Implementation of the " Clean

Smokestacks Act"

A Report to the

Environmental Review Commission and the

Joint Legislative Utility

Review Committee

Submitted by the North Carolina Department

of Environment and Natural Resources and

the North Carolina Utilities Commission

June 1, 2004

Implementation of the " Clean Smokestacks Act"

A Report to the

Environmental Review Commission and the Joint Legislative Utility

Review Committee

Submitted by the North Carolina Department of Environment and

Natural Resources and the North Carolina Utilities Commission

This report is submitted pursuant to the requirement of Section 14 of

Session Law 2002- 4, Senate Bill 1078 enacted June 20, 2002. The actions taken to

date by Progress Energy Carolinas, Inc. and Duke Power, a Division of Duke

Energy Corporation, appear to be in accordance with the provisions and

requirements of the Clean Smokestacks Act.

Signed: ____________________________________________

William G. Ross, Jr., Secretary

Department of Environment and Natural Resources

Signed: ____________________________________________

Jo Anne Sanford, Chair

North Carolina Utilities Commission

June 1, 2004

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Implementation of the " Clean Smokestacks Act"

A Report to the

Environmental Review Commission and the Joint Legislative Utility

Review Committee

June 1, 2004

The General Assembly of North Carolina, Session 2001, passed Session Law

2002- 4 also known as Senate Bill 1078. This legislation is titled " An Act to Improve Air

Quality in the State by Imposing Limits on the Emission of Certain Pollutants from

Certain Facilities that Burn Coal to Generate Electricity and to Provide for Recovery by

Electric Utilities of the Costs of Achieving Compliance with Those Limits" (“ the Clean

Smokestacks Act” or “ the Act”). The Clean Smokestacks Act, in Section 14, requires

the Department of Environment and Natural Resources (“ DENR”) and the

Utilities Commission (“ Commission”) to report annually, i. e., by June 1 of each year, on

the implementation of the Act to the Environmental Review Commission and the

Joint Legislative Utility Review Committee.

The Act, in Section 9, requires Duke Energy and Progress Energy to submit

annual reports to DENR and the Commission containing certain specified information.

Duke Energy and Progress Energy filed reports, with DENR and the Commission, dated

March 31, 2004, and April 1, 2004, respectively. Specifically, such reports were

submitted in compliance with the requirements of G. S. 62- 133.6( i). Duke Energy’s and

Progress Energy’s reports are attached, and made part of this report, as Attachments A

and B, respectively.

Additionally, the Secretary of DENR wrote the Commission on May 3, 2004, as

follows:

“ North Carolina’s investor owned electric utilities, Duke Energy and Progress

Energy, have filed their compliance plan annual updates for 2004 in accordance with

N. C. G. S. 62- 133.6( i), Section 9( i) of S. L. 2002- 4, known as the ‘ Clean Smokestacks

Act’. Pursuant to N. C. G. S. 62- 133.6( j), the Department of Environment and Natural

Resources has reviewed this information, and the submittals comply with the Act. The

plans and schedules of the companies appear adequate to achieve the emission

limitations set out in N. C. G. S. 143- 215.107D.”

This report is presented to meet the reporting requirement of the Act pertaining

to DENR and the Commission, as discussed above, and is submitted jointly by DENR

and the Commission. The report is structured to address the various actions that have

occurred pursuant to the provisions of Sections 9, 10, 12 and 13 of this Act. Reports of

actions under these Sections describe the extent of implementation of the Act to this

date.

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I. Section 9( c) of the Act, Codified as Section 62- 133.6( c) of the North

Carolina General Statutes

G. S. 62- 133.6( c) provides: The investor- owned public utilities shall file their

compliance plans, including initial cost estimates, with the Commission and the

Department of Environment and Natural Resources not later than 10 days after the date

on which this section becomes effective. The Commission shall consult with the

Secretary of Environment and Natural Resources and shall consider the advice of the

Secretary as to whether an investor- owned public utility's proposed compliance plan is

adequate to achieve the emissions limitations set out in G. S. 143- 215.107D.

Status: North Carolina’s investor- owned electric utilities, Progress Energy

Carolinas, Inc. ( Progress Energy) and Duke Power, a division of Duke Energy

Corporation ( Duke Energy), filed their initial compliance plans as required in June and

July of 2002, in accordance with G. S. 62- 133.6( c), Section 9( c) of S. L. 2002- 4, the

Clean Smokestacks Act. DENR reviewed this information and determined that the

submittals comply with the Act and, as proposed, appear adequate to achieve the

emission limitations set out in G. S. 143- 215.107D.

II. Section 9( i) of the Act, Codified as Section 62- 133.6( i) of the North Carolina

General Statutes

G. S. 62- 133.6( i) provides: An investor- owned public utility that is subject to the

emissions limitations set out in G. S. 143- 215.107D shall submit to the Commission and

to the Department of Environment and Natural Resources on or before 1 April of each

year a verified statement that contains all of the following [ specified information]:

The following are the eleven subsections of G. S. 62- 133.6( i) and the related

responses from Progress Energy and Duke Energy for each subsection:

1. G. S. 62- 133.6( i)( 1) requires: A detailed report on the investor- owned

public utility's plans for meeting the emissions limitations set out in G. S. 143- 215.107D.

Progress Energy Response: " The plan for Progress Energy Carolinas, Inc.

was originally submitted on July 29, 2002. Appendix A ( of the attached Progress

submittal dated April 1, 2004) contains an updated version of this plan, effective

April 1, 2004."

