OG&E 2015 Annual Report Download - page 16

OGE Energy Corp. 29
intervened฀in฀this฀proceeding.฀On฀August฀30,฀2013,฀the฀government฀
filed฀a฀Motion฀ or฀Summary฀Judgment฀and฀on฀September฀6,฀2013,฀
OG&E฀filed฀a฀Motion฀to฀Dismiss฀the฀cas .฀On฀January฀15,฀2015,฀U.S.฀
District฀Judge฀Timothy฀DeGuisti฀dismissed฀the฀complaints฀filed฀ y฀the฀
EPA฀and฀the฀Sierra฀Club.฀The฀Court฀held฀that฀it฀lacked฀subject฀matter฀
jurisdiction฀over฀plaintiffs’฀claims฀because฀plaintiffs฀failed฀to฀present฀an฀
actual฀“case฀or฀controversy”฀as฀required฀by฀Article฀III฀of฀the฀Constitution.฀
The฀court฀also฀ruled฀in฀the฀alternative฀that,฀even฀if฀plaintiffs฀had฀
presented฀a฀case฀or฀controversy,฀it฀would฀have฀nonetheless฀“decline[d]฀
to฀exercise฀jurisdiction.”฀The฀EPA฀and฀the฀Sierra฀Club฀did฀not฀file฀a ฀
appeal฀of฀the฀Court’s฀ruling.฀
On฀August฀12,฀2013,฀the฀Sierra฀Club฀filed฀a฀sepa ate฀complaint฀
against฀OG&E฀in฀the฀United฀States฀District฀Court฀for฀the฀Eastern฀
District฀of฀Oklahoma฀alleging฀that฀OG&E฀projects฀at฀Muskogee฀Unit฀6฀
in฀2008฀were฀made฀without฀obtaining฀a฀prevention฀of฀significant
deterioration฀permit฀and฀that฀the฀plant฀had฀exceeded฀emissions฀limits฀
for฀opacity฀and฀particulate฀matter.฀The฀Sierra฀Club฀seeks฀a฀permanent฀
injunction฀preventing฀OG&E฀from฀operating฀the฀Muskogee฀generating฀
plant.฀On฀March฀4,฀2014,฀the฀Eastern฀District฀dismissed฀the฀prevention฀
of฀significant฀dete ioration฀permit฀claim฀based฀on฀the฀statute฀of฀
limitations,฀but฀allowed฀the฀opacity฀and฀particulate฀matter฀claims฀to฀
proceed.฀To฀obtain฀the฀right฀to฀appeal฀this฀decision,฀the฀Sierra฀Club฀
subsequently฀withdrew฀a฀Notice฀of฀Intent฀to฀Sue฀for฀additional฀Clean฀
Air฀Act฀violations฀and฀asked฀the฀Eastern฀District฀to฀dismiss฀its฀
remaining฀claims฀with฀prejudice.฀On฀August฀27,฀2014,฀the฀Eastern฀
District฀granted฀the฀Sierra฀Club’s฀request.฀The฀Sierra฀Club฀has฀filed฀a
Notice฀of฀Appeal฀with฀the฀10th฀Circuit฀where฀oral฀argument฀was฀held฀฀
on฀March฀18,฀2015.฀
At฀this฀time,฀OG&E฀continues฀to฀believe฀that฀it฀has฀acted฀in฀
compliance฀with฀the฀Federal฀Clean฀Air฀Act,฀and฀OG&E฀expects฀to฀
vigorously฀defend฀against฀the฀claims฀that฀have฀been฀asserted.฀If฀OG&E฀
does฀not฀prevail฀in฀the฀remainder฀of฀the฀proceedings,฀the฀EPA฀and฀the฀
Sierra฀Club฀could฀seek฀to฀require฀OG&E฀to฀install฀additional฀pollution฀
control฀equipment,฀including฀dry฀scrubbers,฀baghouses฀and฀selective฀
catalytic฀reduction฀systems฀with฀capital฀costs฀in฀excess฀of฀$1.1฀billion฀
and฀pay฀fines฀and฀significant฀penalties฀as฀a฀result฀of฀the฀allegations฀i
the฀notice฀of฀violation.฀Section฀113฀of฀the฀Federal฀Clean฀Air฀Act฀(along฀
with฀the฀Federal฀Civil฀Penalties฀Inflation฀Adjustment฀Act฀of฀1996)
provides฀for฀civil฀penalties฀as฀much฀as฀$37,500฀per฀day฀for฀each฀
violation.฀Due฀to฀the฀uncertain฀and฀preliminary฀nature฀of฀this฀litigation,฀
OG&E฀cannot฀provide฀a฀range฀of฀reasonably฀possible฀loss฀in฀this฀case.฀
National฀Ambient฀Air฀Quality฀Standards
