Environmental Performance Update

Key 2006 Issues

TVA’s activities are subject to certain federal, state, and local environmental statutes and regulations. Major areas of regulation affecting TVA’s activities include air quality control, water quality control, and management and disposal of solid and hazardous wastes.

TVA has incurred and continues to incur substantial capital and operating and maintenance costs in order to comply with evolving environmental requirements. Many of these costs are associated with the operation of TVA’s 59 coal-fired generating units. Several existing regulatory programs have been and are being made more stringent in their application to fossil-fuel units, and additional regulatory programs affecting fossil-fuel units were promulgated in 2005, including the Clean Air Interstate Rule (CAIR), which requires significant utility reductions of emissions of sulfur dioxide (SO₂) and nitrogen oxides (NO_X) in the eastern half of the United States (including all of TVA’s operating area), and the Clean Air Mercury Rule (CAMR). TVA had previously estimated its total capital cost for reducing emissions from its power plants from 1977 through 2010 to reach $5.8 billion, $4.6 billion of which had already been spent as of September 30, 2006. TVA estimates that compliance with CAIR and CAMR could lead to additional costs of $3.0 billion to $3.5 billion in the next decade if TVA should continue to operate all of its present coal plants.

Clean Air Developments

Expenditures related to clean air projects during 2006 were approximately $182 million. This figure includes expenditures in 2006 of $6 million to continue to reduce NO_X emissions through the installation of selective catalytic reduction (SCR) systems, and of $146 million for the installation of flue gas desulfurization systems (scrubbers) to continue to reduce SO₂ emissions. Both are explained in more detail below. The aforementioned estimates do not include additional capital costs of $3.0 billion to $3.5 billion that TVA expects to incur over the next decade to comply with CAIR and CAMR. Increasingly stringent regulation of conventional pollutants, and possibly carbon dioxide, will continue to result in significant capital and operating costs for coal-fired generating units, including those operated by TVA.

TVA's Clean Air Progress

Sulfur Dioxide

Since 1977 TVA has reduced its SO₂ emissions by approximately 80 percent by switching to lower-sulfur coals, repowering a unit at its Shawnee Fossil Plant with the advanced Atmospheric Fluidized Bed Combustion (AFBC) technology, and installing scrubbers on six of its larger units. A seventh scrubber, at Unit 3 of Paradise Fossil Plant, was placed in commercial operation in December of 2006. TVA broke ground in 2005 on its eighth scrubber, at Bull Run Fossil Plant, and in 2006 broke ground on two more scrubbers, at Kingston Fossil Plant, as part of its previously announced plans to achieve a total SO₂ emission reduction of 80 to 85 percent compared to the 1977 level. Additionally, TVA has switched, or plans to switch, to lower sulfur coal on several additional units in the next few years. It is likely that additional emission reduction measures will have to be undertaken after these planned actions are completed to achieve compliance with CAIR and possible future tightening of applicable requirements.

Nitrogen Oxides

Since 1995 TVA has reduced its NO_X emissions during the summer (when ozone levels increase) by 81 percent by installing various controls, including low-NO_X burners and/or combustion controls on 58 of its coal-fired units. The AFBC unit at Shawnee is inherently low-NO_X-emitting. TVA has also installed SCRs on 21 of its largest units. In 2005 TVA installed selective noncatalytic reduction (SNCR) systems on two units to demonstrate their long-term technology capability. TVA has continued operating these two new SNCR installations through the 2006 ozone season. SNCRs generally cost less to install than SCRs but have lower NO_X removal capabilities.

Early in 2006 TVA began testing a High Energy Reagent Technology (HERT) on three units for potential future application. HERT is similar to SNCR, has lower capital costs than SCRs, and appears to have lower NO_X removal capabilities than SCRs but higher removal capabilities than SNCRs. The initial HERT testing program was successful. In 2007 TVA will install this technology on two coal-fired units that were previously targeted for SNCR installations to demonstrate the HERT technology on a potentially permanent basis. TVA’s NO_X emission reduction program is expected to continue to depend primarily on SCRs, but will also likely incorporate some mix of SNCRs and/or HERTs as TVA gains more experience with these technologies.