Duke Energy Response: " Exhibits A and B ( of the attached Duke submittal

dated March 31, 2004) outline the technology selections by facility and unit, projected

operational dates, expected emission rates, and the corresponding tons of emissions

that demonstrate compliance with G. S. 143- 215.107D."

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2. G. S. 62- 133.6( i)( 2) requires: The actual environmental compliance

costs incurred by the investor- owned public utility in the previous calendar year,

including a description of the construction undertaken and completed during that year.

Summary of Progress Energy Report: The actual environmental compliance

costs incurred by Progress Energy in calendar year 2003 were $ 22.3 million.

Construction began at both Roxboro and Asheville plants after receipt of the necessary

Title V permits and approval of soil and erosion control plans.

Summary of Duke Energy Report: The actual environmental compliance

costs incurred by Duke Energy in calendar year 2003 were $ 16.0 million. The Company

reported that such costs were incurred for such things as a variety of project studies and

investigations, engineering, equipment specifications development, equipment layout,

contracting related costs, and logistics.

3. G. S. 62- 133.6( i)( 3) requires: The amount of the investor- owned

public utility's environmental compliance cost amortized in the previous calendar year.

Summary of Progress Energy and Duke Energy Reports: Progress Energy

amortized $ 74.2 million in 2003. Duke Energy amortized $ 114.8 million in 2003. As

indicated in the May 30, 2003 report to the Environmental Review Commission and the

Joint Legislative Utility Review Committee (“ the May 30, 2003 report”), Progress

Energy, in response to a data request submitted by the Commission, projected that it

would amortize $ 100 million of environmental compliance costs in 2003. Also, as

indicated in the May 30, 2003 report, Duke Energy, in response to a Commission data

request, projected that it would amortize $ 70 million of environmental compliance costs

in 2003.

4. G. S. 62- 133.6( i)( 4) requires: An estimate of the investor- owned

public utility's environmental compliance costs and the basis for any revisions of those

estimates when compared to the estimates submitted during the previous year.

Summary of Progress Energy Report: Progress Energy reported that, while

some unit total and annual costs have changed, the total project cost in future dollars

remains at $ 813 million. More specifically, in its 2004 report, the Company estimated

such cost to be $ 812.968 million, as compared to the $ 813.119 million reflected in its

2003 report, a reduction of $ 151,000. The Company observed that the projected SO2

removal rates have increased for scrubbed units. As a result, the planned scrubber for

Lee 3 has been cancelled

Summary of Duke Energy Report: Duke Energy reported that its expected

costs are not significantly different than the estimates provided in 2003. More

specifically, in its 2004 report, the Company estimated its compliance costs to be

$ 1.526 billion, as compared to the $ 1.479 billion reflected in its 2003 report, an increase

of $ 47 million. The Company also reported that the technologies expected to be

required to support compliance have not changed. The Company further stated that the

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minor adjustments to the estimates at the project level are the result of additional project

scope definition and refinement of project schedules only.

5. G. S. 62- 133.6( i)( 5) requires: A description of all permits required in

order to comply with the provisions of G. S. 143- 215.107D for which the investor- owned

public utility has applied and the status of those permits or permit applications.

Progress Energy Response:

Asheville Plant

• Revised Title V permits to support construction activities have been issued

• NPDES Permit application submitted for required wastewater system

modifications

• Soil erosion and sedimentation control plans have been approved

Roxboro Plant

• Revised Title V permits to support construction activities have been issued

• Soil erosion and sedimentation control plans have been approved

Duke Energy Response:

" Allen Steam Station SNCR, Unit 1

• Air Permit Application for temporary trial submitted and final permit received

in 2002

• NPDES Permit Modification for temporary trial submitted and permit

modification received in 2002

• Air Permit Application for permanent equipment installation submitted and

final permit received in 2002

Marshall Steam Station SNCR, Unit 4

• Air Permit Application for temporary trial submitted and final permit received

in 2002

• NPDES Permit Modification for temporary trial submitted and permit

modification received in 2002

• Marshall Steam Station Scrubbers, Units 1- 4

• Air Permit Application – Submitted 9/ 17/ 03; received 2/ 5/ 04

• Sedimentation and Erosion Control Plan – Submitted 9/ 11/ 03; received

10/ 8/ 03; amended 12/ 19/ 03; amendments approved 12/ 31/ 03

• NPDES Modification – Submitted 4/ 30/ 03; received 1/ 23/ 04

• Landfill Site Suitability Application – Submitted 9/ 3/ 03”

6. G. S. 62- 133.6( i)( 6) requires: A description of the construction

related to compliance with the provisions of G. S. 143- 215.107D that is anticipated

during the following year.

Progress Energy Response: See Appendix C of the attached letter from

Progress Energy dated April 1, 2004, for details of construction and installation of

equipment. The Asheville and Roxboro plants will have significant construction in 2004.

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Duke Energy Response: See attached letter from Duke Energy dated

March 31, 2003, for details of construction anticipated for the next year for:

• Allen Steam Station SNCR, Unit 3

• Allen Steam Station SNCR, Unit 4

• Allen Steam Station Scrubbers

• Belews Creek Steam Station Scrubbers

• Buck Steam Station SNCR, Unit 5

• Buck Steam Station SNCR, Unit 6

• Cliffside Steam Station Scrubbers

• Marshall Steam Station SNCR, Unit 1

• Marshall Steam Station SNCR, Unit 2

• Marshall Steam Station SNCR, Unit 3

• Marshall Steam Station Scrubbers

• Riverbend Steam Station SNCR, Unit 4

• Riverbend Steam Station Burners, Unit 5

• Riverbend Steam Station SNCR, Unit 7

7. G. S. 62- 133.6( i)( 7) requires: A description of the applications for

permits required in order to comply with the provisions of G. S. 143- 215.107D that are

anticipated during the following year.

