S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

Transcription

1 S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) THE DETROIT EDISON COMPANY ) to increase rates, amend its rate ) schedules governing the distribution and ) supply of electric energy, implement ) Power Supply Cost Recovery plans, ) MPSC Case U-0 factors and reconciliations in its rate ) schedules for jurisdictional sales of ) electricity and for miscellaneous ) accounting authority and regulatory ) asset recovery ) QUALIFICATIONS AND DIRECT TESTIMONY OF DAVID B. HARWOOD

2 THE DETROIT EDISON COMPANY QUALIFICATIONS OF DAVID B. HARWOOD Q. Please state your full name and business address. A. My name is David B. Harwood and my business address is 000 Second Avenue, Detroit, Michigan,. I am the Director of Generation Optimization for The Detroit Edison Company (Company). Q. Please state your educational background. A. I received a Bachelor of Science Degree in Chemical Engineering from The University of Michigan (Ann Arbor) in. I received a Masters in Business Administration from Baker College (Flint) in. 0 0 Q. Please describe your work experience. A. I was contracted by the Company as a Chemical Engineer in the spring of. In that capacity, I was responsible for plant water system chemistry and environmental compliance at the Conners Creek Power Plant for approximately two years. I was hired by the Company in as Operations Planning Coordinator at the Fermi Nuclear Power Plant. While at Fermi, I was responsible for planning and coordination of operation and maintenance activities during plant start-up, including several large projects such as the initial turbine roll. In, I was appointed to the position of Chemical Engineer responsible for plant water system chemistry and environmental compliance at the North Area Plants (Marysville, Greenwood, and Harbor Beach). During my ten years in this position, I performed

3 0 numerous functions in addition to the duties of Chemical Engineer. These included Environmental Compliance Specialist, Outage Manager, large and small Capital Projects Manager, interim Business Manager, and interim Plant Manager (Marysville). In, I was promoted to Principal Engineer - Fossil Generation Strategies, a new organization formed to develop, implement, and manage generation strategies relating to deregulation, restructuring, and wholesale competition. While in this organization, I led a team responsible for wholesale power price forecasting, generating unit utilization forecasting, and evaluation of environmental compliance strategies in a competitive wholesale market. 0 Q. Please describe your more recent positions and duties. A. In, I was promoted to Manager of Fossil Generation Mergers and Acquisitions. In this role, I was responsible for fossil power plant valuations and associated due diligence related to numerous utility generation asset divestitures in the region. These valuation analyses were based on regional wholesale power price forecasts, expense forecasting for capital, operating, and maintenance activities, and the evaluation of various environmental compliance strategies relative to the 0 Clean Air Act Amendments, all under my direction. Q. What is your current position and responsibilities? A. In 00, I was appointed Director of Generation Optimization: a group of

4 approximately 0 employees that serves as a focal point for integrating fuel supply, generation, environmental, regulatory, and market issues. More specifically, Generation Optimization is responsible for long and short-term generation strategies, as well as capital and O&M investment evaluations including emission control strategies. Generation Optimization is also responsible for periodic and maintenance outage scheduling, generating unit production scheduling, fuel blending strategies, unit dispatch, and generation sourcing and reliability. 0 Q. Have you written any papers or publications, or given any lectures? A. I authored several papers and I have developed and delivered presentations at the American Power Conference, the International Power Generation Symposium, and the Michigan Sea Grant Annual Conference. I have also authored internal training programs and lectures for power plant personnel regarding steam cycle chemistry, ion exchange, power plant thermodynamics, and economic dispatch. 0 Q. Do you participate on any Boards or Committees? A. I am on the Mechanical Engineering Advisory Board at the University of Michigan Dearborn.

5 THE DETROIT EDISON COMPANY DIRECT TESTIMONY OF DAVID B. HARWOOD Q. Please state the purpose of your testimony. A. The purpose of my testimony is to support the necessity and reasonableness of the capital expenses required by the Company to comply with Nitrogen Oxides (NO x ) emission reduction requirements of Title I and Title IV of the Clean Air Act Amendments of 0. This includes both capital expenses incurred to date and expected capital expenses going forward through 00. I will provide background on the applicable regulations, detail regarding the Company s strategy to comply with these regulations, and detail regarding the costs of implementing this strategy. 0 In addition, I will discuss future requirements for Sulfur Dioxide (SO ) and Mercury (Hg) emission reductions and an associated capital expense forecast to comply with these requirements. Q. Are you sponsoring any exhibits in support of your testimony? A. Yes, I am sponsoring the following exhibits: Exhibit A-0, Schedule F, Page of, Emission Reduction Strategy for Years -00, Emission Reduction Technology 0 Exhibit A-0, Schedule F, Page of, NO x Emission Reduction Costs for Years -00, Capital Expenses

