d. Environmental - MGE Energy and MGE.

Water Quality

Water quality regulations promulgated by the EPA and WDNR in accordance with the Federal Water Pollution Control Act, or more commonly known as the Clean Water Act (CWA), impose restrictions on discharges of various pollutants into surface waters. The CWA also regulates surface water quality issues that affect aquatic life, such as water temperatures, intake structures, and wetlands filling. The CWA also includes discharge standards, which require the use of effluent-treatment processes equivalent to categorical "best practicable" or "best available" technologies. The CWA regulates discharges from "point sources," such as power plants, through establishing discharge limits in water discharge permits. MGE's power plants operate under Wisconsin Pollution Discharge Elimination System (WPDES) permits to ensure compliance with these discharge limits.

EPA’s Proposed Effluent Limitations Guidelines (ELG) and Standards for Steam Electric Power Generating Point Source Category

In June 2013, the EPA published a proposed rule that would amend the current ELG rule and lower the existing permissible water discharge of metals and other pollutants in wastewater from new and existing steam electric generation plants. The proposed rule focuses mainly on water discharges associated with certain air pollution control systems and ash handling systems at coal-burning power plants. Under the proposed rule, the EPA asked for comments on four regulatory options, varying in their compliance stringency and cost. The EPA is under a consent decree to finalize the rule by September 2015. Once finalized, the rule will apply to power plants as they renew their WPDES permits beginning in July 2017.

The ELG rule as proposed would require specific treatments and/or technologies to meet the water discharge requirements. Sites that already have these technologies will be deemed to meet the requirements of the rule. Sites without these technologies would need to install them to be in compliance. The proposed rule as written will likely affect wastewater systems at Columbia and the Elm Road Units. For Columbia, the rule may affect bottom ash handling systems. For the Elm Road Units, the rule may affect its flue gas desulfurization systems.

Based on our current evaluation of the proposed rule and its alternatives, we may need to add treatment systems or additional equipment at our Elm Road and Columbia facilities. However, MGE cannot estimate those costs with any certainty until we are able to evaluate the final version of this rule further.

EPA Cooling Water Intake Rules (Section 316(b))

Section 316(b) of the CWA requires that the cooling water intake structures at electric power plants meet best available technology standards so that mortality from entrainment (drawing aquatic life into a plant's cooling system) and impingement (trapping aquatic life on screens) are reduced. The EPA finalized its 316(b) rule for existing facilities in 2014; however, the rule is the subject of a pending legal challenge. Section 316(b) requirements are implemented in Wisconsin through modifications to plants' WPDES permits, which govern plant water discharges. WDNR is developing rules to implement the EPA 316(b) rule.

Existing facilities under the 316(b) rule (for MGE that includes our Blount, WCCF, and Columbia plants) will need to meet impingement and entrainment reduction standards or take one of seven actions to meet the reduction requirements. Compliance with 316(b) requirements will coincide with permit renewals.

MGE has studied its options and expects that it will meet requirements at its affected facilities with minimal cost. Our WCCF facility already employs a "closed cycle" cooling (CCC) system as defined under the rule. The Columbia plant may need to address multiple intake structures. Our Blount plant has conducted studies regarding options for compliance with the rule. The exact requirements, however, will not be known until those facilities' WPDES permits are modified to account for this rule. Nonetheless, MGE expects that the 316(b) rule will not have material effects on its existing plants.

Energy Efficiency and Renewables

The Wisconsin Energy Efficiency and Renewables Act requires that, by 2015, 10% of the state's electricity be generated from renewable resources. As of December 31, 2014, MGE is in compliance with the 2015 requirement. The costs to comply with the Act and its accompanying regulations are being recovered in rates.

Air Quality

Federal and state air quality regulations impose restrictions on emission of mercury, particulates (PM), sulfur dioxide (SO₂), nitrogen oxides (NO_x), and other pollutants and require permits for operation of emission sources. These permits have been obtained by MGE and must be renewed periodically. Several EPA initiatives, including the EPA's proposed greenhouse gas regulations, EPA's efforts to regulate methane from natural gas lines, the Cross-State Air Pollution Rule (CSAPR), and revised National Ambient Air Quality Standards (NAAQS) have the potential to result in additional operating and capital expenditure costs for MGE.