Progress Energy Response: ” An NPDES permit modification application will

be submitted in the 2nd quarter of 2004 to request changes to the existing wastewater

discharge permit for the Roxboro Plant. Operation of scrubbers to comply with

G. S. 143- 214.107D will create a new wastewater stream, which requires modification of

our current permit. The application characterizes expected wastewater contaminant

concentrations and flows.”

Duke Energy Response:

" Allen Steam Station SNCR, Unit 3

• Air Permit Application – Plan to submit 8/ 1/ 04

Belews Creek Steam Station Scrubbers, Units 1- 2

• Landfill Site Suitability Application – Plan to submit 1/ 11/ 05

• Air Permit Application – Plan to submit 5/ 20/ 05

• Sedimentation and Erosion Control Plan – Plan to submit

6/ 6/ 05

• NPDES Permit Application – Plan to submit 5/ 25/ 04

Dan River Steam Station SOFA, Unit 3

• Air Permit Application – Plan to submit January , 2005

Marshall Steam Station SNCR, Unit 2

• Air Permit Application – Plan to submit June, 2005

Marshall Steam Station SNCR, Unit 3

• Air Permit Application – Plan to submit 6/ 1/ 04

• NPDES Permit Modification ( if required) – Plan to submit

10/ 27/ 04

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• Sedimentation and Erosion Control ( if required) – Plan to

submit 11/ 15/ 04

Marshall Steam Station Scrubbers

• Landfill Construction Plan Application – Plan to submit 4/ 1/ 04

• Sedimentation and Erosion Control Plan for balance of

Marshall site work – Plan to submit 6/ 18/ 04

• Authorization to Construct ( ATC) application for FGD

wastewater treatment system – Plan to submit 6/ 1/ 04

Riverbend Steam Station SOFA, Unit 5

• Air Permit Application – Plan to submit 5/ 1/ 04

Riverbend Steam Station SOFA, Unit 6

• Air Permit Application – Plan to submit January, 2005”

8. G. S. 62- 133.6( i)( 8) requires: The results of equipment testing

related to compliance with G. S. 143- 215.107D.

Progress Energy Response: " No equipment testing related to compliance

with G. S. 143- 215.107D occurred in 2003."

Duke Energy Response:

" Allen Steam Station SNCR, Unit 1

• Technology demonstration in December, 2001 ( one week test)

􀂾 Nominal 30% reduction in NOx with ammonia slip of 5 to 10

ppm at full load

􀂾 Average NOx outlet rate of 0.15 #/ MMBTU for the test period

• Equipment acceptance testing in November, 2003

􀂾 Nominal 25% reduction in NOx with ammonia slip of less than 5

ppm at full load

Marshall Steam Station SNCR, Unit 4

• Technology demonstration in October - November, 2002 ( one

month test)

􀂾 Average 24% - 25% reduction in NOx with ammonia slip of 5 to

10 ppm at full load

􀂾 Average NOx outlet rate of 0.163 #/ MMBTU for the test period "

9. G. S. 62- 133.6( i)( 9) requires: The number of tons of oxides of

nitrogen ( NOx) and sulfur dioxide ( SO2) emitted during the previous calendar year from

the coal- fired generating units that are subject to the emissions limitations set out in

G. S. 143- 215.107D.

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Progress Energy Response: “ The total calendar year 2003 emissions from

the affected coal- fired Progress Energy Carolinas units are:

• NOx - 56,059

• SO2 - 196,184"

Duke Energy Response: In the 2003 calendar year, the following were

emitted from the North Carolina based Duke Energy coal- fired units:

• NOx - 75,550 tons

• SO2 - 264,031 tons

10. G. S. 62- 133.6( i)( 10) requires: The emissions allowances described

in G. S. 143- 215.107D( i) that are acquired by the investor- owned public utility that result

from compliance with the emissions limitations set out in G. S. 143- 215.107D.

Progress Energy Response: " No emissions allowances resulting from

compliance with G. S. 143- 215.107D were acquired in 2003."

Duke Energy Response: “ No emissions allowances have been acquired by

Duke Power Company resulting from compliance with the limitations set out in

G. S. 143- 215.107D."

11. G. S. 62- 133.6( i)( 11) requires: Any other information requested by

the Commission or the Department of Environment and Natural Resources

Summary of Commission Request: The Commission submitted data requests

to Progress Energy and Duke Energy on April 16, 2004. The information requested,

among other things, concerned current projected amortization schedules over the six

remaining years of the seven- year accelerated cost recovery period.

Progress Energy Response: Progress Energy responded that it currently

expects to amortize its remaining compliance costs as follows: 2004 - $ 75 million;

2005 – $ 120 to $ 140 million; 2006 - $ 125 to $ 145 million; 2007 – $ 130 to $ 150 million;

2008 - $ 121.5 million; and 2009 - $ 121.5 million. The Company noted that those

amounts are subject to change.

Duke Energy Response: Duke Energy responded that it currently plans to

amortize its remaining compliance costs as follows: 2004 - $ 171 million; 2005 – $ 277

million; 2006 - $ 277 million; 2007 – $ 277 million; 2008 - $ 214 million; and 2009 - $ 169

million.

