Pennsylvania Electric Company (Pennelec)

October 4, 1996

Kathleen A. McGinty
Chair
Council on Environmental Quality
Room 360
Old Executive Office Building
Washington, DC 20500

RE: Homer City Station Project XL Proposal

Dear Ms. McGinty:

In response to President Clinton's Project XL initiative as part of reinventing environmental regulation, the New York State Electric & Gas Corporation (NYSEG), Pennsylvania Electric Company (Pennelec) and GPU Generation, Inc. (GPU Genco) (collectively, the "Owners") submitted to the Environmental Protection Agency a proposed XL project for the Homer City electric generating station. The proposed XL project would grant the Owners the flexibility to replace current regulatory requirements with a cost-effective alternative compliance strategy that achieves greater environmental benefits. Unfortunately, however, some at EPA have determined that the proposal would not produce a sufficient amount of superior environmental performance.¹ We strongly disagree. By this letter, the Owners respectfully request your evaluation and concurrence that the Homer City XL Project proposal is consistent with the Clinton Administration's vision of Project XL and, if so, your assistance in moving the project forward at EPA.

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By letter dated September 4, 1996, the Owners requested a meeting with EPA to discuss the environmental benefits of the XL proposal. The letter expressed our view that a meeting at the earliest possible date was imperative. As of this date, EPA has not responded to our request.
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Homer City Station is a coal-fired electric generating station composed of three units (boilers) located in Indiana County, Pennsylvania. NYSEG and Pennelec each own 50 percent of the Station, and GPU Genco operates the Station. Units 1 and 2 (620 megawatts each) are "existing" sources while Unit 3 (650 megawatts) is a "new" source subject to the Clean Air Act's New Source Performance Standards (NSPS). To meet the NSPS, Unit 3 uses lower-sulfur coal, some of which is purchased from sources outside the local area. Units 1 and 2 use locally mined coal that is cleaned (i.e., pyritic sulfur is physically removed from the coal) prior to combustion in the Station's coal cleaning facility.² Under the NSPS program, new and existing sources cannot be combined under a single emissions cap.

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² In 1981 Homer City Station was granted an Innovative Technology Waiver pursuant to Clean Air Act section 111(j) to demonstrate that the ability of a new coal cleaning system to achieve reductions in SO₂ emissions. The Innovative Technology Waiver allowed the Station to develop a coal cleaning facility capable of producing coal to achieve the NSPS for Unit 3 and a co-product capable of achieving emission rates substantially below the allowable rates for Units 1 and 2. In 1990-1991, rising organic sulfur levels in local coals prevented the coal cleaning facility from producing adequate quantities of compliance coal for Unit 3. As a result, the Station began to import low sulfur coal for Unit 3 but continued to use the coal cleaning facility to process coals for Units 1 and 2.
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On August 7, 1995, the Owners submitted an XL project proposal which would utilize an innovative regulatory approach for demonstrating the environmental and economic benefits of sulfur dioxide (SO₂) emission strading between the "existing" units (Units 1 and 2) and the "new" (Unit 3) unit at the Station. The original poropsal was supplemented on September 18, 1995, and February 2, 1996, including the Phase I Work Plan submitted on June 8, 1996. Simply put, the Owners proposed to operate under a station-wide SO₂ emission limit which would require a waiver from the NSPS for Unit 3. The flexibility granted by replacing the NSPS emission limits on Unit 3 with a station-wide SO₂ emission limit would allow the Owners to demonstrate for a limited two-year period (Phase I) that modifications to the Station's coal cleaning facility would improve the facility's performance. Improving the coal cleaning facility's performance would have the dual benefits of reducing the Station's actual SO₂ emissions rate and bolstering the local economy by maintaining the viability of the local coal market. If Phase I is successful, a Phase II agreement would be developed incorporating the pollution-prevention and performance measures tested during Phase I. If not, the project would end and Unit 3 would again comply with the NSPS with no risk to the environment during Phase I.

More specifically, in Phase I the station-wide SO₂ emissions limit would be set at the Station's 1995 actual average annual emissions rate of 2.0 lbs/mmBtu. By doing so, the Owners would forego the opportunity to increase the Station's average annual emission rate to its allowable level (2.37 lbs/mmBtu Station annual average). This would be equivalent to an annual increase of 26,472 tons of SO₂ emissions. Unit-specific 3-hour average SO₂ emission limitations (i.e., 2.77, 2.77, and 1.58 lbs/mmBtu for Units 1, 2 and 3, respectively) also would be established to protect and maintain the National Ambient Air Quality Standards (NAAQS) for SO₂. If SO₂ emissions exceeded the Station annual average rate of 2.00 lbs/mmBtu, the Owners proposed to acquire and permanently retire three Acid Rain Program allowances for every ton of SO₂ emitted above the standard. Cost savings of the proposal were estimated to be up to $6.5 million annually.

During Phase I the Owners would evaluate and report on the feasibility of instituting a Phase II proposal for further fuels management and operating measures that would provide additional economic, environmental and multi-media benefits over a longer period of time. The Phase I Work Plan described the tasks to be accomplished, including evaluations of the feasibility of achieving SO₂ emission rates below 1995 actual levels, reducing hazardous air pollutant emissions and the opacity of emissions, and eliminating other air pollutant sources at the Station. The Phase I Work Plan also included an evaluation of the project's ability to support the local community by maintaining the viability of the local coal market through the continued use of locally-available, as opposed to more distant, coal supplies. The Pennsylvania Department of Environmental Protection enthusiastically supported the XL project proposal and local stakeholders also expressed their support.