EPA's Greenhouse Gas (GHG) Reduction Guidelines under the Clean Air Act 111d Rule

In June 2014, the EPA developed a proposed rule called the Clean Power Plan that set guidelines for states to use in developing plans to control GHG emissions from existing fossil fuel fired electric generating units (EGUs). The EPA's proposal includes reductions in GHG emissions from EGUs by a national average of 30% by 2030 as measured from a 2012 baseline. Each state is given its own emission reduction targets to meet this goal, and States' goals can be higher or lower than the national average. The State of Wisconsin's reduction goal is 34%. These targets are expressed as a "rate-based" emission average to be achieved by the combined fleet of EGUs within the state. States would be expected to make "meaningful progress" towards these reductions by 2020 and to meet their respective targets by 2030.

The EPA's proposal establishes guidelines for states and encourages the use of four "building blocks" for achieving these reductions. These "building blocks" are: (1) increasing the efficiency of EGUs; (2) re-dispatching of gas-fired generation in lieu of coal; (3) expanding the use of low and no carbon power sources, such as wind, nuclear and solar; and (4) improving demand side energy efficiency to reduce electric use.

MGE has been studying the EPA's proposed rule to determine what compliance in Wisconsin would look like. MGE has also participated in discussions on the proposed rule with the Wisconsin Department of Natural Resources, Public Service Commission of Wisconsin, Wisconsin utilities, and industry experts.

The rule is expected to be finalized mid-summer 2015. States will then have up to two years to prepare compliance plans. While there is currently no certainty regarding the terms of the final rule, it is reasonable to assume that this rule will have a material impact on MGE. The parameters of the final rule, however, will determine the extent to which this rule will affect MGE.

National Ambient Air Quality Standards (NAAQS)

The EPA’s NAAQS regulations have been developed to set ambient levels of six pollutants to protect sensitive populations (primary NAAQS) and the environment (secondary NAAQS) from the negative effects of exposure to these pollutants at higher levels. The NAAQS regulations govern that the EPA periodically review, and adjust as necessary, the NAAQS for these six air pollutants. The EPA's NAAQS review can result in a lowering of the allowed ambient levels of a pollutant, a change in how the pollutant is monitored, and/or a change in which sources of that pollutant are regulated. States implement any necessary monitoring and measurement changes and recommend areas for attainment (meets the ambient requirements) or nonattainment (does not meet these standards). The EPA makes the final attainment and nonattainment determinations. States must come up with a state implementation plan (SIP) to get nonattainment areas into attainment and maintain air quality in attainment areas. A company with facilities located in a nonattainment area will be most affected. Their facilities may be subject to additional data submissions and measurement during permitting renewals, their facilities may need to meet new standards set by the SIP (which could result in significant capital expenditures), and the company may have additional expenses and/or difficulties expanding or building new facilities. The process from determining acceptable primary and/or secondary NAAQS to executing SIPs can take years. Nonetheless, because the NAAQS regulations have the potential to affect both existing and new facilities in areas, MGE continuously monitors changes to these rules to evaluate whether changes could impact our operations.

MGE is monitoring developments in the Ozone NAAQS rule. In November 2014, the EPA published proposed regulations to lower the Ozone NAAQS to between 65 to 70 parts per billion (ppb). In this proposed rule, the EPA has stated they are also considering leaving the standard at its current level of 75 ppb, or lowering it further to 60 ppb. EPA is seeking comments on these options. Milwaukee County (where our Elm Road Units are located) and Dane and Columbia Counties (where several of our facilities are located) may not meet the Ozone NAAQS if it is lowered to 70 ppb or below. These counties could then be subject to a SIP that could potentially affect MGE facilities, as described above. The EPA plans to have a final Ozone NAAQS rule completed by October 2015. After the rule is finalized, there are several State and Federal actions that need to take place before the Wisconsin SIP will be implemented. Without a SIP in place, it is too soon to tell how a lowered Ozone NAAQS will affect our facilities. MGE will continue to monitor rule developments and subsequent state actions and implementation plans.