III. Section 10 of the Act provides: It is the intent of the General Assembly that

the State use all available resources and means, including negotiation, participation in

interstate compacts and multistate and interagency agreements, petitions pursuant to

42 U. S. C. § 7426, and litigation to induce other states and entities, including the

Tennessee Valley Authority, to achieve reductions in emissions of oxides of nitrogen

( NOx) and sulfur dioxide ( SO2) comparable to those required by G. S. 143- 215.107D, as

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enacted by Section 1 of this act, on a comparable schedule. The State shall give

particular attention to those states and other entities whose emissions negatively impact

air quality in North Carolina or whose failure to achieve comparable reductions would

place the economy of North Carolina at a competitive disadvantage.

DENR and Division of Air Quality ( DAQ) Activities to implement this

Section:

• A meeting was held between DENR/ DAQ and the Tennessee Valley Authority

( TVA) and the Tennessee air program officials in August 2002, to discuss actions

planned by TVA that would be comparable to the Clean Smokestacks Act. TVA

presented their plans to add five additional SO2 scrubbers to power plants

primarily in the eastern portion of the TVA system. These new scrubbers should

benefit North Carolina most. TVA plans to complete installation of the new

facilities by 2010 and the first plant, Paradise, will be installed by 2006.

Regarding NOx control, TVA is on schedule to have the first 8 of its selective

catalytic reduction ( SCR) systems in place. TVA plans to have 25 boiler units

controlled by 2005 at a cost of $ 1.3 billion which will reduce ozone season NOx

by 75 percent.

Through DENR’s efforts, the Clean Smokestacks Act is achieving notoriety nationally

and is being touted in other States as a model for State action. The Secretary of DENR

and the Chief of Planning of DAQ made presentations about the Clean Smokestacks

Act at two national state environmental organization meetings in the fall of 2002. The

Chief of Planning of DAQ testified in 2002, at a U. S. Senate Environment and Public

Works Committee Hearing on the features and benefits of North Carolina's Clean

Smokestacks Act. The Deputy Director of DAQ participates on a national dialogue

workgroup addressing ideal features of national multi- pollutant legislation for coal- fired

utility boilers. The Clean Smokestacks Act is held up as an ideal example.

• The State also has been active in maintaining federal standards. In an

April 2003 letter to EPA Administrator Whitman, Governor Easley urged the

Administration to ensure that the federal Clear Skies bill not override State

initiatives such as the Clean Smokestacks Act. The Governor also indicated the

State’s opposition to bill text that would extinguish the statutory rights of States

regarding interstate pollution abatement. DAQ and the Attorney General

commented last month in opposition to a proposed federal rule that would

weaken the federal New Source Review program and potentially result in

significant new upwind emissions. North Carolina filed a petition on March 18,

2004, calling for the U. S. Environmental Protection Agency to require major

reductions of air pollution in 13 upwind states that are significantly impacting this

state. Reducing these emissions will substantially improve air quality in North

Carolina. The petition, filed pursuant to Section 126 of the Clean Air Act, calls for

the EPA to require cuts in fine particle- forming emissions from power plants in

Alabama, Georgia, Illinois, Indiana, Kentucky, Michigan, Ohio, Pennsylvania,

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South Carolina, Tennessee, Virginia and West Virginia, and ozone- forming

emissions in Georgia, Maryland, South Carolina, Tennessee and Virginia.

IV. Section 12 of the Act provides: The General Assembly anticipates that

measures implemented to achieve the reductions in emissions of oxides of nitrogen

( NOx) and sulfur dioxide ( SO2) required by G. S. 143- 215.107D, as enacted by Section

1 of this act, will also result in significant reductions in the emissions of mercury from

coal- fired generating units. The Division of Air Quality of the Department of

Environment and Natural Resources shall study issues related to monitoring emissions

of mercury and the development and implementation of standards and plans to

implement programs to control emissions of mercury from coal- fired generating units.

The Division shall evaluate available control technologies and shall estimate the

benefits and costs of alternative strategies to reduce emissions of mercury. The

Division shall annually report its interim findings and recommendations to the

Environmental Management Commission and the Environmental Review Commission

beginning 1 September 2003. The Division shall report its final findings and

recommendations to the Environmental Management Commission and the

Environmental Review Commission no later than 1 September 2005. The costs of

implementing any air quality standards and plans to reduce the emission of mercury

from coal- fired generating units below the standards in effect on the date this act

becomes effective, except to the extent that the emission of mercury is reduced as a

result of the reductions in the emissions of oxides of nitrogen ( NOx) and sulfur dioxide

( SO2) required to achieve the emissions limitations set out in G. S. 143- 215.107D, as

enacted by Section 1 of this act, shall not be recoverable pursuant to G. S. 62- 133.6, as

enacted by Section 9 of this act.

DAQ Actions to Implement this Section: The DAQ submitted a report on

September 1, 2003, as required by this section. The first report primarily focused on the

" state of knowledge" of the co- benefit of mercury control that will result from the control

of NOx and SO2 from coal- fired utility boilers. Also, preliminary estimates were made

for this co- benefit for the North Carolina utility boilers based on the initial plans

submitted by Progress Energy and Duke Energy. Two public workshops were held in

June and July 2003, to meet with all interested stakeholders to offer review of the draft

DAQ report. DAQ is presently developing the September 1, 2004 report.

