Business Performance

Environmental Regulations

The increasing scope and stringency of environmental regulations continues to pose technical and financial challenges to the electric utility industry. These challenges are driving decisions to upgrade or retire existing coal-fired generating units, and are strongly influencing the planning of new generation projects. Accordingly, transmission infrastructure must be updated and expanded to allow access to new generation resources and to maintain overall reliability of the system. Given the number of existing regulations to be implemented and the expected likelihood of additional new requirements in the coming years, environmental issues will continue to have a major impact on the planning and operation of our system.

Air Regulations

The U.S. Environmental Protection Agency (EPA) has finalized a number of new regulatory programs in recent years that are focused on reducing air emissions from fossil fuel-fired generating units. These rules are driving the electric utility industry, including AEP, to retire, refuel and retrofit many existing coal plants.

Total AEP System - Annual SO2 Emissions

MATS

The most stringent of these programs is the Mercury and Air Toxics Standards (MATS) rule, which was finalized in 2012. MATS established unit-specific emission requirements for mercury, metals and acid gases. April 2015 is the first compliance date, although there are options to extend the deadline for certain units that are in the process of installing emission controls or whose shutdown could lead to a transmission reliability concern. Our compliance strategy includes installation of emission control systems, unit retirements and possible conversion of some coal units to natural gas. Implementation of the strategy is under way with permitting and regulatory reviews and engineering and design work.

Grid reliability continues to be a concern due to the timing of the MATS rule and the number of compliance-driven unit retirements and retrofit projects occurring at AEP and across the industry. We continue to proactively provide leadership in the ongoing dialogue to ensure that MATS compliance strategies balance the need to maintain grid reliability requirements. These efforts require close coordination with state utility commissions and environmental agencies, the EPA, regional transmission organizations, FERC and NERC.

CSAPR

Ongoing developments continue on EPA’s efforts to reduce the interstate transport of sulfur dioxide (SO2) and nitrogen oxides (NOx) across the eastern half of the country. In 2005, EPA finalized the Clean Air Interstate Rule (CAIR), which was overturned in 2008 by the D.C. Circuit Court of Appeals, but was allowed to remain in place until an alternative rule was developed. In 2011, EPA finalized the Cross State Air Pollution Rule (CSAPR) as a replacement for CAIR. However, CSAPR was vacated by the D.C. Circuit Court in August 2012. The EPA and the Department of Justice requested a rehearing, but the court denied the request. Pending additional court or agency action, CAIR requirements remain in place.

Total AEP System - Annual NOX Emissions

NAAQS

The Clean Air Act requires the EPA to review and, as necessary, revise National Ambient Air Quality Standards (NAAQS). Several NAAQS have been recently revised or are under review that could lead to additional emission reduction requirements in the future. Revised NAAQS include those for SO2 and NOx (revised in 2010) and fine particulate matter (revised in 2012). Revised ozone NAAQS are expected to be proposed in 2013.

Regional Haze

The EPA’s Regional Haze regulation is designed to protect visibility in specially designated areas, such as national parks. In 2012, AEP’s Public Service Company of Oklahoma (PSO) entered into an agreement with the EPA, the State of Oklahoma, and other parties to reduce emissions from the company’s Northeastern Station to comply with the rule. The agreement will result in the installation of emission controls at one unit and the retirement of another unit at the plant, pending regulatory approval.

NSPS

The EPA continues to move forward with a regulatory approach for reducing greenhouse gas (GHG) emissions from power plant sources. In 2012 the agency proposed New Source Performance Standards (NSPS) for new fossil fuel-based power plants. The EPA is expected to finalize these standards, although the schedule for a final rule is uncertain. Separate guidelines from the EPA for reducing GHGs from existing fossil fuel power plants are expected to be proposed, but the agency has not announced a schedule.

Closing Bell at the NYSE

AEP CEO Nick Akins was among a group of executives to ring the closing bell at the NYSE at the close of 2012 COMMIT!Forum in New York City.

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