The฀EPA฀is฀required฀to฀set฀NAAQS฀for฀certain฀pollutants฀considered฀
to฀be฀harmful฀to฀public฀health฀or฀the฀environment.฀The฀Clean฀Air฀Act฀
requires฀the฀EPA฀to฀review฀each฀NAAQS฀every฀fi e฀years.฀As฀a฀result฀
of฀these฀reviews,฀the฀EPA฀periodically฀has฀taken฀action฀to฀adopt฀more฀
stringent฀NAAQS฀for฀those฀pollutants.฀If฀any฀areas฀of฀Oklahoma฀were฀
to฀be฀designated฀as฀not฀attaining฀the฀NAAQS฀for฀a฀particular฀pollutant,฀
the฀Company฀could฀be฀required฀to฀install฀additional฀emission฀controls฀
on฀its฀facilities฀to฀help฀the฀state฀achieve฀attainment฀with฀the฀NAAQS.฀
As฀of฀the฀end฀of฀2015,฀no฀areas฀of฀Oklahoma฀had฀been฀designated฀
as฀non-attainment฀for฀pollutants฀that฀are฀likely฀to฀affect฀the฀Company’s฀
operations.฀Several฀processes฀are฀under฀way฀to฀designate฀areas฀in฀
Oklahoma฀as฀attaining฀or฀not฀attaining฀revised฀NAAQS.฀The฀Company฀฀
is฀monitoring฀those฀processes฀and฀their฀possible฀impact฀on฀its฀
operations฀but,฀at฀this฀time,฀cannot฀determine฀with฀any฀certainty฀
whether฀they฀will฀cause฀a฀material฀impact฀to฀the฀Company’s฀฀
financial฀result .
In฀August฀of฀2013,฀the฀Sierra฀Club฀and฀the฀Natural฀Resources฀
Defense฀Council฀filed฀a฀complaint฀under฀the฀citi en฀suit฀provision฀of฀the฀
Clean฀Air฀Act฀based฀on฀the฀EPA’s฀failure฀to฀promulgate฀and฀publish฀
designations฀for฀the฀2010฀revised฀primary฀SO2฀NAAQS.฀On฀March฀2,฀
2015,฀the฀U.S.฀District฀Court฀for฀the฀Northern฀District฀of฀California฀
issued฀an฀order฀granting฀the฀EPA฀and฀the฀Sierra฀Club’s฀joint฀motion฀to฀
approve฀and฀enter฀a฀consent฀decree฀that฀set฀forth฀mandatory฀deadlines฀
for฀the฀EPA฀to฀issue฀designations฀for฀all฀areas฀of฀the฀country฀that฀
remained฀undesignated.฀On฀September฀18,฀2015฀the฀Oklahoma฀
Department฀of฀Environmental฀Quality฀reported฀to฀the฀EPA฀that฀no฀
areas฀in฀Oklahoma฀should฀be฀designated฀as฀non-attainment฀for฀the฀
2010฀SO2฀standard.฀This฀non-attainment฀designation฀is฀subject฀to฀the฀
EPA’s฀approval.฀In฀a฀letter฀dated฀February฀11,฀2016,฀EPA฀Region฀6฀
notified฀Oklahoma฀of฀their฀intent฀to฀designate฀pa t฀of฀Muskogee฀County฀
in฀which฀OG&E’s฀Muskogee฀Power฀Plant฀is฀located,฀as฀non-attainment฀
for฀the฀2010฀SO2฀NAAQS.฀The฀EPA฀is฀expected฀to฀finali e฀this฀
designation฀in฀July฀2016฀following฀public฀comment.฀This฀could฀require฀
additional฀controls฀(dry฀scrubbers)฀on฀the฀affected฀units.฀On฀August฀21,฀
2015,฀the฀EPA฀finali ed฀a฀data฀requirements฀rule฀for฀implementing฀the฀
2010฀SO2฀standard฀requiring฀air฀agencies฀to฀characterize฀air฀quality฀
around฀sources฀that฀emit฀2,000฀tons฀per฀year฀or฀more฀of฀SO2฀via฀air฀
quality฀modeling฀or฀ambient฀air฀monitoring.฀In฀July฀2016,฀air฀agencies฀
will฀be฀required฀to฀identify฀either฀ambient฀monitoring฀or฀air฀quality฀
modeling฀as฀a฀method฀for฀characterizing฀air฀quality฀for฀2,000฀tons฀per฀
year฀or฀larger฀sources.฀At฀this฀time,฀OG&E฀cannot฀determine฀with฀any฀
certainty฀whether฀this฀determination฀will฀cause฀a฀material฀impact฀to฀the฀
Company’s฀financia ฀results.
