Objections lodged by Dynegy Midwest Generation to an air compliance variance being sought by Midwest Generation are off base, in part because Dynegy’s coal plants in Illinois compete in the Midwest ISO market and Midwest Gen’s coal plants in Illinois complete in the PJM market, said Midwest Gen President Doug McFarlan.
McFarlan was one of the people testifying Jan. 29 at the Illinois Pollution Control Board about a Nov. 30, 2012, variance request by Midwest Gen that would mainly allow the company to delay $210m of emissions control retrofits at Waukegan Unit 8 by two years under the state’s Combined Pollutant Standard (CPS) air program. A 266-page transcript of the hearing was posted on Feb. 8 by the board in the docket for this case.
Midwest Gen asked a two-year delay period beginning Jan. 1, 2015, and a delay from another CPS section for a period of five months, delaying that requirement until May 31, 2015. Additionally, to align with the two-year variance, Midwest Gen is also seeking a variance from the board’s August 2012 order related to Waukegan plant compliance, where the board ordered Midwest Gen to comply with the system-wide emission rates for SO2. Or, in the alternative, Midwest Generation requests that the board adjust that portion of the August 2012 Waukegan order to be consistent with the relief requested on Nov. 30 or specifically find that the new variance supersedes only that provision of the Waukegan order that requires compliance with the system-wide SO2 emissions rate but not the provisions regarding the retrofit of the hot-side precipitator and the installation of the flue gas desulfurization (FGD) equipment or the shutdown deadline as applicable to Waukegan Unit 7.
Dynegy on Dec 31, 2012, had complained to the board that this variance would give Midwest Gen a competitive cost advantage, since Dynegy is also spending money to comply with state standards. McFarlan said at the Jan 29 hearing that he found Dynegy’s objections “selective and misleading.” He said that besides the fact the plants of the two companies compete in different regional markets, Dynegy didn’t last year object at the board to a variance request that the board did grant for Ameren, which also has coal-fired plants in Illinois that do compete directly against the Dynegy plants in the same market. McFarlan also noted that a lot of Dynegy’s $1bn recent investment in new emissions controls is due to a federal consent decree, not its obligations under state mandate.
McFarlan, the President of Midwest Generation and the Senior Vice President of Public Affairs for indirect parent Edison Mission Energy, noted how these companies had to seek Chapter 11 bankruptcy protection on Dec. 17, 2012, not long after filing for the variance.
“We filed this [variance] petition because we concluded that securing what we considered to be a very limited variance will put us in the best possible position to make some very tough decisions about investments that we can make, operations that we can sustain, and the living wage jobs of hard working men and women that we can preserve,” he added. “We are a company that is undergoing a financial restructuring through the Chapter 11 bankruptcy process. Due to the CPS, we face near term decisions that we need to begin making almost immediately with respect to investing hundreds of millions of additional dollars in capital investments in pollution controls.”
Midwest Gen is adhering to five principles with this variance request
McFarlan said the petition was written with five principles in mind.
- “First, in no way, shape or form do we seek a free pass. Even with the variance, we will be investing in the design, planning and/or the installation of pollution control equipment every year through 2019, just as we have done every year since the CPS was adopted in 2007.”
- “Second, we do not seek to extend the timeline of the CPS or relax the emission limits that will be in effect when the CPS is fully implemented in 2019. In contrast, last year Ameren came before this board and was granted five additional years to achieve a required emission rate and three additional years to complete what is known as their Multi-Pollutant Standard, which was negotiated and adopted around the same time as the CPS.
- “The third principle is that we respect that the state must demonstrate attainment with national ambient air quality standards of the U.S. EPA, and that emission reductions under the CPS will be a component, an important component of such demonstrations. With that in mind, we only seek the variance for 2015 and 2016, and then we will catch up, if you will, and resume compliance with the original limits of the CPS in 2017 as an intentional construct to support the state’s anticipated need to demonstrate attainment in 2017 with new federal standards for sulfur dioxide and particulate emissions, as well as regional haze.
- “The fourth principle, we respect past precedent set by the EPA and this board that a petitioner for a variance must demonstrate a net environmental benefit. We have done this by committing to a compliance plan which guarantees that our actual tons of emissions of sulfur dioxide for the years 2013 through 2016 will be lower under the variance than would have occurred under an anticipated business as usual case when the CPS was adopted. The same goes for all other pollutants, mercury, hydrogen oxide, particulate matter, carbon dioxide.”