In 2004 the U.S. Environmental Protection Agency (EPA) issued final nonattainment designations under the current eight-hour ozone standard. Several counties within the TVA region were designated as not in attainment with that standard. Some of these counties have entered into “Early Action Compacts” with EPA and have taken steps such as instituting vehicle emissions testing, lowering speed limits, and other activities to help reduce summer ozone levels. The TVA NO_X emission reductions described above have been a contributor to improving summer ozone levels in those areas, especially in Tennessee. Current monitoring indicates that all counties are making progress toward meeting the lower standard and achieving an attainment designation. The NO_X reduction requirements of CAIR will continue to help states achieve EPA’s ozone and fine particle standards.

Particulates/Opacity

Coarse particulates (particulates of 10 micrometers or larger and especially fly ash) have long been regulated by states to meet EPA’s national ambient air quality standard for particulate matter. TVA’s coal-fired units have been equipped with mechanical collectors, electrostatic precipitators, scrubbers, or baghouses, which have reduced particulate emissions from the TVA system by more than 99 percent compared to uncontrolled units. In 1997 the EPA, for the first time, issued separate national ambient air quality standards for even smaller particles with a size of up to 2.5 micrometers (fine particles).

In December 2004 and April 2005, EPA issued final determinations regarding which areas of the country are not in attainment with the 1997 fine particles standard. Those nonattainment areas include counties and parts of counties in the Knoxville and Chattanooga, Tennessee, metropolitan areas. In September 2006, EPA revised the 1997 standards. The 2006 revisions tighten the 24-hour fine particle standard and retain the current annual fine particle standard. EPA also decided to retain the existing 24-hour standard for coarse particles, but revoked the related annual standard. A preliminary review of the current monitoring data indicates that no additional counties likely will be classified as nonattainment areas under the revised 2006 standards, although actual designations will be based on subsequent years’ monitoring data. CAIR is intended to help states attain the fine particle standards, and actions taken to reduce emissions under CAIR, including those planned by TVA, are expected to continue the reduction in fine particle levels.

Issues regarding utility compliance with state opacity requirements are also increasing. Opacity measures the denseness (or color) of power plant plumes and has traditionally been used by states as a means of monitoring good maintenance and operation of particulate control equipment. Under some conditions, retrofitting a unit with additional equipment to better control SO₂ and NO_X emissions can adversely affect opacity performance, and TVA and other utilities are now addressing this issue. There are also disputes with special interest groups over the role of continuous opacity monitors in determining compliance with opacity limitations.

Mercury

In December 2000 the EPA determined that it was appropriate and necessary to regulate mercury emissions from oil and coal-fired power plants as a hazardous air pollutant under the Clean Air Act. In March 2005 it reversed that earlier decision, and instead issued the Clean Air Mercury Rule, or CAMR. CAMR establishes caps for overall mercury emissions in two phases, with the first phase becoming effective in 2010 and the second in 2018. It allows the states to regulate mercury emissions through a market-based cap-and trade program. All of the states, in which TVA operates potentially affected sources are expected to adopt CAMR without significant change.

In response to a request for reconsideration, EPA confirmed its approach in May 2006. In June 2006, 16 states and several environmental groups filed law suits challenging CAMR. This lawsuit is currently pending. TVA cannot predict the outcome of the pending challenge of CAMR, or what effects any decision may have that would require the EPA to regulate mercury as a hazardous air pollutant. If the EPA’s decisions are upheld and CAMR is implemented, TVA expects to achieve the required mercury reductions at least for Phase I of CAMR as co-benefits of the installation of additional emission control technology in connection with the implementation of CAIR.

Carbon Dioxide

CO₂ is a greenhouse gas believed by some to contribute to global warming. Legislation has been introduced in Congress to require reductions of CO₂ and, if enacted, could result in significant additional costs for TVA. The current Administration has proposed a voluntary initiative that established a goal of reducing the greenhouse gas intensity of the U.S. economy by 18 percent and has asked the electric utility sector and other industry sectors to support this initiative. TVA is supporting this effort and is also a member of the Southeast Regional Carbon Sequestration Partnership.

