S. HRG. 108–347

CLEAR SKIES ACT OF 2003

HEARINGS

BEFORE THE

SUBCOMMITTEE ON CLEAN AIR, CLIMATE CHANGE,

AND NUCLEAR SAFETY

OF THE

COMMITTEE ON

ENVIRONMENT AND PUBLIC WORKS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON

S. 485

A BILL TO AMEND THE CLEAR AIR ACT TO REDUCE AIR POLLUTION

THROUGH EXPANSION OF CAP AND TRADE PROGRAMS, TO PROVIDE

ALTERNATIVE REGULATORY CLASSIFICATION FOR UNITS SUBJECT TO

THE CAP AND TRADE PROGRAM, AND FOR OTHER PURPOSES

APRIL 8, 2003

MAY 8, 2003

JUNE 5, 2003

Printed for the use of the Committee on Environment and Public Works

(
CLEAR SKIES ACT OF 2003
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91–748 PDF 2004

S. HRG. 108–347

CLEAR SKIES ACT OF 2003

HEARINGS

BEFORE THE

SUBCOMMITTEE ON CLEAN AIR, CLIMATE CHANGE,

AND NUCLEAR SAFETY

OF THE

COMMITTEE ON

ENVIRONMENT AND PUBLIC WORKS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON

S. 485

A BILL TO AMEND THE CLEAR AIR ACT TO REDUCE AIR POLLUTION

THROUGH EXPANSION OF CAP AND TRADE PROGRAMS, TO PROVIDE

ALTERNATIVE REGULATORY CLASSIFICATION FOR UNITS SUBJECT TO

THE CAP AND TRADE PROGRAM, AND FOR OTHER PURPOSES

APRIL 8, 2003

MAY 8, 2003

JUNE 5, 2003

Printed for the use of the Committee on Environment and Public Works

(
COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

JAMES M. INHOFE, Oklahoma, Chairman

JOHN W. WARNER, Virginia

CHRISTOPHER S. BOND, Missouri

GEORGE V. VOINOVICH, Ohio

MICHAEL D. CRAPO, Idaho

LINCOLN CHAFEE, Rhode Island

JOHN CORNYN, Texaa

LISA MURKOWSKI, Alaska

CRAIG THOMAS, Wyoming

WAYNE ALLARD, Colorado

JAMES M. JEFFORDS, Vermont

MAX BAUCUS, Montana

HARRY REID, Nevada

BOB GRAHAM, Florida

JOSEPH I. LIEBERMAN, Connecticut

BARBARA BOXER, California

RON WYDEN, Oregon

THOMAS R. CARPER, Delaware

HILLARY RODHAM CLINTON, New York

ANDREW WHEELER, Majority Staff Director

KEN CONNOLLY, Minority Staff Director

SUBCOMMITTEE ON CLEAN AIR, CLIMATE CHANGE, AND NUCLEAR SAFETY

GEORGE V. VOINOVICH, Ohio, Chairman

MICHAEL D. CRAPO, Idaho

CHRISTOPHER S. BOND, Missouri

JOHN CORNYN, Texas

CRAIG THOMAS, Wyoming

THOMAS R. CARPER, Delaware

JOSEPH I. LIEBERMAN, Connecticut

HARRY REID, Nevada

HILLARY RODHAM CLINTON, New York

(II)
(III)

CONTENTS

Page

APRIL 8, 2003

OPENING STATEMENTS

Carper, Hon. Thomas R., U.S. Senator from the State of Delaware ................... 34

Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma .................... 1

Jeffords, Hon. James M., U.S. Senator from the State of Vermont .................... 15

Forum, weather and climate change, National Research Council ................ 17–33

Thomas, Hon. Craig, U.S. Senator from the State of Wyoming .......................... 36

Voinovich, Hon. George V., U.S. Senator from the State of Ohio ........................ 3

WITNESSES

Colburn, Ken, Executive Director, Northeast States for Coordinated Air Use

Management (NESCAUM) .................................................................................. 57

Prepared statement, New Jersey DEP Secretary Bradley Campbell ........... 115

Hawkins, David G., Climate Center Program Director, Natural Resources

Defense Council .................................................................................................... 59

Prepared statement .......................................................................................... 117

McCullough, Glenn, Jr., Chairman, Tennessee Valley Authority ....................... 49

Prepared statement .......................................................................................... 101

Responses to additional questions from:

Senator Jeffords ......................................................................................... 106

Senator Voinovich ..................................................................................... 105

Melewski, Bernard, Adirondack Council ............................................................... 62

Prepared statement .......................................................................................... 138

Responses to additional questions from Senator Jeffords ............................. 145

Rogers, James, CEO and President, Cinergy Corporation, on behalf of the

Edison Electric Institute ...................................................................................... 55

Prepared statement .......................................................................................... 109

Trisko, Eugene, United Mine Workers of America ............................................... 60

Prepared statement .......................................................................................... 134

Responses to additional questions from:

Senator Jeffords ......................................................................................... 137

Senator Voinovich ..................................................................................... 136

Whitman, Hon. Christine Todd, Administrator, U.S. Environmental Protection Agency ........................................................................................................... 38

Prepared statement .......................................................................................... 79

Responses to additional questions from:

Senator Jeffords ......................................................................................... 87

Senator Thomas ......................................................................................... 100

Senator Voinovich ..................................................................................... 99

MAY 8, 2003

OPENING STATEMENTS

Carper, Hon. Thomas R., U.S. Senator from the State of Delaware ................. 179

Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma ................... 147

Jeffords, Hon. James M., U.S. Senator from the State of Vermont ................... 153

Letters:

Americans for Clean Air ........................................................................... 171

Clean Air Act, several organizations ....................................................... 159
Page

IV

Jeffords, Hon. James M., U.S. Senator from the State of Vermont—Continued

Report, Mercury MACT under the Clean Air Act, NESCAUM .................... 154

Voinovich, Hon. George V., U.S. Senator from the State of Ohio ...................... 151

Article, Akron Beacon Journal ........................................................................ 176

Report, Natural Gas 1999 Summary Report, National Petroleum Council ................................................................................................................ 248–329

WITNESSES

Bluestein, Joel, president, Energy and Environmental Analysis, Inc. ................ 188

Prepared statement .......................................................................................... 228

Krimmel, James, president, Zaclon Chemical ....................................................... 183

Prepared statement .......................................................................................... 207

McSlarrow, Hon. Kyle E., Deputy Secretary, U.S. Department of Energy ......... 173

Prepared statement .......................................................................................... 201

Metz, Richard, co-executive officer, Unimark, L.L.C. ........................................... 184

Prepared statement .......................................................................................... 208

Thumb, Steve, principal, Energy Ventures Incorporated ..................................... 186

Prepared statement .......................................................................................... 214

ADDITIONAL MATERIAL

Report, Natural Gas 1999 Summary Report, National Petroleum Council........................................................................................................................ 248–329

Statement, American Chemistry Council .............................................................. 225

JUNE 5, 2003

OPENING STATEMENTS

Carper, Hon. Thomas R., U.S. Senator from the State of Delaware ................... 334

Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma .................... 336

Letter, Clear Skies Act, EPA Administrator Christine Todd Whitman ....... 334

Lieberman, Hon. Joseph I., U.S. Senator from the State of Connecticut ........... 366

Thomas, Hon. Craig, U.S. Senator from the State of Wyoming .......................... 337

Voinovich, Hon. George V., U.S. Senator from the State of Ohio ........................ 331

WITNESSES

Benson, Steven A., senior research manager, Energy and Environmental Center, University of North Dakota .......................................................................... 353

Prepared statement .......................................................................................... 401

Brownstein, Mark S., director, Enterprise Strategy ............................................. 377

Prepared statement .......................................................................................... 442

Bucher, Richard, W.L. Gore and Associates, Inc. ................................................. 355

Prepared statement .......................................................................................... 404

Cogan, Douglas G., deputy director of social issues, Investor Responsibility

Research Center ................................................................................................... 375

Excerpt, Southern Co.’s Proxy Statement ...................................................... 440

Prepared statement .......................................................................................... 421

Reports, IRRC Social Services ..................................................................... 423, 431

Krozner, Randall S., member, Council of Economic Advisers .............................. 338

Prepared statement .......................................................................................... 389

McGinnis, Jim, managing director, Morgan Stanley ............................................ 374

Prepared statement .......................................................................................... 419

Monroe, Larry S., program manager, Office of Pollution Control Research,

Southern Company .............................................................................................. 352

Prepared statement .......................................................................................... 391

Nappier, Hon. Denise, Treasurer, State of Connecticut ....................................... 369

Prepared statement .......................................................................................... 408

Taylor, Wes, president of production, TXU Energy North America .................... 372

Prepared statement .......................................................................................... 415

Thorning, Margo, senior vice president and chief economist, American Council

for Capital Formation .......................................................................................... 371
Page

V

Thorning, Margo, senior vice president and chief economist, American Council

for Capital Formation—Continued

Prepared statement .......................................................................................... 409

(1)

THE CLEAR SKIES ACT OF 2003

TUESDAY, APRIL 8, 2003

U.S. SENATE, COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS, SUBCOMMITTEE ON CLEAN AIR, CLIMATE CHANGE AND

NUCLEAR SAFETY, Washington, DC.

The committee met, pursuant to notice, at 2:12 p.m. in room 406,

Senate Dirksen Building, the Hon. George V. Voinovich [chairman

of the committee] presiding.

Present: Senators Jeffords, Inhofe, Thomas, Cornyn, and Carper.

Senator VOINOVICH. The hearing will come to order.

I am very pleased that the chairman and ranking member of the

full committee are here today. Senator Inhofe, who is chairman of

the committee, has another meeting he has to attend. He asked if

we extend the courtesy of doing his opening statement.

OPENING STATEMENT OF HON. JAMES M. INHOFE,

U.S. SENATOR FROM THE STATE OF OKLAHOMA

Senator Inhofe, I really thank you for being here. We look forward to your opening statement.

Senator INHOFE. Thank you, Senator Voinovich. There is an

Armed Services meeting at the same time. There is a problem we

have been trying to resolve, unsuccessfully.

Thank you, Madame Administrator, for coming before us to testify on the Clear Skies Act. I know that the signal that is sent by

your presence here shows how significant this is to the Administration.

I would like to begin by complementing the Administration for

taking the Clean Air Act into the 21st Century. This legislation

cuts emissions of sulfur dioxide, nitrous oxide, and mercury by 70

percent, which is the largest reduction ever called for by any American President.

As you know, the Clean Air Act has resulted in tremendous gains

in improving the air quality in our Nation in the last 30 years.

Lead, which was commonplace in gasoline, is virtually gone from

our air sheds. That has led to improvements in control technologies

from the auto industry, power plants, and other industrial sectors.

As a result, U.S. manmade emissions have declined dramatically

for all six criteria pollutants. They declined by 29 percent. That is

at a time when population has increased by 38 percent, the GDP

has increased by 160 percent and the vehicle miles traveled 143

percent. It is a success story.
2

The power industry has been a vital part of that success. Since

1970, emission rates at coal-fired power plants for sulfur dioxide

and nitrogenous oxides have been cut by more than half. Unfortunately, each additional turn of emissions reduction in our Nation’s

States to reduce comes at an increasingly expensive price tag.

The current Act is plagued by bureaucratic and sometimes contradictory programs. Every new significant regulation is greeted by

endless rounds of litigation that do more for trial lawyers than they

do to clean up the air. A prime example of that is the 1997 PM/

ozone rule that still has not been implemented because of the years

of litigation.

Generators face an uncertain future as to what costs will be imposed on them. Without certainty, generators will hesitate to invest

in significant capital necessary to build a new base-load coal plant

to meet our Nation’s growing demand.

Two years ago, natural gas prices spiked and the Nation witnessed a crisis that took place in California. They spiked again this

February going as high as $19.50. We should not strain natural gas

supplies beyond its ability to continue to service residential consumers and industrial users.

Preserving our diverse fuel mix also promotes national security.

More than half of the Nation’s electricity currently from coal. Our

Nation has been called the Saudi Arabia of coal. As this chart

shows, 85 percent of the ultimately recoverable fuel reserves on a

Btu basis are coal. That’s simply too important of a resource to

push aside.

I was talking to Chairman McCullough of TVA right before this

meeting, and we both agree, we have to have all forms of energy.

The only issue I remain concerned about is mercury. When the

President’s announced his Clean Skies initiative, we were told that

the Phase 1 cap of 26 tons would be based on the benefit of controls

installed to meet the sulfur dioxide and nitrogen oxide caps. It now

appears that the 26 tons has been redefined as a cost-effective

level. My constituents tell me that 26 tons is an unrealistic target

and will cause fuel-switching from coal to natural gas, which I find

very troubling. I believe we should return to basing the mercury

level on actual coal benefits.

I am pleased, however, that the bill does not attempt to regulate

carbon dioxide, which is not a pollutant under the Clean Air Act.

As you know, I am an avid proponent of taking costs into consideration. To the extent that there is any consensus in the climate

change to date, it is that even the draconian Kyoto Protocol would

have no measurable effect on global temperatures. In other words,

regulating carbon dioxide would bring no measurable benefits, at

extreme costs.

The President’s Clear Skies approach is the sensible approach

and will result in the most significant reforms. By putting in place

a cap and trade program based on the Acid Rain Program—the

most successful and efficient program in the Clean Air Act Amendments of 1990—power plant operators will have the flexibility to

choose which plants should have which control technologies, so that

the system gets the biggest bang for the environmental buck.

I look forward to your hearing today, Mr. Chairman.

[The prepared statement of Senator Inhofe follows:]
3

STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM THE STATE OF

OKLAHOMA

Thank you Madam Administrator for coming before us to testify on the President’s Clear Skies legislation. I appreciate your presence here today and the signal

it sends as to how important this legislation is to the Administration.

I would like to begin by complimenting the Administration for taking the Clean

Air Act into the 21st century. This legislation cuts emissions of sulfur dioxide, nitrogen oxides, and mercury by 70 percent the biggest reductions ever called for by an

American President.

As you know, the Clean Air Act has resulted in tremendous gains in improving

the air quality in our nation over the last 30 years. Lead, which was commonplace

in gasoline, is virtually gone from our airsheds. The Act has led to improvements

in control technologies from the auto industry, power plants, and other industrial

sectors. As a result, U.S. man-made emissions have declined dramatically for all six

criteria pollutants by 29 percent since 1970.

The power industry has been a vital part of that success story. Since 1970, emission rates at coal-fired power plants for sulfur dioxide and nitrogen oxides have

been cut by more than half.

Unfortunately, each additional ton of emissions reduction that our nation seeks

to reduce comes at an increasingly expensive price tag. The current Act is plagued

by bureaucratic and sometimes contradictory programs, and every new significant

regulation is greeted by endless rounds of litigation that do more for trial lawyers

than they do to clean up the air. A prime example of that is the 1997 PM/ozone

rule that has still not been implemented because of years of litigation.

Generators face an uncertain future as to what costs will be imposed on them.

Without certainty, generators will hesitate to invest the significant capital necessary

to build a new base-load coal plant to meet our nation’s growing demand into the

future. Two years ago, natural gas prices spiked and the Nation witnessed the California energy crisis. Prices spiked again this February, going as high as $19.50. We

should not strain natural gas supplies beyond its ability to continue to service residential consumers and industrial users. Preserving our diverse fuel mix also promotes national security. More than half of the nation’s electricity currently comes

from coal. Our country has been called the ‘‘Saudi Arabia of coal.’’ As this chart

shows, 85 percent of the ultimately recoverable fuel reserves on a Btu basis are coal.

That is simply too important a resource to push aside.

One issue I remain concerned about is mercury. When the President announced

his Clear Skies Initiative, we were told that the phase 1 cap of 26 tons would be

based on the co-benefit of controls installed to meet the sulfur dioxide and nitrogen

oxides caps. Now it appears the 26 tons has been redefined as a cost-effective level.

My constituents tell me that 26 tons is an unrealistic target and will cause fuel

switching from coal to natural gas, which I find very troubling. I believe we should

return to basing the mercury level on actual co-benefits.

I am pleased, however, that the bill does not attempt to regulate carbon dioxide,

which is not a pollutant under the Clean Air Act. As you know, I am an avid proponent of taking costs into consideration. To the extent that there is any consensus

in the climate change debate, it is that even the draconian Kyoto protocol would

have no measurable effect on global temperatures. In other words, regulating carbon

dioxide would bring no measurable benefit at extreme costs.

The President’s Clear Skies approach is the sensible approach, and will result in

the most significant reforms. By putting in place a cap and trade program based

on the Acid Rain program the most successful and efficient program in the Clean

Air Act Amendments of 1990 power plant operators will have the flexibility to

choose which plants should have which control technologies so that the system gets

the biggest bang for the environmental buck.

I look forward to hearing from you on this aggressive initiative for reducing air

emissions.

OPENING STATEMENT OF HON. GEORGE V. VOINOVICH,

U.S. SENATOR FROM THE STATE OF OHIO

Senator VOINOVICH. Thank you, Mr. Chairman.

I am probably going to have a little longer statement than I ordinarily would, but this is an initial hearing on something very, very

important to the future of our country and to our economy and to

the environment. It is going to be the first that we intend to have

during this session of Congress on the Clean Air Act. It is an issue
4

that is critically important to me and very important to my home

State of Ohio, which is a major manufacturing State. For several

years now, this committee has been grappling with the complex

issue of how to clean our air by reducing emissions without putting

our economy in a stranglehold. Today, we are here to discuss the

Clear Skies Act, S. 485, which is a proposal sent to us by President

Bush to reduce power plant emissions and protect our economy,

and improve our environment and public health.

As we hear testimony on Clear Skies from our three distinguished panels, I think we need to keep in mind the important context in which we consider this legislation. I think so often here in

Congress we get so wrapped up in the weeds and the grass that

we don’t see the big picture. It is no secret that our economy is

struggling. One of the key reasons our economy is sputtering is

that we don’t have an energy policy. As I have often stated, we

sorely need to develop a long-overdue energy policy for our Nation.

