Memorandum to Commissioner Twinkle Andress Cavanaugh

MEMORANDUM TO: Commissioner Twinkle Andress Cavanaugh FROM: Alabama Public Service Commission Staff RE: Summary of Alabama Power Company’s 2011 Environmental Compliance Costs No Change in Rate Factor for Recovery of Environmental Compliance Costs Alabama Power Company’s (APCo) rates include a factor that recovers the costs associated with environmental compliance. Environmental compliance costs are based on APCo’s investment in environmental compliance controls, along with the related depreciation expense and operation and maintenance expenses. In 2010, those costs totaled approximately $403,192,486. It is estimated that APCo’s 2011 environmental compliance costs will be approximately $410,773,749. As a result, the estimated incremental increase in environmental compliance costs from 2010 to 2011 is $7,581,263.

In order to afford additional rate stability to customers as the economy continues to recover from the recession, the Commission ordered APCo to leave in effect for 2011 the factors associated with its environmental compliance costs for the year 2010.

2011 Environmental Compliance Costs • • •

In 2011, APCo’s environmental compliance costs will be approximately $411 million.

The average residential customer will pay approximately $159.00 in 2011 for environmental compliance costs.

Based on data for the 12-month ended October 2010, ECO contributes 8.48% to total residential price.

Major Environmental Rules, Regulations and Laws The major environmental laws affecting environmental compliance costs are the Clean Air Act, the Clean Water Act, and the Resource Conservation and Recovery Act. Two major programs under the Clean Air Act include the Acid Rain Program and the National Ambient Air Quality Standards (NAAQS). NAAQS standards have had a significant impact on environmental control costs, particularly the Nitrogen Dioxide, Ozone, Sulfur Dioxide and Particulate Matter standards.

Other major rules under the Clean Air Act include the NOx Budget Trading Program (issued in connection with the NAAQS), the Clean Air Interstate Rule (CAIR)*, and Greenhouse Gas Regulation.

* Although CAIR was remanded to EPA, the U.S. Court of Appeals for the D.C. Circuit left the CAIR requirements in place until EPA promulgates a replacement rule (the Transport Rule, as noted below).

Primary Pollutants The primary pollutants are: Carbon Monoxide, Nitrogen Dioxide, Ozone, Sulfur Dioxide, Particulates, Lead, Mercury and Carbon Dioxide Alabama Power Company Compliance Strategies / Equipment In order to comply with various environmental mandates, APCo has: switched to low sulfur fuel at several plants, installed low NOx burners, installed electrostatic precipitators, installed Continuous Emission Monitoring Systems (CEMS), installed Selective Catalytic Reduction (SCR) systems and installed Flue Gas Desulfurization (FGD) systems or “scrubbers.”

Selective Catalytic Reduction (SCR) Systems • •

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SCRs operate like a catalytic converter on a car and are installed to reduce nitrogen dioxide (NOx) gas emissions from coal-fired electric generators.

The SCR essentially entails the creation of a wide space in the ductwork, commonly referred to as a “reactor vessel”. A catalyst is installed in this space wherein ammonia is injected and mixed with the flue gas. The NOx emissions are reduced by the resulting chemical reaction, which produces nitrogen and water.

A typical SCR system is very large, covering an area roughly half the size of a football field and standing approximately 12-14 stories tall.

From 2002-2008, APCo installed 7 SCRs on its largest coal-fired generators. Individual project costs ranged from $62.0 million to $265.0 million.

Flue Gas Desulfurization (FGDs) or Scrubbers •

FGDs are installed to reduce sulfur dioxide (SO 2) gas emission levels from coal-fired electric generators.

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The scrubber is located downstream of the SCR. It is basically a mixing vessel where flue gas is brought into contact with a limestone slurry mixture. The SO 2 emissions are reduced by the resulting chemical reaction, which produces gypsum. In turn, the gypsum by-product can be sold and used in the manufacturing of “sheetrock”.

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Like SCRs, FGDs and their associated equipment are very large - each one requiring several acres. APCo’s seven scrubbers required 7,000 truckloads of concrete.

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During 2008-2011, APCo will install 7 FGDs on its largest coal-fired generators. Individual project costs ranged from $208 million to $284 million.

Major Proposed Environmental Rules, Regulations and Laws

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Coal Combustion By-products, Transport Rule (replaces CAIR), Energy Legislation to reduce carbon emissions and Electric Generating Unit (EGU) Maximum Achievable Control Technology (MACT) Impact of Proposed Regulations on Alabama Power Customers Currently, there are many more environmental regulations being considered that would impact APCo customers. Three areas that are receiving a great deal of attention at this time are: 1) the regulation of coal combustion by-products as a hazardous waste, 2) electric generating unit maximum achievable control technology and 3) clean air transport rule and greenhouse gases.

Depending on the final form of these regulations, the costs to APCo customers could be significant.

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