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Pennsylvania Electric Company (Pennelec)

WINSTON & STRAWN

1400 L STREET, N.W.
WASHINGTON, D.C. 20005-3502

(202) 371-5700


June 18, 1996
VIA FACSIMILE
ORIGINAL VIA MESSENGER DELIVERY

Mr. Christopher A. Knopes
Director, Project XL
Emerging Sectors and Strategies Division
U.S. Environmental Protection Agency
Mail Stop 2129
401 M Street, S.W.
Washington, D.C. 20460



Re: New York State Electric & Gas Corporation, Pennsylvania Electric Company,
and GPU Generation Corporation, Homer City Station XL Demonstration
Project Proposal Supplement; Superior Environmental Benefits

Dear Mr. Knopes:

This will confirm our telephone conversation on June 12, 1996 about the above referenced XL Demonstration Project Proposal Supplement. During that call, we discussed the Homer City Owners' May, 1996 offer to provide environmentally-beneficial changes to the February 2, 1996 Supplement.

Specifically, the Owners would agree to provide a predictable and superior environmental benefit by achieving a target Station average annual emission rate of 1.95 lbs. of SO2/mmBtu rather than the 2.00 lbs. of SO2/mmBtu 1995 annualized actual emission rate discussed in the February 2, 1996 Supplement. Consistent with the Supplement, real and quantifiable reductions must take place at Homer City Units 1 and 2 (from actual emissions of 2.40-2.50 lbs. of SO2/mmBtu down to approximately 2.10-2.20 lbs. of SO2/mmBtu) to offset any increase from Homer City Unit No. 3 (from the actual emission rate of 1.07 lbs. of SO2/mmBtu to a maximum of 1.58 lbs. of SO2/mmBtu). Achieving the Station average 1.95 lbs. of SO2/mmBtu emission rate will result in an annual reduction in SO2 emissions of approximately 3,500 tons per year. These reductions will be achieved by modifications to the coal cleaning facility and will cost the Owners approximately $9.6 million dollars.

Failure to achieve the 1.95 lbs. of SO2/mmBtu Station average emission rate would require the Owners to acquire and retire SO2 allowances at a ratio of 1 to 1 to account for emissions between 1.95 lbs. of SO2/mmBtu and 2.00 lbs. of SO2/mmBtu. In the event the average annual Station emission rate exceed 2.00 lbs. of SO2/mmBtu, then consistent with their original proposal, the Owners would acquire and retire SO2 allowances at a ratio of 3 to 1 to account for the emissions above 2.00 lbs. of SO2/mmBtu

The reduction in SO2 emissions would occur regardless of the actual operation of the Homer City Station because of the purchase and retirement of SO2 allowances. In addition, the Owners would not seek emission credits for achieving stattion average annual emission levels below the 1.95 lbs. of SO2/mmBtu emission rate during Phase I.

The Owners are concerned that the Station's superior environmental performances over the last 10 years is penalizing the Project during the evaluation process. Specifically, the Station has maintained its average annual emission rate at approximately 2.00 lbs. of SO2/mmBtu. This is 26,472 tons of SO2 below the allowable rate at an 89% capacity factor. In the February 2, 1996 Supplement the Owners agreed to maintain the Station's SO2 emission rate at this level. This in combination with the other environmental benefits discussed in the February 2, 1996 Supplement and April 29, 1996 Work Plan (attached) should have satisfied XL Program environmental performance requirements.

Now, despite their concern, the Owners have agreed to achieve an SO2 emission rate below the 2.0 lbs. of SO2/mmBtu average annual rate. In other words, the Owners have agreed to achieve "beyond superior" environmental results. With the Owner's proposal to reduce the Station average annual emission rate to 1.95 lbs. of SO2/mmBtu, the Homer City XL Project should constitute "superior" environmental performance by any objective test.

We would very much like to meet with the EPA staff that have expressed reservations about the Homer City XL Project proposal. We believe that through in-depth, face-to-face discussions they would begin to understand the value of the Project.

Please call if you have any questions or a meeting can be arranged.

Very truly yours,



John P. Proctor

Encl.

cc: Vincent J. Brisini
Ronald P. Lantzy
Philip M. Murphy
Joseph P. Pezze
James R. Rue
James M. Salvaggio

HOMER CITY STATION
XL DEMONSTRATION PROJECT
PHASE I WORK PLAN

OBJECTIVES

The February 2, 1996 Homer City Station XL Project Supplement reflected the Station Owners' desire to implement a proposal to demonstrate environmental and economic benefits that are absolutely achievable, quantifiable and that will withstand the most careful scrutiny. To this end, the Owners have proposed a Phase I Project of limited duration (up to 2 years) in order to ensure that proposed environmental and economic benefits derived from instituting SO2 emissions trading between existing and new units at the Station can be achieved. Specifically, the Station will verify, document, and report on the range of achievable operational improvements, fuels management efficiencies and economic and environmental benefits that can result from iimplementing the SO2 emissions trading. Phase I also will be used to explore and report on the feasibility of instituting a Phase II proposal to achieve additional verifiable economic, environmental and multi-media environmental benefits over a longer period of time.