As a member of the Energy Task Force, I will do everything I can

to work for passage of an energy bill that harmonizes the needs of

our economy and our environment this year. These are not competing needs; a sustainable environment is critical to a strong economy, and a sustainable economy is critical to providing the funding

necessary to improve the environment.

We need a policy that broadens our base of energy resources to

create stability, guarantee reasonable prices, and protect America’s

security. It has to be a policy that will keep energy affordable. Finally, it has to be a policy that won’t cripple the engines of commerce that fund the research that will yield future environmental

protection technologies.

Right now, about 86 percent of the electricity generated in my

State comes from coal-fired facilities. The chairman of the committee has made it clear how much energy is produced in this

country from coal, about 50 percent. For generations, the use of

coal for electricity not only provided affordable and reliable electricity for Ohio manufacturers, it helped to keep the costs of natural gas down, as well. This combination of affordable electricity

and low-cost natural gas is absolutely critical to the health of

Ohio’s manufacturing base and, just as important, our Nation’s

manufacturing base.

The Clean Air Act, enacted in 1970 to protect and enhance the

quality of the Nation’s air resources, has been extremely successful

in reducing emissions of pollutants. As these charts show, since

1970, emissions of all criteria pollutants have been reduced by 29

percent, despite the fact that energy use is up 42 percent, electricity use has grown 159 percent, and the Gross Domestic Product

has grown 160 percent. However, the current approach to regulation utilized by the EPA is plagued with burdensome and overlapping regulations that are subject to costly and time-consuming litigation and have become unnecessarily costly.

There are now more than a dozen separate regulations on the

books for sulfur dioxide and nitrogen oxide alone, with additional

regulations around the corner. As this chart illustrates, the regulatory process at EPA is long, complex and costly. Further litigation over several of these regulations has already delayed their implementation, forestalling the air quality benefits that they were
5

designed to achieve. This patchwork of existing and soon-to-be-implemented regulations, coupled with the delays bred by continuous

litigation over them—on both sides, for that matter—has created

enormous uncertainty for utilities, co-ops, and municipal generators. This uncertainty has curtailed investments in technology that

would reduce emissions at existing plants, prevented numerous

new facilities from coming on line, and caused several utilities to

try to phaseout coal-based generation altogether by fuel switching.

Fuel switching—changing from coal-based generation to natural

gas-based generation—I believe is a tremendous threat to the economy of not just Ohio, but to the Nation as well. There are currently

over 5,000 power plants in the United States that generate over

850,000 megawatt hours of electricity annually. In 2002, 19 percent

of our electricity was generated by natural gas, as opposed to 50

percent generated by coal. Reliance on natural gas for even this

much generation has put a tremendous strain on natural gas supplies and pushed prices on available gas to record highs.

The President’s National Energy Policy Task Force projected that

over 1,300 new power plants will need to be built to satisfy America’s energy needs over the next 20 years. Because of the emissions

limits and regulatory uncertainty triggered by the Clean Air Act,

the Department of Energy currently predicts that over 90 percent

of these new plants will be powered by natural gas. Further, analysis by EIA and the EPA shows that a large percentage of coalfired plants are likely to be replaced by natural gas-fired plants in

the near future.

We do not have enough natural gas to power all of these new facilities, and we do not have the capability to increase our supply

to meet this demand. Unless Congress develops a plan to deal with

this situation, we are looking at major natural gas shortages,

spikes in natural gas prices, and significant spikes in electricity

prices.

Shortages in natural gas supply—and the resultant increase in

natural gas prices—do not just affect utilities. Many other industries rely on natural gas, and I think a lot of Americans are not

aware of this, such as the farming community, the steel and metal

industries as is pointed out on that charge, chemical and polymer

manufacturers. My chemical and polymer people in the State of

Ohio are in deep financial trouble today because of the high cost

of natural gas. They are completing with people in the global marketplace that don’t have those large costs. It also impacts on the

food processing industry.

It is not difficult to understand why a major shortage of natural

gas, coupled with skyrocketing prices for natural gas and electricity, will ensure that many of our companies will no longer be

able to remain competitive in the global marketplace. I recently

met with manufacturers in my hometown of Cleveland, about 50 of

them, and I was shocked when two of them told me that they were

seriously considering moving their operations overseas because of

high energy prices.

Although high electricity prices would severely affect businesses

and their ability to compete in the global marketplace, it will have

an even more profound impact on low-income families and the elderly, as some of you on this committee have seen before. High en-
6

ergy costs impact most on those that are least able to pay for it.

This chart is based on the Department of Energy statistics, and

shows that low-income families pay a disproportionate share of

their income on energy, which prevents that money from being

used for other necessities. The Centers for Disease Control states

that more of our elderly and children died from heat exposure between 1979 and 1999 than from all other natural disasters combined.

For several years now, I have been trying to work on a bipartisan basis to head off this oncoming train wreck. During the last

Congress we held several hearings on the need to harmonize our

environmental and energy policies that highlighted the need to promote energy development and environmental protection. I worked

with Senators Bingaman and Murkowski on comprehensive energy

legislation, and with Senator Jeffords and Senator Carper to try to

find a bipartisan Clean Air reform last year. Unfortunately, we

were not able to enact comprehensive energy legislation on a bipartisan basis, and we are no closer today to solving the problems

than we were a year ago, 2 years ago, or 3 years ago.

In order to defuse the time bomb of skyrocketing natural gas and

electricity prices that is sitting in our laps, Congress must enact a

comprehensive energy policy that will increase our development of

natural gas supplies and ensure that we have a diverse fuel mix

for electricity generation that includes nuclear, renewables, natural

gas, and coal. To get there, the Senate must pass both comprehensive energy legislation and also deal with this legislation that is before us today.

In my opinion, the Clear Skies that you are here to testify about

will improve the Clean Air Act by providing greater certainty that

emissions are reduced, while providing a stable regulatory environment that allows utilities to install necessary pollution controls

without the fear that those controls will be obsolete before they are

paid for. It will result in cleaner air, less regulation and litigation,

and lower energy costs to manufacturers and American consumers.

Simply put, this legislation can provide tremendous benefits to the

environment, and is crucial to the long-term survival of our economy and our manufacturing base.

I am not going to get into the details of the legislation in terms

of the tonnage that is going to be reduced, because I am sure that

you will mention that in your testimony. But I will mention that

the emissions cap and trading program in Clear Skies is based on

the proven success of the Acid Rain Program contained in Title IV

of the Clean Air Act, which to date has been the most effective

clean air program, having reduced SO2 emissions by 37 percent

through 2000, while saving hundreds of millions of dollars in compliance costs.

The Clear Skies Program will provide power plants with the

flexibility to choose among various options for reducing emissions

that best fits their specific circumstances, while saving over $1 billion in compliance costs.

Clear Skies also contains several provisions that reform existing

Clean Air Act programs to streamline the regulatory process and

help reduce the existing patchwork of regulations and rules.
7

The flexibility of Clear Skies’ market-based cap and trade program and the certainty of its emissions reduction targets, combined

with these reforms, will ensure that real reductions called for in

this bill can be achieved without forcing utilities to fuel-switch and

without forcing electricity and natural gas prices through the roof.

Perhaps most importantly, Clear Skies will help ensure that the

least of our brothers and sisters will not be forced to forego heating

their homes, and that our companies will not be forced to move

overseas to remain competitive in the global marketplace due to

high electricity and natural gas prices.

As I mentioned at the beginning of my remarks—and I apologize

for the length of them—this is the first of several hearings that we

intend to hold in this subcommittee on Clear Skies. It is my intention to mark up Clear Skies at the subcommittee level as quickly

as possible, and I will push hard to have the full committee report

a bill to the floor and have the Senate pass it during this Congress.

I want to thank our witnesses this afternoon. Administrator

Whitman, I appreciate your coming to present the President’s proposal to the subcommittee.

It is also a pleasure to have the Administrator testify before us

today, especially on a topic as important as this one. I look forward

to your testimony. I look forward to the testimony of the other witnesses that will be before us today.

Senator Jeffords is the ranking member of the Environment and

Public Works Committee.

[The prepared statement of Senator Voinovich follows:]

STATEMENT OF HON. GEORGE V. VOINOVICH, U.S. SENATOR FROM THE STATE OF

OHIO

This hearing is the first of several that we intend to have during this Congress

on reforms to the Clean Air Act. This is an issue that is critically important to me

and to my home State of Ohio, a major manufacturing State. For several years now,

this committee has been grappling with the complex issue of how to clean our air

by reducing emissions without putting our economy in a stranglehold. Today, we are

here to discuss the Clear Skies Act (S. 485), which is a proposal sent to us by President Bush to reduce power plant emissions and protect our economy.

As we hear testimony on Clear Skies from our three distinguished panels today,

I think we need to keep in mind the important context in which we consider this

legislation. It is no secret that our economy is struggling. One of the key reasons

our economy is sputtering is that we don’t have an energy policy. As I have often

stated, we sorely need to develop a long overdue energy policy for our Nation. As

a member of the Energy Task Force, I will do everything I can to work for passage

of an energy bill that harmonizes the needs of our economy and our environment

this year. These are not competing needs. A sustainable environment is critical to

a strong economy, and a sustainable economy is critical to providing the funding

necessary to improve our environment.

We need a policy that broadens our base of energy resources to create stability,

guarantee reasonable prices, and protect America’s security. It has to be a policy

that will keep energy affordable. Finally, it has to be a policy that won’t cripple the

engines of commerce that fund the research that will yield future environmental

protection technologies.

Right now, about 86 percent of the electricity generated in Ohio comes from coalfired facilities. For generations, the use of coal for electricity generation has not only

provided affordable and reliable electricity for Ohio manufacturers, it has helped to

keep the costs of natural gas down as well. This combination of affordable electricity

and low-cost natural gas is absolutely critical to the health of Ohio’s manufacturing

base, and our Nation’s manufacturing base.

The absence of a comprehensive national policy that harmonizes energy production and environmental protection has led to an unfortunate (and predictable) situation in which the rules and regulations intended to protect our environment are
8

threatening to undermine our economy while failing to achieve significant environmental goals.

The Clean Air Act, enacted in 1970 to protect and enhance the quality of the nation’s air resources, has been extremely successful in reducing emissions of pollutants. As these charts show—Since 1970, emissions of all criteria pollutants have

been reduced by 29 percent despite the fact that energy use is up 42 percent

[CHART 1], electricity use has grown 159 percent and Gross Domestic Product has

grown 158 percent [CHART 2]. However, the current approach to regulation utilized

by the EPA is plagued with burdensome and overlapping regulations that are subject to costly and time-consuming litigation and have become unnecessarily costly.
9

There are now more than a dozen separate regulations on the books for sulfur

dioxide (SO2) and nitrogen oxide (NOx) alone with additional regulations around the

corner. As this chart illustrates, the regulatory process at EPA is long, complex and

costly [CHART 3]. Further, litigation over several of these regulations has already

delayed their implementation, forestalling the air quality benefits that they were designed to achieve. This patchwork of existing and soon-to-be-implemented regulations, coupled with the delays bred by continuous litigation over them, has created

enormous uncertainty for utilities, co-ops, and municipal generators. This uncertainty has curtailed investments in technology that would reduce emissions at existing plants, prevented numerous new facilities from coming online, and caused several utilities to try to phase-out coal-based generation altogether by fuel switching.
10

Fuel switching changing from coal-based generation to natural gas-based generation is a tremendous threat to the economy of not just Ohio, but to the Nation as

well. There are currently over 5,000 power plants in the United States that generate

over 850,000 megawatt hours of electricity annually. In 2002, 19 percent of our electricity was generated by natural gas as opposed to 50 percent generated by coal

[CHART 4]. Reliance on natural gas for even this much generation has put a tremendous strain on natural gas supplies and pushed prices on available gas to record

high prices.
11

The President’s National Energy Policy Task Force projected that over 1,300 new

power plants will need to be built to satisfy America’s energy needs over the next

20 years. Because of the emissions limits and regulatory uncertainty triggered by

the Clean Air Act, the Department of Energy currently predicts that over 90 percent

of these new plants will be powered by natural gas. Further, analysis by EIA and

the EPA shows that a large percentage of coal-fired plants are likely to be replaced

by natural gas-fired plants in the near future.

We do not have enough natural gas to power all of these new facilities, and we

do not have the capability to increase our supply to meet this demand [CHART 5].

Unless Congress develops a plan to deal with this situation, we are looking at major

natural gas shortages, spikes in natural gas prices, and spikes in electricity prices.
12

Shortages in natural gas supply and the resultant increase in natural gas prices

do not just affect utilities. Many other industries rely on natural gas such as the

Farming Community, the Steel and Metal Industries, Chemical and Polymers Manufacturers and Food Processing Industry [CHART 6]. It is not difficult to understand why a major shortage of natural gas coupled with skyrocketing prices for natural gas and electricity will ensure that many of our companies will no longer be

able to remain competitive in the global marketplace. I recently met with a group

of Manufacturers in my hometown of Cleveland. I was shocked when two of them

told me that they were seriously considering moving their operations overseas because of high energy prices.
13

Although high electricity prices would severely affect businesses and their ability

to compete in the global marketplace, it will have an even more profound impact

on low-income families and the elderly. Everyday, many Americans are forced to

make choices between paying for electricity or food and other essentials such as

medicine when energy prices are high. This chart, based on Department of Energy

statistics shows that low-income families pay a disproportionate share of their income on energy which prevents that money from being used for other necessities

[CHART 7]. The Center for Disease Control (CDC) states that more of our elderly

and children die from heat exposure (8,015 between 1979 and 1999) than from all

other natural disasters combined. The CDC also claims that air conditioning is the

No. 1 preventative factor against heat exposure.
14

For several years now, I have been trying to work on a bipartisan basis to head

off this oncoming train wreck. During the last Congress, I held several hearings on

the need to harmonize our environmental and energy policies that highlighted the

need to promote energy development and environmental protection. I worked with

Senators Bingaman and (Frank) Murkowski on comprehensive energy legislation,

and with Senator Jeffords and Senator Carper to try to find a bipartisan compromise on Clean Air Act reform. Unfortunately, we were not able to enact comprehensive energy legislation or reach a bipartisan Clean Air agreement, and we are

no closer to solving these very real problems.

In order to defuse the time bomb of skyrocketing natural gas and electricity prices

that is sitting in our lap, Congress must enact a comprehensive energy policy that

will increase our development of natural gas supplies and ensure that we have a

diverse fuel mix for electricity generation that includes nuclear, renewables, natural

gas and coal. To get there, the Senate must pass both comprehensive energy legislation that promotes domestic natural gas development and multi-pollutant legislation

that will streamline the regulatory process, maintain the diversity of our fuel mix

and achieve greater emissions cuts to protect our environment.

While the task of passing comprehensive energy legislation is underway over in

the Energy Committee and I commend Chairman Domenci for the work he doing

on the bill—the task of passing multi-pollutant legislation falls on us here in this

committee.

Earlier this year, in order to move multi-pollutant legislation that will protect

both our environment and our economy through the committee, Chairman Inhofe

and I introduced the Clear Skies Act (S. 485) by request. This bill—which calls for

70 percent reductions in SO2, NOx, and Mercury—will deliver far-reaching benefits

and maintain energy diversity by expanding and strengthening a proven mandatory,

market-based approach to reducing emissions.

The Clear Skies Act will improve the Clean Air Act by providing greater certainty

that emissions are reduced while providing a stable regulatory environment that allows utilities to install necessary pollution controls without the fear that those controls will be obsolete before they are paid-for. It will result in cleaner air, less regulation and litigation, and lower energy costs to manufacturers and American consumers. Simply put, this legislation will provide tremendous benefits to the environment and is crucial to the long-term survival of our economy and our manufacturing

base.

Specifically, the Clear Skies Act would establish federally enforceable emissions

limits for SO2, NOx and Mercury. For SO2, Clear Skies sets a Phase I cap of 4.5
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million tons in 2010 and a Phase II cap of 3 million tons in 2018 down from 11.2

million tons in 2000. For NOx, Clear Skies sets a Phase I cap of 2.1 million tons

in 2008 and a Phase II cap of 1.7 million tons in 2018 down from 5.1 million tons

in 2000. For Mercury, Clear Skies sets a Phase I cap of 26 tons in 2010 and Phase

II cap of 15 tons in 2018 down from 48 tons in 2000. These reductions are a not

only robust a 73 percent reduction for SO2, a 67 percent reduction for NOx, and a

69 percent reduction for Mercury, they would constitute the largest Clean Air Act

emission reduction targets ever requested by a President.

The emissions cap and trading program in Clear Skies is based on the proven success of the acid rain program contained in Title IV of the Clean Air Act—which to

date has been the most effective clean air program, having reduced SO2 emissions

by 37 percent through 2000 while saving hundreds of millions of dollars in compliance costs. The Clear Skies program will provide power plants with the flexibility

to choose among various options for reducing emissions that best fits their specific

circumstances while saving over $1 billion annually in compliance costs.

Clear Skies also contains several provisions that reform existing Clean Air Act

programs to streamline the regulatory process and help reduce the existing patchwork of regulations and rules.

The flexibility of the Clear Skies’ market-based cap and trade program and the

certainty of its emissions reduction targets—combined with these reforms—will ensure that the real reductions called for in this bill can be achieved without forcing

utilities to fuel switch and without forcing electricity and natural gas prices through

the roof. Perhaps most importantly, Clear Skies will help ensure that the least of

our brothers and sisters will not be forced to forego heating their homes—and that

our companies will not be forced to move overseas to remain competitive in the global market due to sky-high electricity and natural gas prices.

As I mentioned at the beginning of my remarks, this is the first of several hearings that we intend to hold in this Subcommittee on Clear Skies. It is my intention

to mark-up Clear Skies at the Subcommittee level as quickly as possible and I will

push hard to have the full committee report a bill to the floor—and to have the Senate pass it this Congress.