On฀September฀30,฀2015฀the฀EPA฀finali ed฀a฀new฀ambient฀standard฀
for฀ozone฀at฀70฀ppb฀which฀is฀more฀stringent฀than฀the฀current฀standard฀
of฀75฀ppb,฀set฀in฀2008.฀States฀must฀submit฀non-attainment฀designations฀
as฀appropriate฀based฀on฀existing฀ambient฀data฀before฀October฀2016฀for฀
the฀EPA’s฀approval.฀Compliance฀with฀the฀new฀standard฀begins฀in฀2020฀
or฀later฀depending฀on฀the฀degree฀of฀the฀area’s฀non-attainment฀
designation.฀All฀areas฀in฀Oklahoma฀currently฀meet฀the฀new฀standard.฀
The฀Company฀is฀monitoring฀those฀processes฀and฀their฀possible฀
impact฀on฀its฀operations฀but,฀at฀this฀time,฀cannot฀determine฀with฀any฀
certainty฀whether฀they฀will฀cause฀a฀material฀impact฀to฀the฀Company’s฀
financial฀result .฀
Clean฀Power฀Plan฀
On฀October฀23,฀2015,฀the฀EPA฀published฀the฀final฀Clean฀ ower฀Plan฀
that฀established฀standards฀of฀performance฀for฀CO2฀emissions฀from฀
existing฀fossil-fuel-fired฀p wer฀plants฀along฀with฀state-specific฀C 2฀
reduction฀standards฀expressed฀as฀both฀rate-based฀(lbs/MWh)฀and฀
mass-based฀(tons/yr)฀goals.฀The฀2030฀rate-based฀reduction฀
requirement฀for฀all฀existing฀generating฀units฀in฀Oklahoma฀has฀
decreased฀from฀a฀proposed฀43฀percent฀reduction฀to฀32฀percent฀in฀฀
the฀final฀ ule.฀The฀mass-based฀approach฀for฀existing฀units฀calls฀for฀a฀
24฀percent฀reduction฀by฀2030฀in฀Oklahoma.฀The฀Clean฀Power฀Plan฀
requires฀that฀states฀submit฀to฀the฀EPA฀plans฀for฀achieving฀the฀
state-specific฀C 2฀reduction฀goals฀by฀September฀6,฀2016฀or฀submit฀฀
28 OGE Energy Corp.
ALJ’s฀recommendation฀to฀pre-approve฀certain฀estimated฀costs฀of฀the฀
environmental฀recovery฀plan,฀and฀the฀ALJ’s฀recommendation฀to฀defer฀
all฀other฀cost฀recovery฀issues฀until฀the฀next฀general฀rate฀case.฀
On฀December฀2,฀2015,฀OG&E฀received฀an฀order฀from฀the฀OCC฀
denying,฀by฀a฀two฀to฀one฀vote,฀its฀plan฀to฀comply฀with฀the฀environmental฀
mandates฀of฀the฀Federal฀Clean฀Air฀Act,฀Regional฀Haze฀and฀MATS.฀฀
The฀OCC฀also฀denied฀OG&E’s฀request฀for฀pre-approval฀of฀its฀Mustang฀
Modernization฀Plan,฀revised฀depreciation฀rates฀for฀both฀the฀retirement฀
of฀the฀Mustang฀units฀and฀the฀replacement฀combustion฀turbines฀and฀
pre-approval฀of฀early฀retirement฀and฀replacement฀of฀generating฀units฀฀
at฀its฀Mustang฀site,฀including฀cost฀recovery฀through฀a฀rider.฀
On฀December฀11,฀2015,฀OG&E฀filed฀a฀motion฀requesting
modification฀of฀the฀OCC฀order฀ or฀the฀purposes฀of฀approving฀only฀the฀
ECP.฀OG&E฀did฀not฀seek฀modification฀to฀a y฀other฀provisions฀of฀the฀
OCC฀order,฀including฀cost฀recovery.฀OG&E฀also฀agreed฀that฀it฀would฀
not฀implement฀a฀rider฀for฀recovery฀of฀the฀costs฀of฀the฀ECP฀until฀and฀
unless฀authorized฀by฀the฀OCC฀in฀a฀subsequent฀proceeding.