V. Section 13 of the Act provides: The Division of Air Quality of the

Department of Environment and Natural Resources shall study issues related to the

development and implementation of standards and plans to implement programs to

control emissions of carbon dioxide ( CO2) from coal- fired generating units and other

stationary sources of air pollution. The Division shall evaluate available control

technologies and shall estimate the benefits and costs of alternative strategies to

reduce emissions of carbon dioxide ( CO2). The Division shall annually report its interim

findings and recommendations to the Environmental Management Commission and the

Environmental Review Commission beginning 1 September 2003. The Division shall

report its final findings and recommendations to the Environmental Management

Commission and the Environmental Review Commission no later than

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1 September 2005. The costs of implementing any air quality standards and plans to

reduce the emission of carbon dioxide ( CO2) from coal- fired generating units below the

standards in effect on the date this act becomes effective, except to the extent that the

emission of carbon dioxide ( CO2) is reduced as a result of the reductions in the

emissions of oxides of nitrogen ( NOx) and sulfur dioxide ( SO2) required to achieve the

emissions limitations set out in G. S. 143- 215.107D, as enacted by Section 1 of this act,

shall not be recoverable pursuant to G. S. 62- 133.6, as enacted by Section 9 of this act.

DAQ Actions to Implement this Section: The DAQ submitted a report on

September 1, 2003, as required by this section. The first report primarily focused on the

" state of knowledge" and actions being taken or planned elsewhere regarding CO2

control from coal- fired utility boilers. Two public workshops were held in June and July

2003, to meet with all interested stakeholders to offer review of the draft DAQ report.

VI. Supplementary Information: As stated in the May 30, 2003 report, the Public

Staff – North Carolina Utilities Commission ( Public Staff) will audit the books and

records of Progress Energy and Duke Energy in regard to the costs incurred and

amortized by the Companies concerning their compliance with the provisions of the

Clean Smokestacks Act. The Public Staff has undertaken such a review, focusing on

the verification of costs related to complying with the Act, the amortization of those

costs, and contracts with vendors who will engineer and construct emission reduction

equipment. The Public Staff filed its reports with the Commission on May 3, 2004.

Attached, and made part of this report, are the Public Staff’s reports for Duke Energy

and Progress Energy ( without Attachment), Attachments C and D, respectively.

CONCLUSION

Actions taken to date by Progress Energy and Duke Energy appear to be in

accordance with the provisions and requirements of the Clean Smokestacks Act.

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ATTACHMENTS

Attachment A: Clean Smokestacks Act Compliance Plan Annual Update dated

March 31, 2004, Submitted by Duke Power, a Division of Duke

Energy Corporation

Attachment B: Annual North Carolina Clean Smokestacks Act Compliance Report

dated April 1, 2004, Submitted by Progress Energy Carolinas, Inc.

Attachment C: Report of the Public Staff on Costs Incurred and Amortized by Duke

Energy Corporation in Compliance with Session Law 2002- 4

Attachment D: Report of the Public Staff on Costs Incurred and Amortized by

Progress Energy Carolinas, Inc. in Compliance With Session Law

2002- 4

REPORT OF THE PUBLIC STAFF

ON COSTS INCURRED AND AMORTIZED BY DUKE ENERGY CORPORATION

IN COMPLIANCE WITH SESSION LAW 2002- 4

Docket No. E- 7, Sub 718

May 3, 2004

Section 14 of Session Law 2002- 4 (“ the Clean Smokestacks Act” or “ the Act”)

requires the Department of Environment and Natural Resources and the Utilities

Commission to report by June 1 of each year, on the implementation of the Act to the

Environmental Review Commission and the Joint Legislative Utility Review Committee.

The May 30, 2003, report states that the Public Staff will audit the books and records of

the investor owned utilities on an ongoing basis in regard to the costs incurred and

amortized in compliance with the Act. The Public Staff has undertaken such a review,

focusing on the verification of costs related to complying with the Act, the amortization of

those costs, and contracts with vendors who will engineer and construct emission

reduction equipment. This report presents the Public Staff’s findings with regard to

Duke Energy Corporation (“ Duke Energy”).

I. Work to be Performed

To comply with the emissions limitations for nitrogen oxides (“ NOX”) and sulfur

dioxide (“ SO2”) established in the Act, Duke Energy plans to install emission reduction

technologies at several of its facilities. Duke Energy has proposed to install Selective

Non- catalytic Reduction (“ SNCR”) technology to remove NOx and flue- gas

desulfurization (“ FGD”) technology to remove SO2. The facilities requiring these

technologies are as follows:

Facility NO X Reduction SO2 Reduction

Allen Units 1- 5 √ √

Belews Creek Units 1& 2 √

Buck Units 3- 6 √

Cliffside Units 1- 5 √ ( units 1- 4 only) √ ( unit 5 only)

Dan River Units 1- 3 √

Marshall Units 1- 4 √ √

Riverbend Units 4- 7 √

In addition, Duke Energy is currently installing Selective Catalytic Reduction (“ SCR”)

technology to remove NOx from its Belews Creek and Cliffside Unit 5 facilities to comply

with the North Carolina State Implementation Plan for NOx (“ NOx SIP Call”), which is

discussed below.

Duke Energy has conducted preliminary testing on the SNCR equipment at the

Allen facility and the SCR equipment at Belews Creek. Such testing is normal for start-

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up with new systems. Results indicated that the NOX emissions targets at both facilities

were not achieved. Duke Energy suspects that fuel quality may be the reason for the

higher than expected emissions at its Allen facility, but it is still studying the problem at

Belews Creek. Further testing will be conducted during the ozone season of 2004, with

the results expected in late 2004. Duke Energy has expressed confidence that there is

sufficient time to continue shake- down testing and achieve successful results, since the

NOx targets are not triggered until 2007.