I want to thank our first witness this afternoon, Administrator Whitman, for coming to present President Bush’s proposal to the Subcommittee. It is always a pleasure to have the Administrator testify before us especially on a topic as important

as this one.

I look forward also to the testimony of our other witnesses and to working with

the members of this Subcommittee as we move forward on this vital legislation.

Senator VOINOVICH. Senator Jeffords?

OPENING STATEMENT OF HON. JAMES M. JEFFORDS,

U.S. SENATOR FROM THE STATE OF VERMONT

Senator JEFFORDS. Thank you, Senator. I am glad you are continuing to pursue multi-pollutant legislation. That’s one of my favorite topics, as you well know.

Also, I am pleased that the Administrator has come by today to

listen to us.

As most people know, I am a sponsor of S. 366, the Clean Power

Act of 2003. This pollutant legislation has 19 other cosponsors,

both Democrats and Republicans. Our bill is nearly identical to the

one reported out by the committee last year. This bill basically

passed the committee last year. Its ambitious deadlines show that

we want to reduce emissions of core pollutants quickly to protect

human health and the environment. The Administration’s plan,

Clear Skies, takes a different much more leisurely approach toward

a few of our goals. This is troubling to me, since every moment of

delay means more people that die prematurely due to power plant

pollution. More acid rain will fall, and more mercury will spew into

our lakes and streams, threatening children’s health.

The often-quoted and peer-reviewed study of Abt Associates says

that power plant pollution, mainly fin particulate matter, is caus-
16

ing approximately 30,000 premature deaths annually. That’s happening now, and I hope everyone here considers that a crisis.

And yet, the Administration has not acted to regulate sources of

this pollution under its broad authority granted by the existing

Clean Air Act. One might even say that the Administration is deregulating these sources through the so-called NSR reforms and increasing pollution.

If the Administration were to act aggressively under the Clean

Air Act’s present authorities, according to the scenario that EPA

presented to industry in the fall of 2001, then the bars in yellow

on this chart are the kinds of emission levels we would see. Clearly, these levels are substantially lower than those for the pollutants

under Clear Skies.

If the Adminstration were to put forward the original EPA

‘‘straw proposal’’—that was the agency’s interpretation in 2001 of

what levels of reductions are necessary and feasible to protect public health—the numbers would be much lower than Clear Skies, almost down to the yellow levels you see on the chart.

Instead of these two decent options, the Administration has put

forward Clear Skies. Apparently, the only way to make Clear Skies’

levels and timing look good is to assume a ‘‘Rip Van Winkle’’ approach at EPA. That means that EPA would have to be essentially

asleep at the switch for the next decade and not regulate any further.

We know that is ridiculous at best, given the millions of people

who are and will be living in areas with unhealthy air. Indeed, today’s utility witness lays out the numerous regulations which will

require emission reductions from power plants over the next decade

and longer.

And finally, it is ‘‘whistling past the graveyard’’ for the Administration to continue ignoring the need to control greenhouse gas

emissions. As global warming skeptics have told us, increasing

emissions increases the risk of global change. I ask that a summary of a forum on weather and climate at the National Academy

of Sciences be included in the record.

[The referenced document follows:]
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Senator JEFFORDS. Omitting carbon dioxide from a long-term

emissions control program; that will drive investments makes no

sense from a financial or an environmental perspective. As the

CEO from Cinergy will tell us, and has told us in the past, certainty is important. The Administration has not provided certainty

on carbon.

In its legislation the Administration asks Congress to do away

with or downgrade the numerous programs that Congress established to protect local and regional air quality and to push control

technology forward. This includes hurting States’ ability to stop

interstate pollution, cutting provisions to protect air quality and
34

visibility in the National Parks, and delaying air toxics reduction

efforts.

In this legislation the Administration has asked Congress to extend attainment deadlines beyond current law, so people will

breath unhealthy and smoggy air even longer. They want us to

adopt a host of weak emissions performance standards, even weaker than current practice. These are supposed to take the place of

the New Source Review requirements and are unrelated to local air

quality needs.

In exchange for all of this deregulation, we will get caps that are

not adequate or timely enough to save all the saveable lives and

protect the environment, and these caps will not stimulate the

technological development that will allow us to use our vast coal

resources safely and effectively.

Obviously, this exchange isn’t acceptable at all of the supporters

of my bill, and Clear Skies will not become law. But, as I have said

several times over the last 2 years, I am more than happy to collaborate with the Administration and all of the interested parties

to move comprehensive 4-pollutant or 3.5-pollutant legislation. It

could become law quickly with Administration support; so far, however, my offer of compromise has been treated with silence or disdain.

Finally, on an unrelated note, while the Administration is here,

I want to say that I appreciate the EPA’s efforts to take immediate

emergency action at the Elizabeth Mine Superfund site in

Vermont, in the agency’s words to address ‘‘the potential for a slope

failure and tailing flood wave’’ of up to 1 million cubic yards if contaminated mill tailings. That is unacceptable; they are willing to

try to help us with it, and we appreciate it.

Elizabeth Mine is one of only seven sites on the National Priorities List that received no funds in fiscal year 2002. Had the Administration fully funded the Superfund Program and renewed the

Superfund fees, the current emergency could likely have been

avoided.

I look forward to working with you and your staff to ensure that

we don’t face a similar emergency during next year’s spring thaw.

Thank you, Mr. Chairman.

Senator VOINOVICH. Thank you, Senator Jeffords.

Now I would like to call on the ranking member of the subcommittee, Senator Carper.

OPENING STATEMENT OF HON. THOMAS R. CARPER,

U.S. SENATOR FROM THE STATE OF DELAWARE

Senator CARPER. Mr. Chairman, thank you for holding this hearing today.

I want to welcome Governor Whitman to head up this hearing,

and all the other witnesses. We are glad you are with us on this

important issue.

I want to thank our chairman for holding this hearing today. He

has had a full day of providing leadership on hearings. This one is

important and near and dear to his heart, and this one is certainly

near and dear to mine.

To follow up on what Senator Jeffords said, I think there is room

for an alternative here. There is room for a third way, and my hope
35

is that we can work really hard on both sides of the aisle with the

Administration to find the third way, which would include 4–P. We

will see how it unfolds.

I think this is going to be the beginning of a productive discussion on how we can address our shared goals of continued progress

toward cleaner air. Power plants are just one element of that effort,

and what we do to address them will set a model for the debate

on other sources of pollution, such as cars, as well as debate in

other countries, including India and China, who are watching our

efforts closely.

I expect that today we will hear debated questions about the levels of pollution reductions and deadlines established in the various

bills. I will make it clear that I believe that the Clear Skies bill

just doesn’t go far enough. It doesn’t go fast enough to be considered a truly serious effort.

On the other hand, we need to be sure that we here in this committee—and here in the Senate, and here in the Congress—don’t

set standards that are so tight or so fast that they are

unacheivable by any significant portion of the industry. Along with

Senators Judd Gregg and Lincoln Chafee, I have developed a 4–P

proposal, a Clean Air Planning Act that we should consider, as I

said earlier, a middle-ground-approach, a centrist approach, and we

are going to be introducing it tomorrow.

Today’s hearing, though is about the President’s plan. I am not

going to try to steal any spotlight—I’m tempted to, but I’m not

going to try to steal any spotlight to describe our bipartisan alternative. However, I am convinced that the results that would occur

if Clear Skies were to pass would be a step backward from our current laws and would ultimately lead to higher costs for all of us because of unnecessary delays. I am also convinced that we can do

better, and that’s why we have developed our approach. I believe

it is decompromise.

A critical issue is how a multipollutant proposal, whether it is 3

or 4, will impact the diversity of fuel used to generate electricity

in this country. Today, a bit more than 52 percent of our electricity

is generated by coal; approximately 16 percent from natural gas;

roughly 22 percent from nuclear, with the remainder from hydropower or renewables. Twenty years from now, I believe we an—and

I believe we should—have a similarly diverse fuel supply. We could

achieve such a diverse position and still address CO2. We can have

a 4–P bill, such as our Clean Air Planning Act, and still enjoy the

benefits that our domestic coal supply offers.

Analysis that I have seen suggests that the Clean Air Planning

Act would result in a similar generation of fuel mix by 2020, with

only a slightly larger shift to natural gas from coal, maybe 3 percent, under our Clean Air Planning Act, when compared to Clear

Skies in 2020. And this is with controls on carbon, and timelines

are 5 years sooner than those proposed by the Administration.

Well, this is an important debate, as we all know. I suggest that

we agree, maybe from the outset, on four principles to help guide

our debate, and here they are.

No. 1, 4 is better than 3. A comprehensive 4 emissions strategy

that includes carbon reductions will provide regulatory certainty

and offer the greatest environmental and economic benefits.
36

No. 2, markets do work. Cap and trade-based emission standards

provide the maximum incentive to achieve cleaner power.

No. 3, stairs are better than cliffs. Prompt but gradual reductions

through multiphase or declining caps are more desireable than single-phased cuts.

And No. 4, eliminate redundancy only when emission reductions

are secured. Existing regulatory programs, such as New Source Review, will need some modernization on my view in light of tight

emission caps that we should put in place.

Thanks, Mr. Chairman.

Senator VOINOVICH. Thank you.

Senator Thomas?

OPENING STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR

FROM THE STATE OF WYOMING

Senator THOMAS. Thank you, Mr. Chairman.

I will try to be fairly brief, Administrator, so that you will get

a chance, perhaps, to talk.

The issue of clean air is of great importance to all of us, of

course, and I am very grateful for the proposal that you have

brought forth, and the Administration. I think it is a move in the

right direction.

I want to talk a little bit about the fact that it affects us differently in different parts of the country. I spent this morning on

the Energy Committee, talking about an energy policy; and all of

these things kind of go together, as a matter of fact. Wyoming has

some of the cleanest air and the world’s most vast resources of coal

and natural gas, as well as other resources; as you know, the quality issues differ in the west than they do in the east. In part because of our abundance of low-sulfur coal, we don’t have acid rain.

We don’t have ozone nonattainment areas due to power plants. We

don’t have fine particle problems. We do have an issue with visibility. This has been addressed on a regionwide basis through the

WRAP program, which puts in place a program to reduce SO2

emissions over the next 15 years. I am pleased that Clear Skies

embraces the WRAP program for the west.

I am also pleased that the Administration endorses a separate

western NOx program so that costly controls that may be necessary

to address health risks of ozone nonattainment in the east are not

mandated in the west.

I wanted to discuss how to address the additions of Oklahoma

and Kansas to the western NOx zone. When the change was made

in the Clear Skies legislation this year,a the NOx allowances for

Kansas and Oklahoma were left in the east. This action has produced an unfair situation for us in the west, and I think we need

to correct the map.

The west also has a difference from the east and the midwest

with respect to mercury. The mercury emitted from sub-bituminous

coal and lignite that we burn in the west is quite small in volume

and different in form than the mercury emissions produced when

eastern bituminous coal is burned. Western mercury emissions

aren’t typically captured in scrubbers, so there is little ‘‘co-benefit’’

in reducing emissions of mercury by installing scrubbers for SO2.

We must determine how Clear Skies can accommodate the unique
37

circumstances associated with mercury emissions from western

coal.

It is my understanding that EPA modeling projects that power

plants will reduce mercury emissions by switching from sub-bituminous coal to bituminous coal. I am deeply concerned about that

as a dramatic change, and don’t believe it is in the best interest

of energy and environmental policies.

Currently, generation of electricity from coal represents more

than 50 percent, as we have heard. Making massive changes in the

regulatory structure would have a devastating impact on the Nation’s reliable energy. Also, major fuel switching to natural gas has

occurred, and experts agree that we will have a shortage.

I think we have to look at the big picture where we do what we

have to, and be realistic about where we can be in the next 20

years.

So thank you for being here, and I look forward to working with

you.

[The prepared statement of Senator Thomas follows:]

STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR FROM THE STATE OF WYOMING

Mr. Chairman, thank you for holding this hearing today on the Clear Skies proposal. The issue of clean air is of great importance to the entire nation, but particularly to the West and my State of Wyoming where we have some the nation’s cleanest air and world-class reserves of coal and natural gas, as well as wind resources.

As you know, air quality issues are different in the West than they are in the East.

In part, because of our abundance of low-sulfur coal, we don’t have acid rain. We

don’t have ozone non-attainment areas due to power plants (Southern California

and Phoenix have a problem due to mobile sources). And, we don’t have fine particle

problems.

We do, however, have an issue with visibility, and we have addressed that on a

region-wide basis through the Western Regional Air Partnership (WRAP), which has

put in place a program to reduce SO2 emissions over the next 15 years. I was

pleased to see the Clear Skies Act embraces the WRAP program for SO2 in the

West. I am also pleased that the Administration endorses a separate Western NOx

program, so that costly controls that may be necessary to address health risks of

ozone nonattainment in the East are not mandated in the West.

On that note, I wanted to discuss how to address the additions of Oklahoma and

Kansas to the Western NOx zone.. When the change was made in the Clear Skies

legislation this year, the NOx allowances for Kansas and Oklahoma were left in the

East. This action has produced an unfair situation for us in the West.

In addition to being different with respect to SO2 and NOx, the West also is different from the East and Midwest with respect to mercury. The mercury emitted

from sub-bituminous coal and the lignite that we burn in the West is quite small

in volume, and different in form from the mercury emissions produced when Eastern bituminous coal is burned. Western mercury emissions aren’t typically captured

in scrubbers, so there is little ‘‘co-benefit’’ in reduced emissions of mercury from installing scrubbers to reduce SO2. We must determine how Clear Skies can accommodate the unique circumstances associated with mercury emissions from Western

coal.

It is my understanding that EPA modeling now confirms that reducing mercury

emissions from the 48 tons or so that the Nation emits today, to 26 tons in 2010,

will require far more than application of controls to meet SO2 and NOx requirements. Instead, EPA modeling projects that power plants will reduce mercury emissions by switching from sub-bituminous coal to bituminous coal.

I am deeply concerned about this dramatic change and do not believe this is in

the best interest of our energy and environmental policies. Currently, generation of

electricity from coal represents more than 50 percent. Making massive shifts in our

regulatory structure could have devastating impacts on our nation’s most reliable

energy source. Already, major fuel switching to natural gas has occurred and experts agree that we will have a shortage. I think we must look at the big picture

and look at where we want to be, and realistically where we can be, in 20 years.

Thank you and I welcome the witnesses and the Administrator’s comments on

these issues.
38

Senator VOINOVICH. Senator Cornyn?

Senator CORNYN. Mr. Chairman, in the interests of time and getting to the questions, I will yield my time.

Senator VOINOVICH. I just want to note that at the beginning,

Administrator Whitman will take one question from the chairman

and one from Senator Carper, and after that she is going to leave

and Assistant Administrator Holmstead will remain to answer any

other questions that the subcommittee has.

We are very happy to have you here with us. Thank you for serving our country.

STATEMENT OF HON. CHRISTINE TODD WHITMAN, ADMINISTRATOR, UNITED STATES ENVIRONMENTAL PROTECTION

AGENCY ACCOMPANIED BY: JEFFREY HOLMSTEAD, ASSISTANT ADMINISTRATOR FOR AIR AND RADIATION, ENVIRONMENTAL PROTECTION AGENCY

Administrator WHITMAN. Members of the committee, I am very

happy to be here at what is the beginning, I believe, of an extraordinarily important process to address the President’s Clear Skies

Act of 2003, legislation that will provide cleaner air for all Americans. I do hope that this is the beginning of the process that will

enable us to see a 3-pollutant bill enacted this year.

Since the Clean Air Act was enacted in 1970, we’ve gone a long

way in reversing the environmental damage that decades of unchecked pollution had inflicted on our environment. In that timeframe, as you have heard several times, we have reduced emissions

of six key pollutants by 25 percent, while in fact our economy has

grown by 160 percent.

While laudable, there is still more that needs to be done. Children suffer from asthma at alarmingly high rates. Many of our National Parks are shrouded in a murky haze, and our environment

continues to endure damage from poor air quality, even as we have

continued to vigorously enforce the Clean Air Act.

To address this situation, President Bush has proposed Clear

Skies, the most significant improvement to the Clean Air Act in

over a decade, and the most important emission reductions proposed by any President for the electric utility sector. Clear Skies

is a powerful new tool for the next generation of air quality, building on the success of the Clean Air Act, while recognizing its original command and control methodology might not be the most efficient way to continue to improve our air. Indeed, it is important

to note that Clear Skies is based on the most successful program

in over a decade to address air quality, the Acid Rain Trading Program, which was created in 1990 as part of the amendments to the

Clean Air Act. The Acid Rain Program had its genesis in the innovative idea that harnessing the power of the market could reap impressive environmental gains. By utilizing this pioneering cap and

trade strategy, the Acid Rain Program has achieved nearly universal compliance and has cost far less to implement than traditional regulatory approaches, and has already reduced emissions

levels to lower than those that were projected when the Act was

passed.

Far from providing a regulatory escape for old power plants,

Clear Skies is aimed directly at the previously grandfathered
39

plants. It would result in almost all facilities of over 300

megawatts—and many smaller ones, as well—taking action onsite,

something that we have not been able to achieve under the Clean

Air Act to date.

Said another way, when Clear Skies is fully implemented, 85

percent of the coal-generated power will be from facilities that will

have advanced pollution control technology in both the east and the

west. Clear Skies will set a uniform objective standard for mandatory reductions of 70 percent from 2000 levels of the three most

dangerous air pollutants emitted by the power utility: sulfur dioxide, nitrogen oxide, and mercury.

Although it sets the goals, Clear Skies does not regulate the path

to meeting those goals. This flexibility enables States and facilities

to pursue the most cost-effective approach to cleaning the air, and

helps ensure our ability as a Nation to respond quickly and efficiently to changes in the energy marketplace. By moving away

from simple command and control toward a more market-based approach, we will remove 35 million more tons of SOx, NOx and mercury from the air over the first 10 years of the Clear Skies Act than

what the current Clean Air Act would achieve in the same timeframe.