On฀December฀23,฀2015,฀the฀OCC฀rejected,฀by฀a฀two฀to฀one฀vote,฀฀
a฀proposal฀by฀Commissioner฀Dana฀Murphy฀to฀grant฀OG&E’s฀
December฀11,฀2015฀motion.฀
On฀February฀12,฀2016,฀OG&E฀filed฀an฀application฀requesting฀the
OCC฀to฀issue฀an฀order฀approving฀the฀installation฀of฀dry฀scrubbers฀at฀
the฀Sooner฀facility,฀on฀or฀before฀May฀2,฀2016.฀The฀application฀states฀
that฀if฀the฀application฀is฀not฀approved฀by฀May฀2,฀2016,฀OG&E฀will฀
decide฀at฀that฀time฀whether฀to฀cancel฀the฀dry฀scrubber฀equipment฀฀
and฀installation฀contracts฀and฀make฀plans฀to฀convert฀the฀Sooner฀coal฀
units฀to฀natural฀gas.฀As฀of฀December฀31,฀2015,฀OG&E฀had฀incurred฀
$94.8฀million฀of฀construction฀work฀in฀progress฀on฀the฀dry฀scrubbers.฀
OG&E฀estimates฀another฀$35.0฀million฀of฀in-process฀expenditures฀will฀
be฀incurred฀prior฀to฀May฀1,฀2016.฀Additionally,฀if฀the฀request฀is฀not฀
approved,฀OG&E฀expects฀to฀seek฀recovery฀in฀subsequent฀proceedings฀
for฀the฀expenditures฀incurred฀for฀the฀dry฀scrubber฀project฀and฀
reasonable฀stranded฀costs฀associated฀with฀the฀discontinuance฀฀
of฀the฀Sooner฀coal฀units.
Cross-State฀Air฀Pollution฀Rule
In฀August฀2011,฀the฀EPA฀finali ed฀its฀CSAPR฀that฀required฀27฀states฀in฀
the฀eastern฀half฀of฀the฀United฀States฀to฀reduce฀power฀plant฀emissions฀
that฀contribute฀to฀ozone฀and฀particulate฀matter฀pollution฀in฀other฀states.฀
In฀December฀2011,฀the฀EPA฀published฀a฀supplemental฀CSAPR,฀which฀
would฀make฀six฀additional฀states,฀including฀Oklahoma,฀subject฀to฀the฀
CSAPR฀for฀NOX฀emissions฀during฀the฀ozone-season฀from฀May฀1฀
through฀September฀30.฀Under฀the฀rule,฀OG&E฀would฀have฀been฀
required฀to฀reduce฀ozone-season฀NOX฀emissions฀from฀its฀electrical฀
generating฀units฀within฀the฀state฀beginning฀in฀2012.฀In฀response฀to฀legal฀
challenges฀of฀the฀final฀ ule฀on฀December฀30,฀2011,฀the฀U.S.฀Court฀of฀
Appeals฀issued฀a฀stay฀of฀the฀rule,฀which฀includes฀the฀supplemental฀
rule,฀pending฀a฀decision฀on฀the฀merits.฀By฀order฀dated฀August฀21,฀
2012,฀the฀Court฀of฀Appeals฀vacated฀the฀CSAPR฀and฀ordered฀the฀EPA฀
to฀promulgate฀a฀replacement฀rule.฀On฀April฀29,฀2014,฀the฀U.S.฀Supreme฀
Court฀reversed฀the฀decision฀by฀the฀Court฀of฀Appeals.฀On฀October฀23,฀
2014,฀the฀Court฀of฀Appeals฀for฀the฀District฀of฀Columbia฀Circuit฀granted฀
the฀EPA’s฀request฀that฀the฀court฀lift฀the฀stay฀of฀the฀CSAPR.฀The฀EPA฀
subsequently฀clarified฀that฀compliance฀with฀the฀CSAPR฀ ould฀begin฀฀
in฀2015฀using฀the฀amount฀of฀allowances฀originally฀scheduled฀to฀be฀
available฀in฀2012.฀As฀of฀December฀31,฀2015,฀OG&E฀has฀installed฀
fi e฀low฀NOX฀burner฀systems฀on฀two฀Muskogee฀units,฀two฀Sooner฀units฀
and฀one฀Seminole฀unit฀and฀is฀in฀compliance฀with฀the฀final฀ ule.฀In฀the฀
meantime,฀the฀petitions฀for฀review฀of฀the฀supplemental฀rule฀remain฀
pending฀before฀the฀D.C.฀Circuit฀Court฀of฀Appeals฀for฀consideration฀of฀
issues฀that฀are฀not฀addressed฀by฀the฀Supreme฀Court’s฀decision.
