P.! 

OAR Box 1778 

Prepped by Ollie Stewart 

Document Number: 

233)11-1-13 

Docket Number: 

A-90-06 

Printed 10/28/2008 9:51:02 AM Sheet 233 of 276 
i 2 _ 

0--. '02 -*9C 09-04 COUG^L I IMTE 

II-1-13 

Department of Energy 

Washington. OC 80585 

MEMORANDUM 

TO i 

FROM: 

RE I 

DATE i 

Dr. Roger B. Porter 

Assistant to the President 

for Economic and Domestic policy 

D r. Mieha*1 J. Boekin 

Chairman, Council of Economic Advisors 

and 

C. Boyden oray 

Counsel to the President 

Linda 0. Stunts £ $ 

Deputy Under secretary 

Policy, planning and Analysis 

WEPCO 

April 2, 1**0 

-c\ 

•^<E %2^\ 

^ © a \ 

h. \ l \ 

Enclosed are examples that illustrate how failure to meaningfully 

addresB the WEPCO problem, aa Senators Johnston, McClure and 

others have proposed to do, will substantially interfere with the 

cost-effective operation of the allowance trading eyetem. 

Substantively, maintaining a system that allows only trading 

"down" is neither consistent with everything we have been saying 

about the trading system nor defensible. Politically, the 

argument against DOE*a approach seems to have two legsi (1) the 

environmentallets will oppose this; and (2) EPW staff will oppose 

this. Let me bristly address each of these arguments. 

1) Having received no oomprehensible answer to my question 

of why the Johnston amendment, as DOE would amend it to protect 

NAAQS, P8D increment and visibility, doee not sufficiently 

protect the environment, J think the environmentalists would'have 

a hard time demonstrating why thla revised amendment was bad for 

the environment. On a purely political basis, I have not heard 

the environmentalists saying anything nice about the compromise 

lately anyway. What are ws worried about them doing that they 

are not doing already? 

2) Ae tax EPW staff, 1 suggested at our firet meeting last 

week on this subject that Johnston and othere Who are interested 

would have to persuade EPW membere of the amendment's merit. On 

matters outside the agreement, such as thla one, EPW staff has no 

right to exercise a veto. Even matters inside the agreement have 

been revised when it was considered necessary to do so because of 

stmber concerns (NOX and dead tones). 
P.3 

04.--02/9C 09! 05 CGN61. I 1KTERG00EPM'€HTAL 003 

A real problem has been demonetrated. We ehould at leaet support 

Johnston, McClure and others who are trying to fix it. If< with 

our support, Johnston and McClure determine that the votes are 

not there, we can regroup to look at our optione ln the Houee. 

The Energy and Commerce Committee le more receptive to a WEPCO 

fix than is EPW. 

Substantively, the EPA approach may be a marginal improvement 

over current law, depending on how "actual" la defined, a matter 

not addressed ln EPA's Friday formulation. However, the EPA 

approach ln no way removes the uncertainty gripping the utility 

Industry on this issue. Nor does lt allow free trading up and 

gown in the moat efficient manner. We do not, therefore, expect 

that Senators Johnston and McClure would support EPA's proposal. 

If the Administration support* EPA's WEPCO fix, we are eaying 

that it fixes the problem. (To eee the truth of this, one need 

only remember the claims being made for the Bumpers amendment 

passed last Thursday night to preempt Senator Johnston). Any 

real fixes would then be precluded. For that reaaon, we urge 

that the Adminletration eupport the DOE approach, not EPA'a. 

ect Bob Grady 

Terese Gorman 

Howard Gruenspecht. 

David Rifken 

Bill Rosenborg 

Polly Oault 
P.4 

04-'02/90 0?!05 CONSUL & iHTER&OyERHfe-ITftL 004 

Attachment 1 

EXAMPLES 

pxBpnflie v UIMB control equipment installation 

Scenario: Powerpiam A installs UIMB, a low capital 802/NOx control 

system to meet 802 and NOx standards in 1095. Removal 

efficiency is 60% for 802 and 50% for NOx. The plant 

Operated at 50% capacity factor for the previous five years, 

but might want to operate at 75% capacity factor in the 

future, given the degree of S02 reduction achieved (80%). 