To accomplish the objectives described in the February 2nd Proposal Supplement, the Station will establish an XL Project team to implement, evaluate and document the results of the Phase I Project. The team members will be from the different organizational areas of the Station Corporate GPU, Genco, and NYSEG, including: Station operations, technical, environmental, fuels, and financial/administrative. The Owners also will form a stakeholder partnership group to facilitate dialogue between the Station and stakeholders regarding Project results. The attached work plan describes the tasks to be accomplished by the Homer City XL Project team to meet the Phase I objectives.

HOMER CITY STATION
XL DEMONSTRATION PROJECT
PHASE I WORK PLAN
(2 YEARS)


Time line Task

1. Implement Operational Modifications

Coal Cleaning Facility Modifications

A principal objective of Phase I of the Homer City Station XL Project is to verify the beneficial environmental effects of modifications to the Station's coal cleaning facility. These modifications will increase the facility's coal cleaning efficiency. They will include the installation of new spiral concentrators and froth floatation equipment, which are intended to reduce sulfur and ash in the fine coal size fraction of the coal cleaning facility feed to Units 1 and 2. The Owners anticipate that this effort will lead to reduced SO2 emissions from Units 1 and 2. They also expect that the modifications will enable the facility to produce a product with lower levels of toxics, resulting in reduced hazardous air pollutant emissions, and lower ash content, enabling the Station to reduce the opacity from Units 1 and 2. Coal cleaning facility modificatins are expected to be completed within nine (9) months after XL Project approval. The following efforts will be undertaken to meet the Phase I operational restrictions discussed in the February 2nd Proposal Supplement during the two year demonstration period:

a. Maintain Station average annual SO2 emission rate at 1995 level
Initially - During Phase I, the Station will establish and implement an operational strategy for maintaining the Station average annual SO2 emission rate at 2.0 lbs. of SO2/mmBtu or less. Actions to be implemented would include burning the existing inventory for Units 1 and 2 and replacing it with lower sulfur coal (produced as a result of cleaning facility modifications) to achieve -- by reducing Unit 1 and 2 emissions from annualized 1995 levels -- the 2.0 lbs. of SO2/mmBtu Station average and annual rate.
Quarterly -- Evaluate Station SO2 emissions on quarterly basis to determine need to adjust strategy to maintain the Station average annual rate.
End of Year 1 -- Evaluate the Station's ability to maintain average annual emission rate of 2.00 lbs. of SO2/mmBtu or less

If rate exceeded for year, acquire and permanently retire three Title IV allowances for every ton emitted above the standard. If annual emissions below standard, limit credit to only 0.9 tons for every ton of actual reduction.

End of Year 2 -- Same.

Time Line Task

Initially b. Comply with Unit-specific 3-hour average SO2 limitations to maintain and protect attainment. Comply with unit-specific 3-hour average limits of 2.77 lbs. of SO2/mmBtu for Units 1 and 2 and 1.58 lbs. of SO/2mmBtu for Unit 3. On-site coal cleaning facility product will continue to be used to fire Units 1 and 2. Unit 3 has a bunker feed system, which allows Station operations to feed various coal types or coal quality levels into specific bunkers to accomplish blending of coals in the boiler. This system will be used to increase the amount of higher sulfur local coal (e.g. Unit 1 and 2 coal product) that is blended with the lower sulfur compliance coals received at the Station to achieve the fuel specification necessary to meet the Unit 3 limitation. The Station also will evaluate the SO2 reduction implications of increasing the sulfur specification (i.e. percent sulfur content) of the lower sulfur compliance coals (e.g. from 0.57 to 0.7 lbs. of SO2/mmBtu) to enable the Station to achieve additional flexibility in its Unit 3 coal supply strategy. Compliance with limitations will be monitored through the Station's continuous emission monitoring systems.

2. Multi-media Environmental Benefits Feasibility Evaluation

As described in the February 2nd Proposal Supplement, the Station will conduct an evaluation to determine the feasibility of instituting a Phase II proposal to achieve additional economic, environmental and multi-media environmental benefits. An evaluation of the effect of the coal cleaning facility modifications described above will be a critical component of this effort. Specifically, during Phase I, the feasibility of achieving a number of objectives will be evaluated, as follows:

a. Reducing the Station's average annual SO2 emission rate below 2.0 SO2/mmBtu.
As described above, coal cleaning facility modifications are expected to enable the facility to reduce the sulfur in the facility's product, enabling the facility to reduce SO2 emissions from Units 1 and 2 below 1995 levels.


b. Reducing hazardous air pollutant emissions from Units 1 and 2.
Coal cleaning facility modifications are expected to enable the facility to reduce the level of toxics present in the facility product, with corresponding reductions in the hazardous air pollutant emissions from Units 1 and 2. The Owners also anticipate that the modifications will enable the Station to reduce a particulate matter in Unit 1 and 2 emissions. This should result in some additional reduction in hazardous air pollutants.
-- Establish baseline (using emission factors and Title V application information) for hazardous air pollutant emissions from Units 1 and 2.
-- Evaluate coal cleaning facility product (using emission factors) to determine effect of modifications on the level of toxics, and the resulting in hazardous air pollutant emissions.
-- Also, during Phase I, evaluate particulate matter emissions (by means of opacity monitoring) to determine effect of modifications on hazardous air pollutant emissions.