While the Clean Air Act enables EPA to regulate these three pollutants through the rulemaking process, unlike Clear Skies, there

is no mandatory cap and no guarantees that emissions will reach

those lower beneficial levels set by Clear Skies. When fully implemented, Clear Skies would result in $96 billion

in environmental and health benefits each year, benefits that include virtually eliminating the chronic acidity in northeastern

lakes; improving visibility in our National Parks; avoiding 12,000

premature deaths; and preventing 15 million fewer days when sufferers of respiratory illnesses are unable to carry out their normal

daily activities because of poor air quality, according to our analysis last year.

Clear Skies is not a change in direction, but a course adjustment.

While our goal of cleaner air remains fixed, we believe that over

30 years of experience and the lessons that we have learned from

addressing air pollution should be reflected as we move forward.

Our environment isn’t static. Our efforts to improve it shouldn’t be

static, either.

With or without Clear Skies, there are hundreds of counties all

across America that will have to meet the Clean Air Act fine particulate and ozone standards. Either we move forward with clear legislative guidance, or face the uncertainty of regulation, rulemaking,

and litigation. We believe that Clear Skies is the far preferable

path.

In the President’s State of the Union address, he stated that

Clear Skies was one of his top domestic priorities, and I can attest

to that fact. Every time that I have met with him subsequent to

that, as recently as a few weeks ago, he has asked me about the

status of this legislation.

With strong backing from the President, the time to enact this

legislation is now. From improving our air to increasing energy security to protecting human health, Clear Skies is a clear win for

the American people. In the coming months I look forward to work-
40

ing with you to pass this legislation and begin reaping the environmental and health benefits that it will secure.

I thank you again for the opportunity to appear, and would be

happy to answer questions in the time allotted.

Senator VOINOVICH. Thank you very much for your testimony.

One of the things I would like to see if your EPA could produce

would be a list of the lawsuits on both sides of the Clean Air Act,

and how they have impacted on moving to improve air and public

health, and utilities unwillingness to move forward with improvements to make their facilities more efficient and to provide more

reasonable energy.

Administrator WHITMAN. We can certainly provide that.

Senator VOINOVICH. I think one of the issues here is that the current law has really tied us up in a cobweb of litigation that is not

really making any improvement in the public health of this country

or improving our air quality. We are nibbling away at it. There are

critics that say that Clear Skies is not as environmentally protective as future Clean Air requirements would be, and that in fact

it would roll back the Clean Air Act—as one of the Senators said,

put us in a ‘‘Rip Van Winkle’’ environment.

It seems to me that one of the major advantages of Clear Skies

is that it provides both regulatory and environmental certainty;

that is, the fact that significant emissions are locked into statutory

deadlines that cannot be circumvented or delayed the way that

most requirements are now being delayed.

I would like you to comment on that allegation, that Clear Skies

would roll back the current Clean Air Act.

Administrator WHITMAN. Well, obviously, Senator, we don’t agree

with that. As you stated, putting a mandatory cap on the three

emissions, making it clear what is to be expected, and requiring a

70 percent reduction from 2000 levels are very significant movements forward, we believe, and great improvements to the Act.

You see there a chart that will tell you what we expect to get

in emissions reductions from the Clean Air Act as it currently exists, and what we expect under Clear Skies. You will notice that

in some of those columns there is—well, first of all you will notice

that the numbers show a dramatic reduction, but you will also notice that there is a blank there for mercury, because we have not

yet set a mercury standard. That process is in progress. We have

it scheduled to be proposed before December of this year. It will be

final in 2004 and become enforceable in 2007 or 2008, and that is

without litigation. We know that everything we do gets litigated.

One of the big benefits of having Congress act with mandatory levels is that when Congress acts, people listen, and they start to respond. When EPA acts, they go to court. And that means that we

spend a lot of time in litigation, as you pointed out.

Now, we are proud of the results that we have achieved on the

individual cases that we brought, but they are incremental. As you

point out, Senator, it’s more of a ‘‘nibbling away.’’ By providing certainty with a cap and trade proposal with the steep 70 percent reductions that the President is calling for, Clear Skies will, as our

modeling has shown, give us a 35-million-ton greater reduction in

those three pollutants over the next 10 years than we can get moving forward under the Clean Air Act as it now exists. And that is
41

with the vigorous enforcement of New Source Review as one of the

tools.

Senator VOINOVICH. Senator Carper?

Senator CARPER. Governor Whitman, as I mentioned earlier in

my testimony, I mentioned that Senators Chafee and Gregg will be

joining me tomorrow as we introduce our 4-pollutant bill, which is

similar but not identical to legislation that some of us introduced

last October, S. 3135.

My question of you is this. Has EPA conducted, to your knowledge, formal economic and environmental analysis of the legislation

that we introduced last October, S. 3135?

Administrator WHITMAN. Senator, I am not sure of the status of

that, but I can certainly find out for you.

Senator CARPER. If you could. If you could do that, I would appreciate it. If you would be willing to share that analysis with us,

I would welcome that very much.

My other question would be, would EPA anticipate conducting an

environmental and economic analysis on our new legislation that

we will be submitting tomorrow, introducing tomorrow?

Administrator WHITMAN. We would be happy to work with you

on that, Senator.

Senator CARPER. Those are my questions, Mr. Chairman. Thank

you.

Administrator WHITMAN. Senator, I understand—looking at the

time, there are a few more minutes left here, and I would be happy

to do some quick answer—— Senator VOINOVICH. That would be wonderful. Thank you very

much.

Senator Jeffords?

Senator JEFFORDS. At the budget hearing you said that there is

a correlation between greenhouse gas emissions and global warming, from an EPA and EIA project that these emissions by power

plants will grow by leaps and bounds over the course of Clear

Skies. Why shouldn’t this legislation guarantee real greenhouse gas

reductions from this sector?

Administrator WHITMAN. Well, Senator, as you may know, this

Administration has undertaken a number of different programs directed at greenhouse gases. And as you point out, it is more than

just carbon; there are six of them.

First of all, as far as Clear Skies is concerned, Clear Skies is directed at improving and enhancing the progress that has already

been made under the Clean Air Act, and as has already been stated, carbon is not a regulated pollutant under that act. So Clear

Skies is directed at the three most egregious emissions from the

power plants that we feel can be addressed now, and we want to

enhance those benefits and get at them quickly in a way that

makes sense for that sector.

But we have a number of programs right now that are underway.

We also have as an extraordinary commitment from the Administration on research on global climate change—if we get energy bill

incentives—that includes programs to encourage people to use alternate technology and to improve alternatives to the standard energy sources that we use. That means that we encourage more conservation and more renewable resources. We believe that we will
42

make significant progress toward the President’s goal of an 18 percent reduction in greenhouse gas intensity over the next 10 years.

Senator JEFFORDS. The present law and our bill put a lot of emphasis on reducing the number of premature deaths. Is the principal purpose of Clear Skies to reduce the number of premature

deaths from power plant pollution?

Administrator WHITMAN. That is certainly an enhancement of it.

It is not the only reason to enact Clear Skies. We also look at the

other environmental benefits that go along with it, and the reduction of other health concerns, such as asthma and bronchitis, from

bad air quality.

Senator JEFFORDS. But it’s not the principal purpose. All right.

According to the modeling, the agency’s straw proposal would

save 7,000 more lives annually than Clear Skies, and achieve $60

billion more benefits in avoided health damages per year, at an incremental cost of only $3.5 billion per year in 2020.

Why are Clear Skies’s weaker requirements and slower deadlines

better than the emissions reductions in the straw proposal for public health?

Administrator WHITMAN. Well, Senator, the straw proposal was

just that. It was our first cut, and it was a straw. On further analysis of that straw proposal the agency determined that many of the

targets there were not feasible, neither timewise nor at levels that

had been projected. That was the first go-round, and as we looked

at the technical capabilities that exist in reaching some of those

numbers, and also looking at the economic dislocation, the impact

it would have, and the overall feasibility of achieving those goals,

we determined that those were not the best way to approach this.

Senator JEFFORDS. I would be willing to defer my other questions

to Mr. Holmstead——

Administrator WHITMAN. You can get all the really technical answers from him. He knows what he’s talking about.

[Laughter.]

Senator JEFFORDS. Thank you, Mr. Chairman.

Senator VOINOVICH. Mr. Thomas?

Senator THOMAS. Thank you, Mr. Chairman.

I am told, and your EPA modeling now confirms, that reducing

mercury emissions significantly will require more than application

of controls on SO2 and NOx requirements. Instead, I understand,

EPA’s modeling projects that power plants will reduce mercury

emissions by a significant amount by switching from sub-bituminous to bituminous coal.

If so, what kind of an impact do you think that would have on

the costs and environment and economic and energy policy in the

west?

Administrator WHITMAN. Senator, first of all, we do believe that

in Phase 1 of the Clear Skies Act that the vast majority of the mercury goal can be attained through co-benefits. The last few tons

may require something more than just a co-benefit, moret than just

an enhancement of existing SOx and NOx technology, tweaking

that technology a little bit further to capture more mercury with

a cap than without, or maybe some other actions, but we do not

believe that what will be left out there for Phase 1 is going to re-
43

quire a large investment from the utilities. Our modeling doesn’t

show that.

Without a mercury cap, I don’t think there is any incentive to reduce mercury emissions. We have taken into account, as we developed Clear Skies, the difference in the type of coal—lignite coal

versus other coals. We recognize that as we set at the credits that

utilities get for reducing mercury, reducing emissions from the lignite coal. We believe we are reflective and balanced, understanding

that we still need to achieve the goals for air quality. We recognize

the different types of coal and the technology available to address

the mercury in different types of coal varies, and the expense of

doing that varies terrifically, as well. So we have tried to anticipate

that in the legislation.

Senator THOMAS. As you know, we are also working on an energy

policy, and bituminous coal is one of the longer-term resources that

we have available, and it seems to me that all those things have

to be taken into account.

So I hope——

Administrator WHITMAN. Clear Skies anticipates a 10 percent increase in coal as a power source overall. In the course of Clear

Skies, coal use will grow in both the east and the west. It may not

grow as fast in the west as it would without any kind of a mercury

cap, but it will still continue to grow.

Senator THOMAS. Thank you.

Senator VOINOVICH. Senator Cornyn?

Senator CORNYN. Thank you.

Governor Whitman, you and I have discussed—my colleague was

talking about bituminous coal, and I want to talk to you a little bit

about lignite, which you mentioned.

I am concerned, as I know you are, about fuel diversity. Much

of the electricity generated in Texas, about 40 percent, is produced

by coal-fired power plants. Under Clear Skies, EPA estimates that

figure will drop down to 25 percent in 2020, which is a significant

decrease. This is of particular interest to me because some of the

plants in Texas, of course, are using locally mined lignite coal, a

practice that is a win-win situation because it creates jobs, cuts

down transportation costs.

My question is this. Does EPA have any figures on whether, in

Texas, the declining coal used under Clear Skies would be native

lignite—that is, Texas coal—or coal that was imported from out of

State?

Administrator WHITMAN. I’m sure we could get that for you, Senator. I don’t know that answer off the top of my head.

Senator CORNYN. OK, if you would, please.

Just one quick follow-up, and if you would like to supply the answer to us later, that would be fine.

Does EPA have any figures on the decline in coal-mining jobs in

Texas that accompanies this significant decline in percentage of

coal-fired generation?

Administrator WHITMAN. Again, I don’t, but in fact your next— do you have an answer to that?

OK, we both of us have to find that. I was hoping that the Assistant Administrator would be able to answer it right now. We will

have to get you that.
44

Senator THOMAS. We’ll be glad to send coal down from Wyoming,

of course.

[Laughter.]

Senator CORNYN. Thank you, Mr. Chairman

Senator VOINOVICH. I thank you, Administrator Whitman. We

really appreciate your being here today.

Administrator WHITMAN. Thank you very much. Thank you for

this hearing, again. We appreciate it.

Senator VOINOVICH. Mr. Holmstead, do you want to sit in the

warm chair?

[Laughter.]

Senator VOINOVICH. As I mentioned in my opening remarks, the

threat of fuel-switching—utilities switching from coal-based generation to natural gas generation—is a major concern that must be addressed. In other words, if I look at everything that is being suggested, the one thing that I try to really pay attention to is, how

far do you take us to the point where utilities say, ‘‘Chuck it, we’re

going to go to the use of natural gas’’? And to me, that’s very, very

bad because that then—that cost will be passed on to all their customers, and then I believe that would have a devastating impact

on our economy.

What effect will Clear Skies have on this in terms of fuel-switching? Do you think it will cause more utilities to fuel-switch?

Mr. HOLMSTEAD. This is an issue that both we and other parts

of the Federal Government have looked at pretty closely, for the

very reasons that you suggest. As a matter of energy policy, we

think it would be a mistake to become overly dependent on natural

gas, so we have looked at this issue very carefully. I know, for instance, that EIA has looked at this issue very carefully. And all of

our analysis shows that even with the stringent caps in Clear

Skies, that the way the industry will meet those caps is by installing control technology on coal-fired plants and not by switching to

natural gas.

So we see essentially no impact on future demand for natural gas

in the utility sector. I think when we compare a scenario that has

us not taking any other action, the so-called ‘‘Rip Van Winkle’’ scenario, to Clear Skies, as far as 2020, I think the increase in natural

gas usage for power generation is about 2 percent. But we all know

that the ‘‘Rip Van Winkle’’ scenario can’t be the case under the current Clean Air Act. So we think that under Clear Skies you will

actually get less fuel-switching than you would get under the current Clean Air Act.

As I think you know, Mr. Chairman, one of the things that we

tried to do here—and I know that Senator Carper and others are

looking at the same type of issue—is to give the industry certainty

and longer timeframes to plan out their investments, so that they

can actually raise the capital and plan out their investments and

preserve coal use. But when you have shorter time periods, which

you sometimes do from the time a regulation is passed until it is

implemented, it actually tends to encourage more fuel-switching

than you would get under a multipollutant scenario.

So the bottom line is that by using this more efficient, more certain tool, we avoid the need for any fuel switching in the power industry.
45

Senator VOINOVICH. Is this philosophy of Clear Skies based on

what we have had pretty much with the acid rain provisions of the

Clean Air Act? I mean, there has been so much controversy about

that, but it is my understanding that that has been fairly successful in moving forward and getting steady improvement.

Mr. HOLMSTEAD. Well, I think this is the best indication of its

success. Wherever I go now I run into someone who claims to have

invented Title IV, Acid Rain Program, which I think is an indication of how well it has worked. Back in 1990—and by the way, it

was actually my idea——

[Laughter.]

Mr. HOLMSTEAD.—the Acid Rain Program was highly controversial back in 1990, and there was a lot of skepticism over whether

it would prove to be effective. But President Bush, the first President Bush, made that really the centerpiece of his Clean Air Act

reforms, with support from people in this room today.

What that has shown is that when you use a market-based program—and I believe I can quote Senator Carper, when he says that

‘‘markets do work’’—and you give people an economic incentive to

over-control and to find good ways to reduce their pollution, you

can actually achieve greater gains quicker than you otherwise

would.

So back in 1990, I think EPA projected that the cost of the Acid

Rain Program would be somewhere in the neighborhood of $6 billion to $7 billion. The industry said it would be more than that.

Now we know, 10 or 12 or 13 years later, that in fact the annual

cost isn’t $6 billion to $10 billion; it’s more like $1 billion to $2 billion. It has substantially reduced pollution. It has done it in a way

that we’ve never had to bring any enforcement actions because it

is completely self-implementing. So I think it has really been, by

everyone’s measure, one of the most successful programs under the

Clean Air Act. And the Clear Skies approach is really designed to

build on that, simply to extend that to the two other pollutants and

substantially lower the cap for SO2.

Senator VOINOVICH. Senator Carper?

Senator CARPER. Thank you, Mr. Chairman.

Mr. Holmstead, welcome. It is good to see you again, and thank

you for your testimony today and your response to my questions.

Thank you for quoting me, and don’t forget that first principle,

too——

[Laughter.]

Senator CARPER. [continuing]... and as I’ve said now and

then, you’re welcome to do that.

Let me say, as I said earlier, I think we can have a 4–P rule,

such as the Clean Air Planning Act that we are introducing tomorrow, and still enjoy the benefits that our domestic coal supply offers. I say that as the only native West Virginian in the U.S. Senate. An analysis that I have seen suggests that the Clean Air Planning Act would result in a similar generation fuel mix by 2020; I

alluded to that during my earlier statement. But just a slightly

larger shift, maybe 3 percent, to natural gas from coal, under legislation that we will be introducing, as compared to Clear Skies in

2020.
46

With that in mind, any idea why the President is offering a bill

that does not include CO2, while at the same time addressing SOx,

NOx, and mercury?

Mr. HOLMSTEAD. I think Governor Whitman—as she said, the

Administration has determined that there are really better ways of

addressing the CO2 issue and global warming in general. As you

well know, CO2 is one of six gases that is believed to contribute— possibly contribute—to global climate change. CO2 and all of these

other gases come from many different sectors of the economy, and

it is really a global problem.

On the other hand, the issues that we are trying to deal with in

the Clear Skies Act have to do fundamentally with the power sector. The power sector is responsible for about 65 percent of total

SO2 emissions in the United States, responsible for somewhere in

the neighborhood of 25 percent of the NOx, and I think more than

25 percent of the mercury. Pollutants which are having immediate

and direct health impacts. So we just think that that sort of regulatory approach is appropriate for the three pollutants, but that approach under the Clean Air Act just isn’t well-suited for dealing

with CO2. As the Governor mentioned, we have a number of other

programs that are proving to be successful, although some of them

are only starting out, for dealing with the issue of CO2 emissions.

Senator CARPER. Any idea what percentage of CO2 is produced

in this country by our electric utilities?

Mr. HOLMSTEAD. I know it’s a significant percentage. I don’t have

that number at my fingertips, but we could certainly provide it to

you.

Senator CARPER. I understand it’s a bit more than a third.

