, May 31.

Connecticut Department of Environmental Protection, 2007, Nitrogen Removal Projects Financed by the CWF through 2006, Provided by Iliana Ayala, June 13.

Doran, M.D., 1997, POTW Phosphorus Control Costs . Unpublished memorandum, Madison, WI, Strand Associates, April 27.

Electric Power Research Institute (EPRI), 2006, Water Quality Trading Opportunities for Electric Power Companies, EPRI White Paper, January.

Faeth, P., 2000, F ertile Ground: Nutrient Trading’s Potential to Cost

- Effectively Improve Water Quality , World Resources Institute, Washington, D.C.

Foess, G.W., P. Steinbrecher, K. Williams, G.S. Garrett, 1998, Cost and Performance Evaluation of BNR Processes , Florida Wate r Resources Journal: December.

Jeyanayagam, Sam, 2005, True Confessions of the Biological Nutrient Removal Process , Florida Water Resources Journal: January.

Kentucky Division of Water, 2006, Draft 2006 Integrated Report to Congress on the Condition of Wat er Resources in Kentucky , Volume II, 303(d) List of Surface Waters, Kentucky Environmental and Public Protection Cabinet Division of Water, Kentucky Division of Water, November.

Kieser & Associates (K&A), 2004, Preliminary Economic Analysis of Water Qualit y Trading Opportunities in the Great Miami River Watershed, Ohio, Prepared for the Miami Conservancy District, Dayton, Ohio.

Lohner, T., 2007, Personal Communication, American Electric Power, Columbus, Ohio.

Maryland Department of the Environment, 2006, BNR Costs and Status BNR Project Costs Eligible for State Funding , Provided by Elaine Dietz on October 31.

Metcalf & Eddy, Inc., 2003, Wastewater Engineering: Treatment and Reuse , 4 th ed., New York, NY: McGraw

- Hill.

Mississippi River/Gulf of Mexico Watersh ed Nutrient Task Force, 2008, Gulf Hypoxia Action Plan for Reducing, Mitigating, and Controlling Hypoxia in the Northern Gulf of Mexico and Improving Water Quality in the Mississippi Basin , November 9.

ORSANCO, 2003, Assessment of Overland Runoff Nonpoint Source Pollution: Impacts on the Ohio River including a Ranking of Major Tributaries by NPS Pollutant Contribution.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 6

- 1Pariseau, Richard, 2007, telephone interviews with Shaw between July 15 and October 13.



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## E N V I R O N M E N T A L 

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## . , 2 0 0 7 , Water Quality Tradin g Pilot Programs: Review of Catawba River Basin, Chesapeake Bay, and Ohio River Pilot Projects, EPRI Contract No. 125935.4411, July 13.

Shaw Team, 2007, Technical Memorandum: Point Source WQT Credit Demand Analysis for WWTPs in the Great Miami and Musking um River Watersheds under EPRI Contract No. 125935.4411, In Process.

Tennant, Peter, 2007, Report of the Ohio River Sub Basin Committee, June.

U.S. Environmental Protection Agency Region 4, 2004, Evaluation of the Role of Nitrogen and Phosphorus in Causin g or Contributing to Hypoxia in the Northern Gulf, August.

USEPA, 2007, Biological Nutrient Removal and Costs, EPA

- 823

- R

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- 002.

USEPA. 2000. Nutrient Criteria Technical Guidance Manual Rivers and Streams, United States Office of Water EPA

- 822

- B

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- 002. En vironmental Protection Office of Science and Technology July 2000 Agency Washington, DC 20460 www.epa.gov

National Pollutant Discharge Effluent System Permits:

Indiana NPDES permits: IN0002160, IN0051845.

North Carolina NPDES permits: NC0004979, NC0004987, NC0024937, NC0024945, NC0030210, and NC0036277.

Ohio NPDES permits: 0IB00003*ND, 0IB00005*LD, 0IB00006*HD, 0IB00006*ID, 0IB00009*OD, 0IB00013*KD, 0IB00022*ED, 0IB00027*BD, 0IB00028*CD, 0IB00032*CD, 0IB00049*LD, 0PD00027*FD, 0PQ00000*LD, 1IB00000*JD, 1IB00 004*ID.

West Virginia permits: WV0001058, WV0005291, WV0005304, WV048500.

Ohio River Water Quality Trading Pilot Program: Business Case for Power Company Participation 6

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