After reviewing the XL project proposal, EPA expressed reservations about the extent of its environmental benefits. Specifically, EPA was concerned that the proposed project's most predictable benefit to the environment was simply the Station's forbearance to emit at its allowable rate. The Owners believe that EPA's position unfairly penalizes the Station for having achieved a level of environmental performance over the last 10 years that is superior to the existing regulatory requirements: since the mid-1980s, the Station has maintained its average annual SO₂ rate at approximately 2.00 lbs/mmBtu, which is approximately 26,000 tons below its allowable level.

In a letter dated July 12, 1996, David Gardiner, Assistant Administrator, EPA Office of Policy, Planning and Evaluation, concluded that the Homer City proposal could not be accepted for Project XL because it would not assure "superior environmental performance." To provide superior environmental performance, EPA asserted that the Homer City proposal must achieve either a 20 percent reduction in actual SO₂ emissions or demonstrably equivalent environmental benefits. EPA invited the Owners to modify their proposal accordingly.

The Owners then evaluated the feasibility of achieving the 20 percent reduction beyond actual SO2 emissions, as well as other options for meeting EPA's declared criterion for superior environmental performance. The evaluation concluded that an additional 20 percent reduction from actual emissions was economically and operationally infeasible. Based on the Station's current 5-year business plan, a 20 percent reduction from actual SO₂ emissions (from 1995 levels) would cost the Station $18.5 million. That high cost results from the fact that the Station is already operating significantly below its allowable level. Moreover, the burden associated with incurring an $18.5 million cost is unacceptable given the Station's need to maximize its competitiveness as the electric utility industry is deregulated, particularly when the Owners' primary alternative to the XL proposal is to save up to $6.5 million per year by running the Station at its maximum allowable emission rates (a decison that would result in a projected 45,433 ton increase in actual SO₂ emissions during 1997-1998 combined, relative to current operations). A 20 percent reduction from actual SO₂ emissions also is operationally infeasible because the modified coal cleaning facility cannot clean coal to the level (e.g., approximately 1.60 lbs. of SO₂/mmBtu) necessary to achieve EPA's suggested reduction. In fact, achieving the EPA's suggested reduction probably would require abandonment of the coal cleaning facility modifications at a cost of $9.6 million and require the Owners to obtain coal from outside the local region. That would defeat the purpose of the XL proposal.

Because the Owners have proposed to operate the Station in a manner that is both cost-effective and environmentally beneficial, the Owners submitted a revised XL Project proposal to EPA staff on August 27, 1996. Under the revised proposal the Station would reduce its annual SO₂ emissions rate to the equivalent of 1.95 lbs/mmBtu. That would represent a 14.9 percent savings from potential SO² emissions during 1997-1998 (23,406 ton reduction in 1997; 48,517 ton reduction in 1997-1998 combined) based on the Station's projected capacity factors as set out in the Station's 5-year business plan. Specifically, the Station would reduce the actual annual SO₂ emission rates of Units 1 and 2 from 2.47 lbs/mmBtu (average for January-June 1996) to 2.25 lbs/mmBtu in order to offset at a 1.2 to 1 ratio any increase in actual SO₂ emissions at Unit 3 from 1.12 lbs/mmBtu (average January-June 1996) to a maximum of 1.60 lbs/mmBtu. As under the original proposal, if actual emissions exceeded the Station average annual emissions rate of 1.95 lbs/mmBtu, the Owners would retire Acid Rain Program allowances at a ratio of 3 to 1. Annual cost savings of the revised proposal are projected to be up to $5.4 million.

The revised August 1996 proposal also includes enforceable commitments to implement specific improvements to the Station's coal cleaning facility and to retire the Station's thermal dryers (a reduction of 721 tons of SO₂, 152 tons of NOx, 66 tons of PM₁₀ and 12 tons of VOCs). The Owners would not seek emission credits for those reductions. In addition, the revised proposal includes projected goals for the reduction of hazardous air pollutant (HAP) emissions. The Owners' analysis of HAP emissions, which was completed subsequent to submission of the revised proposal, indicates that the XL project proposal could reduce the Station's hydrogen chloride emissions by 448 tons per year (an 8.0% reduction), mercury by 395 lbs/year (32.9% reduction), selenium by 1,376 lbs/year (20.1% reduction), lead by 361 lbs/year (20.7% reduction), and other HAPs by lesser amounts. The revised proposal also includes more detailed information regarding projected beneficial effects on the local economy and an up-front commitment to establish a stakeholder partnership group for fostering active public participation in and review of the project results and future implementation.

In short, the Homer City XL project proposal is at a crossroads. The Station could follow its business plan and realize a cost savings of up to $6.5 million per year while increasing SO₂ emissions up to its allowable emission rate (an increase of 45,433 tons during 1997-1998 combined, relative to current operations). Alternatively, with XL project approval, the Station could realize an annual cost savings of up to $5.4 million, a savings in potential SO₂ emissions of 48,517 tons during the 1997-1998 period combined, and other environmental benefits. The Owners strongly prefer to operate the Station in a manner that maximizes both cost effectiveness and benefit to the environment. We believe our project XL proposal would do exactly that.

Based on the foregoing, we request your concurrence that the Homer City XL proposal is consistent with the Clinton Administration's vision of the Project XL initiative. If you concur, we request your assistance in moving the project forward at EPA. A decision to the contrary will force us to abandon this unique opportunity to demonstrate that environmental and economic benefits can be achieved simultaneously.

Thank you for giving this issue your attention.

Sincerely,

Ronald P. Lantzy
Generation Technical Services Director/
Strategy Process Owner

cc: David M. Gardiner, USEPA OPPE
Joseph P. Pezze, PaDEP

Pennsylvania Electric Company (Pennelec)

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