All right. One second question, if I could. A group of companies

called the ‘‘Clean Energy Group’’—and I think some of them actually have representatives present in this room—I understand they

ran an analysis of the legislation that Senator Chafee and I and

others introduced last fall, and in that analysis they considered the

cost of our bill as introduced, and then they considered our bill as

if it were a 3–P bill, the same dates and levels as our bill but without any kind of carbon control. And what they found—this, to me,

was amazing—they found that by adding CO2 to the other 3 Ps

they would increase the total system cost of compliance by just

about 1.5 percent.

My question is this. If we can get the benefit of carbon controls

for less than 2 percent in additional compliance costs—that’s actually within the margin of error on most models—why is the Administration not addressing carbon?

Mr. HOLMSTEAD. I guess what I would have to say is that I

haven’t seen that analysis. I suppose that could be correct, although the numbers that I’ve seen in terms of cost for CO2 suggest

that it could be more than that. But I think the real answer is, we

believe it is important to look at CO2 in its proper context. To the

extent that we need to address CO2 and other greenhouse gases,

the fact that we may make some modest reduction from one sector

of the U.S. economy is probably not very relevant, and we think it

would be much more efficient to focus on improvements in technology. I know, being a native of West Virginia, you must be aware

of the President’s proposal on FutureGen, which is $1 billion to try
47

to develop a power plant working with other partners a power

plant that would have zero emissions of CO2 and zero emissions of

pollutants. We think it is important to focus our efforts on those

sorts of things that really can resolve the issue in the longer term

instead of looking at shorter-term things.

And I think my personal perspective is, I would hate to have us

lose the benefits of very substantial reductions in these other pollutants that are having immediate health consequences, as we continue to take a much longer time to try to develop an elusive consensus on CO2. Senator CARPER. Mr. Chairman, my time has expired.

Let me just say, as I relinquish this microphone, that I find it

of more than just passing interest, that we could add a fourth P

to the Administration’s proposal and not have a very substantial

impact on the fuel mix, coal or natural gas, between what it is

today and what it might be in the year 2020, and I think that’s relevant to this debate.

The other thing that I described as amazing, that is surprising

to me, that we can add a fourth P to a 3–P proposal, so that we

are comparing apples with apples, and do so while adding less than

2 percent to the compliance cost. Those aren’t my numbers; those

are the numbers that were produced by a consortium of the Clean

Energy Group, which includes a number of companies and utilities

in this country.

Thank you again.

Senator VOINOVICH. Senator Cornyn?

Senator CORNYN. Mr. Chairman, I asked Governor Whitman

about lignite. My understanding is that lignite coal is not only used

significantly in Texas, but also in North Dakota, Louisiana, and

Mississippi.

My concern has to do with the technology availability to reduce

mercury—removal levels in lignite coal. I discussed this at the earlier budget hearing with Governor Whitman, and while I applaud

her goals and optimism, I want to make sure that for Texas it

doesn’t represent a big gamble.

Can you tell me about any commercially available technology

that is available today for mercury removal from lignite?

Mr. HOLMSTEAD. We understand that the technology known as

Activated Carbon Injection, or ACI, is designed—and should be successful—in removing mercury from lignite.

Now, your question was, is that commercially available, and I

think the answer to that is that it’s not at this point. We don’t have

full-scale kinds of projects. But that’s one of the reasons why we

are really focused on having an overall cap as opposed to plant-byplant kinds of requirements. One of the things that we all learned

in 1990 is that as much as we may know about what we think are

appropriate ways to reduce emissions, that the marketplace, left to

its own devices, can find better ways of doing it. And so by having

emission caps, first of 26 tons and then 15 tons, it may be that for

that lignite plant it doesn’t make sense to put specific controls on

that, but another plant could over-control

So the real issue here is how we get to that overall cap, and so

we’re not as concerned about specific—what can be achieved at a

specific plant.
48

I will say that we recognize that it seems to be more expensive

to reduce mercury emissions from lignite coal, and we have tried

to address that in terms of the allowances. So I think you are probably aware that we have tried to account—we would like to be able

to equalize the cost of control across the different coal types, and

we believe, based on what we’ve seen, that it can be controlled; it’s

just more expensive to do so. So we have taken that into account

in the allowance system.

Senator CORNYN. I appreciate the fact that the bill does take into

account the particular difficulty with which mercury removal from

lignite is greater than other types of coal. But just to clarify, you

are saying that to your knowledge there is no currently commercially available technology to remove mercury from lignite?

Mr. HOLMSTEAD. I think to be completely correct, I should say

that there is a commercially available technology. To my knowledge

it has not been used on a full-scale lignite plant yet. I think the

vendors are telling people that they will guarantee that it can be

used, but the folks that do the technology reviews believe that’s the

case.

But you are correct, we don’t at this point have—at least as far

as I know—a full-scale, full-size plant burning lignite that uses

ACI technology.

Senator CORNYN. No demonstration of it——

Mr. HOLMSTEAD. I am sure my staff will correct me, which they

are fond of doing, but I do think that we have some cases where

we have plants burning lignite coal that have other control systems

designed to reduce NOx and SOx, but also reducing mercury. So I

believe that we have some evidence of that, but you are correct

that there is much more uncertainty about exactly how we would

get emission reductions from plants burning lignite.

Senator CORNYN. Are you referring to the North Dakota test? My

staff advises me, and you can just check this out and get back to

me——

Mr. HOLMSTEAD. I would be happy to.

I understand that there is a difference between the lignite in

North Dakota and the lignite in——

Senator CORNYN. I just want to make sure that we’re comparing

apples with apples. So I would ask you to provide my staff with the

test on North Dakota or any other place where you have found this

to be successful, or claim to be successful, so that we can compare

that to our situation in Texas.

I yield back for now.

Senator VOINOVICH. There being no other questions, you are excused, Mr. Holmstead. I know you will be available to the committee and staff as we move along to try to mark this bill up.

Mr. HOLMSTEAD. Thank you very much for the chance.

Senator CORNYN. Mr. Chairman, I just have one or two other

questions I would like to submit in writing, if I may, and get responses in writing.

Senator VOINOVICH. Let the record show that Senator Cornyn

will be submitting questions in writing. We are now going to ask

Mr. Glenn McCullough, chairman of the TVA, to be our next witness.
49

Mr. McCullough, we are very pleased that you are here today to

testify on behalf of Public Power. You may proceed with your testimony.

STATEMENT OF GLENN MC CULLOUGH, JR., CHAIRMAN,

TENNESSEE VALLEY AUTHORITY

Mr. MCCULLOUGH. Thank you, Mr. Chairman, and members of

the Subcommittee.

On behalf of the TVA Board and our employees, thank you for

the opportunity to discuss our views on clean air and more specifically, the Clear Skies Act of 2003. As both steward of the environment and provider of electricity in the Tennessee Valley, TVA has

a unique perspective on the clean air issues facing our region and

the Nation. Each day TVA works to find the best balance for providing affordable reliable electricity to fuel a sustainable and vibrant economy and enhancing environmental quality.

No aspect of that balance is of greater importance than the issue

you are considering today—clean air. Through 158 local utilities

and 62 large industrial customers, TVA supplies electricity for 8.3

million people across a seven–State region. The President’s national energy policy recognizes the importance of a diverse generating mix for our Nation.

TVA’s power system reflect such diversity. The diversity of our

system requires a comprehensive commitment to environmental

stewardship. That commitment is reflected by a record of emissions

reductions. Since 1977, TVA has reduced sulfur dioxide emissions

by 76 percent. We plan to invest an additional $1.5 billion to build

an additional five scrubber systems. This action, along with switching to low sulfur coal, will reduce SO2 emissions 85 percent from

1977 levels and when completed will result in scrubbers on more

than half of our capacity.

In the past 8 years TVA has reduced nitrogen oxide emissions by

50 percent, and in the future we are investing more than $1.1 billion to install selective catalytic reduction systems or similar technologies on 25 generating units. In combination with other controls,

the SERs will reduce our NOx emissions by 75 percent during the

ozone season.

By 2005, we will have SERs on more than 60 percent of our coalfired capacity. So far TVA has invested more than $3 billion for

clean air improvements, and by 2010 we will have invested nearly

$5.6 billion.

As I outlined, we are in the midst of one of the most aggressive

emission reduction programs in the Nation which means that between now and the end of decade, TVA will spend an average of

nearly $1 million a day to improve air quality. We know that emissions from all sources—stationery and mobile—must continue to be

reduced.

For that reason, Mr. Chairman, I am here today to endorse the

Clear Skies Act of 2003. While the current Clean Air Act has done

much to improve air quality, it contains provisions that could

threaten reliability and affordability of the Nation’s electricity supply. Affordable, reliable electricity is achieved, in part, by the industry’s ability to use a diverse number of fuel sources including

coal, our Nation’s most abundant energy source.
50

The Tennessee Valley depends on coal for about 60 percent of our

electricity. Unfortunately, this vital energy resource currently faces

a complicated web of overlapping, duplicative, and unnecessarily

costly emission control requirements to create enormous uncertainty for future investment.

For example, there are more than a dozen separate regulations

for sulfur dioxide and nitrogen oxides alone. At times disputes over

these regulations have significantly delayed the improvement of air

quality they were designed to achieve. This piecemeal approach

should be replaced with a set of timetables and reduction targets

for sulfur dioxide, nitrogen oxide, and mercury.

We believe that Clear Skies, a well-designed multi-emission approach, will continue the national trend of better air quality and

provide additional benefits. Those benefits include a streamlined

regulatory process; sustained diversity in the Nation’s fuel supply;

and market-based mechanisms for achieving reductions that are

fair. They are fair to both public and private power providers.

Clear Skies would give the utility industry the certainty it needs

to plan and to finance emission reductions without unduly driving

up prices for consumers. Such results have been demonstrated by

the very successful Acid Rain Program, as has been referenced to

today.

While TVA endorses the reduction targets and timetables in

Clear Skies, some provisions could be addressed to achieve the

same environmental benefit and be less burdensome to coal-fired

generations. Specifically, we urge you to ensure that the interim

2010 mercury targets reflect the Administration’s intent of reducing mercury to levels achievable via a cap-and-trade system

through the co-benefits provided by sulfur and nitrogen control

technologies. This would allow utilities that have already reduced

mercury through sulfur and nitrogen technologies to realize credit

for previous action.

In conclusion, Clear Skies is a very aggressive proposal. Unlike

those advocating for more stringent targets and timetables, TVA

uniquely knows what is required to achieve reductions such as

those called for in Clear Skies. As I mentioned earlier, TVA will

have invested $5.6 billion in emission reductions by the end of this

decade. Achieving the results contemplated by Clear Skies would

require TVA to invest an additional $4 billion between now and

2018.

To achieve more on a faster timetable would increase costs considerably and place an unrealistic burden on both the consumer

and the economy for little additional environmental benefit. The

TVA appreciates the Subcommittee’s valuable work in shaping a

balanced, achievable path to cleaner air for our Nation.

Thank you. I will be happy to respond to any questions you may

have.

I would ask that my written statement be placed in the record

in its entirety.

Senator VOINOVICH. Mr. McCullough, are you familiar at all with

the bill that was marked up by this committee last year, the Jeffords–Lieberman bill?

Mr. MCCULLOUGH. I have not researched that bill, Senator.
51

Senator VOINOVICH. One of the provisions that is contained in

the bill deals with the issue of greenhouse gases, CO2. There has

been some debate on whether or not CO2 ought to be included in

Clear Skies. Preliminary to that, I have been doing what I can,

working with Senator Carper and some other people to see if we

cannot find some kind of a compromise that will deal with the

issue of greenhouse gases.

Mr. MCCULLOUGH. Yes, sir.

Senator VOINOVICH. The question is: If we cap CO2, what impact

would that have on TVA?

Mr. MCCULLOUGH. Mr. Chairman, I would have to know what

the cap might be. We believe that the President’s proposal to voluntarily reduce greenhouse gases is responsible, and is one that has

worked. TVA, over the last decade, has reduced our greenhouse gas

emission by over 200 million tons. We have done that by introducing renewables, by biomass, co-firing our coal units, and by

other technologies.

We believe that the Administration’s proposal to voluntarily call

for a reduction in greenhouse gases at this point in time with the

level of technology still advancing in terms of greenhouse gas sequestration and containment, is a responsible way to proceed.

Senator VOINOVICH. I would like you to run the numbers on the

bill last year. There will be a number in the bill that I am sure

Senator Carper introduces. I would just like to get your honest

opinion about what impact it would have on your operation.

What impact do you think that Clear Skies would have on your

ability to maintain your diverse fuel mix? You have 60 percent coal.

What is the rest of it?

Mr. MCCULLOUGH. Mr. Chairman, that is right. TVA’s generation

mix is about 60 percent goal. Clear Skies is very ambitious and

very aggressive. Control will be required to achieve the reductions

in nitrogen oxide and sulfur dioxide that Clear Skies calls for. It

provides a 15-year period of time so that utilities can prepare to

meet these reductions in a way that is responsible for the consumer.

At the same time, we can continue to rely on what is about a

300-year most abundant supply of fuel that this Nation has. We

can continue to implement clean coal technologies that are reducing in a really significant way the NOx and sulfur emissions. We

feel that we can continue to add to the diversity in the strength

and not reliance of any one single fuel mix of renewals, the expansion of safe nuclear, and hydroelectric. We believe that all of these

diverse generation mixes are the key to having energy security and

achieving additional reductions in emissions.

Senator VOINOVICH. Thank you.

Senator Carper?

Senator CARPER. Welcome, McCullough. We are delighted to have

you before us today.

I understand you may have a common bond with our chairman.

Have you ever been an elected official?

Mr. MCCULLOUGH. Yes, sir.

Senator CARPER. What position did you hold?

Mr. MCCULLOUGH. Senator, I was elected mayor of Tupelo, Mississippi.
52

Senator CARPER. Are there any famous people who ever born in

Tupelo?

[Laughter.]

Mr. MCCULLOUGH. Elvis Presley might come to mind.

Senator VOINOVICH. Thank you, very much.

[Laughter.]

Senator CARPER. He does a great Elvis impersonation. He just

gave us a little piece of it here. This is the guy who started the

Rock and Roll Hall of Fame when he was Mayor of Cleveland.

Senator VOINOVICH. Absolutely.

Senator CARPER. You guys may want to get together and jam

later.

[Laughter.]

Senator CARPER. I want to follow up on a question of a response

that was going back and forth between you and our chairman. The

question I think he was asking was the effect on TVA of the enactment of legislation that addresses CO2, that addresses carbon. You

indicated, understandable, that you would have to know what the

caps were before you would be able to give some indication of how

you and the folks of TVA would be able to respond and comply.

The legislation introduced by our colleague, Jim Jeffords, who

has already gone, if I am not mistaken, his legislation says that by

2008, we should have reduced emissions of CO2, of carbon, so that

the levels are back to those that existed in 1990.

The proposals that I and some others will introduce tomorrow

have two goals: an interim goal and then a longer-term goal. By

2009, we would expect the industry to have levels of emissions no

greater than what existed in 2005.

Further, by 2013, we would expect those levels of emissions to

have been reduced to have existed in 2001. So in 2009 we want to

be back down to 2005 levels, and in 2013 we want to be back down

to 2001 levels.

If you could give us some initial reaction to that, I would welcome it. You have an array of proposals here from Senators Jeffords’ very aggressive approach, to the Administration which chooses not to include carbon in their proposal, to what I have outlined,

the stair step approach.

What are your thoughts?

Mr. MCCULLOUGH. Senator, and Mr. chairman, I will get the

analysis run. We will certain respond in more detail as to how that

could affect TVA’s system.

We believe that a reduction in greenhouse gases to an 18 percent

intensity of the U.S. economy by 2012 is responsible and very ambitious, and yet an achievable greenhouse gas strategy.

I will be happy to take a look at the caps that are called for and

do the analysis on our system and get that information to you in

more detail.

Senator CARPER. You mentioned the 18 percent reduction. I

think Governor Whitman may have alluded to that as well in her

own testimony.

My understanding is that it is not an outright 18 percent reduction, but it is an 18 percent slower growth in the level of emissions.

Mr. MCCULLOUGH. It is my understanding that in 2012, we

would have a greenhouse gas intensity that would not exceed 18
53

percent of the economic activity. The is a range, a ratio, that you

can measure there.

Senator CARPER. We will have an opportunity to double check

that. I will double check it and perhaps you could as well. But my

understanding is that the 18 percent reduction is not a reduction

overall, but it is a reduction of 18 percent in the growth.

I see some members of the audience nodding their heads. So I

am thinking maybe there is something to that.

Mr. MCCULLOUGH. Yes, sir.

Senator CARPER. This is more of a personal question, but we are

among friends. Just talk to me about your own personal commitment and views on clean air. You have an obligation to the folks

who work for you and your customers. Talk to me about your obligations that you feel to the people who may live in the areas that

you serve and the rest of us who live downwind. Talk to us about

SOx and NOx and CO2 from your heart.

Mr. MCCULLOUGH. Thank you for the question, Senator. TVA

does have an intense responsibility to ensuring that our air is

cleaner. As I said, we have invested over $3 billion to date to bring

down NOx and sulfur dioxide emissions significantly. By 2005, TVA

will reduce nitrogen oxide emissions by 75 percent.

Senator CARPER. By when?

Mr. MCCULLOUGH. By 2005.

Senator CARPER. Compared to what?

Mr. MCCULLOUGH. Going back to 1997 levels when we started

this ambitious selected catalytic reduction system strategy. By the

same year in 2005, we are going to reduce carbon dioxide emissions

by 85 percent through the employment scrubbers.

Now, going forward, if Clear Skies were implemented, we would have to install SERs on 23 additional units at a cost of another $5

billion by 2018.

Senator CARPER. You said $5 billion by 2018?

Mr. MCCULLOUGH. Yes, sir.

Senator CARPER. Give me some idea of what your revenues are

in a year? Do you have any idea what your revenues were last

year?