II. Capital Costs Associated with the Installation of Emission Reduction

Technologies

Duke Energy is required by the Act to report its actual capital costs

(“ environmental compliance costs”) associated with its plan to install emission reduction

technologies pursuant to the Act. Operational costs related to these emission reduction

technologies are not environmental compliance costs as defined by the Act.

Duke Energy reported that its actual environmental compliance costs in calendar

year 2003 were $ 16,041,000. The cumulative environmental compliance costs incurred

through 2003 are $ 20,464,000, broken down as follows:

Year 2001 $ 800,000

Year 2002 3,623,000

Year 2003 16,041,000

$ 20,464,000

Duke Energy’s expenditures to date involve emission reduction technologies at

its Allen, Belews Creek, Cliffside, Dan River, Marshall, and Riverbend facilities.

Environmental compliance costs were incurred for project studies and investigations,

engineering, equipment procurement, and contracting.

As part of its review, the Public Staff requested information from Duke Energy on

the project costs, invoices documenting costs, and the purpose of the costs. Duke

Energy provided project cost sheets delineating actual project costs by year into the

following categories: ( 1) direct labor costs including overtime and premiums; ( 2) labor

loads; ( 3) contract costs; ( 4) material costs; ( 5) overhead costs; and, ( 6) other costs.

These costs are as follows:

Direct Labor $ 2,075,949

Labor Loads 1,500,133

Contracts 12,020,087

Materials 3,091,897

Overheads 344,789

Other 1,430,696

$ 20,463,551

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The project cost sheets were supported by detailed spreadsheets that

incorporated all expenditures to date for a particular category. The Public Staff selected

invoices in each category from the detailed spreadsheets, and requested Duke Energy

to provide specific information on the selected costs. The Public Staff also had

extensive discussions with Duke personnel regarding the individual cost items charged

to specific projects. Duke Energy provided sufficient documentation to support each

selected cost.

Duke Energy was also requested to delineate costs related to complying with

NOX SIP Call. NOX SIP Call requires electric utility generating facilities to reduce their

emissions of NOX during the summer ozone season, while the objective of the Clean

Smokestacks Act is to reduce overall NOX emissions for the entire year.

As a result of NOX SIP Call, Duke Energy has undertaken a program to

reconfigure its coal and air injection systems on its boiler units. In two cases, Belews

Creek and Cliffside Unit 5, Duke Energy has chosen to install SCR technology to

comply with NOX SIP Call. Costs related to NOX SIP Call are specifically exempted from

the amortization allowed in Section 9 of the Act. The Public Staff has determined that

Duke has not included any NOX SIP Call related costs to date in its reported actual

environmental compliance costs. However, Duke Energy may be required to install

additional SCR technology on facilities where it initially plans to install SNCR technology

to comply with the Act, if the SNCR technology fails to achieve the emission reduction

goals set forth in the Act due to matters, such as coal quality, that are beyond the scope

of Duke’s contracts for work related to the Act.

III. Amortization of Costs

In Section 9 of the Act [ G. S. 62- 133.6( b)], the investor owned utilities are allowed

to accelerate the cost recovery of their estimated environmental compliance costs over

a seven- year period, beginning January 1, 2003, and ending December 31, 2009. Duke

Energy’s estimated environmental compliance costs are $ 1.5 billion. The statute

requires that a minimum of 70% of the environmental compliance costs shall be

amortized before December 31, 2007, when the rate freeze period expires. In Duke

Energy’s case, this amount is $ 1,050,000,000. The annual levelized amount is

$ 214,285,714. The maximum amount that can be amortized in any given year is 150%

of the annual levelized environmental compliance costs or, in Duke Energy’s case,

$ 321,428,000.

On December 11, 2003 the Commission issued an order authorizing Duke

Energy to use certain regulatory liability and amortization accounts to record the

environmental compliance costs associated with the Act. The Commission further

ordered that no accrual of AFUDC would be allowed on any construction expenditures

up to the $ 1.5 billion required to be amortized pursuant to the Act.

Using the protocols established by the Act and subsequent Commission orders,

Duke reported that its environmental compliance costs amortization for 2003 is

4

$ 114,813,336. The Public Staff has reviewed Duke Energy’s quarterly amortization

filings and concluded that the reported amounts appear to be accurate.

IV. Contracts

The Public Staff also requested Duke Energy to provide for its review copies of

any contracts for engineering, procurement, project management, and construction

awarded to engineering firms and construction companies for the purpose of installing

the emission reduction technologies. Duke Energy complied with the Public Staff’s

request and provided the applicable contracts.

Duke Energy has contracted with a vendor to install SNCR equipment at its Allen

Steam Station. Duke Energy has elected to award separate fixed- price contracts for

each project requiring emission reduction technologies to comply with the Act.

Duke Energy has also signed an alliance agreement with two vendors, creating a

consortium between the companies for the installation of FGD technology, optimized

specifically for Duke Energy. This agreement is a fixed price contract for each of the

twelve coal- fired generation units identified by Duke Energy that require emission

reduction technology to comply with the Act.

The Public Staff reviewed these contracts and determined that they contain

language establishing minimum performance standards on the equipment to be

installed. The contracts contain a two- year performance standard that requires the

equipment to perform as designed or the vendor would be responsible for replacing,

repairing, or redesigning the equipment to achieve the emission reduction target

specified by Duke Energy.