MGE is also monitoring developments in the SO₂ NAAQS rule. The EPA's SO₂ NAAQS rule has been in place for some time and initial attainment/nonattainment designations by states were due in 2013. However, there was no mechanism for determining attainment and thus, the majority of areas across the U.S., including most of Wisconsin, were unable to be classified as either in attainment or nonattainment. In 2014, the EPA proposed a data requirements rule with procedures for states to use to determine attainment and nonattainment areas. The proposed procedures include analyzing a state's highest emitting SO₂ sources to determine through measurement and/or modeling if those sources are contributing to SO₂ NAAQS exceedances. Based on the proposed data requirements rule, the State of Wisconsin will likely include our Columbia plant and may include the Elm Road Units, in the list of larger sources that require further evaluation through modeling and/or monitoring. Both Columbia and the Elm Road Units already have effective SO₂ pollution controls installed and should be in compliance with the final rule, however, we will not know with any certainty if the rule will affect our plants until the State of Wisconsin completes its evaluation. MGE will continue monitoring further actions under this rule to better evaluate the effect it may have on Columbia and the Elm Road Units.

EPA's Cross-State Air Pollution Rule

The EPA's Cross-State Air Pollution Rule (CSAPR) is an interstate air pollution transport rule designed to reduce ozone and fine particulate (PM2.5) air levels in areas that the EPA has determined are being affected by pollution from neighboring and upwind states. The EPA has identified 27 eastern states that are contributing to pollution in other states. CSAPR aims to achieve ozone and PM2.5 reductions by reducing NO_x and/or SO₂ air emissions, which contribute to ozone and PM2.5, from qualifying electric power plants in the 27 "contributing" states. The rule has been designed so that qualifying power plants will be allocated NO_x and SO₂ allowances in two phases, with the second phase including further emissions reductions. These plants will need to reduce their emissions and/or purchase allocations from the marketplace to meet their obligations.

CSAPR, as well as its precursor rules, the Clean Air Interstate Rule (CAIR) and the NO_x SIP Call, have been subject to litigation. EPA rule adjustments and several court rulings, including recent court and EPA actions, continue to impart a level of uncertainty heading into 2015. See below for additional information on recent developments and uncertainties associated with this rule.

In July 2011, the EPA finalized CSAPR as a court-ordered replacement rule for its CAIR that had been remanded in 2008. The D.C. Circuit Court of Appeals stayed CSAPR in December 2011, then vacated CSAPR and conditionally reinstated CAIR in August 2012. The U.S. Supreme Court issued a decision in April 2014, reversing the D.C. Circuit Court's vacature of CSAPR and remanded the matter back to the D.C. Circuit for further proceedings. In October 2014, the D.C. Circuit lifted its stay of CSAPR and set a briefing schedule for remaining litigation issues that were not resolved by the Supreme Court's decision. The briefing schedule with oral arguments is planned for 2015. Additionally, the State of Wisconsin has filed pleadings with the D.C. Circuit Court reiterating its contention that Wisconsin be removed from CSAPR.

The EPA has interpreted the October 2014 lifting of the stay by the D.C. Circuit as granting the EPA the ability to reset deadlines that have since passed (CSAPR was originally designed to begin in 2012). The EPA instituted an interim final rule effective January 1, 2015, that tolls the CSAPR's deadlines by three years. The tolling of three years under the interim final rule introduces Phase I of CSAPR in 2015, and Phase II of CSAPR in 2017. The EPA is accepting comments on other aspects of the rule through February 2015.

The ongoing litigation in the D.C. Circuit, including the EPA's interpretation of tolling rule deadlines and the State of Wisconsin's arguments to be removed from the rule, leaves unresolved issues that may affect whether, when, and how MGE's facilities will need to comply with this rule. We have worked to achieve compliance with Phase I requirements, should those requirements be confirmed as being effective as of January 1, 2015, while monitoring the court proceedings, which will extend into 2015, as well as any additional actions taken by the EPA in response to its request for comments on the reinstated rule. Further, MGE expects to be able to meet CSAPR requirements by applying reductions achieved from recent pollution control installations at Columbia and early reduction efforts at Blount. We will continue to monitor and evaluate the D.C. Circuit Court remand proceedings and the implementation of the interim rule by the EPA.

