Attachment 1 Clean Air Regulatory Schedule

Attachment 2 Coal-based Electric Generation

Attachment 3 Regional Impacts of Fuel Mixing

 

Introduction

 

Good morning. My name is Jim Rogers and I am Chairman, President and CEO of Cinergy Corp, which is a Midwest leader in electricity generation. Our regulated delivery operations in Ohio, Indiana, and Kentucky serve 1.5 million electric customers and about 500,000 gas customers. Cinergy’s core energy system comprises approximately 13,300 megawatts at 14 base load stations and seven peaking stations. This portfolio includes 37 coal-based units that we operate and at least partially own. Altogether Cinergy is responsible for the operation of 114 electric generation units at 40 locations in 15 states. And, just so you fully understand why Cinergy is so interested in today’s topic, more than 90 percent of the megawatt hours that we generate come from coal units. As I like to say, Cinergy is the largest non-nuclear utility in the United States

 

Today I am also testifying on behalf of the Edison Electric Institute (EEI). EEI is the association of U.S. shareholder-owned electric companies, international affiliates and industry associates worldwide. EEI’s U.S. members serve more than 90 percent of all customers served by the shareholder-owned segment of the industry, generate approximately three-quarters of all of the electricity generated by electric companies in the country, and serve about 70 percent of all ultimate customers in the nation.

Since 2000, Cinergy has testified before this committee on several occasions, urging it to pass legislation that would alter the way power plant emissions are regulated. We have worked with the environmental community, with industry and with many of you on this Committee. While we have not achieved unanimity within all of the stakeholder groups, there has been general consensus that the current Clean Air Act fails to deliver certainty for the environment, certainty for consumers or certainty for the industry.

 

In fact, in testimony in May 2000, major environmental groups recognized that the lack of certainty requires immediate attention:

 

“The Act is designed to address air pollution from the power sector… on a pollutant-by-pollutant basis. The result is that there are numerous EPA regulatory initiatives all underway at present affecting different pieces of the power plant pollution problem, on different time scales, and with different geographic targets and often-different criteria. Each of these regulatory proceedings is subject to delay and court review…the time has come to improve on the Act’s current regulatory scheme for power plants. Surely the devil will be in the details but the stage has been set for a policy discussion that could drive us to a better, cleaner outcome.” [1]

 

The multi-emissions idea has also garnered tremendous support from a diverse group of stakeholders including the United Mineworkers of America, International Brotherhood of Electrical Workers, the National Governors Association, the National Association of Counties, the Environmental Council of States, Candidate Al Gore, and, of course, President Bush.

 

The Edison Electric Institute's CEO Policy Committee on Environment, which I chair, has for several years actively addressed the multi-emissions issue. That Committee recommended to the Board of Directors that EEI embrace the scope and framework of the President’s Clear Skies Initiative. The Board has adopted that recommendation.

 

The Progress We Have Made

 

Before I venture into why multi-emissions legislation is so important, let me first quickly review how far the industry has come. The electric power industry has reduced its air emissions significantly, even as demand for electricity has increased. Attached is a chart that demonstrates that we have dramatically reduced our emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx.) We have also reduced particulate matter (PM10) by over 90 percent. Moreover because some particulate matter, SO2 and NOx controls have some mercury reduction co-benefits, our industry has also reduced mercury emissions significantly by almost 40% – from 75 tons per year to approximately 48 tons per year.

 

We have done all this despite a steady climb in electricity demand and without sacrificing the reliability and affordability of the electricity that we produce.

 

Cinergy itself has invested considerable sums in clean air compliance. In the decade of the 90’s, we spent more than $650 million, primarily to meet the SO2 and NOx requirements of Title IV of the Clean Air Act. Between 2000 and 2005, we will spend an additional $800 million to build Selective Catalytic Reduction (SCR) pollution control units to meet the NOx SIP Call. To meet Clear Skies, we estimate our capital expenditures for just pollution control equipment will top these two sums combined – or $1.5 billion. And – unfortunately for Cinergy and most other utilities– these costs are not back-loaded. We estimate that more than two-thirds of these expenditures are necessary to meet the first phase of the Clear Skies targets. Having said all that, the widely diverse commitment to support multi-emission legislation, even in the face of the costs I have just noted, clearly demonstrates that the electric utility industry is prepared to do more – but we need to do it the right way.