6 Exhibit A-0, Schedule F, Page of, SO and Hg Emission Reduction Costs for Years 00-00, Capital Expenses Q. Were these exhibits prepared by you or under your direction? A. Yes. 0 SUMMARY Q. Please provide a summary of the Clean Air Act Amendments of 0 and their impact on the Company. A. The Clean Air Act Amendments of 0 (CAAA) produced significant changes in the regulation of Nitrogen Oxide (NO x ) emissions for Electric Generating Units (EGUs). Within the CAAA, Attainment and Maintenance of National Ambient Air Quality Standards (Title I) and Acid Deposition Control (Title IV) regulate NO x emissions from EGUs. The associated NO x emission reduction requirements have resulted in significant capital expenditures by Detroit Edison. These expenditures began in and will continue through Q. Please provide a summary of the Title IV requirements. A. Title IV of the CAAA set standards by which 0 NO x emission levels from electric utility sources would be reduced by million tons by the year 000. Detroit Edison made capital equipment modifications totaling approximately

7 $ million between and to successfully meet the requirements of Title IV. 0 Q. Please provide a summary of the Title I requirements. A. In addition to the Title IV requirements, Title I mandated the United States Environmental Protection Agency (EPA) to develop programs by which ozone non-attainment areas would be brought into compliance. This impacted NO x emission sources (including EGU s) since NO x contributes to the formation of ground level ozone. However, as the EPA developed these programs over the past seven years, there has been much uncertainty with regard to who would be affected, what reductions would be required, and when they would be required. During this period, Detroit Edison was forced to develop compliance strategies for several programs with conflicting requirements. Today, these programs (commonly referred to as the NOx SIP Call and the Section Rule) are defined to a point where the Detroit Edison compliance requirements, which begin in 00, are fairly clear. Starting in and continuing through 00, Detroit Edison has and will continue to incur significant capital expense to comply with the NO x SIP Call and the Section Rule. 0 Q. Please provide a summary of the impact of Title I on the Company. A. The NOx SIP Call and the Section Rule have resulted in a % reduction requirement for NO x emissions by 00 for EGU s located in a

8 geographic region that includes Eastern States (including Michigan) and the District of Columbia. For Detroit Edison, this represents an annual ozone season NO x reduction of over,000 tons from historic levels, significantly more than was required by Title IV. These rules include a market based cap and trade component that allows affected sources to comply by either installing NO x emission reduction technology or by purchasing excess allowances from a market supplied by those who may reduce beyond the actual reduction requirements. 0 0 Detroit Edison has pursued a technology-based NO x compliance strategy as opposed to purchasing allowances that may or may not be available from others. In doing so, Detroit Edison evaluated a number of proven NO x reduction technologies and identified a combination of applications for its EGU portfolio that would safely and reliably provide the necessary reductions at least cost. The Company s NO x compliance strategy includes the installation of both combustion and post combustion technologies on numerous units within the portfolio, beginning in and continuing until 00. The Company is expecting to earn a number of Early Reduction Credits (ERC s) due the performance of certain technology installations made prior to the 00 compliance deadline. The Company s capital expense associated with the NOx SIP Call strategy is currently forecasted to be $ million. By the end of 00,

9 approximately $ million is forecasted to be spent. The remaining is forecasted to be spent during the timeframe in order to complete the required technology installations. 0 The Company s compliance strategy is viewed to be prudent for several reasons. First, NO x allowance trading has not yet developed to a point where Detroit Edison could purchase the volume of NO x allowances required for compliance. This has made technology-based strategies, such as Detroit Edison s, the only viable approach to comply. Secondly, if and when trading volumes increase, the current NO x allowance price forecasts exceed the cost of the Company s strategy on a $/ton basis. Thirdly, the Company s compliance strategy incorporates a staggered technology installation schedule. In doing so, the Company is positioned to take advantage of the NOx allowance market or emerging NOx reduction technologies, should opportunities arise. 0 Q. Please provide a summary of any further emission reduction requirements for the Company. A. In addition to the NO x reduction requirements of the NOx SIP Call and the Section Rule, the Company will be further impacted by additional emission reduction requirements going forward. The EPA is currently revising the National Ambient Air Quality Standards for certain criteria pollutants under Title I and Hazardous Air Toxics under Title III of the CAAA

10 and it is likely that additional emission reduction requirements for NO x, SO, and Hg will be enacted at some point. A number of multi-pollutant proposals have been introduced in Congress and it is currently not clear what regulations will eventually emerge. However, Detroit Edison capital expense requirements during the time period for one proposed program, the Bush Administration s Clear Skies Initiative, is estimated to be $ million. 0 NITROGEN OXIDE REDUCTION REQUIREMENT HISTORY Q. What regulations currently govern emissions of Nitrogen Oxides from Detroit Edison electric generating units? A. A number of regulations currently govern emissions of nitrogen oxides (NO x ) from Detroit Edison s Electric Generating Units (EGUs). On the Federal level, they include Title IV of the Clean Air Act Amendments of 0 (CAAA) and both the NO x SIP Call and the Section Rule developed by the United States Environmental Protection Agency (EPA) under authority granted by Title I of the CAAA. On the State level, Michigan Part Rules regulate NO x emissions from the Company s EGU s. 0 Q. Please describe the Clean Air Act Amendments of 0. A. The CAAA built upon the federal regulatory framework created by the Clean Air Act Amendments of 0 and. The CAAA created significant changes from the previous amendments, including changes in air quality