c. Reducing opacity from Units 1 and 2.
The coal cleaning facility modifications described above are expected to enable the Station to reduce the opacity (as a result of lower ash content) from Units 1 and 2.
-- Established baseline (from Title V, continuous opacity monitoring systems) for opacity performance based on emission monitoring results predating coal cleaning facility modifications.
-- Continuously monitor opacity for Units 1 and 2. Compare results of Year 1 and Year 2 baseline.

d. Eliminate thermal dryers associated with the coal cleaning process, and associated emissions.
The installation of fine coal cleaning modifications at the coal cleaning facility to produce coal with improved coal handling characteristics that possibly would eliminate the need for the existing thermal dryers and associated emissions. (Annual emission reductions that would result are discussed on page 11 of the February 2nd Proposal Supplement.)
End of Year 1 -- Confirm ability to possibly eliminate thermal dryers.
End of Year 2 -- Provide a preliminary evaluation by end of Year 1, with final determination by end of Year 2.

e. Reducing fugitive dust and vehicular emissions associated with storage/stockpiling of coal for Unit 3. The ability to burn more of the higher sulfur Unit 1 and 2 coal product in Unit 3 would enable the Station to increase direct loading of coal from the coal cleaning facility into the Unit 3 silo with the facility's existing conveyance system. This in turn may enable the Station to reduce the use of one of three stockpiles on the ground that currently is used to blend Unit 3 compliance coal, and the fugitive dust and vehicular emissions associated with managing that third pile.
-- Use Pennsylvania DEP protocol and existing industry standards for determining coal stockpile dust emissions to determine effect of -- Project on emissions associated with the third-stockpile.
End of Year 1 -- Conduct preliminary evaluation of reductions in fugitive emissions.
End of Year 2 -- Complete evaluation.

f. Using same 3-hour average SO2 emission rate for all three units to consolidate to one-product coal stockpile. A successful demonstration that the product from the modified coal cleaning facility could fuel Units 1 and 2 to emit SO2 at levels lower than annualized 1995 levels would raise the possibility that the Station ultimately could fuel Units 1, 2, and 3 to comply with the same 3-hour average emission limitation, while still maintaining and protecting attainment and meeting a Station average annual emission rate.
End of Year 1 -- Evaluation of the facility's ability to fuel Units 1 and 2 to achieve an SO2 emission rate below 1995 level will be used to provide an initial determination of whether using a one-product coal stockpile would be possible; with conclusion verified during Year 2.
End of Year 2 -- Identify the range of possible multi-media environmental benefits of converting to a one-product coal stockpile (e.g. reduced run-off from coal piles, reduced air emissions resulting from decreased on-site truck traffic and idling time).



g. Reducing operational costs by up to $6.5 million.
-- The Station will establish a baseline for determining whether the Project achieves anticipated reductions in fuel costs and increased efficiency in energy production.
End of Year 1 -- Operational costs will be monitored for Year 1 and compared to baseline.
End of Year 2 -- The same analysis will be conducted for Year 2.

h. Maintaining viability of local coal market\reducing off-site facilities used to blend Unit 3 compliance coal.
End of Year 1 -- By end of Year 1, provide preliminary evaluation of effect of Project on viability of local coal market.
End of Year 2 -- Final evaluation to be provided by the end of Year 2.
End of Year 1 -- Evaluate Unit 3 coal supplier activities to determine effect of Project and year 2 on off-site blending facilities for Unit 3 compliance coal.

3. STAKEHOLDER PARTNERSHIP

Initially -- The Station will form a stakeholder partnership group, consisting of a representative from Pennsylvania DEP, EPA, and other relevant and interested stakeholder groups. The purpose of the group will be to enhance the dialogue between the Station and stakeholders regarding Project results. The first task of the group will be to determine the level and frequency of its participation in the Homer City XL Project over the two year period and the protocol for sharing information about the Project with the group.

4. REPORTING (Beyond compliance with Part 75 Continuous Emissions Monitoring Requirements)

After End of Submit preliminary report on:
Year 1
-- Station emissions compared to the 2.00 lbs. of SO2/mmBtu Station average annual emission rate.
-- environmental benefits; whether Title IV allowances must be acquired and retired or credit limited.
-- cost savings
-- the feasibility of reducing hazardous air pollutant and opacity emissions and eliminating thermal dryers and their emissions through modifications to the coal cleaning facility.
the feasibility of establishing the same 3-hour average SO2 emission rate for all three units and consolidating to a one-product coal stockpile, and the range of possible multi-media environmental benefits that would result.
-- the effects of the Project on the local coal market.

After End of Submit final report containing results of completed evaluation of these issues Year 2 and an evaluation of the feasibility of a Phase II demonstration, including operational/emission limitation proposals for Phase II.

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