Keeping Coal in the Fuel Mix

 

Low-cost, reliable electricity results, in part, from our ability to utilize a variety of readily available energy resources—coal, nuclear energy, natural gas, hydropower, and new renewable energy resources such as wind and solar. Fuel diversity is key to affordable and reliable electricity. A diverse fuel mix helps to protect consumers from contingencies such as fuel shortages or disruptions, price fluctuations and changes in regulatory practices. A diverse fuel mix takes advantage of regional differences in fuel availability that have evolved over many decades. I have attached a chart showing that different parts of the United States are dependent on different sources of electricity.

 

While coal fuels slightly more than 50 percent of the generation produced in the United States, coal fuels more than eighty percent of the electrical generation in the Midwest. These coal plants help to keep the price of electricity down for consumers and businesses, an extremely important issue in Midwest states whose economies are already financially strapped.

Coal and the Clean Air Act

 

But coal-based electric generators face emissions control requirements in the Clean Air Act that are duplicative, contradictory, costly and complex -- creating enormous uncertainty for future investment. Attached to my testimony is an EPA chart showing the complexity of the Clean Air Act for electric generators over the next decade (and it doesn't even include all the pre-2000 requirements that continue now and into the future). While I think many of these deadlines are ambitious and will be missed, the chart does show the regulatory muddle that coal-fired power faces.

 

The net result of the current regulatory system is a planning nightmare that makes it virtually impossible for electric generators to have any stable notion of what requirements will be in place for our plants at any point in the future. In addition to this chaos, are the long construction cycles and large capital expenditures that prohibit us from accurately assessing which plants should be retrofitted with controls, which plants should be switched to different coals or to natural gas, which plants should be retired and when any of this should take place. The result is a system that threatens the reliability and affordability of our nation’s electric supply.

 

This regulatory morass also puts more pressure on the natural gas supply and delivery systems that already are yielding gas prices of great concern to the nation’s industrial users and electric customers. Just this past winter, spikes in natural gas prices forced the Wheeling-Pittsburgh Steel Corp. to reduce or halt operations at three plants in Ohio. According to the American Chemistry Council, every dollar that the price of natural gas increases translates to about $1 billion in additional annual costs for the chemical industry that alone employs more than one million people directly.

 

Stephen Brown, director of energy economics at the Dallas Federal Reserve Bank stated that “strong energy prices weaken the economy and it’s likely to retard the recovery. Nine of the 10 last recessions have been preceded by sharply higher energy prices.” [2]

 

Ironically, the present system also does not advantage those seeking further emissions reductions from coal-fired power plants. The piecemeal approach inherent in the current Clean Air Act necessarily involves many sequential scientific and technical decisions by EPA and the States that may not necessarily be resolved in favor of the environmental community and, regardless are typically late in being made and then litigated by all sides, causing further delay. This regulatory soup may deliver cleaner air – it hasn’t so far – but the chaos that accompanies this approach makes the timing of that environmental progress doubtful. And we will have the nation’s energy policy set by Brownian motion. The end result of all of these rulemakings randomly bouncing against each other will form a totally unpredictable pattern. However there will be some certain consequences – significantly higher electricity prices and further delays in environmental benefits.

 

For instance, implementation of National Ambient Air Quality Standards requires a series of sequential steps including monitoring of each air shed, designating nonattainment areas, inventorying emissions in the nonattainment area, modeling emissions in the nonattainment area, creating attainment demonstrations, and, finally, implementing these plans. Each step requires administrative action by the State – or in some cases the State legislature – followed by a formal approval by EPA. Because of this cumbersome process, there have been no nonattainment designations for either the fine particle NAAQS or the 8-hour ozone NAAQS, both of which were established in 1997. Once those designations of nonattainment areas occur, the Clean Air Act still allows States up to 12 years to bring nonattainment areas into compliance.