11 permitting, allowable air toxics, and requirements to develop control programs related to acid rain. Within the CAAA, Attainment and Maintenance of National Ambient Air Quality Standards (Title I) and Acid Deposition Control (Title IV) regulate EGU NO x emissions. 0 0 Q. Can you describe Title I of the CAAA in further detail? A. Yes. Title I of the CAAA significantly modified the existing National Ambient Air Quality Standards (NAAQS), including establishment of new compliance dates for attainment of ozone NAAQS. Title I allowed states to expand ozone non-attainment areas and gave the EPA authority to create interstate ozone transport regions. Specifically, these are regions where nonattainment in one state is at least partially a result of emissions from sources in other states. The EPA was directed to develop programs by which specific non-attainment areas would be brought into compliance by dates indicated in Title I. This is relevant to Detroit Edison EGU NO x emissions since NO x is a precursor to the formation of ground level ozone and although Southeastern Michigan was in attainment with ozone NAAQS, Title I put Midwest NO x sources at risk of being identified as contributors to non-attainment in other states. Q. Can you describe Title IV of the CAAA in further detail? 0

12 0 A. Title IV of the CAAA (commonly called the Acid Rain program), defined reduction programs for utility emissions of both sulfur dioxide (SO ) and NO x. With regard to NO x, Title IV set standards for emissions from utility sources with a goal of reducing 0 level emissions by million tons regionally by the year 000. Specifically, NOx reduction requirements defined in Part of Title IV outline a phase-in approach to NOx rate limits for various boiler designs. The first phase required NOx emission rate reductions by for some of the sources identified in the Sulfur Dioxide (SO ) section of Title IV. The second phase required NOx emission rate reductions by 000 for the remaining sources (including all of the Detroit Edison coal-fired boilers). The program included a results oriented compliance approach that allowed compliance on a portfolio level rather than by individual source. This unique approach was designed to allow EGU owner/operators flexibility in meeting the requirements, potentially in a more cost effective manner. 0 Q. With respect to the Acid Rain Program defined in Title IV of the CAAA, what NO x emission reductions were required of Detroit Edison? A. The Company utilized the portfolio level compliance approach included in Part to comply with the NO x requirements of Title IV. As a result, the Company was required to reduce its portfolio average annual NOx emission rate from 0. lbs/mbtu to 0. lbs/mbtu.

13 0 Q. How did Detroit Edison comply with the NO x reductions required by the Acid Rain Program? A. The company determined that the most effective way to comply with the NOx requirements outlined in Title IV was to install Low NOx Burner (LNB) technology on the four boilers at the Monroe Power Plant. These burner modifications were installed between and as shown in Exhibit A- 0, Schedule F, Page of, Emission Reduction Strategy for Years -00, Emission Reduction Technology. The Company s portfolio wide NOx emission rate in was 0. lbs/mbtu, within the limit required under Title IV. Q. What capital costs were incurred by Detroit Edison as a result of the NO x emission reduction requirements of the Acid Rain Program? A. The total capital cost associated with the Title IV requirements was approximately $ million as shown in line, columns B through D of Exhibit A-0, Schedule F, Page of, NO x Emission Reduction Costs for Years -00, Capital Expenses. 0 Q. You stated that Title I of the CAAA directed the EPA to develop programs to bring ozone non-attainment areas into compliance with NAAQS. How did the EPA meet these requirements? A. In October, the EPA finalized the "Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment

14 0 Group Region for Purposes of Reducing Regional Transport of Ozone" (Commonly called the NO x SIP Call). The NO x SIP Call expanded on the results oriented portfolio level compliance approach included in Title IV by including a full market-based approach to compliance. The EPA introduced a model NO x Budget Trading Program rule (Part of Title I) as guidance for those States opting to meet the requirements of the NO x SIP Call through an allowance-trading program (commonly called a cap and trade program). This trading program was developed to facilitate cost effective NO x emissions reductions from large stationary sources. States choosing to participate in the NO x Budget Trading Program have the flexibility to modify certain provisions within the model rule as they develop their respective State Implementation Plans (SIPs). Q. Please describe the cap & trade component of the NO x SIP Call in more detail. A. Traditionally, emission control regulations have utilized set limits (or rates) by which each source was measured. Cap and trade differs from the traditional approach by providing operational and economic flexibility to the participating sources with the intent of reducing overall compliance costs. 0 In administering the cap and trade approach, the EPA first set a total allowable emission level (in tons) for a given compliance period and geographic region. The total emissions level is called the cap. The

15 geographic region defined in the NOx SIP Call includes states (including Michigan) and the District of Columbia and the compliance period is May through September (commonly called the ozone season). The EGU NO x emission cap for the region is set at,000 tons, representing an approximate % reduction in historic NO x emissions. 0 The overall cap was then divided and allocated to each State within the region based on criteria defined by the EPA. These allocated amounts became the NO x tonnage budgets that each State was required to meet via an EPA approved SIP. Each SIP further divides and allocates the State budget by assigning allowances (in tons) to each affected source of NO x emissions, which in turn becomes a NO x emissions budget for that source. In the end, the sum total of the budget allowances for each NO x source will be equal to or less than the cap for the entire region. 0 During the ozone season, sources are required to measure, report, and certify all NO x emissions. Sources achieve compliance by having enough allowances to cover the actual emissions for the period. If a source emits less than the number of allowances it has in hand, it can sell the excess in the open market. Sources that emit more than the number of allowances in hand must purchase the required balance from the market. In doing so, the cap and trade program provides an incentive to optimize economic resources between sources in the region, reduce overall compliance costs,

