Update on Environmental Issues

December 2010

Legislative advertising paid for by: John W. Fainter, Jr. • President and CEO Association of Electric Companies of Texas, Inc. 1005 Congress, Suite 600 • Austin, TX 78701 • phone 512-474-6725 • fax 512-474-9670 • www.aect.net

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AECT Principles

• AECT is an advocacy group composed of member companies committed to:

- Ensuring a modern, reliable infrastructure for the supply & delivery of electricity.

- Supporting efficient competitive markets that are fair to customers and market participants.

- Supporting consistent and predictable oversight and regulation that will promote investment and ensure the stability of Texas’ electric industry.

- Promoting an economically strong and environmentally healthy future for Texas, including conservation and efficient use of available resources.

• AECT member companies remain dedicated to providing Texas customers with reliable service and are committed to the highest standards of integrity.

The Association of Electric Companies of Texas, Inc. (AECT) is a trade organization of investor-owned electric companies in Texas. Organized in 1978, AECT provides a forum for member company representatives to exchange information about public policy, and to communicate with government officials and the public. For more information, visit www.aect.net.

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ERCOT Generation Mix Compared to U.S. Average

Note: Oil-fired generation is negligible in ERCOT, accounting for less than 0.1% of ERCOT capacity and load; numbers may not add up to 100% due to rounding.

Sources: ERCOT (2009 summer data), EIA (2008 data, latest available)

Cap

acity

(MW

) En

ergy

(MW

h) ERCOT U.S. Average

Natural Gas

Coal

Nuclear

Renewable (Mostly Hydro)

Oil

39%

31%

10%

14%

6%

Nuclear

Natural Gas

Coal

Renewable (Mostly Hydro)

Petroleum

21%

48%

20%

9% 1%

Coal

Nuclear

Natural Gas

Other

40%

36%

15%

2%

Coal

Natural Gas

Nuclear

Wind

65%

16%

6%

10% 3%

Other

Wind 7%

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The Use of Coal in Texas is Important

For Texas2:

•  $10.498 billion in annual Total Expenditures; •  $3.516 billion in annual Gross Product; •  $2.081 billion in annual Personal Income; •  $0.584 billion in annual Retail Sales; and •  33,197 Permanent Jobs.

For East Texas2:

•  $3.635 billion in annual Total Expenditures; •  $1.185 billion in annual Gross Product; •  $0.741 billion in annual Personal Income; •  $0.193 billion in annual Retail Sales; and •  11,195 Permanent Jobs.

1EIA, State Electricity Profiles 2008; 2Perryman Report, 2004

The total economic impact of coal mining and coal-fired electric generating plants is estimated to be:

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•  Texas ranks #1 among the states for electricity generation  80% above #2

•  Texas ranks #1 among states for electricity consumption  population, industry, weather

•  Texas ranks #1 among states for coal consumption

•  Texas ranks #6 among states for coal production

•  Texas has the 11th largest economy in the world

•  Texas ranks #1 among states for energy production

•  Texas ranks #1 among states in each of - natural gas, oil and wind energy production.

•  Texas ranks # 6 in the world in annual wind energy production

•  Texas consumes 11.5% of U.S. energy production

•  Texas ranks #1 among states for energy consumption & #2 $GSP  Industry uses 50% of the energy consumed in Texas

•  Texas’ population – currently 23.5 million — grew at more than double the national rate — 14.6 percent versus 7.2 percent between 2000 and 2007.

•  Texas’ population will increase by more than 50 percent, growing to an estimated 35.8 million people, by 2040.

Source: Comptroller of Public Accounts and The Fort Worth Star-Telegram June 11, 2009, and Texas Association of Business, 2/11/10

Things are BIGGER in Texas

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0.351 NM

0.098 TX

0.234 OK 0.198

AR

0.142 LA

EPA Clean Air Markets Division – 2009 Acid Rain Program Data

Area

2009 NOx Emission Rate Averages (lbs/

mmBtu) National 0.159 Texas 0.098

Texas Is Already Leading the Way in Clean Power Plants

Texas will always have the largest emissions of any state

since it produces ~80% more power than the next ranked state,

but Texas also has one of the cleaner emission rates per energy output.

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EPA 2010 and Beyond

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82nd Texas Legislature January 11, 2011 – May 30, 2011

Texas Legislature’s Agency Sunset includes three of the environmental agencies:

–  Texas Commission on Environmental Quality (TCEQ) –  Texas Water Development Board (TWDB) –  Railroad Commission (RRC)

Expected influences on the 82nd Session: –  EPA Disapproval of TCEQ Air Permitting Program –  Maintenance, Start-up, and Shutdown Emissions (MSS) Permitting by

TCEQ –  Agency budget pressures –  Water supply

AECT’s primary goal during Texas legislative sessions and rulemakings is to avoid new onerous regulation which is unnecessary, expensive, reduces optionality, and limits operational flexibility. Initiatives are undertaken to provide significant improvement in risk, cost, and operation.

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Texasʼ Electric Generating Plants Among Cleanest NOx Emitters in the Nation

EPA Acid Rain Database, 2009

Texas has the 11th cleanest average NOx emissions rate.