The plant already had a 95% efficient electrostatic 

precipitator (ESP) for particulate control. Under the current 

policy of "actual-to-potential" emissions comparison, 

emissions of S02 and NOx decrease (due to the control 

equipment Installed, but particulate matter shows a 

potential increase, related primarily to capacity factor 

changes (up from 50% to 75%, a 50% increase), but also 

due in part (assume another 10%) to increased particulate 

loading from the LIMB system. 

Outcome: Current policy - installation of control equipment Is a nonroutine change. There Is a net increase in emissions of 

particulate matter and NOx since the future capacity factor 

could be 100%, compared to the old actual capacity factor. 

The source must either install additional control equipment 

for particulate matter and NOx to offset the potential 

increase in emissions, or stipulate to a limitation on 

operation, Since additional NOx control is extremely 

expensive, and the source only expects to operate at 75% 

capacity factor anyway, the source would likely stipulate to 

a limit on utilization of 75%, and agree to upgrade its ESP 

to about 98% efficiency. 

Breaux amendment - Under the Breaux amendment, 

installation of control equipment (a presumed to cause no 

increase in capacity factor. Therefore one would expect 

that the plant would have no problems. However, two 

potential problems stHt remain. First, a rival control 

equipment vendor wants to block use of LIMB at the 

facility, because he offers a more traditional control 
O4/02.-9O 69 s 07 COHG'L 8, INTER30'JERH'©mPL. or. 

package (wet limestone scrubbing). He informed the utility 

that they are at risk If they go forward with the project 

because he might inform EPA that the utility has an 

economic incentive to run the controlled system at sw 

greater capacity factor, and thereby rebut the presumption 

of constant capacity factor and force a commitment to a 

maximum capacity factor and an ESP upgrade. Secortov 

EPA may decide that the LIMB system wJl cause 10% 

more particulate matter emissions and force an ESP 

upgrade to cover that increase. 

Proposed amendment - Under the proposed amendment*: 

emissions before and after the nonroutine change are 

compared based on maximum hourly operation. Under 

this comparison, the 10% increase in emissions of 

particulate matter could still require additional control, but if 

ambient air quality modelling demonstrated that no NAAQS 

or PSD increment was exceeded, then no additional 

control would be required. If 8 standard were exceeded, 

control would be required, but only enough to protect the 

standard. Generally speaking, a small or moderate change 

in powerpiam emissions will not create an ambient air 

quality problem, so additional control requirements are 

unlikely. 

Example #2: Simple FGO retrofit 

Scenario: Assume the above scenario, but assume a 95% efficient 

wet limestone scrubber is being installed on a cyclone unit. 

Because of the extremely good S02 control, the utility 

again intends to significantly increase osjafittiuttetion, 

and use other units with greater S02 emjssionrateTlew. 

Outcome: Current policy - As m case #1 , the (nstallation is a nonroutine change. Emissions of S02 go down, but emissions 

of NOx go up, under the actual-to-potential comparison. 

The particulate matter increase could be offset by 

upgrading the ESP, but the level of NOx control needed is 

not achievable with currently available technology. The 

utility would have to stipulate to no Increase ki capacity 

factor, which It does not want to do given the capital 

Investment needed for tiie equipment. 

Breaux amendment - Under the Breaux amendment, the 

presumption of no increase m capacity factor would 
. - . . aa. , n »l..l.i r »a .•«. M n Uf> • f ftftl 

04.O2-'*O 09: IG POLICY. PLPM41N5 fiND *N*LYS IS BC2 

appear to be sufficient. However, the utility is still 

vulnerable to claims that It will run the unit more due to the 

extremely good 802 emissions rate (a claim which, infect, 

is true). Hence, ft is still constrained from optimizing its 

control program. 

Proposed amendment - The proposal would base the 

emission difference on maximum hourly operation rates 

before and after the change. It is unlikely that there would 

be any increase in maximum emission rates based on such 

operations. The source would still have to model air quality 

and take any necessary steps to ensure that future 

operations would not violate standards, as in case #1. 

Exempt #a. Example #1, with control equipment shutdown. 

Scenario: Assume Example # 1, but 20 years after 1995, the source 

is in such poor condition, the utility only wants to use K for 

very light cycling duty after 2015 (30% capacity factor). 

Given the refurbishment costs of the $02 control system, 

the utility would Hke to discontinue Its use. Rather, rt will 

continue the use of tow NOx burners, but use low sulfur 

Coal, and increase S02 controls at other units, if necessary 

to stay within the cap. 

