CHAPTER 3 ENVIRONMENTAL ISSUES

CHAPTER 3 ENVIRONMENTAL ISSUES CHAPTER 3 NorthWestern is committed to environmental stewardship and compliance. Environmental Discussion Environmental factors are a key risk consideration in NorthWestern Energy s resource planning. For example, regulations to control or reduce greenhouse gas emissions (carbon dioxide) at thermal power plants are expected to affect the cost of electric supply resources and prices associated with market transactions. Greenhouse Gas Emission Risks are Increasing In The President s Climate Action Plan issued in June 2013, President Obama issued a Presidential Memorandum directing the Environmental Protection Agency ( EPA ) to work expeditiously to complete carbon pollution standards for both new and existing power plants. On September 20, 2013, the EPA proposed new source performance standards, setting aggressive greenhouse gas emission reduction requirements for new fossil fuel-fired plants. These standards are expected to be finalized in mid-2014. The proposed CO 2 emissions limit for new coal-fired generating units is 1,100 lb CO 2 /MWh based on implementation of partial carbon capture and sequestration (CCS). Significant disagreement exists between EPA and industry about the availability of CCS for coal, with EPA contending that it has been adequately demonstrated and industry claiming that it has not. Litigation over the new source standards is expected to focus largely on 2013 Electricity Supply Resource Procurement Plan Page 3 1

this dispute. The proposed CO 2 emissions limit for new larger natural gas-fired stationary turbines is 1,000 lb CO 2 /MWh and for new smaller natural gas-fired stationary turbines is 1,100 lb CO 2 /MWh. The EPA is not proposing to require CCS for gas-fired units, on the grounds that CCS has not been adequately demonstrated for gas units and because emissions from gas units are already acceptably low. The EPA is also in the process of preparing to publish proposed emission guidelines for existing power plants by June, 2014, with final guidelines for such facilities expected by June 2015. According to the Climate Change Action Plan and the Clean Air Act, individual States must then submit plans to implement those guidelines by July 2016. Based on public comments made by the EPA, CCS is not expected to be required for existing power plants. Instead the guidelines are likely to focus on alternatives such as incentives to reduce demand for electricity and promote the development of renewable energy capacity, and possibly a banking, averaging, and trading program for emission reduction credits. NorthWestern Includes a Carbon Cost in its Planning NorthWestern s planning includes a cost imposed on carbon emissions within the 2013 planning horizon. NorthWestern recognizes that the ultimate resolution of carbon emissions regulation may take the form of alternative carbon mitigation schemes but believes the carbon tax approach employed in this and previous plans is an adequate surrogate until greater clarity is obtained. NorthWestern s modeling of carbon costs has been modified from the 2011 Plan, incorporating MPSC comments. The 2013 Plan uses the Energy Information Administration s ( EIA ) 2013 Annual Energy Outlook greenhouse gas case of $15 per metric ton (GHG15 case), which begins in 2014 and escalates at 5%. NorthWestern s price forecast includes the GHG15 case beginning in 2021 when the carbon penalty 2013 Electricity Supply Resource Procurement Plan Page 3 2