Clean Air Visibility Rule (CAVR)

Air modeling indicates that SO₂ and NO_x emissions from Columbia may impair visibility at certain Class I Scenic Areas. Columbia may, therefore, be subject to the best available retrofit technology (BART) regulations, a subsection of the EPA's Clean Air Visibility Rule (CAVR), which may require pollution control retrofits. The EPA has issued rules directing that compliance with emissions limitations in the CSAPR could also serve as compliance with the BART for SO₂ and NO_x emissions at electric plants such as Columbia. However, these rules are subject to a legal challenge pending before the D.C. Circuit. In addition, an environmental group had sought, then dismissed without prejudice to refile, a federal appellate court review of Wisconsin's implementation plan for the BART portion of CAVR. These BART rules remain uncertain while subject to the pending legal challenges and while regulatory uncertainty surrounds the CSAPR. Thus, at this time, the BART regulatory obligations, compliance strategies, and costs remain uncertain.

Solid Waste

EPA’s Coal Combustion Residuals Rule

In December 2014, the EPA finalized its Disposal of Coal Combustion Residuals from Electric Utilities rule. The rule will go into effect six months after it is published in the Federal Register. The rule provides that coal ash will be regulated as a special waste rather than a hazardous waste and more strictly defines what ash use activities would be exempt from solid waste disposal and considered beneficial use of coal ash. The rule also regulates landfills, ash ponds, and other surface impoundments for coal combustion residuals (CCRS or coal ash) by regulating their design, location, monitoring, and operation.

The final rule is intended to reduce the risk of structural failure of impoundments (ash ponds) and protect groundwater from both impoundment and landfill operations by setting new standards. The rule requires closure of active coal ash ponds and landfills that do not upgrade to meet these standards. Facilities with landfills and/or surface impoundments will be subject to various timeframes for meeting new regulatory requirements depending on the type of landfill or surface impoundment onsite, whether the site has failed any required integrity testing, and whether the facility intends to upgrade to meet regulatory requirements or begin closure proceedings. Timeframes to meet various compliance parameters can vary from 18 months to over 5 years.

The Columbia and Elm Road Units co-owners and plant operators are evaluating the final rule to determine what changes may be necessary at those facilities and the associated timeframes. We anticipate that some design and operational changes may need to be made at these facilities; however, evaluation of this rule is not completed so we are unable to estimate with any certainty the costs to MGE operations at this time. Management believes any compliance costs will be recovered in future rates.

Columbia

Based upon current available information, compliance with various environmental requirements and initiatives is expected to result in significant additional operating and capital expenditures at Columbia as noted below.

Columbia Clean Air Act Litigation

In December 2009, the EPA sent a notice of violation (NOV) to MGE and the other co-owners of Columbia. The NOV alleged that WPL, as owner-operator, and the other co-owners failed to comply with appropriate pre-construction review and permitting requirements and, as a result, violated the PSD program requirements, the Title V operating permit requirements of the CAA, and the Wisconsin State Implementation Plan (SIP). In April 2013, the EPA filed a lawsuit against the co-owners of Columbia asserting similar allegations. In September 2010 and April 2013, Sierra Club filed lawsuits against WPL alleging violations of the CAA at Columbia and other WPL-operated Wisconsin facilities.

In April 2013, WPL, as owner-operator, along with the other owners of Columbia, entered into a consent decree with the EPA and the Sierra Club to resolve these claims, while admitting no liability. In June 2013, the consent decree was approved and entered by the Court. The consent decree requires installation of the following emission controls at Columbia: SO₂ scrubbers and baghouses at Columbia Units 1 and 2 by December 31, 2014 (which have now been installed) and an SCR system at Columbia Unit 2 by December 31, 2018. Installation of the SCR was recently authorized by the PSCW. In addition, the consent decree establishes emission rate limits for SO₂, NO_x, and particulate matter for Columbia Units 1 and 2. The consent decree also includes annual plant-wide emission caps for SO₂ and NO_x for Columbia. MGE also paid approximately $0.2 million as its share of a civil penalty and will complete approximately $0.6 million in environmental mitigation projects. MGE intends to seek recovery in rates of the costs associated with its compliance with the terms of the final consent decree and currently expects to recover any material compliance costs.