Mr. MCCULLOUGH. Yes, sir. Our revenues in fiscal year 2002 were $6.8 billion.

Senator CARPER. So, looking at between now and 2018, we are talking about revenues probably close to $200 billion?

Mr. MCCULLOUGH. Our revenues are growing at 2 to 3 percent

per year. I would have to project that out for you.

Senator CARPER. I was just trying to get an understanding of

what percent of your revenues a $5 billion is suggesting. It sounds

like it is about 2 or 3 percent.

Mr. MCCULLOUGH. We are spending $527 million in this fiscal

year alone on clean air. That is on a $7 billion budget. We are projecting to reduce SOx emissions by 85 percent by 2005. Again, we

would have to control 40 additional generation units if Clear Skies

were enacted by the year 2018. This is very aggressive.

Senator CARPER. Just out of curiosity. How do you fund those investments? How much did you say this year?

Mr. MCCULLOUGH. $527 million.

Senator CARPER. How do you fund that?
54

Mr. MCCULLOUGH. Although we are owned by the Federal Government, TVA is totally self-financed. We do not rely on any appropriated dollars. So all of the funding for clean air, for a higher

quality of water, for power generation, and transmission upgrades

to run our system and to reduce our debt, comes from the ratepayers of the Tennessee Valley.

Senator CARPER. Do you issue debt?

Mr. MCCULLOUGH. Yes, we do issue bonded indebtedness.

Senator CARPER. Will you issue debt in part to pay for those kind

of investments?

Mr. MCCULLOUGH. Yes, this Board is committed to continuing to

bring our debt down.

Senator CARPER. To quote a native son of Tupelo, ‘‘Thank you

very much.’’

[Laughter.]

Mr. MCCULLOUGH. You are welcome, very much.

Senator VOINOVICH. Are you familiar with the Jeffords–

Lieberman numbers for the 3–Ps—NOx, SOx, and mercury?

Mr. MCCULLOUGH. No, sir; I am not.

Senator VOINOVICH. I would like to get your reaction to what

those numbers would do if that legislation had passed. The real

issue is whether or not it would have caused you to fuel switch?

Mr. MCCULLOUGH. Mr. Chairman, we would like to do that analysis in detail and report back to you.

Senator VOINOVICH. Have you ever calculated what impact fuel

switching to most probably natural gas would have on your customers?

Mr. MCCULLOUGH. It would result in an increase in cost due to

the volatility in the price of natural gas. We do rely on natural gas

for peaking capacity, but primarily our system, as I stated, is close

to 60 percent coal. We are about 25 percent nuclear. We are

uprating our nuclear units bringing on line the first reactor in the

21st century at Browns Ferry. We are modernizing our turbines in

29 of our hydroelectric facilities. We are doing renewables. We are

doing solar, wind, and land fill gas. We rely on natural gas for

peaking capacity.

Senator VOINOVICH. Thank you.

Senator Carper, do you have anything else?

Senator CARPER. I have just one last quick question.

We had a hearing last week with the Department of Defense. We

were talking about their interest in being ‘‘excused’’ from strict

compliance with some of our environmental laws when it comes to

cleaning their environmental hazards and waste sites.

One of the points that we made to the Department of Defense is

that while we are not interested in doing anything that curtails the

readiness and their ability to defend our security at home and our

interests abroad, we felt that because they are a government agency, they had a special obligation to be good stewards of our environment. Your authority is not exactly a government entity but created by the government and has a special standing and I think

maybe a special responsibility.

I was pleased to hear of your interest in looking to renewables—

wind, solar, and others—as you provide power to your customers.
55

I would also ask you just keep in mind the special standing that

you have and the special responsibility that you have with respect

to our environment and our clean air. I think you have that. I just

want to reinforce that today.

Mr. MCCULLOUGH. Thank you, Senator. We definitely concur

with that point. I can assure you that we take that responsibility

very seriously.

Senator CARPER. The last question I would ask is: People sometime say to you, ‘‘What do you want to do next in your life?’’ I always tell them, ‘‘I would like to move to a little city—not Cleveland. Just a little city and maybe be their mayor.’’ What is it like being mayor of Tupelo?

Mr. MCCULLOUGH. It is a wonderful opportunity.

Senator CARPER. My home town is a wonderful city. That was a

great opportunity. The opportunity to serve at TVA is likewise. I

was with three mayors from Alabama earlier this morning. It is a

great accountability to be held accountable and to have this opportunity to hear your thoughts and to respond.

Thank you, Mr. McCullough.

Senator VOINOVICH. Thank you for joining us.

Mr. MCCULLOUGH. My pleasure.

Senator VOINOVICH. The first witness of our next panel will be

Mr. Jim Rogers, CEO and President, Cinergy Corporation. Mr. Rogers is going to be here on behalf of the Edison Electric Institute

which represents the major utility companies in the United States.

This is an Ohio-based utility, Cinergy Corporation.

Mr. Rogers is not only representing them but he is also representing the Edison Electric Institute.

He will be followed by Ken Colburn of the Northeast States for

coordinated Air Use Management; David Hawkins, Climate Center

Program Director, Natural Resources Defense Council; Eugene

Trisko, United Mine Workers of America; and Bernard Melewski,

Adirondack Council.

Mr. Rogers, we are very happy to have you here today with us.

Thank you.

STATEMENT OF JAMES ROGERS, CEO AND PRESIDENT,

CINERGY CORPORATION, ON BEHALF OF THE EDISON ELECTRIC INSTITUTE

Mr. ROGERS. Thank you, Mr. Chairman. I appreciate the opportunity to be here today. I want to start by thanking you personally

for your leadership on this Subcommittee and driving these important issues forward because it is critical to entire economy to get

it right.

As you said in your opening statement, it is really all about harmonizing our energy, environmental, and economic goals in this

country. I have every hope that with your leadership we will get

that done.

While it is your job to harmonize, my job is to translate our country’s goals and policies into kilowatt hours delivered into the homes

and businesses of Ohio, Indiana, and Kentucky. I take my stewardship in a very serious way. That is why I have been for many years

a supporter of multi-emission legislation that has ultimately been

embodied in the Clear Skies proposal.
56

My job is to purchase fuel. We purchase almost $800 million a

year, or 30 million tons of coal to purchase gas, to build power

plants, to build scrubbers and SERs to reduce emissions, to invest

in new technologies.

Senator Carper, this really goes to your question about steward- ship, we spent $950 million to reduce emissions. On NOx, we spent

on $800 million, which is significantly more than many projected

that it would be because of the compressed time lines that occurred. With respect to Clear Skies, we are going to spend roughly

$1.5 billion.

My job is to make sure this impact on our customers, our investors, and our communities is done in a way that creates a value

for all of them. My testimony lays out all of the specific issues. It

urges you to go to work. I am prepared to go to work and to spend

the $1.5 billion to make further emissions reductions.

I do not think that there is any question that the Clean Air Act

is broken. I think everybody that is sitting here could support that.

Just look at the proposals—whether it is Senator Jeffords’ proposal,

or whether it is your proposal, Senator Carper, or whether it is

Clear Skies—everybody is pointing to the fact that it needs to get

fixed. There needs to be a sense of urgency about getting it fixed.

I do not think anybody disagrees with that.

I think the other thing is we need to reach agreement. Every day

we delay, every day we are in court litigating the Clean Air amendments in the Clean Air Act, is a day delayed in reducing emissions.

I urge you to have a robust debate, but not an endless debate.

Again, every day you debate is one less day we have to reduce

emissions.

The important issues are to maintain coal’s position in the mix.

This is a diversity of fuel issue. We have to get that right. We have

to keep coal in the mix. Under the current Clean Air Act, we are

going to become increasingly dependent on gas. In my judgment

that is not a good thing for this country.

In the last 3 years we have built 10 years of generating capacity

in this country, all gas-fired. No time in the history of our country

have we built so much generation predicated on one fuel. What I

worry about is where the gas is going to come from? Is it going to

be new L&G terminals with all the environmental issues there and

the importation and further dependency on the Middle East? Is the

gas going to come from wilderness areas? Is it going to come from

offshore? Is it going to come from Alaska?

These are the questions we need to ask. We have not answered

those questions in an affirmative way that really allows the gas

supply to be there. Just this winter in Ohio three still plants were

shut down because gas prices went so high. Heating is a very critical factor to make sure we have adequate heating.

I would urge you to remember back to 1978 when this Congress

passed the law banning the burning of natural gas to generate electricity. It was repealed 6 years later, but the fact of the matter is

that we think of gas as a premium fuel. If we go back to that way

of thinking again and looking at the supply/demand balance, we

may well. If we go back to that way of thinking again, where do

we turn to meet the demand for electricity in this country. The

place we turn is to coal where we are so dependent today.
57

My recommendation to you is to go to work, get it done, give us

the ability to go to work and continue to reduce emissions in the

future.

Thank you very much.

I would ask that my written statement be placed in the record

in its entirety.

Senator VOINOVICH. Thank you.

Our next witness will be Ken Colburn, Executive Director, Northeast States for Coordinated Air Use Management.

We are glad to have you here today.

STATEMENT OF KEN COLBURN, EXECUTIVE DIRECTOR,

NORTHEAST STATES FOR COORDINATED AIR USE MANAGEMENT

Mr. COLBURN. Thank you, Mr. Chairman. My name is Ken

Colburn. I am Executive Director of NESCAUM, an association of

air quality agencies of the eight Northeast States. I am pleased to

fill in for New Jersey Department of Environmental Protection

Commissioner, Bradley Campbell, who had to leave for some appointments with Members of Congress.

The Northeast States strongly support an integrated multi-pollutant approach to reducing power plant emissions, and have so

testified before you in the past. We applaud the Administration

and the committee for making such legislation a priority in this

Congress.

In the Northeast, where sulfur dioxide and nitrogen oxide emissions from upwind power plants contribute significantly to fine particle and ozone pollution, acid rain, and poor visibility in our wilderness areas, we have long appreciated the need for Federal action.

Mercury contamination had led to fish consumption advisories on

our lakes and rivers, creating an urgent need to curb the buildup

of this persistent neurotoxin in our environment. We see the problem of climate change as presenting unprecedented challenges for

our ecosystems and quality of life, but also great economic opportunity for those who develop the clean energy technologies of the

future.

For these reasons, the Northeast States have followed with keen

interest the multi-pollutant initiatives now before Congress, including the Administration’s ‘‘Clear Skies’’ proposal. In evaluating each,

we have asked three core questions:

Is it comprehensive? Does it adequately address public health

and the environmental challenges we face? Does it ensure continued clean air progress, not only at the national level, but at the

local, State, and regional levels as well.

Recognizing Clear Skies as a starting point for the committee’s

deliberations, I want to focus my remarks today on how Clear

Skies can be improved to meet these tests.

First, emission reductions can and should happen sooner. Many

areas of the country need to attain new, more stringent standards

for ozone and fine particles in the next four to 7 years. Yet, the

emissions caps in Clear Skies will not be fully implemented until

2018. Delaying these cuts for another 15 years is a problem for
58

States trying to reach attainment, but it is an even bigger problem

for individuals experiencing serious health concerns.

Second, we can and should do more to reduce mercury emissions.

Given the availability of highly effective control technologies, and

the bioaccumulative threat posed by this toxin, we should not depend only on co-benefits from other controls. Mercury emissions

should be capped at a level around half what Clear Skies proposes.

Third, national multi-pollutant legislation must address the intractable problem of transported air pollution, and must not weaken or remove the regulatory tools that States rely on to improve air

quality at the local and State levels. There is no guarantee that regional transport concerns will be solved under Clear Skies. Yet,

States would be unable to secure Federal help in addressing transport until after 2012. Even then, new hurdles for Federal intervention could make the current transport provisions of the Clean Air

Act essentially unenforceable.

States support constructive reform of the Clean Air Act provided

it advances clean air objectives and is strictly tied to implementation of new reduction requirements. Clear Skies appears to go too

far in the direction of regulatory reform, however, weakening or

even eliminating several provisions of the Clean Air Act before its

caps even take effect. Several such concerns including New Source

Review, regulation of non-mercury toxins, potential local impacts,

and protection of States’ rights are listed in an attachment to my

testimony.

The bottom line is that it is better for States to have too many

tools and not need to use them than to have States in a Catch–

22 position with the responsibility for reaching attainment, but

without the tools to do so.

The final issue I want to address is carbon dioxide. It belongs in

multi-pollutant legislation because without it, the market signals

and business certainty needed to promote sound investment decisions will remain absent. The result will be greater climate risk

and higher costs for both the industry and consumers. The Northeast States feel so strongly about the need to act on climate change

that they have made State level commitments to reduce greenhouse gas emissions. Some have included carbon in their own aggressive 4–P initiatives. Regulation of carbon does not need to be

onerous, but carbon does need to be ‘‘in.’’

In short, we support multi-pollutant legislation that does both

more and less than Clear Skies proposes, more (and sooner) in

terms of pollution reductions, and less in terms of altering the

Clean Air Act.

Earlier, the EPA Straw Proposal was mentioned. We urge the

committee to revisit EPA’s Straw Proposal and other current legislative initiatives to see about capturing the additional benefits I

have already enumerated.

In closing, let me thank you for considering our views. Again, we

commend the Administration for keeping multi-pollutant legislation on its legislative agenda. The Northeast States believe that the

opportunity for real progress here is as great as the need for it. We

look forward to playing a constructive role in this effort.

Thank you, Mr. Chairman.
59

I would ask that my written statement be placed in the record

in its entirety.

Senator VOINOVICH. Thank you.

Mr. Hawkins?

STATEMENT OF DAVID G. HAWKINS, CLIMATE CENTER PROGRAM DIRECTOR, NATURAL RESOURCES DEFENSE COUNCIL

Mr. HAWKINS. Thank you, Mr. Chairman.

I would request that my full statement be placed in the record

in its entirety.

On behalf of the National Resources Defense Council, I will try

to highlight the three major policy failings in the Administration

proposal. They are: The proposal fails to protect public health; it

repeals or weakens key safeguards in existing law, and that by ignoring carbon dioxide it worsens global warming.

On the first point, public health, the evidence is undisputed that

power plant pollution contributes to some 30,000 premature deaths

a year in the United States along with other damages. The first

question you should ask about any proposal before us: How good

a job does it do in reducing that toll of public health damage?

The first chart to your right shows that the Administration proposal does not do an adequate job. It fails to protect public health,

especially when compared to proposals that were sent into the Administration but never came out of the Administration. I refer to

what was called the ‘‘Straw Proposal’’ of EPA.

That was the label on the document. The analyses were not

straw analyses. They used the same peer-reviewed methods as the

Administration’s proposal, but analyzed a tighter cap. Governor

Whitman testified that those proposals did not go forward because

they were determined to be infeasible.

If EPA determined them to be infeasible, it has not published the

results of that conclusion. Indeed, the only analysis on the Agency’s

website and the only analysis we have seen publicly shows the opposite—that it is feasible, that you can achieve these reductions

faster.

I urge the committee to ask these kinds of questions: Is there an

analysis that shows that the better program is infeasible? If so,

this committee should see it, especially before voting on something

that has the results which I will display on the next slide.

Compared to the proposal it rejected, the Administration’s bill

saves $3 billion for the industry, but at a cost of $60 billion in public health damage to the American public. That is an incredibly bad

bargain. Before you vote for it, I would hope you would want full

answers to why that is a justifiable outcome.

These damages do not just occur in 2020, but in fact, they occur

all the way along between now and 2020 as a result of the higher

emissions allowed by the Administration proposal, compared to the

EPA proposal that they rejected. This second chart shows that all

along the way that the emissions from the Administration proposal

are significantly higher than the emissions under the EPA proposal. Again, a discussion of why this better proposal was rejected

is what is critical here.

When you look at the pollutant mercury, you see again dramatically higher loadings. This is a snap shot in 2015 of the mercury
60

loadings under the Administration’s bill compared to the EPA proposal which was rejected. As you can see, the mercury emission

loadings are much higher around the country. I want to draw your

attention both to the Great Lakes Regions, to the Adirondacks regions, as well as to the Mid–Atlantic Regions. These are all dramatically higher mercury loadings.

That mercury, once released to the environment, will stay there

for decades, if not hundreds of years. That is a commitment not

just for this generation, but for future generations.

The next slide illustrates the weakening changes to current law.

The testimony before you, especially from Governor Whitman, indicated that it would be better to get these pollution reductions

through a cap. Well, it is a false choice to say that you have to

weaken the current law in order to have a cap.

The first President Bush did not do that. A cap was adopted by

this Congress for sulfur dioxide in 1990. It has produced economic

benefits. It has produced efficiencies. Not one word of the existing

law was weakened or repealed as a result. You do not need to do

it in this legislation, either.

Finally, since my time is almost at an end, I just want to say a

few words about global warming. This is a problem that will not

get easier by ignoring it. The investments made to comply with a

multi-pollutant bill will be long-term capital investments. We need

to do something about this problem of global warming in making

those investments. For business certainty we need to do something

about this problem to preserve the option of stabilizing global

warming.

Carbon dioxide emissions from the electric sector are 40 percent

of U.S. CO2. They have gone up by 26 percent since 1990. That is

three times the rate of the increase in the rest of the economy.

They will go up by another 38 percent between now and 2025, according to the base case analyses. If we do not do something about

this, we will dig ourselves a deeper hole. We can do something, and

we should.

Thank you very much.

Senator CARPER. Thank you very much.

Mr. Trisko, welcome.

STATEMENT OF EUGENE TRISKO, UNITED MINE WORKERS OF

AMERICA

Mr. TRISKO. Thank you, Senator. It is my pleasure.

I am Eugene Trisko. I am an attorney here representing the

United Mine Workers of America. The UMWA is the labor union

that represents the Nation’s organized coal miners. The Union supports additional reductions in SO2, nitrogen oxide, and mercury

from coal-fired power plants provided that the reductions are

achieved in a manner that preserves coal miners jobs.