NO

x (

lb/

MM

Btu

)

U.S. Average-0.159 lb/mmBtu

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Average Emission Rates of Nitrogen Oxides from Existing Texas and U.S. Power Plants

Notes: NOx Emission Rates for New Coal-Fired Power Plants range from 0.05 to 0.08 pounds per million Btu NOx Emission Rates for New Gas-Fired Power Plants are approx. 0.015 pounds per million Btu

Source: EPA Acid Rain Database, 2009

NO

x (

lb/

MM

Btu

)

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Texas’ Electric Generating Plants Among Cleanest SO2 Emitters in the Nation

EPA Acid Rain Database, 2009

Texas has the 24th cleanest average SO2 emissions rate.

SO

2 (

lb/

MM

Btu

)

U.S. Average-0.458 lb/mmBtu

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1995-2009 Emission Rate Trends

Sulfur Dioxide (SO2)

lb./mmBtu

Nitrogen Oxides (NOx)

lb./mmBtu Year Nation Texas Nation Texas 1995 1.086 0.517 0.551 0.313 1996 1.096 0.527 0.518 0.314 1997 1.093 0.523 0.509 0.310 1998 1.058 0.485 0.481 0.307 1999 0.999 0.481 0.440 0.286 2000 0.875 0.380 0.399 0.261 2001 0.843 0.385 0.373 0.221 2002 0.794 0.384 0.348 0.173 2003 0.815 0.390 0.320 0.142 2004 0.779 0.353 0.286 0.124 2005 0.753 0.349 0.268 0.116 2006 0.702 0.338 0.255 0.111 2007 0.644 0.321 0.237 0.103 2008 0.564 0.316 0.222 0.103 2009 0.458 0.309 0.159 0.098

1995 - 2002 data are from the Acid Rain Program Scorecard Table B1 2003 - 2009 data are from the Clean Air Markets Division database for the Acid Rain Program

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Update on Federal Activites

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Federal: Mercury and Hazardous Air Pollutants (HAPs)

 Bush Administration rulemaking (CAMR) on Mercury was vacated by courts March 2008.

 The EPA entered a settlement to propose a new Mercury control rule in March of 2011 with a final rule in November of 2011 and compliance will be required around ~2014 .

 The EPA is developing a Maximum Achievable Control Technology (MACT) standard for power plants; will include all “hazardous air pollutants” – not just mercury.

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Federal: Clean Air Transport Rule (CATR)

 Bush Administration rulemaking on Clean Air Interstate Rule (CAIR) was remanded December 2008. CAIR was a cap-and-trade proposal for SO2 and NOx for the eastern U.S.

 On July 6, 2010, the EPA proposed the CATR, which will replace CAIR when final.

 The EPA anticipates the final CATR in 2011.

 CATR applies to 31 eastern states (including Texas) requiring SO2 and NOx emission reductions.

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Federal: Ozone

  In 2008, the Bush Administration set a new Ozone National Ambient Air Quality Standards (NAAQS) of 0.075 parts per million (ppm).

  In January 2010, EPA proposed lowering the ozone standard to between 0.060 and 0.070 ppm.

  A final rule is expected in October 2010; compliance required ~2016-31.

  A new standard will require revisions to the State Implementation Plan (SIP).

  The large urban areas and some East Texas areas are likely to be non-attainment for the new standard and will require a new SIP.

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Federal: SO2 / Regional Haze

  Under the Clean Air Act, the EPA reconsiders every five years all of the National Ambient Air Quality Standards (NAAQS).

  In December 2009, EPA proposed lowering the SO2 standard to be approximately 50% to 75% more stringent that the current standard.

  In June 2010, the EPA announced a final 75ppb 1-hour SO2 standard with compliance required ~ 2017.

Regional Haze

  Requires reductions primarily in SO2 emissions based on best available retrofit technology (BART) for different types of facilities, including electric generating units, industrial boilers, and refineries.

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Federal: Greenhouse Gas (GHG) Regulation

“Tailoring Rule” for GHG permitting

  In June 2010, EPA issued a final “Tailoring rule” to require GHG emission permitting but ‘Tailored’ for larger sources such as power plants and refineries.

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Federal: Coal Combustion Residuals (CCR)

  On 4 separate occasions in administrations from both political parties, EPA has studied the regulation of CCRs and has always concluded that they should be classified as non-hazardous, and regulated by the states.

  In June 2010, the EPA proposed a rule for federal regulation of coal combustion residuals (CCR) which include fly ash, bottom ash and scrubber byproduct.

  EPA presented two primary options to regulate CCRs: (1) as non-hazardous wastes under Subtitle D of RCRA, or (2) under RCRA's Subtitle C hazardous waste controls (EPA’s preferred option).

  EPA’s proposed Subtitle C ‘hazardous’ classification would not only raise the cost of disposal of the CCRs but would also have a chilling effect on any and all CCR recycling.

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Federal: Water Quality

Cooling Towers under Clean Water Act Sec.316(b)

  EPA is revising its cooling water intake structure rules under the Clean Water Act (CWA) Section 316(b) for new and existing power plants.

  EPA plans for a proposed rule in December 2010 and a final rule by July 2012.

  EPA wants to propose that new and existing once-through cooling plants retrofit cooling towers.

Electric Generating Unit- Effluent Limitation Guidelines (ELGs)

  In September 2009, EPA announced its intention to review the Steam Electric Generating Unit (EGU) Effluent Limitation Guidelines (ELGs).

  EPA believes wastewater discharges will increase due to installation of new pollution control equipment at EGUs.

  In June 2010, the EPA distributed an Information Collection Request (ICR) to EGUs across the U.S. (including several Texas’ genearting units) and a final rule is anticipated in 2014.