Progress Energy 2008 Annual Report Download - page 44

MANAGEMENT’S DISCUSSION AND ANALYSIS
42
PEC and PEF evaluate potential claims against other PRPs
and insurance carriers and plan to submit claims for cost
recovery where appropriate. The outcome of potential
and pending claims cannot be predicted. Hazardous and
solid waste management matters are discussed in detail
in Note 21A.
We accrue costs to the extent our liability is probable and
the costs can be reasonably estimated in accordance
with GAAP. Because the extent of environmental
impact, allocation among PRPs for all sites, remediation
alternatives (which could involve either minimal or
significant efforts), and concurrence of the regulatory
authorities have not yet reached the stage where a
reasonable estimate of the remediation costs can be
made, we cannot determine the total costs that may be
incurred in connection with the remediation of all sites
at this time. It is probable that current estimates could
change and additional losses, which could be material,
may be incurred in the future.
AIR QUALITY AND WATER QUALITY
We are, or may ultimately be, subject to various current
and proposed federal, state and local environmental
compliance laws and regulations, which likely would result
in increased capital expenditures and O&M expenses.
Additionally, Congress is considering legislation that
would require additional reductions in air emissions of
nitrogen oxides (NOx), SO
2
, CO
2
and mercury. Some of
these proposals establish nationwide caps and emission
rates over an extended period of time. This national
multipollutant approach to air pollution control could
involve significant capital costs that could be material
to our financial position or results of operations. Control
equipment installed pursuant to the provisions of CAIR,
CAVR and mercury regulation, which are discussed below,
may address some of the issues outlined above. PEC and
PEF have been developing an integrated compliance
strategy to meet the requirements of the CAIR, CAVR and
mercury regulation (see discussion of the court decisions
that impacted the CAIR, the delisting determination and
the CAMR below). The CAVR requires the installation
of best available retrofit technology (BART) on certain
units. However, the outcome of these matters cannot be
predicted.
Clean Smokestacks Act
In June 2002, the Clean Smokestacks Act was enacted
in North Carolina requiring the state’s electric utilities
to reduce the emissions of NOx and SO2 from their
North Carolina coal-fired power plants in phases by
2013. PEC currently has approximately 5,000 MW of
coal-fired generation capacity in North Carolina that is
affected by the Clean Smokestacks Act. In March 2008,
PEC filed its annual estimate with the NCUC of the total
capital expenditures to meet emission targets under the
Clean Smokestacks Act by the end of 2013, which were
approximately $1.5 billion to $1.6 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 change expenditures required by the
Clean Smokestacks Act. Changes in projected fuel sources
may require us to incur costs, which are not currently
estimable, to install additional controls subsequent to 2013
in order to remain compliant with the requirements of the
Clean Smokestacks Act. O&M expenses will significantly
increase due to the cost of reagents, additional personnel
and general maintenance associated with the pollution
control 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. See discussion regarding future
recovery of costs to comply with 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).
Clean Air Interstate Rule
On March 10, 2005, the EPA issued the final CAIR. The
EPA’s rule required the District of Columbia and 28 states,
including North Carolina, South Carolina and Florida, to
reduce NOx and SO
2
emissions. The CAIR set 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 and the EPA approved the North
Carolina CAIR, the South Carolina CAIR and the Florida
CAIR in 2007.
PEF participated in a coalition of Florida utilities that
filed a challenge to the CAIR as it applied to Florida (PEF
withdrew from the coalition during the fourth quarter of