The Union supports the emission tonnage reduction targets in

the Clear Skies Act and has only a couple of suggested changes to

the bill. We further believe that the time to act on this legislation

is now.

Since 1990, the UMWA has lost thousands of coal mining jobs as

a consequence of fuel switching in response to the acid rain provi-
61

sions of Title IV. The Union is very sensitive to the risks of additional job losses through new clean air legislation.

For this reason, the UMWA appreciates the concerns that the

Administration has expressed toward its interest in the development of the Clear Skies Act, including the provision of incentives

to encourage the early installation of control technologies.

The UMWA became active in the Clear Skies process in August

2001 in response to the release of EPA’s initial ‘‘Straw Man.’’ The

UMWA believes that a single phase approach to reducing SO2

emissions can be developed in a manner that reduces the risk of

fuel switching by encouraging the use of available emission control

technologies, thereby maximizing the co-benefits of mercury reductions.

The United Mine Workers respectfully request the committee to

consider limiting Eastern SO2 reductions to a control program with

a three million ton cap and a reasonable final deadline, perhaps

similar to the 10-year deadline provided by the Title IV Acid Rain

Program. This will provide larger emission reductions in time to assist States in attaining the new PM2.5 standard.

The Mine Workers agree that differentiating NOx control requires between Eastern and Western States makes sense in light

of OTAG modeling results showing the miner contribution of Western NOx emissions to ozone affecting Eastern States.

The Union also supports the mercury tonnage targets and timetables in Clear Skies. This approach will provide time for new mercury control technologies to be developed and commercially demonstrated.

On the other hand, the Mine Workers urge elimination of the

emission auction provisions of the Clear Skies Act. Requiring

sources both to reduce emissions and to pay for auctioned allowances is a form of double taxation. Over time this new energy tax

would create major disincentives to the use of coal reserves in eastern States producing higher sulfur coals.

The Mine Workers are concerned that efforts to craft new clean

air legislation should remain focused as the Clear Skies Act is on

reducing the air pollutants contributing to domestic air quality

problems.

Regulating global concentrations of greenhouse gases under the

Clean Air Act is not feasible. Carbon dioxide, the principle greenhouse gas, is not harmful to human health, and could not properly

be classified as a criteria air pollutant. Global greenhouse gas concentrations are projected to increase into the foreseeable future,

driven by the economic growth of developing nations exempt from

the Kyoto protocol.

Moving forward on climate change requires a truly global agreement on greenhouse gases that recognizes the common but differentiated responsibilities of parties to the Rio Treaty with an equitable apportionment of emission limitation targets among all parties.

Mr. Chairman, on October 24, 2001, the presidents of seven labor

unions conveyed their views on this issue to this committee. A copy

of their letter is attached to my full statement.

Finally, we need to recognize that State utility restructuring efforts and other economic forces have degraded the financial health
62

of the electric utility industry. The industry is littered with companies in or teetering on the edge of bankruptcy. Under these circumstances, UMWA recommends that the committee consult with

the congressional Research Service or the General Accounting Office on the financial implications of the Clear Skies Act and other

proposed emission controlled legislation.

Both the tonnage reductions and timetables for compliance

should reflect sound financial and economic assumptions about the

ability of the industry to comply.

Thank you.

I would request that my full statement be placed in the record

in its entirety.

Senator CARPER. Thank you very much, Mr. Trisko.

Mr. MELEWSKI. Welcome.

STATEMENT OF BERNARD MELEWSKI, ADIRONDACK COUNCIL

Mr. MELEWSKI. Thank you. Good afternoon. My name is Bernard

Melewski. I am the Counsel and Deputy Director of the Adirondack

Council. I would like to thank the committee for this opportunity

to be with you today.

The Adirondack Council is a private not-for-profit organization

dedicated to enhancing the natural and human communities of the

Adirondack Park in New York State. The six-million acre Adirondack Park is the largest park of any kind in the contiguous Untied

States. It is nearly three times the size of Yellowstone National

Park, and almost half the Adirondack Park is publicly owned and

protected as forever wild by the New York State Constitution since

1895.

Due to its location and its thin soils, the Adirondack Park has

suffered the worst environmental damage from acid rain in America. Prevailing winds carry power plant emissions from outside

New York’s borders into the Adirondack Mountains where they fall

as acid precipitation. The acidity alters soil chemistry, inhibits

plant growth, and releases heavy metals that are toxic to plants,

animals, and fish. Reports conducted by a host of Federal agencies

have shown that more than 500 of the Park’s 2,800 lakes and

ponds have become too acidic to support their native life.

Each spring our waters suffer acidic shock for weeks as the winter’s nitrogen loaded snow pack melts. The Park’s high elevation

spruce and fir trees and its spectacular maples are disappearing at

an alarming rate. Every report issued in the past 10 years reflects

these observations and worse and predicts continuing damage if

more is not done to control power plant emissions.

In 1998 the Adirondack Council was invited by this committee to

testify about S. 172, the Acid Rain Control Act, legislation then

proposed by the late Senator Patrick Moynihan. We said in 1998

that any new legislation that seeks to bring an end to the acid rain

problem should, at a minimum, contain two provisions. The same

holds true today.

First, build on the successful sulfur dioxide cap-and-trade program by creating a third phase of reductions of 50 percent or more.

Second, create a new year-around cap-and-trade program for nitrogen oxides that reduces emissions by 70 percent or more.
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The Clear Skies Act meets and exceeds those emissions targets.

The Clear Skies Act embraces the reductions in the Moynihan proposal and then goes further with an additional phase of cuts. The

emission caps in the Clear Skies Act will set the course for recovery

of the Adirondacks.

Three years ago when the Adirondack Council last testified before this committee, Senator Voinovich observed that New York

had to show that we were willing to do what were asking of the

States upwind. Well, Senator, it is done, and we are back.

Last week the Pataki Administration in New York adopted the

toughest acid rain regulations in the country despite the fact that

more than 80 percent of our acid deposition problem originates outside our borders. We are doing what we can but we need Congress’

help.

New York is part of the EPA brokered 22–State State Implementation Plan that will reduce nitrogen emissions significantly during

the summer ozone season in 2004. The SIP call is only a summer

seasonal program and will not address in a significant way the

total loading of nitrogen to sensitive areas. New York will require

its power plants to implement year-around controls immediately

under the new regulations.

The Clear Skies Act does not impose those year-around controls

until 2008. The Council requests that the committee take a look at

whether imposition of year-around control controls could be advanced.

In the markup of Senator Jeffords’ bill last session, Senator Clinton offered an amendment which was adopted by this committee.

The amendment would ensure that the benefits anticipated by new

emission caps were, in fact, occurring in sensitive areas. If not, the

Administrator would have the authority to reduce emissions from

contributing sources to reduce acid deposition to tolerable levels.

We appreciate that Senator Jeffords has retained the provision in

the reintroduction of his bill this session. We would appreciate this

consideration by the committee.

We would also request that the committee examine whether

there can be faster timetables, especially in the out-years for the

second phases of SOx and NOx reductions in Clear Skies. Every

year that can be gained and every ton that can be saved will hasten the biological recovery of our forest, our streams, and our coastal estuaries and will save thousands of lives.

Last spring President George W. Bush visited the Adirondack

Park on Earth Day. He said that he was committed to solving the

acid rain problem. The President chose the occasion of the State of

the Union message to renew that commitment to call for action this

year. The introduction by the leadership of this committee of the

Clear Skies Act is an important step forward.

I want to extend on behalf of the Board of Directors of the Adirondack Council an invitation to all of members of this committee

to visit the Adirondack Park and see what a wonderful resource

you will save. Perhaps you will have the good future to hear the

haunting call of the loon in the Adirondack Wilderness and know

that the same experience has been preserved for future generations

by the actions you take this year.
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Mr. Chairman, the Senate committed itself to the task of ending

the destruction of acid rain over a decade ago. We think it is time

to finish the job.

Thank you again.

I would request that my full statement be placed in the record

in its entirety.

Senator VOINOVICH. Thank you very much.

Mr. Melewski, I am sorry I was not here to hear all of your testimony. But you mentioned in the testimony the adoption of the caps

proposed for sulfur dioxide and nitrogen oxide in Clear Skies will

set the course for recovery of the Adirondacks and the many other

acid rain ravaged sections of the country.

If you mentioned this, I apologize. I know we have had some dialog with your organization last year in terms of the issue of greenhouse gases. You indicated that you were in favor of moving forward on these three because you felt that it was time for something

to be done.

Would you comment on your frustration over the last couple of

years with the lack of real movement in terms of making any difference for your part of the country and why you feel that not including greenhouse gases is something that you feel comfortable

with?

Mr. MELEWSKI. Well, Senator, if it were just the last couple of

years, we would be happy. It has actually been over a 10-year period. As you know, our organization joined with New York State in

suing the U.S. EPA several times to get reports out that reveal

that the Clear Air Amendments of 1990 were not adequate to protect the Adirondack Park and many other sensitive areas.

We have continued to generate and to publicize scientific inquiries that verify the need for additional action. We have had a string

of our New York Senators—D’Amato, Moynihan, Schumer, and

Clinton—all introducing legislation trying to make this the No. 1

environmental priority in New York. As I mentioned in my testimony, Governor Pataki has already implemented regulations that,

in effect, have adopted the Moynihan proposal.

So the difficulty in the last couple of years has been the ongoing

controversy over carbon dioxide and global warming. We would be

pleased to see a bill move out of this committee and onto the floor

that has provisions on climate change and global warming. We

would not be pleased to see any controversy or lack of agreement

on that one issue keep us from moving forward on the very desperately needed measures for sulfur, nitrogen, and mercury.

Senator VOINOVICH. I think last year when we contacted you, you

indicated that same position. I think at that stage of the game you

were in favor of a more aggressive program that we had talked

with you about. It was not Clear Skies.

But you feel that the numbers in Clear Skies will move down the

road and start making some difference for you?

Mr. MELEWSKI. Yes, absolutely. As I stated in my testimony, the

Moynihan legislation represented the minimum that needs to be

done, in our opinion, to change the course of direction in the Adirondack Park. Clear Skies meets those same standards and exceeds

them. In fact, all the major proposals that have been introduced in
65

this committee, or are about to be introduced, as Senator Carper

mentioned, would resolve the acid rain problem.

The facts are that the faster we get the cuts and the deeper the

cuts are, the quicker the biological recovery will occur in the Adirondacks. If we had to choose between deeper and faster, faster

would be the choice.

Senator VOINOVICH. You just want to get going?

Mr. MELEWSKI. We just want to get going.

Senator VOINOVICH. Mr. Rogers, obviously one of the major drivers for Clear Skies is the need for regulatory certainty. Can you explain why certainty is so important to your company, especially

with regard to your need to raise capital that will fund the pollution control projects that you need in the future?

Once you have answered that, I would be interested in your comments about living in this regulatory environment that we have

been in for the last couple of years. What impact do you feel it has

had on your ability to make the air cleaner, improve public health,

and provide more efficient energy?

Mr. ROGERS. The key to certainty, Senator, really is having a

road map so that you can do the work in a systematic way on each

of your power plants. What that requires is knowing what the SO2

regulations will be, what the NOx regulations will be, what the

mercury regulations will be. We sit here today with no clarity with

respect to what those regulations will be in the future.

What Clear Skies offers is a clear path. It allows us to time investments. Our company’s balance sheet was under tremendous

pressure. Many of the coal-fired utilities’ balance sheets have been

under great pressure of just complying with NOx.

This work on the back end of your plants is in terms of building

scrubbers, but at the same time maintaining the reliability of your

system. If you phase it in over the right period of time, not only

do you maintain the integrity of your balance sheets, you attract

the necessary capital to make the investments, but you smooth out

the impact on consumers over a period of time rather than having

steep increases.

The primary reason we support Clear Skies is that it gives a

clear path and allows you to plan investments, to plan construction, and at the end of the day, it translates into delivering cleaner

power at lower cost.

One of the challenges we have had, is there has been so much

litigation, for instance, around NOx. The time lines have been compressed, and that translates into greater costs and a greater need

for workers that are qualified. We also need to make the right investments.

So from our standpoint, timing matters. The sooner we know the

plan, the sooner we go to work. We are able to execute this over

a period of time and that translates into lower costs for consumers.

That is very important.

Senator VOINOVICH. We have to strike a balance. We heard from

Mr. Hawkins that we ought to move forward. When do you get to

the point that you say to your shareholders that it is better for us

to fuel switch to natural gas? If that happens, then as I mentioned

in my opening statement, you then have a situation where the cost

just skyrockets. You have a lot of people to just pick up and leave.
66

Where is that balance? We are talking about numbers and we

are talking about time. You want to strike that. What is your reaction?

Mr. ROGERS. I think the industry has actually, interestingly

enough, almost defaulted to a place where we have increasingly become dependent on gas-fired generation. As I mentioned, as an industry, we have built 10 years of capacity in a 3-year period. It is

all gas-fired. No other time in our history have we been so dependent on one fuel.

Our company, for instance, has added 2,000 megawatts of gasfired peaking. We are converting one of our small coal plants to

gas. But at the end of the day, there are limits on how much you

can switch to gas. I think you already see that. Nobody in their

right mind is going to plan to build a coal-fired plant which takes

five to 7 years to build when you do not know what the regulations

will be with respect to SOx, NOx, or mercury.

It leaves the industry in a place where you continue to default

to gas-fired peakers. That is not the long-term solution for this

country, to become so dependent on one fuel.

Senator VOINOVICH. Let me tell you what worries me. If you have

reached that point where that decision is made for fuel switching,

it impacts on your industries. Your industries leave. As I told Senator Jeffords last year, they are not going to Vermont. They are

going somewhere else.

I do not think a lot of people who are involved in this issue understand how devastating natural gas prices are today, not only on

heating costs but what they have had on electric costs. We move

the jobs out of the United States to some other place that burns

coal. They do not have the types of environmental concerns, and in

terms of the environment of the world, we have made no progress.

If you can keep the pressure on to get you to use clean coal technology and other technology for mercury and other things, that you

keep the jobs here, you develop the technology, and then you can

either sell or give that technology away to other countries in the

world that are going to be out there manufacturing this stuff. That

is the delicate balance that we have to try to achieve.

Mr. ROGERS. Unfortunately, Senator, there is no silver bullet for

these issues. We have to invest in technology. At the same time,

we have to work to help our customers become more efficient in

terms of their use of energy. At the same time, if we do not pay

attention to the supply/demand balance on the gas side and if we

continue to default to more and more gas-fired generation, that is

going to translate to times where we could not run some of our gasfired units when we needed them because there was no capacity in

the pipelines. You need that kind of infrastructure investment that

had not occurred. You need to look at the prices this summer and

the number of plants that shut down for the short term—but it

could be for a longer term.

One of the great fears of the gas industry is that the volatility

of the gas prices and the rising gas prices forces a lot of industries,

as you suggested, to basically pack up and leave town and leave

the country. That is not a good answer long term for creating jobs.

What I worry about is jobs. We are in an economy where the

growth is only two to two-and-a-half percent. That is still better
67

than other parts of the world, but not what we expect, and not

what we hope for. If prices of gas continue to go up and we do not

use the resources that we have in an environmentally responsible

manner, we have created a death spiral for ourselves that makes

it even more difficult for us to succeed as a country.

Senator VOINOVICH. Thank you.

Senator Carper?

Senator CARPER. Thank you, Mr. Chairman.

To each of our witnesses, we are glad you are here. We

appreciate your testimony and your responsiveness to our questions.

I do not mean to pick on you, Mr. Rogers. Let me just ask my

first question of you and then we will pick on some others. I want

to read you a statement by a leader of a major utility company. I

just want you to listen to it and then react to it, if you do not mind.

It is quote. It goes back to sometime in 2001. It says: ‘‘My company seeks comprehensive multi-emissions power plant

legislation because we want long-term clarity and certainty built

into our environmental compliance and planning process. This kind

of reasoning dictates the necessity of including a carbon commitment in the legislation. Without some sense of what our carbon

commitment might be over the next 10, 15, or 20 years, how can

I or any other utility CEO have an adequate picture of what the

future requirements our plants may face? How can we prudently

plan?’’ You probably recognize those words because they are your own.

Those were words that I am told that you stated in a presentation

in September 2001 before a forum on applied research and public

policy.

I do not recall everything that I say anyone that I suspect any

of the rest of us do. But I found that to be a powerful statement

and one that I certainly welcome. I do not know you well, but I

know your reputation, and your reputation is a person who says

what he thinks and someone who can take what he says to the

bank.

I presume you meant what you said in 2001. I would just like

to ask you to reflect on what you said and think about it today.

Mr. ROGERS. Thank you. My staff read that back to me in preparation for today.

[Laughter.]

Mr. ROGERS. I am here to say that it was just as brilliant then

as it might be perceived today. Let me make a point—and this is

from a personal standpoint and not speaking for EEI. I am just

speaking for Jim Rogers, CEO of one company.

We burn 30 million tons of coal a year. We have significant emissions. As a consequence of that, we have a responsibility to get it

right, not only with respect to our emissions, but with respect to

the costs to our consumers. I am concerned about climate change.

I think it is an issue that we need to address. But we need to have

in this country reasonable expectations about what is possible.

Yes, we want certainty. One of the things I said in a more detailed way is that we need to find a way to take a risk at first

strategy that allows us to flatten the curve. I think the reduction

in carbon intensity is a step in that direction. There has been a
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number of voluntary steps that we have taken as a company, and

in fact, that our industry has taken, to reduce CO2 emissions.

These are all steps in the right direction.

But unfortunately we cannot have the certainty that we desire.

One, we have yet to find a technology that really reduces CO2. That

is an issue. We have not found a substitute for the coal-fired plants

and gas-fired plants that we have in this country. Yet, we still have

a requirement to keep our TVs on and to run our computers and

to maintain the lifestyle that we have grown accustomed to.

I think we need to go to work. I think we are going to work.

There are many voluntary programs, first steps, good steps, more

investments in technology. But we need to work to reduce our carbon intensity. We have taken steps in that direction.

