Progress Energy 2007 Annual Report Download - page 58

MANAGEMENT’S DISCUSSION AND ANALYSIS
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$1.1 billion to $1.4 billion at the time of the filing. The
increase in estimated total capital expenditures from the
original 2002 estimate of $813 million is primarily due to
the higher cost and revised quantities of construction
materials, such as concrete and steel, refinement of
cost and scope estimates for the current projects,
and increases in the estimated inflation factor applied
to future project costs. We are continuing to evaluate
various design, technology and new generation options
that could further change expenditures required by the
Clean Smokestacks Act. O&M expenses will significantly
increase due to the cost of reagents, additional personnel
and general maintenance associated with the equipment.
Recent legislation in North Carolina and South Carolina
expanded the traditional fuel clause to include the annual
recovery of reagents and certain other costs; all other
O&M expenses are currently recoverable through base
rates. On March 23, 2007, PEC filed a petition with the
NCUC regarding future recovery of costs to comply with
the Clean Smokestacks Act, and on October 22, 2007, PEC
filed with the NCUC a settlement agreement with the NCUC
Public Staff, CUCA and CIGFUR supporting PEC’s proposal.
The NCUC held a hearing on this matter on October 30,
2007. On December 20, 2007, the NCUC approved the
settlement agreement on a provisional basis. See further
discussion about the Clean Smokestacks Act in Note 7B.
We cannot predict the outcome of this matter.
Two of PEC’s largest coal-fired generating units (the
Roxboro No. 4 and Mayo Units) impacted by the Clean
Smokestacks Act are jointly owned. In 2005, PEC entered
into an agreement with the joint owner to limit their
aggregate costs associated with capital expenditures to
comply with the Clean Smokestacks Act and recognized
a liability related to this indemnification (See Note 21B).
Pursuant to the Clean Smokestacks Act, PEC entered into
an agreement with the state of North Carolina to transfer
to the state certain NO x and SO
2
emissions allowances
that result from compliance with the collective NOx and
SO2 emissions limitations set in the Clean Smokestacks
Act. The Clean Smokestacks Act also required the state
to undertake a study of mercury and CO2 emissions in
North Carolina. The future regulatory interpretation,
implementation or impact of the Clean Smokestacks Act
cannot be predicted.
Clean Air Interstate Rule, Clean Air Mercury Rule and
Clean Air Visibility Rule
On March 10, 2005, the EPA issued the final CAIR. The
EPA’s rule requires the District of Columbia and 28 states,
including North Carolina, South Carolina and Florida, to
reduce NOx and SO
2
emissions in order to reduce levels of
fine particulate matter and impacts to visibility. The CAIR
sets emission limits to be met in two phases beginning
in 2009 and 2015, respectively, for NOx and beginning in
2010 and 2015, respectively, for SO2. States were required
to adopt rules implementing the CAIR. The EPA approved
the North Carolina CAIR on October 5, 2007, the South
Carolina CAIR on October 9, 2007, and the Florida CAIR
on October 12, 2007.
PEF has joined a coalition of Florida utilities that has
filed a challenge to the CAIR as it applies to Florida.
A petition for reconsideration and stay and a petition for
judicial review of the CAIR were filed on July 11, 2005.
On October 27, 2005, the D.C. Court of Appeals issued an
order granting the motion for stay of the proceedings. On
December 2, 2005, the EPA announced a reconsideration
of four aspects of the CAIR, including its applicability to
Florida. On March 16, 2006, the EPA denied all pending
reconsiderations, allowing the challenge to proceed.
While we consider it unlikely that this challenge would
eliminate the compliance requirements of the CAIR, it
could potentially reduce or delay our costs to comply
with the CAIR. Oral argument has been set by the D.C.
Court of Appeals for March 25, 2008. On June 29, 2006, the
Florida Environmental Regulation Commission adopted
the Florida CAIR, which is very similar to the EPA’s model
rule. An unaffiliated utility challenged the state-adopted
rule. On November 7, 2007, the Florida District Court of
Appeals ruled against the challenge and in favor of the
Florida Department of Environmental Protection. The
outcome of these matters cannot be predicted.
On March 15, 2005, the EPA finalized two separate but
related rules: the CAMR that sets mercury emissions
limits to be met in two phases beginning in 2010 and
2018, respectively, and encourages a cap-and-trade
approach to achieving those caps, and a delisting rule
that eliminated any requirement to pursue a maximum
achievable control technology approach for limiting
mercury emissions from coal-fired power plants.
NOx and SO2 controls also are effective in reducing
mercury emissions. However, according to the EPA, the
second phase cap reflects a level of mercury emissions
reduction that exceeds the level that would be achieved
solely as a co-benefit of controlling NO x and SO2 under
CAIR. The delisting rule was challenged by a number
of parties. Sixteen states subsequently petitioned for a
review of the EPA’s determination confirming the delisting.
On February 8, 2008, the D.C. Court of Appeals decided
in favor of the petitioners and vacated the delisting
determination and the CAMR. The exact impacts of