V. Site Inspections

On March 9, 2004, the Public Staff conducted a site inspection of Duke Energy’s

Allen Steam Station in Belmont, North Carolina. Specifically, the Public Staff inspected

the SNCR equipment that had been installed on the boilers and the other ancillary

equipment used in the reduction of NOX emissions from those boilers. The Public Staff

confirmed the installation of the equipment and discussed the testing procedures with

the plant engineer. No other facilities were inspected. It is the intent of the Public Staff

to conduct inspections of other coal- fired generating facilities as Duke Energy continues

to install emission reduction equipment in its boiler units.

REPORT OF THE PUBLIC STAFF

ON COSTS INCURRED AND AMORTIZED BY

PROGRESS ENERGY CAROLINAS, INC.

IN COMPLIANCE WITH SESSION LAW 2002- 4

Docket No. E- 2, Sub 815

May 3, 2004

Section 14 of Session Law 2002- 4 (“ the Clean Smokestacks Act” or “ the Act”)

requires the Department of Environment and Natural Resources and the Utilities

Commission to report by June 1 of each year, on the implementation of the Act to the

Environmental Review Commission and the Joint Legislative Utility Review Committee.

The May 30, 2003, report states that the Public Staff will audit the books and records of

the investor owned utilities on an ongoing basis in regard to the costs incurred and

amortized in compliance with the Act. The Public Staff has undertaken such a review,

focusing on the verification of costs related to complying with the Act, the amortization of

those costs, and contracts with vendors who will engineer and construct emission

reduction equipment. This report presents the Public Staff’s findings with regard to

Progress Energy Carolinas, Inc. (“ PEC”).

I. Work to be Performed

To comply with the emissions limitations for nitrogen oxides (“ NOX”) and sulfur

dioxide (“ SO2”) established in the Act, PEC plans to install emission reduction

technologies at several of its facilities. PEC has proposed to install Selective Catalytic

Reduction (“ SCR”) technology to remove NOx and flue- gas desulfurization (“ FGD”)

technology to remove SO2 to comply with the Act. The facilities requiring these

technologies are as follows:

Facility NO X

Reduction SO2 Reduction

Asheville Units 1& 2 √ ( Unit 1 only) √

Cape Fear Units 5& 6 √

Lee Unit 3 √

Mayo Unit 1 √

Roxboro Units 1- 4 √

Sutton Unit 3 √

PEC is also installing SCR technology and reconfiguring its coal and air injection

systems to remove NOx from its other coal- fired generating units to comply with the

North Carolina State Implementation Plan for NOx (“ NOx SIP Call”), which is discussed

below.

2

Although PEC initially planned to install a scrubber on Lee Unit 3, PEC indicated

in its annual compliance report filed on April 1, 2004, that this work has been cancelled

because projected SO2 removal rates for scrubbed units have increased.

PEC is only in the initial design and engineering phase of construction plan, and

therefore no testing data is yet available.

II. Capital Costs Associated with the Installation of Emission Reduction

Technologies

PEC is required by the Act to report the actual capital costs (“ environmental

compliance costs”) associated with its plan to install emission reduction technologies

pursuant to the Act. Operational costs related to these emission reduction technologies

are not environmental compliance costs as defined in the Act.

PEC reported that its actual environmental compliance costs in calendar year

2003 were $ 22,323,791. The cumulative environmental compliance costs incurred

through 2003 are $ 23,209,512, as follows:

Year 2002 $ 885,721

Year 2003 22,323,791

$ 23,209,512 1

PEC’s expenditures to date involve emission reduction technologies at its

Asheville, Mayo, and Roxboro facilities. Environmental compliance costs were incurred

for project studies and investigations, engineering, and contracting.

As part of its review, the Public Staff requested information from PEC on the

project costs, invoices documenting costs, and the purpose of the costs. PEC provided

project cost sheets delineating actual project costs by year into the following categories:

( 1) company labor costs; ( 2) materials costs; ( 3) outside services costs; and ( 4) other

costs. These costs are as follows:

Company Labor $ 1,276,561

Materials 68,249

Outside Services 21,631,350

Other 233,351

Total $ 23,209,511

The project cost sheet was supported by detailed spreadsheets that incorporated

all expenditures to date for a particular category. The Public Staff selected invoices in

each category from the detailed spreadsheets and requested PEC to provide specific

1 PEC’s estimated and reported environmental compliance costs exclude costs attributable to the

portion of its Mayo and Roxboro facilities that is owned by the North Carolina Eastern Municipal Power

Agency.

3

information on the selected costs. The Public Staff also had extensive discussions with

PEC personnel regarding the individual cost items charged to specific projects. PEC

provided sufficient documentation to support each selected cost.

However, the Public Staff determined that there is a discrepancy between the

environmental compliance costs that are being recorded on PEC’s books and the

environmental compliance costs that are being reported to the Commission. The

reported costs do not include labor loads or overhead costs. PEC explained that this

practice is consistent with the types of costs considered to be environmental compliance

costs in its estimate of $ 813,000,000. Typically, these costs are treated as part of

project costs, whether they are considered incremental or not. The Public Staff

recommends that PEC be required to file a reconciliation showing the per book and

reported environmental compliance costs.

As stated above, PEC has cancelled the planned scrubber for Lee Unit 3.

However, according to Appendix B to PEC’s April 1, 2004, report, PEC’s estimated

environmental compliance costs remain approximately $ 813 million. Attachment I to

this report shows the differences in the estimated environmental compliance costs

between 2003 and 2004 according to PEC’s annual reports.

PEC was also requested to delineate costs related to complying with NOX SIP

Call. NOX SIP Call requires electric utility generating facilities to reduce its emissions of

NOX during the summer ozone season, while the objective of the Clean Smokestacks

Act is to reduce overall NOX emissions for the entire year.