TVA is also working with the Electric Power Research Institute and other electric utilities on projects investigating technologies for CO₂ capture and geologic storage, as well as carbon sequestration via reforestation. The previous Administration also asked utilities to voluntarily participate in an effort to reduce, sequester, or avoid greenhouse gases. Under that program, TVA reduced, sequestered, or avoided more than 305 million tons of CO₂ from 1994 through 2005, as reported under Section 1605b of the Energy Policy Act. TVA has also brought on line about 3,850 megawatts of non-CO₂-emitting generation since 1990, and is in the process of adding another 1,800 megawatts of non-CO₂-emitting generation. TVA’s clean air strategy, as it relates to investments in coal-fired generating facilities, allows for continued review of decisions for clean air and other capital investments as potential climate change legislation is developed.

In addition to legislative activity, climate change issues are the subject of several lawsuits, including lawsuits against TVA. On November 29, 2006, the United States Supreme Court heard a case concerning whether EPA has the authority and duty to regulate CO₂ emissions under the Clean Air Act. The District of Columbia Circuit Court of Appeals earlier affirmed EPA’s decision not to regulate CO₂. While the case focuses on CO₂ emissions from the transportation industry, it could set a precedent for regulation in other industrial sectors depending upon how the Supreme Court rules. States are also becoming more active on the climate change front. In the Southeast, to TVA’s knowledge, only North Carolina, where TVA does not operate any coal-fired generating facilities, is studying initiatives aimed at climate change under the provisions of the state’s Clean Smokestacks Act of 2002. This act required the State Division of Air Quality to study potential control of CO₂ emissions from coal-fired utility plants and other stationary sources. This effort has also prompted actions to develop a climate action plan for North Carolina.

Clean Water Developments

In the second phase of a three-part rulemaking to minimize the adverse impacts from cooling water intake structures on fish and shellfish, as required under Section 316(b) of the Clean Water Act, EPA promulgated a final rule for existing power producing facilities that became effective on September 7, 2004. The new rule requires existing facilities to select among several different compliance options for reducing the number of organisms pinned against and/or drawn into the cooling systems. These include development of a site-specific compliance option based on application of cost/cost or cost/benefit tests. The site-specific tests are designed to ensure that a facility’s costs are not significantly greater than cost projections in the rule or the benefits derived from taking mitigation actions. Actions taken to compensate for any impacts by restoring habitat or pursuing other options, such as building hatcheries for fish/shellfish production, count toward compliance.

All of the intakes at TVA’s existing coal-fired and nuclear-generating facilities are subject to this rule. Compliance assessments are under way for these facilities to determine what should be done to meet the new requirements. Some capital and/or operating expenditures may have to be made to comply at some or all facilities. The assessments, however, are complicated by the uncertainty created by pending legal action challenging EPA’s rule.

As is the case across the utility industry and in other industrial sectors, TVA is facing more stringent requirements related to protection of wetlands, reductions in storm water impacts from construction activities, water quality degradation and criteria, and laboratory analytical methods. TVA is also following litigation related to the use of herbicides, water transfers, and releases from dams. TVA has a good compliance record and is not facing any substantive requirements related to noncompliance with existing Clean Water Act regulations.

Hazardous Substances

Liability for releases and cleanup of hazardous substances is regulated by the federal Comprehensive Environmental Response, Compensation, and Liability Act, among others, and similar state statutes. In a manner similar to many other industries and power systems, TVA has generated or used hazardous substances over the years. TVA operations at some TVA-owned facilities have resulted in releases of hazardous substances and/or oil which require cleanup and/or remediation. TVA also is aware of alleged hazardous-substance releases at 10 non-TVA areas for which it may have some liability.

Coal-Combustion Wastes

Coal combustion waste disposed in landfills and surface impoundments continues to be regulated as nonhazardous. EPA now is developing national solid waste management standards to address coal-combustion wastes disposed in unlined landfills and surface impoundments or placed in mines. These standards are likely to include increased groundwater monitoring, more stringent siting requirements, and closure of existing waste-management facilities not meeting minimum standards. EPA is expected to issue these new management standards sometime in 2007. TVA is monitoring these developments and will evaluate the potential impact of these rules upon its operations as more information becomes available.