16 while still achieving compliance. 0 Q. In addition to the NO x SIP Call, were there other programs developed by the EPA in accordance with Title I of the CAAA? A. Yes. In August, eight northeastern States submitted petitions under Section of the Clean Air Act sought NO x reductions from sources in upwind States. Section authorizes a downwind State to petition the EPA for a finding that stationary source(s) in upwind States must reduce emissions because they contribute significantly to NAAQS non-attainment in the petitioning State. In May, prior to the EPA ruling on the Section petitions, the U.S. Court of Appeals for the District of Columbia granted a motion to stay the deadline for the SIP revisions under the NO x SIP call. Since it was now uncertain when, or if NO x SIP Call reductions would be required, the EPA proposed to go ahead and require reductions under the Section Rule without waiting for State actions on the NO x SIP Call. 0 The EPA published "Findings of Significant Contribution and Rulemaking on Section Petitions for Purposes of Reducing Interstate Ozone Transport" (commonly called the Section Rule) on January, 000. The Section Rule determined that large fossil fuel-fired stationary sources in certain upwind States should be required to reduce their ozone season emissions

17 to mitigate the effect that these sources have on ozone non-attainment in downwind States. The sources implicated in the Section Rule included all Detroit Edison coal-fired EGUs and required a reduction from 000 level NO x emissions by approximately 0% by the 00 ozone season. 0 The EPA also indicated that SIPs submitted under the NO x SIP Call by States also covered by the Section Rule could provide adequate NO x reduction approaches sufficient to reduce downwind ozone levels. In other words, the controls required by the Section Rule would not be necessary if States made timely SIP submissions that were approved by the EPA. Issuance of the Section Rule created a situation where the Company was forced to plan for compliance with two simultaneous regulatory programs with differing requirements. Specifically, the Section Rule and the NO x SIP Call were not consistent with respect to sources affected or reductions required. In addition, the stay of the NOx SIP Call resulted in a potential inconsistency in compliance dates as well. 0 Q. How did Michigan respond to the NO x SIP Call and the Section requirements? A. The State of Michigan, along with several other Midwestern states (commonly called the Governor s Coalition of States ) named in the NO x

18 0 SIP call, responded with a revised plan (commonly called the Governor s Proposal ). Based on modeling completed by those states, the Governor s Plan was drafted to mitigate the proportional contribution from the Midwest to the ozone attainment problem in the northeast. This plan was a twophased approach in which EGUs would have an ozone season NO x emission rate limit of 0. lb/mmbtu in 00 followed by a reduced rate limit of 0. lb/mmbtu in the 00 ozone season and beyond. The Governor s Plan was proposed to the EPA in response to the NO x SIP Call and was promulgated into the Michigan Part NO x Rules in May 000. As written in May 000, The Michigan Part Rules created a third regulatory NO x reduction program that was not consistent with either the NOx SIP Call or the Section Rule. Q. Were the differences between the NO x SIP Call, Section, and the Governor s Proposal ever resolved? A. Yes. The DC Circuit Court of Appeals ruled on various challenges to the NO x SIP Call, including Michigan v. EPA. In 000, the DC court upheld the NO x SIP Call in most respects, but amended the deadline for full implementation of EPA approved SIPs from May, 00 to May, In early 00, the EPA changed the Section Rule compliance date to May, 00, making it consistent with the NOx SIP Call. Additionally, the Michigan Department of Environmental Quality (MDEQ) commenced a

19 rulemaking process using a Stakeholders Workgroup to develop a SIP that was consistent with the NOx SIP Call. The resulting Michigan Part Rules, promulgated on December, 00, included Rules 0 through, which comprise Michigan s response to EPA s NO x SIP Call. Q. When did Michigan submit the SIP for NO x? A. The Michigan Part NO x Rules mentioned above were submitted to EPA Region for review and approval in April Q. Has the EPA approved the Michigan SIP for NO x? A. The EPA has not yet made an approval decision on the rules package, but a full approval is expected prior to the 00 ozone season. 0 NO x REDUCTION REQUIREMENT ALTERNATIVES Q. What NO x reductions are required of Detroit Edison as a result of the NO x SIP Call and the proposed Michigan SIP? A. Based on the proposed Michigan SIP, the Company will receive approximately,00 tons of NO x allowances per ozone season, starting with the 00 ozone season. This represents a reduction of over,000 tons from the ozone season emissions level of,0 tons and is equivalent to a % reduction in NO x emissions for Detroit Edison sources over that time frame.