As a result of NOx SIP Call, PEC has undertaken a program to reconfigure its

coal and air injection systems on its boiler units and/ or install SCR technology at its

Asheville 2, Cape Fear 5& 6, Lee 1, Mayo 1, Roxboro 1- 4, Sutton 1& 3, and

Weatherspoon 1- 3. PEC also intends to use this equipment to achieve it emissions

limitations as set forth in the Act. However, PEC will also be required to install SCR

technology at its Asheville 1 and Lee 3 facilities in order to fully comply with the Act and

achieve its required emissions limitations by 2007. The Public Staff has determined that

PEC has not included any NOx SIP Call related costs to date in its reported actual

environmental compliance costs.

III. Amortization of Costs

In Section 9 of the Act [ G. S. 62- 133.6( b)], the investor owned utilities are allowed

to accelerate the cost recovery of their estimated environmental compliance costs over

a seven- year period, beginning January 1, 2003, and ending December 31, 2009.

PEC’s estimated environmental compliance costs are $ 813,000,000. The statute

requires that a minimum of 70% of the environmental compliance costs be amortized

before December 31, 2007, when the rate freeze period expires. In PEC’s case, this

amount is $ 569,100,000. The annual levelized amount is $ 116,142,857. The maximum

amount that can be amortized in any given year is 150% of the annual levelized

environmental compliance costs or, in PEC’s case, $ 174,214,285.

4

On December 11, 2003, the Commission issued an order authorizing PEC to use

certain regulatory liability and amortization accounts to record the environmental

compliance costs associated with the Act. The Commission further ordered that no

accrual of AFUDC would be allowed on any construction expenditures up to the

$ 813,000,000 required to be amortized pursuant to the Act.

Using the protocols established by the Act and subsequent Commission orders,

PEC reported that its environmental compliance costs amortization for 2003 is

$ 74,218,804. The Public Staff has reviewed PEC’s quarterly amortization filings and

concluded that the reported amounts appear to be accurate.

IV. Contracts

The Public Staff also requested PEC to provide copies of any contracts for

engineering, procurement, project management, and construction awarded to

engineering firms and construction companies for the purpose of installing the emission

reduction technologies. PEC complied with the Public Staff’s request and provided the

applicable contracts.

PEC has contracted with three vendors for engineering and design work,

procurement of equipment, project management, and construction. PEC has elected to

use one vendor for overall project management and engineering, another vendor for

procurement of equipment, and a general contractor who will actually install the

emission reduction technologies to comply with the Act.

PEC’s agreements with its vendors are incentive- fee based contracts for all of

the thirteen coal- fired generation units identified by PEC that required emission

reduction technology to comply with the Act. PEC does not intend to execute separate

agreements for each facility.

The Public Staff reviewed these contracts and determined that they contain

language establishing minimum performance standards on the equipment to be

installed. PEC’s contract with its engineering and project management vendor contains

a twelve- month performance guarantee from the date of functional operation. PEC’s

contract with its equipment vendor contains a two- year performance standard that

requires the equipment to perform as designed or the vendor will be responsible for

replacing or repairing the equipment to achieve the emission reduction target specified

by PEC. PEC’s contract with its general contractor contains a twelve- month

workmanship guarantee.

V. Site Inspections

The Public Staff conducted no site inspections of any PEC facilities in connection

with this audit. It is the intent of the Public Staff to conduct inspections of PEC’s coal-fired

generating facilities as emission reduction equipment is installed.

Progress Energy Carolinas, Inc. Attachment I

Docket No. E- 2, Sub 815

Environmental Compliance Cost Estimates

planned

outage 2003 estimate 1/ 2004 estimate 2/ difference 3/

( a) ( b) ( c) ( d)

General

Asheville 1 FGD F2004 $ 62,750,610 $ 77,906,056 $ 15,155,446

Asheville 1 SCR S2012 25,387,755 24,826,000 ( 561,755)

Asheville 2 FGD F2005 63,404,068 65,623,450 2,219,382

Asheville FGD Common 175,887 191,778 15,891

Mayo 1 FGD S2007 88,849,025 95,482,822 6,633,797

Roxboro FGD Common 51,214,618 100,250,948 49,036,330

Roxboro 1 FGD S2009 51,244,851 62,094,441 10,849,590

Roxboro 2 FGD S2005 77,004,137 64,169,187 ( 12,834,950)

Roxboro 3 FGD F2006 72,289,067 69,556,393 ( 2,732,674)

Roxboro 4 FGD S2008 64,224,392 57,532,330 ( 6,692,062)

Cape Fear 5 FGD S2012 41,426,445 40,921,839 ( 504,606)

Cape Fear 6 FGD S2011 40,114,613 38,753,266 ( 1,361,347)

Lee 3 FGD F2009 53,293,359 - ( 53,293,359)

Lee 3 SCR F2009 35,269,245 31,596,934 ( 3,672,311)

Sutton 3 FGD F2012 77,452,773 75,475,674 ( 1,977,099)

Lee 2 ROFA F2007 4,460,486 4,005,031 ( 455,455)

Sutton 2 ROFA S2010 4,733,504 4,582,203 ( 151,301)

Total $ 813,294,835 $ 812,968,352 $ ( 326,483)

1/ Appendix B attached to PEC's Annual NC Clean Smokestacks Legislation Compliance Report filed April 1, 2003.

2/ Appendix B attached to PEC's Annual NC Clean Smokestacks Legislation Compliance Report filed April 1, 2004.

3/ Column ( c) - Column ( b).