2010 OFII General Counsel Conference Washington, D.C. Granta Y. Nakayama, P.C. David R. Hill Kirkland & Ellis LLP Sidley Austin LLP October 19, 2010 Recent Developments in U.S. Energy and Climate Policy

2010 OFII General Counsel Conference Washington, D.C. U.S. Legal and Policy Developments Brief Background on Current EIA Supply/Demand Projections U.S. Congress Action Concerning Greenhouse Gases and Energy Issues EPA – GHG-Related Regulations and Source-Specific Controls DOE – Efficiency Standards and Enforcement; Loan Guarantee Program EPA – Enforcement Trends and Targets Litigation – GHG Nuisance Cases; Section 526 Litigation 2

2010 OFII General Counsel Conference Washington, D.C. World Energy Consumption Outlook Increases 35% from ; Non-OECD accounts for 86% of the increase (in quadrillion Btu; Source: EIA International Energy Outlook, 2010) 3

2010 OFII General Counsel Conference Washington, D.C. Energy supply will grow from all sources (World primary energy consumption, in quadrillion Btu Source: EIA International Energy Outlook, 2010) 4

2010 OFII General Counsel Conference Washington, D.C. Energy-related CO 2 emissions will grow 43% (assuming no policy changes) (Energy CO2 emissions, in billions of metric tons; Source: EIA International Energy Outlook, 2010) 5

2010 OFII General Counsel Conference Washington, D.C. Congressional Action to Address GHGs Prospects have steadily diminished, mid-2009 to the present American Clean Energy and Security Act (Waxman-Markey) –Passed U.S. House June 26, 2009 American Clean Energy Leadership Act (Bingaman) –Passed Senate Energy & Natural Resources Committee July 16, 2009 Clean Energy Jobs and American Power Act (Boxer-Kerry) –Introduced September 30, 2009 Kerry-Graham-Lieberman bill –Graham abandoned process April 2010; bill never acted on Attempts at targeted bills (utility only, RPS only) as well as bills going in the other direction (e.g., Rockefeller bill to slow or stop EPA action) Also, bills to address Gulf of Mexico oil spill, hydraulic fracturing, etc. 6

2010 OFII General Counsel Conference Washington, D.C. EPA Regulatory Program for Greenhouse Gases Endangerment Determination Johnson Memorandum Motor Vehicle Emissions Rule PSD Tailoring Rule – Stationary Sources GHG Reporting Rule Renewable Fuels Standard 7

2010 OFII General Counsel Conference Washington, D.C. U.S. Department of Energy Efficiency Standards and Enforcement Efforts Significant New DOE Enforcement Effort – Major Public Focus of the General Counsel and of the Department’s Overall Efficiency Effort New Efficiency Standards, and More on the Horizon Changes in Test Procedures – GHG Pricing, Life Cycle Analysis Changes in the Energy Star Program – Certification, Standards Also, Federal Trade Commission Revision of its “Green Guides” 8

2010 OFII General Counsel Conference Washington, D.C. U.S. Department of Energy Loan Guarantee Program and Possible Changes Energy Policy Act of 2005, Title XVII Loan Guarantee Program –Authority to issue tens of billions in loan guarantees –Stimulus Act provided $6 billion to pay credit subsidy costs; Congress subsequently rescinded $3.5 billion to pay for other programs –A few significant loan guarantees closed to date –Many complications – EPAct, FCRA, NEPA, OMB –One utility recently rejected terms of potential loan guarantee for nuclear plant Efforts underway to significantly change program or create new federal green energy financing mechanism (e.g., CEDA) Issues with existing and new programs include – program’s primary objective, scope of authority and projects, Federal Credit Reform Act, annual appropriations cycle, effect on private sector markets 9

2010 OFII General Counsel Conference Washington, D.C. Big Expectations for Enforcement Bigger EPA budget (> 35% increase FY10) Comparisons to prior annual results Negative enforcement press – –“EPA Enforcement-Related Penalties Plummeted in Fiscal 2009” NY Times, January 5, 2010 (“EPA during the first year of the... administration saw deep declines in the amount of penalties...” Result »»» need to show results 10

2010 OFII General Counsel Conference Washington, D.C. EPA Enforcement – Continued (?) Increases 11

2010 OFII General Counsel Conference Washington, D.C. Larger Cases - Environmental Outcomes 12

2010 OFII General Counsel Conference Washington, D.C. EPA Enforcement Targets (FY 2011 to 2013) “Energy Extraction Sector” – New Initiative –EPA justification: “urgent need to... develop “clean energy” sources.... new techniques for oil and gas extraction and coal mining, pose a risk of pollution of air, surface waters and ground waters” Coal-Fired Utility, Cement, Glass, and Acid Sectors Air Toxics – “ wide range of industrial and commercial facilities” FY EPA Strategic Plan – Sept. 30, 2010 –“Enforcement supports reductions in greenhouse gases (GHG) through enforcement settlements that encourage GHG emission reductions. 13

2010 OFII General Counsel Conference Washington, D.C. Enforcement – EPA’s Evolving View Many paths toward compliance Goal is the environmental result Compliance Assistance Administrative Enforcement Civil/Judicial Enforcement Criminal Enforcement 14

2010 OFII General Counsel Conference Washington, D.C. GHG-Related Litigation Courts can be, and are, used to press policy objectives Nuisance cases focusing on GHG emissions –State of Connecticut v. American Electric Power Co. –Comer v. Murphy Oil USA –Native Village of Kivalina v. Exxon Mobil Corp. Case challenging Defense Department’s purchase of fuel derived in part from Canadian oil sands –Sierra Club and Southern Alliance for Clean Energy v. U.S. Defense Energy Support Center Cases directed at forcing, or stopping, GHG regulations 15