20 Q. In order to achieve this level of NO x emission reductions, what strategic options exist for Detroit Edison? A. In theory, four possibilities exist: ) unit shutdown and/or unit output reduction during the annual ozone season, ) purchase of emission allowances from the market to offset actual emissions, ) install NO x reduction equipment to reduce NO x emissions, and ) any combination of the three items listed above. 0 Q. In developing a NO x SIP Call reduction strategy involving these alternatives, what factors should be considered? A. Each alternative has a unique set of risks and associated costs. In identifying the best overall compliance strategy, a company must evaluate each alternative with respect to cost and ability to achieve the required level of NO x reductions. Cost comparisons of various compliance alternatives can be made on a $/ton of NO x reduced basis. In addition to reduction levels and cost aspects, a Company must develop a strategy that is flexible with respect to implementation timing given the regulatory uncertainties that may exist at the time that strategic decisions are required. 0 Specifically with respect to option number above, unit shutdown and/or reduced unit output during the ozone season would indeed reduce NO x emissions. However, significant system reliability concerns would result from lost capacity during peak periods characteristic of the ozone season.

21 0 Additionally, the amount of ozone season allocations given to each unit under the NOx SIP Call is redistributed every three years based on actual unit heat input. If compliance to a cap and trade oriented reduction program is achieved by reducing output or shutting a unit(s) down, future allowances for those generating units are reduced. In turn this would require additional output reductions and/or more shutdowns. In the end, this is not a sustainable compliance strategy. Additionally, at the time that the Company developed its compliance strategy, it was not clear what form the NO x reduction requirements would take. Under emission rate limit regulation, such as the Governor s proposal discussed above, this option would not accomplish the required reduction. As for option number, buying NO x allowances from the marketplace to offset excess NO x emissions for a company s entire generating portfolio would require the purchase of a large amount of allowances in a new and undeveloped market. The amount of allowances available in the 0 marketplace is a function of whether various companies decide to overcontrol by installing more NO x reduction technology than is required to achieve initial compliance. To the extent over-control does not occur, allowances may not be available to purchase at any price, resulting in unit shutdown as the only remaining alternative in the short term. To the extent over-control does occur, the risk of high allowance prices could result as companies that are long on NO x allowances extract maximum value from 0

22 those companies that are short. As mentioned above, the difference between Detroit Edison s ozone season allocations and historic emission levels would require the purchase of over,000 tons/season. Since there is no guarantee that this volume of allowances would be available (at any price), a market based compliance option was considered extremely risky. 0 0 With respect to option number, achieving compliance by installing NO x reduction technology and actually reducing NO x emissions does not carry the reliability risks of option number and has significantly less economic risk than option number. Nonetheless, a company employing this option is challenged with identifying the mix of technology applications that achieves the required reduction levels at least cost. This is a complex and somewhat uncertain analysis given the regulatory uncertainties discussed above and timing of the decisions required to employ particular technology options. Few large-scale high efficiency NO x reduction installations existed in the United States (burning U.S. fuels) prior to the finalization of rules, making both cost and reduction efficiency difficult to forecast. Furthermore, the availability of materials and skilled labor required to construct largescale NO x reduction technologies at numerous plants across the region was in question. Nonetheless, as research, development, and the number of installations increased during the late 0 s, the uncertainties were reduced, making this an appropriate option for many EGU owner/operators.

23 Finally, as to option number, any combination strategy that includes a market based component carries risk for the same reasons outlined in option above. Until a robust liquid market develops for NO x allowances, this option carries the same uncertainties with regard to compliance as well as cost. 0 DETROIT EDISON NO x REDUCTION STRATEGY Q. Which NO x SIP Call reduction strategy did Detroit Edison choose? A. After evaluating the various alternatives described above, the Company chose to employ a technology-based approach similar to option number above. The original strategy was developed in and has maintained enough flexibility to manage the tradeoffs between these regulatory, market, and technological risks in order to minimize the cost of compliance. With regulations not completely finalized and the NO x allowance market continuing to develop, the potential for further plan adjustments and cost reduction remains. 0 Q. When the initial compliance plan was developed, were there any assumptions regarding the NO x market? A. In an efficient and liquid market, NO x emissions allowances should approach the marginal cost of the technology required to comply. Using a combination of assumptions regarding proposed rules and estimated technology costs in, a NO x allowance price of $,000 - $,000/ton was

24 assumed. However, regulatory and technological uncertainties combined with a lack of knowledge with respect to what compliance strategies others might employ, made NO x market forecasts very sketchy, at best. 0 Q. How has the NO x allowance market developed? A. The NO x market is still in early stages of development, as evidenced by the small volume of trading to date. In 00, only,000 tons of 00 vintage allowances were traded by independent market participants at prices ranging from $,00 - $,000/ton. Given the annual ozone season cap for the state region of,000 tons, makes this a very thinly traded market. Current allowance price forecasts remain approximately equal or slightly up from last years levels. According to certain industry publications such as Energy Argus Air Daily and brokerage services such Evolution Markets, LLC and Natsource, LLC, 00 vintage NO x allowances were clearing at approximately $,000/ton in May Q. Please describe the various technology alternatives that were evaluated by the Company in determining the compliance plan, including respective costs and NO x reduction efficiencies. A. As mentioned above, numerous NO x reduction technologies exist and