On฀December฀3,฀2015,฀the฀EPA฀proposed฀an฀update฀to฀CSAPR฀
finding฀that฀o one-season฀NOX฀emissions฀in฀23฀eastern฀states฀including฀
Oklahoma฀affect฀the฀ability฀of฀downwind฀states฀to฀attain฀and฀maintain฀
ozone฀standards฀and฀proposing฀to฀issue฀FIPs฀to฀update฀the฀existing฀
NOX฀ozone-season฀emission฀budgets฀for฀electrical฀generating฀units.฀฀
The฀proposed฀rule฀reduces฀OG&E’s฀NOX฀emissions฀requirements฀under฀
the฀current฀CSAPR฀by฀25฀percent.฀Compliance฀is฀proposed฀to฀begin฀฀
in฀May฀2017.฀OG&E฀continues฀to฀evaluate฀what฀additional฀measures,฀฀
if฀any,฀will฀be฀needed฀for฀compliance฀with฀the฀new฀rule.฀
Hazardous฀Air฀Pollutants฀Emission฀Standards
On฀February฀16,฀2012,฀the฀EPA฀published฀the฀final฀M TS฀rule฀
regulating฀the฀emissions฀of฀certain฀hazardous฀air฀pollutants฀from฀
electric฀generating฀units,฀which฀became฀effective฀April฀16,฀2012.฀The฀
final฀ ule฀uses฀a฀numerical฀standard฀to฀establish฀limits฀for฀particulate฀
matter฀(as฀a฀surrogate฀for฀toxic฀metals),฀hydrogen฀chloride฀and฀mercury฀
emissions฀from฀coal-fired฀boiler .฀Compliance฀was฀required฀within฀
three฀years฀of฀the฀rule’s฀effective฀date.฀Based฀on฀OG&E’s฀request฀for฀฀
a฀one-year฀extension,฀the฀deadline฀for฀compliance฀was฀extended฀to฀
April฀16,฀2016.฀To฀comply฀with฀this฀rule,฀OG&E฀utilized฀activated฀carbon฀
injections฀at฀each฀of฀its฀fi e฀coal-fired฀units฀du ing฀2015.฀
The฀final฀M TS฀rule฀was฀appealed฀by฀several฀parties,฀but฀OG&E฀was฀
not฀a฀party฀to฀the฀appeals.฀After฀withstanding฀judicial฀scrutiny฀at฀the฀
District฀of฀Columbia฀Circuit฀Court฀of฀Appeals,฀the฀MATS฀rule฀was฀
challenged฀at฀the฀U.S.฀Supreme฀Court.฀On฀June฀29,฀2015,฀the฀U.S.฀
Supreme฀Court฀found฀that฀the฀EPA฀should฀have฀considered฀the฀
compliance฀costs฀imposed฀on฀utilities฀at฀the฀first฀stage฀of฀the฀E A’s฀
regulatory฀analysis.฀The฀U.S.฀Supreme฀Court฀did฀not฀vacate฀the฀rule,฀but฀
reversed฀the฀D.C.฀Circuit’s฀decision฀and฀remanded฀to฀the฀D.C.฀Circuit฀for฀
further฀proceedings.฀The฀MATS฀rule฀currently฀remains฀in฀effect฀and฀
OG&E฀is฀still฀required฀to฀meet฀the฀April฀2016฀compliance฀deadline.฀
Federal฀Clean฀Air฀Act฀New฀Source฀Review฀Litigation฀
As฀previously฀reported,฀in฀July฀2008,฀OG&E฀received฀a฀request฀for฀
information฀from฀the฀EPA฀regarding฀Federal฀Clean฀Air฀Act฀compliance฀
at฀OG&E’s฀Muskogee฀and฀Sooner฀generating฀plants.฀
On฀July฀8,฀2013,฀the฀U.S.฀Department฀of฀Justice฀filed฀a฀complaint
against฀OG&E฀in฀United฀States฀District฀Court฀for฀the฀Western฀District฀of฀
Oklahoma฀alleging฀that฀OG&E฀did฀not฀follow฀the฀Federal฀Clean฀Air฀Act฀
procedures฀for฀projecting฀emission฀increases฀attributable฀to฀eight฀
projects฀that฀occurred฀between฀2003฀and฀2006.฀This฀complaint฀seeks฀
to฀have฀OG&E฀submit฀a฀new฀assessment฀of฀whether฀the฀projects฀were฀
likely฀to฀result฀in฀a฀significant฀emissions฀increas .฀The฀Sierra฀Club฀