DeckS.SloneSeniorVicePresident,)tr(trgyendPublicPolicydsIonetOarchcoaI.comFebruary20.2014Mr.Joseph(ioitanSeniorCounselO1’liceolAii’andRadiationU.S.EnvironmentalProtectionAgency1200PennsylvaniaAvenue,NW.Washington,D.C.20460I)earJoe:1Thankstoyouandyourcolleaguesattheagencyforaveryproductivemeeting.AsIhopewasevident,ArchvaluestheroleoftheEPA,andsharestheagency’scommitmenttocontinuous111provenientiiieiivironmentalperformance.Tokeeptheexchangeofinformationflowing,IthoughtIwouldusethislettertoexpanduponsomeofthetopicswediscussedduringthatmeeting.Naturally,wewouldwelcometheopportunitytofurtherexploretheseandotherissuesatatimethatprovesconvenient.Asyouwillrecall,wespentasignificantamountoftirnediscussingthewaveofcoalplantretirementsnowunderwayhereintheU.S.Asindicated,Archhasatalentedmarketanalysisteamthatspendsmuchofitstimestudyingpowermarkettrends.Basedonourforecasts,weexpectnearly60gigawattsofcoal-basedcapacity—orjustunder20percentofthecoalfleet—toretirebytheendof2Ol7.Tobeclear,thistotalreflectstheimpactofalreadypromulgatedregulations—andassumesafairlybenignexistingsourcestandardforGHGs.Theretirementofsomuchcapacityinsuchashortperiodoftimewouldbeunprecedented.BasedonEIAdatasources,itappearsthattherehasneverbeenayearpriortothisdecadewhencoalbasedgenerationcontractedbymorethanasinglepercentagepoint.Justasimportantly,theHAdoesnotanticipatethatothertypesofgeneratingcapacitywillstepintothebreach—atleastnotinitially.EIAprojectsthatonlyIInetgigawattsofnaturalgascapacitywillheaddedduringthattimeframe—suggestingareductioninoverallfossilfuelcapacityofnearly50gigawatts.Ofcourse,wecouldseeamorerapidbuild-outofnewnaturalgascapacitythaniscurrentlyprojected,assumingpublicutilitycommissionsprovemoresupportiveofraterecoveryrequestsfornewcapitalthantheyhaveintherecentpast.Butevenamorerapidnaturalgasbuild-outwouldcarryrisk,intheformofpipelinedeliverabilitychallenges,increasedpricevolatility,andpotentialsupplyshortfallsincriticalend-usemarketslikehomeheating.ArchCoal,Inc.OneCityPtaceDrive,Suite300St.Louis,Missouri634imain:314.994.2700fax:314.994.2880,archcoal.comArchCoa[Pleasedon’tviewthatrecitationascriticalofnaturalgas;webelieveit’sanindispensablefuel,andweviewrecentdevelopmentsinshalemarketsashighlypositive.Butthesearestillearlydaysforsuchteclmologies,andenergymarketscanshiftquicklyandunexpectedly.Asyouknow,thepowerindustryhascycledthrougha“dash-for-gas,”asizeablecoalplantbuild-out,a“nuclearrenaissance,”andnowa“shalegasrevolution”injustthepast20years.Clearly,ourenergyfutureisneverascertainasitseems—whichiswhywebelieveit’simportanttoadjustthesystemgraduallyanddeliberately,whilemaintainingthesafetynetthatfueldiversityprovides.It’salsoimportanttonotethatthecurrentcoalplantretirementcycleisjustgettingunderway.oftheexpected60gigawattsofretirementsreferencedabove,weestimatethatonlyabout30percent—orI8gigawatts—hasoccurredtodate.Thatmeansthatthesystemwillexperienceanother40gigawattsorsoofclosuresoverthecourseofthenextfouryears.Thatislightningspeedwhereenergymarketsareconcerned,andleaveslittletimeforcoursecorrections.Moreover,webelievethateventheI8gigawattsofclosuresexperiencedsince2O1arestressingthesystemtosomedegree—despitethefactthatthefirstplantstoshutterhavetendedtobetheoldestandmostunder-utilized.Todatethiswinter,whenmeasuredbyso-called“heatingdegreedays,”theU.S.hasexperiencedtemperaturesapproximatelyI0percentcolderthanthe10-yearaverage.So,it’sbeencold,butnotremarkablyso—andnoteverywhereatonce.Yettheresultingbumpinenergydemandhasledtosignificantdisruptions—withpowerpricesspikingabove$1000permegawatt-hourincertainareasandnaturalgaspricesrisingto$100permillionBtu’satcertaincitygates.Granted,thesespikeshavebeengenerallyshortinduration,butenergypricesremainelevatedevennow,andwinterstillhasseveralweekstorun.Thequestion,ofcourse,iswhatmighthappenifasimilar“polarvortex”—or,conversely,aheatwave—weretomakeanappearancein2017,afterall60gigawattshavegoneoffline?Andwhatiftheeconomyisgrowingatamorerobustpaceatthattime?AEPmayhaveprovidedsomeinsightwhentheyannouncedtoinvestorsthat89percentofthe7gigawattsslatedforretirementwithintheirownsystemwasneededandoperatingduringtherecentcoldsnap.Someofourothercustomersarereportingsimilarexperiences.Inlightofthisanalysis,webelievethatanexistingsourcestandardthatcouldspuradditionalcoalplantclosureswouldberisky—andunnecessary.Inthepastfiveyears,U.S.thermalcoalconsumptionhasdeclinedbymorethanI80milliontons,drivinga16-percentreductioninGHGemissionsfromthepowersector.Thenear-certainretirementcyclenowunderwaywilllockinthosegainsandcoulddeliverstillfurtherreductions—particularlyifnaturalgaspricesremainlowandstable.(Iftheydon’t,allpartieswillbepleasedtohaveasmuchcoal-basedcapacitystilloperatingaspossible.)So,what’stherightcourseforareasonable111(d)standard?Again,webelievethetoppriorityshouldbetoavoidtouchingoffthatnexttrancheofcoalplantretirementsbeforethecurrentonehasrunitscourse.Ifnothingelse,thereneedstobesufficienttimetoseehowpowermarketswillreacttosuchatransformationalchangetothegrid—andwesimplywon’tknowthatuntilthelatteryearsofthisdecadeattheearliest.Instead,wewouldcounselthattheagencyseektosetstandardsthatfocusexclusivelyonwringingoutefficiencyimprovementsfromtheexistingfleet,whileavoidingtheriskofadditionalclosures.Inourview,EPAwillhavemanyopportunitiestosetmoreambitiousstandardsinthefuture.Consequently,wedon’tbelievethereisasoundpolicyrationalefordoingsonow,givenarapidly2changingpowermarketenvironmentYes,focusingsolelyonefficiencyimprovementswilllimittheincrementalreductionsthatcanbeachieved—butEPAhasachievedagreatdealalready.Finallyandimportantly,weremainconvincedthatarapidslideinU.S.coalusagewillprovecounterproductivetotherealendgame,whichisaddressingtheglobalclimatechallenge.Withglobalcoalconsumptionexpectedtosurpass8billionmetrictoilsby2020,low-carbontechnologiesforcoal—aswellasfornaturalgas—willbeindispensable.TheexecutivedirectoroftheTEA,MariavanderHoeven,echoedthissentimentrecentlywhenshestatedthat,withoutthewidespreadavailabilityofCCStechnologiesbytheearly2030s,thecostofstabilizingGHGconcentrationsintheatmospherebymidcenturywillincreaseby$1trillion.Needlesstosay,thatwouldmakeaheavyliftheavierstill.WefirmlybelievethatmaintainingasignificantandstableroleforcoalhereintheU.S.willprovemoresupportiveoftechnologicalinvestmentandprogressthanthealternative.Inshort,wemustaddresscarbonemissionsillthedevelopingworldifwearetoaddressthematall—andtheU.S.canandshouldbehelpingtodrivetileadvancesthatwillmakesuchprogresspossible.Again,thankyouforaproductivemeeting,andfortheopportunitytosharethesefurtherthoughts.Wearecurrentlytakingadeeperlookatthecoalfleet,includingamoredetailedassessmentoftilecoalplantsthathavealreadyclosed,thecoalplantsexpectedtocloseby2017,andthecoalplantsmostlikelytocloseinatheoreticalnextroundofretirements.Wehopetosharethatanalysiswithyouatatimethatprovesconvenient.Sincerely,DeckSloneCc:LisaFeldtElliottLaws3