25 comprise both combustion and post-combustion alternatives. The Company evaluated both combustion and post-combustion technologies prior to determining the mix that provided the required NO x emission reductions for the least overall cost. Of the technologies considered, several significant ones are described below. They include Combustion Optimization (CO), Low NO x Burners (LNB), Over-Fire Air (OFA), and Selective Catalytic Reduction (SCR), natural gas conversion, reburn technology, and selective non-catalytic reduction (SNCR). 0 Q. Please describe Combustion Optimization (CO) technology. A. CO is a combustion related technology that involves installation of sophisticated boiler controls that minimize the presence of excess air in the furnace, thereby reducing NO x formation. In addition, CO is a useful combustion monitoring tool that allows a boiler operator to sustain improvements gained through other combustion technologies, such as LNB and OFA. CO can achieve NO x reductions of % to 0% depending on boiler design and fuel type. The cost of CO ranges from $00,000 to $00,000 depending on the level of sophistication. 0 Q. Please describe Low NOx Burner (LNB) technology. A. LNB is a combustion related technology that involves the modification or replacement of existing coal burners on the boiler. As opposed to a traditional coal burner, LNB minimizes turbulent mixtures of coal and

26 combustion air as it enters the furnace, thereby slowing the rate of combustion. The slower combustion results in a larger, lower temperature fireball, thereby reducing NO x formation. The NO x reduction efficiency and cost is somewhat dependent on boiler design and fuel type. Low NO x Burners can achieve NO x reductions of 0% to 0% at a cost range of $0 to $0/kW. 0 Q. Please describe Over-Fire Air (OFA) technology. A. OFA is also a combustion related technology that stages the combustion of coal to reduce NO x formation in the furnace. First, a fuel-rich combustion environment is generated in the lower furnace by reducing the quantity of air delivered to the burners. Second, supplemental combustion air is introduced through ports installed above the existing coal burners. This combustion staging results in lower flame temperatures, lower levels of free oxygen for combustion, and reduced NO x formation. Generally, OFA is installed in concert with LNB to enhance LNB performance. When installed with LNB, NO x reductions in the range of 0% to 0% can be achieved. OFA can be installed at an incremental cost of approximately $0/kW when installed with LNB. 0 Q. Please describe Selective Catalytic Reduction (SCR) technology. A. SCR is a post-combustion technology that converts the NO x formed in the boiler to nitrogen gas and water. This reaction occurs in the presence of

27 ammonia, which is injected into the flue gas stream as part of the process. A catalyst is used to increase the efficiency and completeness of the reaction at the temperatures normally realized in the flue gas stream. SCR is the most efficient NO x reduction technology available and can achieve a NO x removal rate of 0% - 0%, depending on catalyst performance and ammonia injection rates. It is also the most expensive at a range of $0/kW to over $0/kW. This wide range results from a number of variables associated with boilers of varying size, design, and layout. These include the costs associated with installation of support structure, ductwork, catalyst 0 beds, induced draft fans, and other support components. Another significant cost variable for SCR (and other technologies that require ammonia), relates to the chemical delivery system required for storage and delivery of ammonia to the flue gas stream. 0 Q. Please describe Gas Conversion. A. Although a full Gas Conversion system could potentially provide the required NO x emission reductions, the fuel cost would be significantly increased. In addition, conversion from coal to natural gas requires extensive and costly boiler modifications in order to maintain the steam production capability normally achieved with coal. In the end, this is not an economic alternative for NO x reduction on a large coal based generation asset portfolio, such as that of Detroit Edison.

28 Q. Please describe Reburn technology. A. Similar to OFA, Reburn Technology is a combustion-related technology that stages the combustion in the furnace, although in a different way. Reburning requires the injection of some fraction (typically 0-0%) of the fuel input into the upper furnace through ports located above the primary combustion zone. Natural gas is typically the reburn fuel of choice because it results in reductions in particulate matter, SO, and CO emissions, in addition to NO x. The Company also evaluated pulverized coal, micronized coal (<0 microns), fuel oil, and Orimulsion as reburn fuels. 0 0 Q. Please describe Selective Non-Catalytic Reduction (SNCR) technology. A. Similar to SCR, SNCR is a post-combustion control technology that involves the injection of ammonia (or urea) into flue gas stream where it reacts with NO x to form nitrogen and water. However, SNCR differs from SCR in that it does not utilize a catalyst, thereby significantly increasing ammonia usage and associated operating costs. The gas temperature at the point of injection is critical to the NO x reduction performance of an SNCR system. Since the temperature profile in the flue gas stream changes with changes in boiler load, the optimum injection point changes and multiple injection points are required. However, most large utility boilers have heat transfer surfaces (pendants and platens) positioned in this flue gas temperature zone. This will reduce the effective use of the SNCR system, even if multiple injection levels are installed. In some cases, these internal