- The fifth principle is related to a Midwest Gen proposal to add firm SO2 emissions caps for the 2013-2016 period, and an alternative SO2 emissions rate for 2015 and 2016.
“We make no bones about it,” McFarlan added. “We are in financial distress and have entered into a restructuring process that is expected to run well into, if not all the way through 2014. Our petition and supporting affidavits are clear that with this variance we believe we can defer on the order of $200 million in capital expense out of 2013 and 2014, the two critical years in our restructuring process when cash conservation is paramount as we work with stakeholders in our business to develop a plan of reorganization and a new capital structure.”
In answering a previous board question on this point, McFarlan stated about certain coal units: “The board asked whether Midwest Generation is now committing to not operating Crawford Station Units 7 and 8 in 2015 and 2016. This is now a requirement for the CPS under the Waukegan 7 variance approved by the board last year, and nothing in this variance affects that.”
Midwest Gen says emissions control financing impossible right now
Also testifying at the Jan. 29 hearing was William Petmecky, Vice President and Treasurer of Edison Mission Energy.
“The total cost of complying with CPS is forecast to be just over $1 billion,” Petmecky noted. “Of this amount we have already spent about $200 million. Therefore we estimate the remaining cost to be about $850 million. Over the next two years, 2013 and 14, assuming that we do not have a CPS variance, we expect that we’ll need to spend about a half a billion dollars, and that will get us compliant through 2016. This spending can be separated into two parts. About half of the spending needs to be spent to comply with the CPS SO2 emission rates for 2013 and 2014, so the immediate term things, and to satisfy specific control requirements for Waukegan Unit 7. In addition, we’ll perform some engineering and other work on other units. The other half of the money that needs to be spent to assure compliance with CPS SO2 emission rates for 2015 and 2016 and to complete the installation of equipment to satisfy the Waukegan Unit 8 FGD work. It is the second set of costs that are at issue in this petition.”
In the past, Midwest Gen got funding for capital projects from indirect parent Edison Mission Energy, which is now in bankruptcy. And, Midwest Gen normally tries to recover all of its costs through its own operations. “However, Midwest Gen expects to incur operating losses this year and next because of low revenues from low energy and capacity prices,” Petmecky noted. “We have high costs, and that means reduced output.”
He added: “Even though Midwest Generation is working hard to manage through and improve the situation, during the next two years Midwest Gen will not be able to fund all the retrofits without external support. Midwest Generation simply cannot generate the cash to fund the retrofits necessary for 2015 and ’16 compliance.”
Creditors of Edison Mission Energy won’t want to approve additional borrowing for the Midwest Gen projects until past debts are resolved, Petmecky said. And Edison International (NYSE: EIX), the parent of Edison Mission Energy, has said it will not provide funding for Edison Mission Energy. Indeed, Edison International has indicated that the bankrupt operations will be spun off to creditors in the bankruptcy process, leaving it out of future planning for those operations.
“Which brings us to raising funds from outside the company from third party lenders, such as banks,” Petmecky said. “Lenders may be very reluctant to provide long-term loans to Midwest Generation until we have consummated or at least proposed a plan that demonstrates financial viability of Midwest Generation into the long term.”
Crawford coal plant is already off-line, and more may follow
Fred McCluskey, Vice President of Technical Services for EME and Midwest Generation, said at the hearing that the company has accepted obligations to shut down a Fisk coal unit in 2012 and two Crawford units at the end of 2014. Crawford is actually currently shut. He pointed out that the company is in the process of installing SO2 controls on Powerton Unit 6.
“The work we seek to defer includes work in connection with the installation of Trona FGD equipment and [electrostatic precipitator] ESP upgrades on Waukegan Unit 8, Powerton Unit 5 and either Joliet Unit 7 or 8,” McCluskey said. “If the variance is denied Midwest Generation would need to begin incurring substantial costs in connection with these controls no later than April of this year as a result of equipment construction lead times.”
It is neither feasible nor productive to now attempt to change course and move to another compliance strategy, he said. “Installing wet scrubbers or other types of dry scrubbers would cost more than controls we have selected and would take more time. Converting to natural gas would reduce SO2 emissions, but would render the units uneconomic relative to more efficient combustion turbine based gas generation. In short, it would be unable to survive in a competitive market place. If the board denies the variance to Midwest Generation and Midwest Generation cannot secure the necessary funding by April of 2013, which it almost certainly will be unable to do, Midwest Generation would be forced to curtail its operations. We estimate that the curtailment would be roughly 35% in 2015 and 75% in 2016, as compared to average generation from the uncontrolled units over the past five years.”