 

There is also no certainty around mercury reductions. While EPA is under a court order to finalize a mercury rule for coal-fired power by December 15, 2004, considerable uncertainty surrounds this endeavor. Under the Clean Air Act, maximum achievable control technology (MACT) standards are supposed to be based on the performance of the best available control technology in actual use in the source category. For coal-fired utility boilers, no high removal mercury-specific technology is in place. What reductions have occurred result from the installation of control technology aimed at other emissions. But data quality and variability issues make simple extrapolation of these results (which is necessary in determining a standard) very problematic. Reductions fluctuate without explanation over time at a single unit; similar units with similar controls and coals experience very different results. As a result, EPA will need to build into the final rule emissions targets that reflect these fluctuations.

 

Add to this the reality that while the Clean Air Act generally requires a three-year implementation period, there are extensions available, making implementation more likely in 2009 or 2010 – and that does not count any delays spawned by the inevitable litigation, further delaying the implementation date.

 

By the way, the nominal three-year period is too short for utilities to design, permit and install SO2 scrubbers, the most cost effective means for bituminous coal to reduce mercury emissions. If utilities are held to the three years, we will be forced to focus our capital dollars on other extremely expensive and unproven technologies or switching to natural gas -- both of which are ill-conceived outcomes for ratepayers, shareholders and the breathing public.

Why a Multi-Pollutant Approach Makes Sense

 

In contrast to the current piecemeal approach to regulation inherent in the existing Clean Air Act, a well-designed multi-emission approach is the best roadmap for further reducing power plant emissions. The right multi-emission bill will benefit electricity producers, consumers and the environment, by:

•Locking in major emission reductions today

•Locking in a timeline for those reductions so that emission control strategies can begin today – resulting in cleaner air sooner

•Lowering the cost impact for consumers

•Coordinating reductions so that utilities are able to use multi-pollutant control technology

•Providing the electric industry – in need of certainty – with the time necessary to attract capital for the multi-billions of investments that will be needed to meet the new requirements

•Maintaining coal as a generation fuel thereby preserving natural gas reserves for consumers, farmers and businesses that rely on natural gas for their operations

•Saving jobs at existing coal-fired power plants and in the coal industry and creating new jobs to construct massive pollution control projects

•Providing flexibility through market-based programs such as emissions trading and early reduction credits

•Easing implementation for states to meet federal clean air standards

 

The Clear Skies Act (S. 485)

 

The “Clear Skies Act” would require the most ambitious emissions reductions ever from power plants, ensuring air quality results that are cleaner, sooner, and cheaper. The emissions reductions would be rock solid, due to continuous emissions monitoring and large penalties for non-compliance. The scope and framework of the Clear Skies Act are ambitious and, for many companies including small public power systems, extremely painful. This is especially true for the first phase of Clear Skies.

 

Clear Skies would deliver additional dramatic reductions of power plant emissions—cutting SO2, NOx and mercury emissions by 70 percent from current levels – while reducing costs and providing greater business certainty by combining multiple, overlapping regulations into a single set of reduction requirements.

 

An essential component of Clear Skies is that is provides industry with the time needed to attract capital necessary to make the reductions without jeopardizing the balance sheets. Given the current economic situation for our industry, we must spread the huge Clean Air capital investments over more than a few years in order to maintain our economic health.

 

And, the appropriate timelines also saves existing and creates new jobs. A deliberate approach to meeting emission reduction goals is essential for continued reliable electric generation and cost-effectiveness. Retrofits of additional selective catalytic reduction (SCR) systems for NOx, flue gas desulfurization systems (scrubbers) for SO2, activated carbon and fabric filters for mercury will be needed on over 100 GW of power plants, which is the equivalent of 250 medium sized generation units. Each of these installations will require capital expenditures of anywhere from $60 million to more than $200 million.

 

Clear Skies represents probably one of the largest construction projects this nation will see. These installations must be spread over time to ensure reliability and stable prices that will not occur if too many large units are off line for retrofits at once. A smooth timeline also provides a steady construction program over the next 15 years. As we found with the NOx SIP Call, if controls are pushed within too narrow a time window, aside from increasing pressure on switching to natural gas, there will be labor and materials shortages and bottlenecks, which will greatly (and unnecessarily) increase costs.