Outcome: Current policy - Removal of control equipment is a nonroutine change. The increase in $02, although below 

levels existing in 1990, Is still an increase over S02 

emissions in 2010. Stipulation to a tower capacity factor 

will not ensure S02 emissions wUi not increase above 

levels emitted with the control hardware. The utility does 

not have the prerogative to reconfigure Its 802 control 

program to adjust to the reality of the aging unit, even 

though S02 rates stay within the utility's cap. 

Breaux amendment - No help. 

Proposed amendment - The seme basic rules apply, 

except that additional controls are required only to the 

extent to protect real environmental values (NAAQS, PSD 

increments, etc.). With use of low sulfur ooal, It la doubtful 

that any further constraint would be necessary. 
P.7 

W02.'90 09:06 COMS-t. li INTER»«&rE!frAL 005 

»&* • 

Example A: Oil-to-gas conversion. 

Scenario: A large oil fired steam-electric unit is not designed to burn 

natural gas, but wants to convert to natural gas because 

gas prices are currently lower than oil prices, and $02 

emissions are tower (zero). 

Outcome: Current policy - The conversion is a non-routine change. 

f -J^C^Uturo potential omissions of NOx are greater than current if ^ 

**i£ i vactual emissions. The source must agree to a future ^0^ *r • ^ 

\Jr*" maximum capacity factor no greater than its recent pasjf ^ ^^ ^ 

Breaux amendment - The conversion would appear to be 

sanctioned by the rebuttable presumption regarding 

capacity factor. However, the current oil supplier has r^f, <y -" 

notified the utility that it will supply to EPA detailed cost

 lJ^ tf 

data showing that gas-fired operation will be cheaper than *°£ Dp 

current oil-fired operation. Lower variable costs should *"' 

lead to increased capacity utilization, thereby rebutting the 

presumption. EPA would be forced to require reductions 

in NOx. 

Proposed amendment - Because of the emissions 

comparison being made on maximum hourly basis, there 

iSProgapT-y no increase In emissions. The source would 

still have to model air quality and take any necessary steps 

to ensure that future operations would not violate 

standards, as in case #1 , but no additional control 

requirement is likely. 

gxample 5; Qas/coal cofirlng. 

Scenario; A unit In Texas burning low sulfur coal would like to switch 

to 90% low sulfur coal and 10% natural gas. The utility has 

already met Its 802 reduction requirements, but gas is 

cheap enough that tha utility can sell the "extra* allowances 

for more than the cost differential between coal and gas in 

Texas. The unit currently runs at 60% capacity factor, but 

the utility anticipates that the unit will run more in the future 

as electricity demand increases. 

Outcome: Current policy - Cofiring requires non-routine changes. 

. Vf t C The utility fails the actual-to-potantlai emissions test for 

J ^ 1 5AN0X . Additional NOX and particulate controls, or a 

•^ {JJJ^^etlpulation on capacity factor, or aome combination is 
_P.8 

04'O2-'9G 095 0? CONS^U & n-rTEReok»ERM!i£irri^L BC6 

required. The utility would probably forego the trading 

opportunity rather than relinquish its flexibility to operate as 

It sees fit. 

Breaux amendment -Th e amendment explicitly includes 

gas use within the Rebuttable presumption" on capacity 

factor. There are no obvious problems, unless future gas 

prices and allowance values change enough that the S02 

reduction cannot be obtained et a profit H switching back 

to 100% coal requires a physical change to the boiler 

(perhaps some of the original air supply pons were being 

used for gas and need to be reconverted), then the unit 

would be subject to an actual*to*potentiat emissions test 

for all pollutants, even though It Is only a return to 

conditions existing in 1994. Additional controls would 

likely be required on all pollutants, tf tow NOx burners have 

ic^r v alroad y

 been

 installed (e.g- If the reconversion to coal is 

J^Zf^S T post-2000), then something bevond low NQ* humera 

#y v * ' wmild ho nannTflnjy Knowing nil th'n In mm . thn ilHTry 

' {^jt^ wouW be * 00,hard y

 to pursue the cofiring project. 

Proposed amendment - The cofiring change would not 

Increase emissions, but returning to 100% coal would. 

However, it is likely that the small Increase in emissions 

could be accomplished without violating any environmental 

standards. To reconvert to 100% coal, the unit would have 

to find a way to reduce 80 2 emissions by 10%, perhaps byt 

using slightly lower sulfur coal. 

A 

%yy 

/