Dominion has reached a $1.2 billion agreement with the Environmental Protection Agency (EPA) and five states under which the electric utility will install state-of-the-art emissions control equipment on its largest coal-fired generating units in Virginia and West Virginia.

Dominion said that expenditures related to the agreement are consistent with assumptions already in the company’s current financial models and will not effect earnings, cash flow or previously announced capital spending plans.

The agreement represents a collaborative effort between Dominion, EPA, the U.S. Department of Justice, and the states of Virginia, West Virginia, Connecticut, New Jersey and New York. The agreement was filed on Monday in federal court in the Eastern District of Virginia in Alexandria, according to New York Attorney General Elliot Spitzer.

The agreement is the result of negotiations that began after Spitzer announced in September 1999 his intention to sue the owners of 17 Midwestern and mid-Atlantic coal-fired power plants, for violating the federal Clean Air Act. Spitzer filed a lawsuit against Dominion’s Virginia Electric Power Co. (VEPCO) in July 2000.

The agreement resolves both the New York lawsuit and a notice of violation that the EPA filed against the company’s Mt. Storm Power Station in June 2000. The notice of violation alleged that modifications were made to the Mt. Storm generating units by Dominion without obtaining the proper permits in violation of the Clean Air Act. The Mt. Storm plant is located in West Virginia.

The Clean Air Act’s New Source Review (NSR) rule requires utilities to undergo review for environmental controls if a power company builds new plants or if “non-routine” changes are made to existing power plants, that result in a significant increase in emissions.

Some utilities have allegedly violated the law by undertaking major improvements and upgrades to their power plants without also installing the required pollution controls, although Dominion maintains that it acted in accordance with the regulations and conducted only routine maintenance on the units. The Bush administration has implemented changes to NSR intended to give utilities advance notice of whether modernizing their power plants will bring stricter emission reductions, which could save them cleanup or modification expenses.

Under the agreement, Dominion will install state-of-the-art emissions control equipment on its largest coal-fired generating units in both Virginia and West Virginia. Dominion plans to complete several of the projects ahead of the schedule required by the decree.

By the time all the requirements of the agreement are instituted in 2013, Dominion said that sulfur dioxide (SO2) emissions at the company’s coal-fired units in Virginia and West Virginia will be reduced by 64% over 2000 levels, while total nitrogen oxide (NOx) emissions will be reduced by 66% over 2000 levels.

Dominion approached the EPA in May 2000 about negotiating a settlement rather than enduring what the utility said would be a “long and costly legal battle” that would have occurred if the company had been sued. The EPA and the Department of Justice did sue seven other energy companies over similar issues and has served notice of violations on several dozen utilities and industries. No federal suit was ever filed against Dominion or any of its affiliates.

Dominion, the EPA and New York reached an agreement in principle in November 2000. The other four states have, since that time, become part of the settlement. The final settlement, while following those guidelines, provides the details on how emission reductions will be achieved.

Under the agreement, Dominion will install two scrubbers that will remove up to 95% of all SO2 emissions at Mt. Storm. The facility already had one scrubber in operation. Between them, the three scrubbers will remove about 150,000 tons of SO2 a year, the utility said.

In addition, Dominion will install equipment to reduce NOx emissions on all three units at Mt. Storm. Two of the units will be complete this summer, and the third will be finished in 2004. The systems, which involve selective catalytic reduction (SCR) technology, will remove up to 85% of the NOx from emissions.

In Virginia, the utility will install two scrubbers at the Chesterfield Power Station, near Richmond. Dominion will install NOx control equipment on three units at Chesterfield. Two of the units will be in operation this spring, and the third will be complete in 2004. The SCRs will remove about 85% of the units’ NOx emissions.

Dominion will also install NOx control equipment on two units at the Chesapeake Energy Center in Chesapeake, VA. Construction should be finished in 2004. The SCRs will remove about 85% of the units’ NOx emissions.

The agreement also calls for the conversion of two units at Dominion’s Possum Point Power Station near Washington, D.C., from coal-fired generation to natural gas-fired generation and the construction of a 550 MW combined cycle unit. Work on the conversions is occurring now and the combined cycle unit will be operational this summer. Compared to a similarly sized state-of-the-art coal-fired station, the combined-cycle unit will produce about 82% fewer NOx emissions and 92% fewer SO2 emissions, according to Dominion.

Under the agreement, Dominion will pay a $5.3 million civil penalty to resolve issues at Mt. Storm, as well as commit $14 million for major environmental programs or projects in cooperation with the five states, the National Park Service and the EPA. The company already has set aside the money for the civil penalty and the environmental projects and these payments will not have an impact on earnings.

Dominion has also agreed to surrender 45,000 SO2 emissions allowances each year beginning in 2013. In addition, the company will upgrade the operation of equipment designed to remove fine particulate matter from its emissions.

Thomas Capps, Dominion’s CEO, called the agreement a “grand slam. Everybody scores: the environment, the Commonwealth of Virginia, our customers, and our shareholders.” Capps said that the deal is a “comprehensive, affordable resolution that results in major environmental improvements that set a high standard for the rest of the industry. At the same time, it provides us the flexibility to maintain and make selective improvements to our generating units to better serve our customers.”

The settlement “reflects the combined efforts of all parties to reach one common goal — cleaner air,” said Tom Sansonetti, assistant attorney general for the Justice Department’s Environment and Natural Resources Division. “These massive reductions in pollution will benefit not only the citizens of Virginia and West Virginia, but also the states in the Northeast to which windblown emissions of these pollutants are transported.”

The settlement “illustrates the need to both enforce and defend the Clean Air Act,” said Spitzer. “The Clean Air Act is a cornerstone of our environmental law and should be strengthened, not weakened; revered, not reviled; embraced, not eviscerated.”

Meanwhile, on a related front, the National Academy of Public Administration (NAPA) last Monday issued a report to the EPA and Congress concluding that the NSR program, as applied to existing facilities, “is not working as Congress intended.”

The two-year independent study, which was commissioned by Congress, asserts that NSR should be “fundamentally reformed” and “strongly enforced” against past violations by existing facilities. The report also found that NSR’s “unpredictable and lengthy” permitting process is detrimental to facilities that want to change operations quickly and compete effectively.

The study urged Congress to retain NSR, but to strengthen its impact by ending grandfathering, vigorously enforcing NSR’s permitting requirements for existing facilities and improving EPA and state information systems and public accountability.

NAPA describes itself as an independent, nonpartisan organization chartered by Congress to assist federal, state, and local governments in improving their effectiveness, efficiency and accountability.

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