 

Congress in the Clean Air Act Amendments of 1990 afforded the industry a decade to comply with reductions of fifty percent in SO2 and NOx emissions. And just as Congress said in the 1990 amendments, a defined emissions target set over a reasonable timeframe resulted in real environmental improvements. Emissions reductions of seventy percent for three different emissions will be more costly, resource intensive and time consuming. Providing two phases of reductions, with the first phase limited to a fifty percent reduction, squares not only with reality but also with the precedent established in 1990.

 

As I have mentioned, the targets in the Clear Skies proposal are aggressive. To provide the planning certainty we need to meet these goals, the Clear Skies Initiative must also harmonize the existing Title I requirements including New Source Review; facilitate emissions trading; provide credit for early reductions; and distribute emission allowances equitably. The industry also has concerns about the auction provision that would only increase costs for those spending billions in retrofits with no commensurate environmental benefit. S. 366

 

While I prefer to emphasize the positive aspects of the Clear Skies Act, I cannot go without noting that S. 366, which Senator Jeffords and co-sponsors introduced on February 12, 2003, is unworkable and would cause tremendous economic hardship for my company, the industry and the nation. All of the bill's new requirements would be placed on top of the existing Clean Air Act, exacerbating the complexity of an Act that already can give the Tax Code a run for being crowned the “most convoluted, Byzantine and difficult to understand” federal law.

 

More importantly, S.366 would greatly impact electricity prices, natural gas prices, coal consumption and other key factors. As you know, in November 2001, Mary J. Hutzler, the Acting Administrator of the Energy Information Administration, that as a result of S.556, “the average delivered price of electricity in 2020 is projected to be 33 percent higher” and “natural gas prices are also higher by 20 percent.” 3 An earlier EIA report pegged the loss of coal generation at 38 to 42 percent while natural gas generation increased by 60 percent.

 

And significantly, the analysis did not actually capture the full costs of S.366 since many new, troublesome provisions were added in June 2002. EIA did not model S.556's “Outdated Power Plants” provision, which will almost immediately cancel out the cap and trade program supposedly contained in the bill, and dictate compliance strategy. In fact, the Congressional Budget Office last November estimated the impact of S.556 to power generators as possibly reaching $60 billion in just the year 2012.

 

Conclusion

While I know the challenges are daunting, I do believe that this Subcommittee can craft multi-emission legislation that both meets environmental goals and provides the industry with a workable roadmap. To do otherwise will ignore both an opportunity to make tremendous progress on Clean Air while ensuring the economic health of the energy industry. This industry, which faces enormous uncertainty on all fronts, is also the target of a morass of new Clean Air Act regulations which I have outlined today. These regulations threaten coal and dramatically increase compliance costs, yet leave environmental progress up in the air. With the economy in perilous shape at the national and state level, massive increases in the use of natural gas for generation will be very destructive. Environmental goals can and must be met, but fuel switching and consumer price increases must be kept to a minimum. That is why EEI and Cinergy support multi-pollutant legislation and the scope and framework of the Clear Skies Initiative. It delivers clean air with certainty while protecting workers, consumers and industry.

 

Finally, the time to act is now. I strongly believe that the window for passing multi-pollutant legislation will close next year due to national elections and further regulatory developments. So I respectfully ask this Subcommittee not to squander this unique opportunity to create a new chapter of Clean Air progress for the American people. It is time to find a sensible, practical solution to the environmental issues facing coal-fired power before we jeopardize our future.

 

We look forward to working with the Committee, the Administration and other key members of Congress to help make this legislation a reality.

 

Thank you.

[1] Testimony before the Subcommittee on Clean Air, Wetlands, Private Property and Nuclear Safety, Committee on Environment and Public Works, May 17, 2000. Testimony submitted on behalf of Clean Air Task Force, NRDC, USPIRG, National Environmental Trust and other environmental groups.

[2] Wall Street Journal, February 28, 2003 “Effects of Gas Shortage Rip Through Economy

[3] Statement of Mary J. Hutzler, Acting Administrator, Energy Information Administration, Department of Energy, before the Committee on Environment and Public Works (Nov. 1, 2001) p.3