has escalated to $21.11/metric ton. NorthWestern s incorporation of a price on carbon is an assumption shared by many utilities 1 and mainstream companies: according to Carbon Disclosure Project s (CDP) December 5, 2013 Report, 29 companies include a price on carbon in their business planning. These include Excel Energy, Inc. ($20); Ameren Corporation ($30); and Exxon Corporation ($60). 2 NorthWestern is placing significant positive value on resources such as hydroelectric facilities, that do not emit carbon and that, therefore, eliminates the risks and costs associated with the regulation of carbon. Other Environmental Considerations Aside from potential greenhouse gas regulations, few of the environmental regulations under consideration are likely to materially impact Colstrip 3 & 4 operation, which supplies 27% of NorthWestern s energy portfolio (based on nameplate capacity). A brief discussion of regulations under consideration that could affect operation at Colstrip follows 3 : Mercury and Air Toxics Standards On February 16, 2012, EPA finalized the National Emissions Standards for Hazardous Air Pollutants: Coal and Oil-Fired Electric Utility Steam Generating Units. These standards are commonly known as the Mercury and Air Toxics Standards ( MATS ). At the same time, EPA also signed revisions to the new source performance standards (NSPS) for fossil-fuel-fired electric generating 1 See Chapter 6, page 6-27 for examples and ranges of various utilities CO 2 penalty forecasts. 2 Use of internal carbon price by companies as incentive and strategic planning tool, A review of findings from CDP 2013 Disclosure (December 2013). 3 See Volume 2, Chapter 2 for a table summarizing environmental regulations and Colstrip s compliance status. 2013 Electricity Supply Resource Procurement Plan Page 3 3

units. This NSPS revises the standards that new coal- and oil-fired power plants must meet for particulate matter (PM), sulfur dioxide (SO2), and nitrogen oxides (NOx). While these new requirements provide some certainty concerning environmental requirements, individual compliance requirements for many power plants are still being evaluated and could involve a variety of technologies with different costs. Moreover, while compliance, generally, is required by 2015, state regulatory agency exceptions may extend the compliance deadline until 2016, while EPA administrative order exceptions may extend to 2017. Also, the MATS is presently under judicial review before the United States Court of Appeals for the District of Columbia Circuit, and it remains a possibility that the MATS could be vacated in whole or in part. A decision from the court is expected in the first half of 2014. However, assuming MATS is upheld, the operation of Colstrip 3 & 4 will not be affected by this regulation as emission standards can be met at Colstrip 3 & 4 without installation of additional emission control equipment, aside from some increased monitoring requirements. In addition, Montana implemented a mercury standard in 2009 under Rule 17.8.771. This standard exceeds the most recently adopted federal mercury limit. Colstrip 3 & 4 has emissions controls that meet Montana s mercury emissions standard. Regional Haze On September 18, 2012, EPA published the Approval and Promulgation of Implementation Plans; State of Montana; State Implementation Plan and Regional Haze Federal Implementation Plan (FIP). The EPA promulgated the FIP to address regional haze in the State of Montana. This rule addresses visibility; it was established to increase visibility to that of natural conditions by the year 2064. To that end, the rule establishes limits for particulate matter, sulfur dioxide and nitrogen oxide emissions for stationary sources that may contribute to 2013 Electricity Supply Resource Procurement Plan Page 3 4

visibility degradation in Class 1 airsheds, such as national parks and wilderness areas. Under this rule, plants built between 1962 and 1977 are subject to Best Available Retrofit Technology (BART) requirements and must meet emission limits that are attainable by installing those controls. Plants built after 1977 are subject to a review similar to BART that ensures reasonable progress is made toward the 2064 goal of natural visibility. Colstrip 3 & 4 are subject to reasonable progress requirements. During the first review period (2012 review 2017 control), EPA did not mandate further reductions at Colstrip 3 & 4. As Reviews are conducted every 5 years with control required within 5 years following a review, Colstrip 3 & 4 will be reviewed again in 2017. Thus, the earliest any controls could be required for Colstrip 3 & 4 would be in 2022. However, at this time NorthWestern does not have any basis for assuming there will be additional controls. Coal Ash Management Coal combustion residuals (CCRs), including coal ash, are a byproduct of combustion of coal in power plants. CCRs are currently exempted wastes under the Resource Conservation and Recovery Act (RCRA); however, in 2010, the EPA proposed to regulate CCRs. The proposal included two options to regulate CCRs under RCRA. Under the first option, EPA would list these residual materials as special wastes (a category of hazardous wastes) subject to regulation under Subtitle C of RCRA with significant requirements from the point of generation to disposition including the closure of disposal units. Under the second option, EPA would regulate coal combustion residuals as nonhazardous waste under Subtitle D of RCRA and establish minimum nationwide standards for the disposal of coal combustion residuals. Under either option for regulation, surface impoundments utilized for coal combustion byproducts such as the fly ash and bottom ash ponds at Colstrip would have to be closed unless they could meet more stringent regulatory requirements. 2013 Electricity Supply Resource Procurement Plan Page 3 5