29 obstructions make the application of SNCR impractical. Emission reduction capabilities range from 0% to 0% at an installed cost range of $0 to $0/kW. 0 Q. Were there any other NO x reduction technologies evaluated by Detroit Edison? A. Yes. Detroit Edison has and continues to evaluate alternative NO x control technologies with respect to its reduction strategy. Many of these are in early stages of development and are unproven in full commercial application. However, while under developed alternatives continue to be evaluated, Detroit Edison is utilizing proven technologies to meet the requirements of the NOx SIP Call. Q. Please describe Detroit Edison s NO x SIP Call compliance strategy. A. As described above, the Company determined that the best NO x reduction strategy was to install a cost efficient combination of NO x reduction technologies on a number of units. The overall goal of the Company s plan is to achieve full compliance in a safe and reliable manner for the least possible cost. 0 Unit by unit detail regarding what technology has been chosen for each unit is shown in Exhibit A-0, Schedule F, Page of, Emission Reduction Strategy for Years -00, Emission Reduction Technology. The years

30 indicated represent the in-service years for the respective unit and technology. 0 Q. How did Detroit Edison determine the best technology for specific units? A. First, the Company compared the numerous technology options on each unit to assess which ones would safely and reliably provide the necessary NO x emission reductions. Once this was done, the remaining options were compared on a $/ton (tons of NO x emissions reduced) basis. This included analysis of capital and operating costs (including any production efficiency costs) and the expected NO x reduction efficiencies of the viable technologies. Given their relative lower cost, certain combustion related technologies (LNB, OFA, and CO) were chosen for installation wherever practical, given unit design and other constraints. These alone, however, do not provide the required NO x emission reductions to meet the NOx SIP Call. To achieve full compliance, additional controls are needed. 0 As discussed above, SCR is the only technology that can achieve NO x reduction efficiency in excess of the % reduction requirement in the NOx SIP Call. In fact, given that SCR can reduce NO x by 0% - 0%, EGU s that utilize SCR technology achieve some level of over-control. In doing so, the

31 Company was able to reduce expenditures otherwise required on the remaining EGU s. It was determined that by installing SCR at the Monroe Power plant, the largest source of NO x emissions in the Detroit Edison system, the Company could minimize the overall cost of the NOx SIP Call compliance. 0 Q. You stated that NO x SIP Call emission reductions are not required until May, 00. Why did Detroit Edison begin installing NOx reduction technology as early as? A. Installation of combustion technologies require full unit outages and therefore must be timed such that the impact to system reliability is minimized. Furthermore, completing the combustion technology installations during normally scheduled periodic outages reduces the overall fuel and purchase power costs associated with the outage. The same issues apply for post combustion technologies such as SCR. Although much of the work can be completed while the unit is online, full unit outages are required to complete final tie-ins. Since the periodic outage frequency of most of Detroit Edison EGU s is - years, some NO x reduction technology installations began in. 0 In addition, uncertainty regarding compliance timing and availability of manpower and materials, combined with the ability to earn NO x early reduction credits, dictated that implementation of the compliance plan 0

32 commence well in advance of Q. What are NO x Early Reduction Credits and how are they earned? A. The proposed Michigan SIP provides incentives for EGU s to reduce NO x emissions prior to the first compliance season in 00. EGU s that meet certain NO x reduction criteria in the 00- ozone seasons (May-Sept) can earn Early Reduction Credits (ERC s) that can then be used as allowance supplements in the 00- ozone seasons. Similar to allowances, ERC s are accounted for in increments of one ton. To earn an ERC, a generating unit must demonstrate that it has ) reduced its NO x emission rate (lbs NO x /mbtu of heat input) by at least 0% from the year 000 ozone season average, and ) has a reduced rate below 0. lbs NO x /mbtu heat input. If an EGU meets these criteria, an ERC is earned for each ton of NO x emissions reduced below the lower of 0.-lb/mbtu or the year 000 ozone season average. 0 However, the amount of ERC s is not unlimited. The proposed Michigan SIP limits the total amount of ERC s available to EGU s at, tons. If, after the 00 ozone season, the total amount of ERC s earned by all Michigan EGU s exceeds this limit, the actual ERC s allocated to each Michigan EGU will be prorated down until the total amount allocated equals, tons. As a result, EGU s that attempt to earn ERC s by meeting the criteria described above will not know for sure how many they will be

33 allocated until after the 00 ozone season. Q. How does Detroit Edison s NO x SIP Call strategy compare with that of similar utilities? A. The Company s compliance plan appears to compare favorably to others in the state region in several ways. First, essentially all affected utilities are implementing technology based compliance strategies as opposed to a NO x allowance market-based strategies. 0 Second, many companies appear to be utilizing similar technologies as well. As each company evaluates their respective options, some differences occur due to the specific nature of each company s generation asset portfolio. However, given that SCR is the only technology that alone can achieve the NO x SIP Call requirements, it is a critical component of many compliance plans across the region. In fact, approximately 0% of the coalfired capacity in the region is expected to have SCR technology by 00. In addition, LNB, OFA, and CO technologies are being utilized on almost all coal fired units in the region. 0 Q. What capital expenditures are required to implement the Company s NOx SIP Call strategy described above? A. The plan will require total capital expenditures of $ million. Of this, approximately $ million is being sought for inclusion in the Company s

