Salem Harbor Station: Can

1
Salem Harbor StationCant Live With It Cant
Live Without It

• Sanford L. Hartman
• Vice President and General Counsel
• National Energy Gas Transmission, Inc.
• Presentation to
• Electric Industry Restructuring Roundtable
• June 18, 2004

2
Brief Chronology

• Sept. 1998 USGen New England purchases electric
  generating assets from New England Power
  subject to the requirements of Consumers
  First
• May 2000 Press conference with Gov. Cellucci to
  announce voluntary reductions at Salem
  Harbor including repowering of large oil
  unit at Salem
• May 2001 Massachusetts DEP promulgates new air
  regulations for older power plants (7.29
  regulations).
• - eliminates long-standing policy of
  bubbling across Brayton and Salem to
  achieve compliance at least cost

3
Brief Chronology

• Dec. 2001 Salem Harbor submits ECP to comply by
  2006 repowering no longer cost effective
  in New England market
• June 2002 DEP approves Salem Harbors ECP but
  with 2004 compliance date
• Dec. 2002 DEP issues draft approval of revised
  ECP with 2006 compliance date
• Jan. 2003 Romney Administration begins
• Feb. 2003 DEP reverses its position and issues
  disapproval of ECP with 2006 compliance
  date Salem Harbor appeals

4
Brief Chronology

• April 2003 Salem Harbor files an 18.4 request to
  ISO New England to retire by October 1, 2004
• June 2003 ACO signed with DEP, City of Salem,
  CLF, HealthLink, Wenham Watershed Association
  and MASSPIRG
• July 2003 USGenNE files for bankruptcy
• ISO denies USGenNE request to retire
• Salem Harbor

5
Competing Objectives

• Environmental Community make further
  environmental improvements as quickly as possible
  or retire the plant
• ISO do not retire the plant needed for
  reliability on the North Shore and in the Boston
  Import Area
• City of Salem sudden plant closure will mean
  catastrophic loss of tax revenues supporting
  schools, police and fire
• USGenNE in bankruptcy compliance equipment
  investment not cost-effective (irrelevant
  ofbankruptcy) no access to capital

6
ACOs Resolution of Competing Objectives

• Environmental Improvements
• Near Term Compliance Measures
• Immediate SO2 reductions from Unit 4 (lower
  sulfur oil)
• Immediate NOx reductions from Units 1, 2 and 3
  (run SNCRs year-round and implement Burner Tip
  Optimization Program)
• Accelerate permitting of SNCR (NOx) for Unit 4
• Implement dust mitigation measures re coal pile
• Issue RFP for coal pile windscreen

7
ACOs Resolution of Competing Objectives

• Environmental Improvements
• Long Term Compliance Measures
• Initiate critical path permitting for compliance
  equipment
• Implement Compliance Account which tracks
  emissions of SO2 and NOx in excess of 7.29 regs
  as of Oct. 1, 2005, for payback once compliance
  equipment installed
• Seek funding for compliance equipment
• Install compliance equipment within 32months of
  initiation of funding

8
ACOs Resolution of Competing Objectives

• Reliability
• If compliance equipment funding is delayed,
  day-for-day extension allowed in construction
  milestone schedule
• Salem Harbor units may continue to operate so
  long as needed by ISO for reliability purposes

9
ACOs Resolution of Competing Objectives

• Tax Revenues
• Units will continue to operate so long as needed
  for reliability purposes by ISO tax payments
  can continue so long as units operate
• Units may continue to operate up to one
  additional year after reliability need ceases to
  allow for an orderly transition
• Units may continue to operate indefinitely after
  reliability need ceases if in compliance with
  7.29 regs and all other applicable regulations

10
ACOs Resolution of Competing Objectives

• Access to Funding
• Salem Harbor has obligation to seek funding
• Filed petition for approval of Reliability
  Agreement negotiated with ISO
• FERC approval of Reliability Agreement could
  occur within third quarter

11
Overview of Reliability Agreement

• Negotiated between USGenNE and ISO
• Enabling Agreement which establishes a mechanism
  for funding an escrow account for costs actually
  incurred by Salem Harbor in construction
  compliance equipment
• Also establishes a mechanism for USGenNE to repay
  funds drawn from the escrow account assuming one
  or more of the units continue to operate

12
Innovations in Reliability Agreement

• Repayment mechanism
• Explicitly requires consultation between ISO and
  state agencies in process of deciding whether to
  initiate funding or halt funding
• Minimizes the type of market interference created
  by traditional RMR contracts

13
Possible Outcomes

• FERC approves funding mechanism
• Trigger may or may not be pulled on funding
• If trigger is pulled, Salem Harbor will submit to
  ISO cost estimates for project
• Project costs will be reviewed by ISOs
  Independent Engineer
• If costs are approved, escrow will be funded
• Construction will commence

14
Possible Outcomes

• FERC does not approve funding mechanism
• Salem Harbor will continue to comply with the
  7.29 regs by implementing the Near Term
  Compliance Measures in the ACO
• ISO will continue to assess whether some or all
  of the units at Salem Harbor are needed for
  reliability