In October 2011, the EPA issued a Notice of Data Availability inviting comments on chemical constituent data from coal combustion residuals; facility and waste management unit data; information on additional alleged damage cases; adequacy of State programs; and beneficial uses of CCRs. The comment period closed November 14, 2011. The EPA has not yet indicated when the rule will be finalized, and the substance of the final rule is not known. EPA s most recent regulatory agenda lists the CCR rule as a long-term item with no specific deadline. However, in a recent decision, Appalachian Voices v. McCarthy, No. 12-0523 (RBW) (D.D.C.) (Oct. 29, 2013), a federal district judge ordered the EPA to develop and submit a schedule for finalizing the CCR rule. The order makes it more likely that the EPA will work to finalize the rule by the end of 2014. Earlier in 2013, the EPA also announced plans to coordinate its eventual regulation of CCRs with its proposed rule establishing effluent limitation guidelines for the steam electric power generating category. EPA must take final action on its proposed effluent limitation guidelines by May 22, 2014, under a consent decree that EPA has entered. EPA has also indicated that its proposed effluent limitations guidelines, if finalized, are likely to lead many power plants to dry-handling of coal ash. This, in EPA s view, would reduce the risks associated with storage of coal ash and is likely to lead it, in a final Coal Ash Rule, to treat coal combustion residuals as non-hazardous municipal and solid waste rather than as hazardous substances and consequently to be subject to less stringent regulation than would be required for hazardous wastes. Colstrip 3 & 4 are zerodischarge facilities and thus operate without a NPDES permit. Because the effluent limitation guidelines, if finalized, would only regulate facilities that discharge, they should not apply to Colstrip 3&4. Thus, since Colstrip 3 & 4, are zero-discharge facilities and it is likely that CCRs will be regulated as a municipal and solid waste, the CCR rule and the effluent limitation guidelines for power 2013 Electricity Supply Resource Procurement Plan Page 3 6

plants should have little to no effect on the future cost of handling CCRs at Colstrip 3 & 4. Summary While there are environmental risks, we do not expect that the MATS, regional haze requirements, and coal ash regulations individually or in the aggregate will negatively affect Colstrip 3 & 4 operations within the planning horizon. However, the next phase of environmental regulations, such as the Regional Haze regulations, will need to be closely monitored. The Administration's Climate Action Plan, when implemented, is assumed to increase market prices which are already factored into NorthWestern s electricity price forecast. The forecast uses a carbon tax as a surrogate for a broad range of potential carbon mitigation efforts. For these reasons, it is prudent to invest in utility owned generation resources, especially those such as the Hydros, which emit no carbon. This investment will protect customers from both market price and environmental risks. NORTHWESTERN ENVIRONMENTAL POLICY NorthWestern places the environment directly in its corporate vision, mission, and value statement. Its value acronym SERVICE, has Environment as the last lettered statement that reads as follows; We are committed to providing all customers with utility services that meet their current and future needs, while protecting and enhancing the quality of the environment. We utilize our limited natural resources wisely and act responsibly to limit impacts on our air, water, and land resources. NorthWestern recognizes its obligation to be a good steward of the natural resources entrusted to it. The newly established Environmental Department is creating environmental performance goals and will continue work toward written procedures, standards, guidelines, or policies for 2013 Electricity Supply Resource Procurement Plan Page 3 7

protecting and maintaining the environment, and for environmental compliance. It will then communicate these established procedures, standards, guidelines, and policies to all employees. 2013 Electricity Supply Resource Procurement Plan Page 3 8