20070812 Ver 2_Memorandum of Agreement_20090507

DIVISION OF WATER QUALITY
May 7, 2009
TO: File
FROM: Coleen H. Sullins
SUBJECT: 401 Certification - Alcoa Power Generating Inc. (APGI)
DWQ#2007-0812; FERC Project No. 2197
Certification 003173
I have reviewed the hearing officers' recommendation and supporting documentation. I have
further reviewed Alcoa's annual report filed pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 and the quarterly report for the period ending March 31, 2009.
I find the technical conclusions of the hearing officers' report are supportable. I concur that a
401 Certification can be issued, with conditions to assure water quality is improved and
protected and the waters uses are supported. However, additional conditions beyond those
recommended by the hearing officers must be included to assure the dissolved oxygen
improvements are completed and successful.
It is clear that the dissolved oxygen levels below the discharges are less than the state water
quality standard of 5 mg/1, particularly in the summer/warmer months of the year. Alcoa Power
Generating Inc. (APGI) has proposed a schedule, which is included in the draft 401 Certification,
to upgrade the turbines including improvements to address dissolved oxygen. In fact, initial
improvements have been made at the Narrows Dam (Badin Lake) to two turbines and have
shown improvement to the dissolved oxygen levels. However, after these improvements, the
dissolved oxygen levels were still below the standard approximately 16% of the time.
The result of the Yadkin Water Quality Monitoring report (Normandeau 2005) discussed the
effects of improvements to Turbine 4 resulting from intensive studies of various operating
scenarios performed in 2001 and 2004 (a 2 mg/l increase in dissolved oxygen). APGI also
reports improvements of dissolved oxygen based on the upgrades completed to Turbine 1 in
2008. However, in-depth studies, as performed in 2001 and 2004, have not been performed
following the upgrade to the second turbine. An additional condition needs to be added to the
401 Certification to conduct studies similar to those performed in 2001 and 2004 with both
turbines upgraded and following other upgrades in the project (as laid out in condition b. Water
Quality -Article WQ-1 A. Tailwater Dissolved Oxygen Enhancement Schedule).
An additional concern, the status of the economy and Alcoa's own financial standing, requires
that the state have financial assurance that the water quality improvements including the
improvements to the turbines as outlined in the 401 Certification (and agreed upon in the
Relicensing Settlement Agreement) will be completed in accordance with the previously agreed
upon schedule. Alcoa stated in their 2008 Annual Report, issued pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934, that the company was taking a number of steps to
reduce expenditures. Additionally, the company stated that "there can be no assurance that these
actions, or any others that the company may take in response to further deterioration in economic
and financial conditions, will be sufficient. A protracted continuation or worsening of the global
economic downturn or disruptions in the financial markets could have a material adverse effect
on Alcoa's business, financial condition or results of operations." Furthermore, the company's
quarterly report for the period ending March 31, 2009 shows a net loss of $497 million. Three of
the major bond rating entities have also reduced bond ratings for Alcoa based on concerns about
the company's liquidity. Therefore, a condition requiring a surety bond (or equivalent
instrument) is necessary to assure the improvements are accomplished, including the monitoring
to demonstrate compliance with the dissolved oxygen standards downstream of the dams. The
surety bond must be sufficient to cover all potential costs, to include modifications not only at
Narrows and High Rock dams, but also improvements at Tuckertown and Falls dams and to
include the monitoring necessary to show the success of the improvements. Based on Alcoa's
October 20, 208 memorandum submitted to members of the General Assembly, the amount
related to improving water quality is $240 million (see page 2 and 11 of said memo).
Based on the record for the 401 Certification Application, the hearing officers' report and the
above, I am issuing the certification that the discharge will comply with Sections 301, 302, 303,
306 and 307 of the Federal Water Pollution Control Act, if the discharge is managed in
conformity with the attached conditioned 401 Certification.