34 rate base in this proceeding. The difference relates to the expenditures at Belle River being only partially allocable to Detroit Edison due to its partial ownership of that plant. With respect to the Detroit Edison capital expense, approximately $ million will be spent by the end of 00. Approximately $00 million will be spent in the 00 to 00 timeframe. Detroit Edison capital expenses (by plant, by year) are listed in Exhibit A-0, Schedule F, Page of, NO x Emission Reduction Costs for Years -00, Capital Expenses. 0 Q. What do these capital expenditures include? A. These capital expenditures include direct and indirect labor, material, and capitalized AFUDC. For the years to 00, the actual indirect labor costs are included as part of the plant specific values as indicated. For the years 00 00, the forecasted indirect labor costs are shown separately in line 0, columns K through R. 0 Q. Will there be O&M expenditures required to operate Detroit Edison s NO x reduction technologies? A. Yes. Mr. Baig discusses this subject in his direct testimony. Q. Has Detroit Edison earned any Early Reduction Credits? A. The Company expects to earn early reduction credits. However, as

35 described above, early reduction credits (ERC s) will not be awarded by the State until after the 00 ozone season. The Company is expecting early reduction credits to be awarded for NO x reductions achieved on units where the necessary reduction criteria were met. 0 Q. Do early reduction credits have any value to Detroit Edison? A. Yes. As indicated above, NOx SIP Call compliance is achieved by having enough NO x allowances in hand to cover the actual emissions for each unit for a given ozone season. In addition to the allowances that are allocated to sources beginning with the 00 ozone season, a limited number of ERC s are available to sources that reduce NO x emissions prior to the first compliance season. These early reduction credits can be used as allowance supplements in either the 00 or 00 ozone seasons. A company that earns early reduction credits may be able to defer NO x allowance purchases and/or technology installation expenses. 0 In early 00, the Company s NO x reduction strategy included the installation of SCR on all four Monroe units prior to the 00 ozone season. Due to a combination of factors, including an anticipated level of early reduction credits earned, the Company was able to defer two SCR installations and still achieve compliance. The in-service date of these SCR units was deferred from 00 and 00 to 00 and 00 respectively. In addition to providing significant cash flow savings in 00 and 00, this

36 deferral has resulted in additional time for the Company to improve efficiencies in SCR construction costs, evaluate emerging alternative technologies, and potentially reduce the overall cost of the compliance program. 0 Q. Given the costs associated with NO x SIP Call compliance and the performance of the technologies placed in service to date, is Detroit Edison implementing an effective and cost efficient strategy? A. Yes. The Company will not only meet the NOx SIP Call reduction requirements through implementation of the compliance strategy identified in this testimony, but will do so in a cost effective manner. With respect to the effectiveness of the strategy, the combustion technologies already installed on numerous units are achieving the NO x reductions expected. Early testing of the Monroe # and # SCR units indicates that they will also achieve the expected NO x reduction rates. 0 With respect to cost efficiency, the Company s plan is expected to cost approximately $,000/ton. Comparing this to the current NO x emissions market price of $,00 to $,000/ton, demonstrates that the Company s strategy to install technology instead of buying NO x allowances from the market is economically justified.

37 Q. How was the $/ton value for the Company s plan calculated? A. First, the total annual cost of capital was determined by multiplying the total program capital cost of $ million by %. This results in an annualized cost of capital equal to $ million. The factor of % is the sum of the Company s approved pre-tax rate of return of 0% plus an approximate depreciation rate of %. 0 Second, the forecasted annual O&M cost for all NOx equipment in 00 is approximately $ million. Adding this to the annual cost of capital results in a total annualized cost of $ million. Third, the total annualized cost is divided by the approximate total tons of NOx reduced as a result of the Company s NOx reduction plan, or,00. This results in the overall NOx reduction program cost of approximately $,00/ton of NOx emissions reduced. 0 ADDITIONAL EMISSION REDUCTION REQUIREMENTS Q. Are there any emission reduction requirements, in addition to the NO x SIP Call requirements discussed above that will impact Detroit Edison s power plants in the future? A. Yes. Under Title I of the CAAA, the EPA regularly reviews and, if necessary, revises the NAAQS for criteria pollutants. New standards are currently being implemented for particulate (PM. ) and ozone. Since it has

38 been shown that SO and NO x emissions contribute to the formation of fine particulate and NO x emissions contribute to ground level ozone, it is expected that further reductions in both NO x and SO will be required from EGUs to meet the new standards. 0 Furthermore, Title III of the CAAA requires the EPA to study the public health effects of air toxic emissions from utilities that burn fossil fuels (coal, oil and natural gas) and to determine whether it is necessary to regulate those emissions. The EPA determined in December 000 that they intend to regulate emissions of mercury (Hg) from coal- and oil-fired EGUs. The EPA is expected to propose mercury regulations by December, 00 and issue final regulations by December, In addition to the SO, NO x, and Hg regulations that may result from CAAA Title I and Title III, several alternative methods of regulating emissions from EGUs have been introduced by the Administration and in Congress. Some of these include the Clear Skies Act (S.), the Clean Power Act (Jeffords S.), and the Clean Air Planning Act (Carper S.). While the various proposals differ in the required reductions and timelines to achieve those reductions, the proposed programs would each reduce power plant emissions of SO, NO x, and Hg by setting a national cap on each pollutant. Some proposals include cap-and-trade programs while others require unit specific reductions.