I believe this is an issue that we will not go away. It is an issue

that we have to deal with. But I do not think at the end of the

day—and I going to be blunt with this point—there is a lot of theology around it also. I will not dare go there. I will leave that to

you.

But I think the importance of making progress on SOx, NOx, and

mercury is great. I look to the difficulty that the Senate had in just

coming together around the simple question of reporting emissions.

I think that will become even more difficult to do more than even

that.

I am a realist. I say and I urge you to think. We need to make

progress with SOx, NOx, and mercury. Let us not fight for days

and months and years around CO2 while we ignore making

progress on those three pollutants. I would urge you to continue

the debate, to continue the investigation, to continue the investment in new technologies, and to continue to issue on the front

burner, but not delay moving forward on these other things, waiting to come up with the perfect solution for that.

In an ideal world I would love for it to happen. But I do not

think it going to happen for the reasons I stated.

Senator CARPER. About once a week I hear someone here on Capitol Hill say, ‘‘Don’t let the perfect be the enemy of the good.’’ I was

very encouraged when I read your statement. I realize there was

something said about 18 months ago. I appreciate the way you

have spoken today—I think from your heart.

I would just like to my colleagues on my right and my left. I

think there are other CEOs of utilities around this country who

share that conviction, who are not comfortable with the idea that

we are putting as much carbon into the air from a lot of sources

as we are and what the long-term consequences for us, whether we

are in Tupelo, Mississippi, Cleveland, Ohio, Vermont, or Delaware.

I want to ask a question, if I could, of Mr. Trisko. You may have

been in the room earlier in the day when I introduced myself as

the only native-born Senator from West Virginia and one who still

has a lot of family in West Virginia and who goes back there from

time-to-time for a reunion at Grand View State Park. If I would

take a course here in Congress that undercut coal, I could go back

to the reunions, but I would not be as warmly welcomed as I might

want to be.

I would like to ask you to share with us what are some recent

developments, particularly as we look forward, to being able to use
69

our abundant coal resources, to use them to create energy, electricity, but to do so in a way that we do not have problems with

the kind of problems we have had in the past with coal with respect to SOx, NOx, and mercury.

I have heard just in the last 24 hours some really inspiring information about reductions in those emissions from coal, and from a

coal that has been turned into a gas. Talk to us about that kind

of technology.

Mr. TRISKO. Senator, I would be happy to, on a couple of levels.

First, in terms of the pragmatic and what is necessary for utilities to achieve the kinds of reductions that are called for by Clear

Skies. There has been very significant progress made in the last

decade in particular on technologies that reduce SO2 emissions and

NOx emissions.

Scrubbers, particularly the so-called magnesium-enhanced limestone scrubbers—lime or limestone, but those that utilize a magnesium enhancement—are capable of achieving in excess of 95 percent removal of SO2 at a quite reasonable cost per ton. In some

cases, it is 98 percent or more. As a byproduct of the scrubbing

process, you also achieve mercury reductions.

NOx technology improvements also are notable. In the last few

years, largely as a result of the emphasis on reducing transported

ozone in the Eastern United States and the development of EPA’s

SIP call, the commercial development of selective catalytic reduction technology has progressed quite rapidly. It had been used in

Europe and in other countries. It is our understanding that SCR

technology now is capable of achieving NOx emission rate limits at

coal plants of NOx at 0.7 pounds. That would be for a large base

load plant application.

One of the greater difficulties that we see in terms of the pragmatic here and now in complying with multi-emission legislation

really is in the mercury area. While it is true that the use of conventional emission control technologies such as scrubbers—and

some particulate control equipment—reduces mercury as a byproduct, we do not have a commercially demonstrated system.

The activated carbon injection technology that EPA relies upon

largely in its models to estimate the prospective costs of mercury

of Clear Skies, that technology has only been applied at a handful

of plants on a demonstration basis. Those plants were selected

based on the generous size of their particulate removal equipment.

They may not be representative of the hundreds of coal plants that

do not have that particularly generous particulate electrostatic precipitator configuration.

Looking forward over the longer term, there certainly is reason

for optimism in terms of the development of advanced clean coal

technologies going beyond conventional pulverized coal systems,

such as integrated gasification combined cycle equipment that will

virtually eliminate the emissions of criteria pollutants, and as a

consequence of their improved thermal efficiency, also make great

progress in terms of carbon reductions.

But for purposes of legislation or regulation at the current moment, we are not quite ready for prime time in terms of those systems. That is why the kinds of programs that the Administration

is advancing through its clean coal technology programs to us
70

makes sense as a form of insurance. We are not just the Saudi Arabia of coal. Our coal reserves in their energy content are equivalent

to the world’s known oil reserves. But those kinds of technology developments make a lot of sense to ensure that that resource in the

future will be available for our use.

Senator CARPER. Thank you.

Mr. Chairman, if we have a chance to ask a couple of other questions later, I would like to. My time has expired for now.

Senator VOINOVICH. Senator Jeffords.

Senator JEFFORDS. Mr. Hawkins, I would like to know if you

have any comments on the EPA or the other witnesses’ testimony

that you have not had a chance to make and would like to make.

Mr. HAWKINS. Yes, Senator Jeffords. Maybe I will make a comment on a theme that has been raised by a number of Senators and

the panel, and that is the topic of coal. The fact is that the status

quo is not good for U.S. coal, in addition to being not good for the

climate.

The current uncertainty about what is going to happen with climate policy is causing investors to behavior rationally. What do I

mean by that? They are not investing in coal. The forecast for new

capacity in the United States is not going to coal. It is going to natural gas. Because of that uncertainty, the only entities that are

proposing to build coal plants are coal companies. With few exceptions a power company will not even make the effort to try to permit a significant coal plant.

Basically, the uncertainty about global warming policy has

caused people to be nervous about investing in conventional coal.

And that uncertainty has caused them to not have sufficient incentive to invest in advanced coal technologies either.

Senator Carper asked the question about technologies for carbon.

In his own State, Delaware, there is advanced technology in operation today at the Motiva Refinery. The feed stock is not coal. It

is petroleum coke. But the technology is basically the same. It is

commercially demonstrated. You put the coal or the petroleum coke

in there. You gasify it. Then in order to manage the carbon, you

need to capture the carbon and you need to do something with it.

In this country we are storing CO2 for purposes of oil recovery

in enhanced oil recovery operations. We are storing 30 million tons

of it a year. All of the elements of a strategy that would allow coal

to continue to be used, and decouple it from a global warming problem, are out there today. They are not being used in an integrated

package because there is absolutely no market incentive to do so.

That is going to stay that way until this committee starts the

process rolling. It is not too soon to start it. We can develop a program that sends the signal that gets people moving and gets the

investors making the right decision. Eugene Trisko and I could sit

in a room and come up with something. I think it would address

the needs of the coal industry and it would address the needs of

protecting the climate. It would provide business certainty. I think

it would address Jim Rogers’ needs as well.

We just have to get over what is an irrational fear of addressing

this issue. It will not get easier. The longer we ignore it, the harder

it will get.

Senator JEFFORDS. Thank you. That is very helpful.
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Mr. Colburn, what would Clear Skies do to your State’s abilities

to protect public health, achieve attainment, and to operate their

existing pollution control programs?

Mr. COLBURN. Senator, there are several ways that State authorities would be impacted. I have listed several on an attachment

to my testimony. Perhaps rather than go through those individually, I will cover just a few of the high points.

The most important aspect of your question is what happens following whatever Federal solution or Federal reductions emanate

from a bill passed by Congress this session. Under Clear Skies, for

example, it is not clear that the reductions achieved will produce

attainment everywhere in all the States. Under Federal law now,

the States have the responsibility for achieving Federal healthbased air quality standards.

If the States lose any of their current regulatory authorities as

a result of Federal multi-pollutant legislation, it is not clear what

mechanisms they will use to fulfill this responsibility to achieve attainment. One of our biggest fears, then, is the apparent reduction

in State authorities that are incorporated in the Clear Skies proposal. We feel, as I indicated in my testimony, that it is a far safer

and far better approach for States to retain all the authorities that

exist in the current Clean Air Act and not need to use them if attainment is reached everywhere or is easily reached with a few additional mechanisms that States impose. This approach is much

more likely to guarantee that healthy air quality is achieved than

depriving States of those tools, as called for in some of the provisions of Clear Skies.

If the tools are not used, that is wonderful. A State that is in attainment cannot use Section 126, for example. I think that is the

outcome we all want.

In addition, there are other hazardous air pollutants besides

mercury emitted by the power sector. It may be that scientific investigations now under way show that several of those should be

regulated in form or another. States currently have the authority

to do so.

That authority is deleted under Clear Skies. There is a little bit

of a question about this, Senator, but it even appears that under

Clear Skies State actions to go beyond Federal requirements to

meet their State SIP requirements, may be prohibited or constrained.

Essentially the States feel that while Clear Skies itself represents a good step in the right direction, perhaps not as far, or as

fast, or for as many pollutants as need be, they are fundamentally

getting their arms tied behind their back in exchange for that down

payment of initial reductions. It is not clear to us that that will end

up being a good trade in the end. We are concerned about that.

Senator JEFFORDS. Thank you.

Mr. Trisko, would your Union support a CO2 cap that would

produce no significant impact on domestic coal production?

Mr. TRISKO. Senator, that is a hypothetical question. I learned in

law school a long time ago to avoid answering hypothetical questions, but I would be happy to comment upon the question.

First of all, I am not at liberty to state whether President Cecil

Roberts of the United Mine Workers would or would not support
72

such a hypothetical cap. You would have to address the question

to him directly. But that being said, given the wealth of analytical

evidence that is available to us through the studies that have been

done leading up to Kyoto and subsequent to Kyoto for the design

of an alternative ‘‘Kyoto-lite’’ approach, however it might be characterized, we have yet to see a program that would cap domestic utility carbon emissions that would not have adverse effects upon coal

consumption.

One analysis that has been made available to us was done by a

private group—for the bill that Senator Carper is currently associated with—analyzed the prospective impact of those emissions caps

on the domestic utility industry. It suggested that in the worst case

the bill could be associated with a 41 percent reduction of coal utilization.

We would like to see and encourage the committee to pursue additional analyses of alternative measures. In fact, when the mine

workers were approached last year for their prospective support to

Senator Carper’s proposal, that was our request. We want to see

the numbers. We want to understand what the bill would do.

Senator JEFFORDS. Thank you.

Mr. Melewski, why does the Adirondack Council support legislation that eliminates the New Source Review Program?

Mr. MELEWSKI. Well, Senator, first of all, I do not think the

Clear Skies program eliminates the New Source Review Program.

There is a moratorium on new initiatives for a period of years.

There is a troubling new standard that is provided in the Clear

Skies bill. We do not offer any particular expertise in those provisions. They have been intensely discussed since the bill was introduced. I know that many members of the committee have problems

with them.

We can offer a simple solution that is one that was taken in 1990

which is to keep the existing Act in place and create new programs

on SO2, NOx, SOx, and hopefully something on the climate change.

Senator JEFFORDS. Mr. Chairman, that exhausts my present desires to pursue anything more. We will expect the answers to our

questions that have been submitted.

Thank you.

Senator VOINOVICH. Thank you.

I just have one last question for the panel. You have all heard

each other comment about each other’s testimony. Would any of

you like to comment on any of your fellow panelist’s testimony?

Mr. Colburn?

Mr. COLBURN. Thank you, Mr. Chairman. I would make one comment. I think Mr. Trisko raised an extremely important point when

he suggests that at the current time the situation is such-and-such.

I would remind the committee that we are not talking about the

current time. We are talking about 15 years from now.

The reason that is important, Senator, is this. I was the Air Director of the State of New Hampshire in 1995 when we installed

the first selective catalytic reduction NOx control technology (SCR)

on a coal-fired plant in, I believe, the world, but certainly in America. Soon after that, there were deliberations as part of the OTAG

process (Ozone Transport Assessment Group), in which industry indicated how impossible it was to secure the steep reductions in Nox
73

reductions that we were already getting. I was the only guy there

with canceled checks about how much it would actually cost to control NOx.

That process essentially took 6 years—1995 to 2001. Now, we are

looking at the ability to replicate a 6- or 7-year process like that— twice—before Clear Skies would be fully implemented. In terms of

coal use, I think there is a strong technology opportunity for the

integrated coal gasification that Mr. Trisko and Mr. Hawkins mentioned that could create a bright future for coal. This technology

would preserve and potentially even increase coal usage while diminishing dramatically its environmental impacts.

Right now there is an energy penalty for coal gasification. In the

way we use coal today, we are paying a health penalty. Let us pay

the energy penalty instead, and stop paying the health penalty,

and do so in the next 5 or 6 years instead of the next 15 years.

All of this can be done. It has been done. It has been done at less

cost than EPA ever estimated, just like the acid rain program. We

do not have to have it all in the bag today. We have seen in the

past the progress that has been made when we set our minds to

it.

Perhaps my favorite saying is: If you ask an engineer to do something, you will get nothing but problems—why it cannot be done

as fast, what could go wrong, and so forth. But if you tell an engineer to do something, you will get nothing but solutions.

That is what has happened in the past, Senators, when Congress

told the engineers and companies like Mr. Rogers’ to do something.

They go to it and achieved spectacularly beyond our expectations.

They will do so again.

Senator VOINOVICH. As a Governor of a State that encouraged a

company to put on a $650 million scrubber at the Gavin Plant, an

extraordinary amount of money has gone into these investments.

This new SER technology was done at Gavin. They had to buy out

a town in the vicinity there because of a plume that settled over

the town. They just finally just bought the property.

I think this concept of this technology is around the corner. We

have a long way to go. It is very expensive.

One of the things that puzzles me is that last year Tom Moynihan from Catholic Charities testified about the cost of energy on

poor people. Clean Air Trust put them on. He was the villain of the

month because he testified about that.

You talked about deaths of 30,000 people. If they cannot afford

their energy cost and they cannot afford their air conditioning, then

they die. You talked about individuals that lose their jobs. They go

overseas and they do not have the money to pay for health care,

they are not in very good shape.

It is very disturbing to me. It is very typical here in this Congress. We do not really very often put each other’s shoes on and

try to work with each other to figure out how things should be

worked out. That is why we are not really getting very far here.

It is a very frustrating place to be for me as a Governor and as a

Mayor who was able to try to work things out.

Mr. Trisko, I would like you to comment.

Mr. TRISKO. Senator, thank you. In exchange for your remarks,

I will be quite brief on this subject. To paraphrase the gentleman
74

from Tupelo, it is now or never for this legislation. It is now appropriate for the Congress to move a three-pollutant bill. If Congress

delays and there is further inaction, we may lose the opportunity

to realize the benefit of the public health and environmental protections that the bill offers.

Mr. ROGERS. Mr. Chairman, I would like to echo Mr. Trisko’s

comments. I do think now is the time. I think one of the themes

that is consistent among all of us here today—and I have tried to

listen carefully to the themes—one of the themes that emerges is

that the Clean Air Act is not working. It needs to get fixed. Now

is the time to fix it. I think everybody here recognizes that.

My dad was a lawyer. He used to say that the devil was in the

details. My mom quickly responded that God is in the details. The

way I understand this issue I think there are enough details for

the both of them.

I would urge you to roll up your sleeves as you do, and you have,

and you did as a Governor, and go to work. Work through the details, find the right sets of compromises, and go to work so that we

can turn our engineers loose. We can turn our people loose and go

to work and solve the problems in a way that allows us to meet

our energy goals, meet our environmental goals, keep our economy

going, and keep jobs in the U.S. That has to be an important ingredient in this whole discussion.

Senator VOINOVICH. Mr. Hawkins?

Mr. HAWKINS. Senator, if I might make a comment on costs. Of

course you are right. It is important to consider the costs of policies

you adopt. But EPA has done that consideration and it has presented you some of that information. That is more that they have

to present. If requested, perhaps they would do so.

But the analyses that they have conducted, for example, of the

more protective option that the Administration rejected, had a compliance cost of $10 billion a year. Those are EPA’s calculations. The

electric sector revenues in 2020, which is the forecast year, are

$330 billion. So $10 billion is a lot of money. But $10 billion as an

addition to a $330 billion total is a small amount of money. It is

about a 3 percent increase in the cost of generating electricity. That

is not a large amount of money.

The same analysis was done to examine a policy that would have

capped emissions at 75 percent reductions for SOx, NOx, and mercury, and imposed a carbon cap at year 2008 levels. That analysis

was done in response to your request to the Energy Information

Agency back in the spring 2001.

EIA came back and said that that would raise the average electricity rate from 6.7 cents per kilowatt hour to 7.1 cents per kilowatt hour. That is about a 5 or 6 percent increase.

In terms of poor people’s needs, of course those should be addressed. Senator Jeffords’ bill has provisions in it which could be

incorporated into a piece of legislation that calls for establishment

of a public trust that could make funds available for things like

lifeline rates and other purposes to make sure that there is no adverse impact while we actually go about protecting health and

starting to address global warming.

There are ways to solve these problems. We want to work with

you to try to find them.
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Thank you.

Senator VOINOVICH. I do a lot of meeting with people in my

State. We are in a global market place. It is very interesting that

another great cost that they all have is health care costs. They are

competing with other countries that do not have the same health

care costs. You just start adding all of this up. It is not really a

rosy scenario about jobs in this country and where are going. I

think we have to realize that we are in a global market place and

that the environmental concerns that we have also have to be balanced with the economic concerns of the people in our country.

Senator Carper has one more question. I think we will then wrap

it up.

Senator CARPER. Thank you, Mr. Chairman.

In your testimony, Mr. Colburn, I believe you said—and I am

going to paraphrase you—you said that carbon does not need to be

onerous. It does need to be in the bill.

Give us some idea of the approach you would have us take with

respect to carbon.

Mr. COLBURN. Senator, I think that even the greatest trading

foes admit that trading of carbon dioxide does make sense because

its impact is global. There are no local impacts from climate

change. It is all global impact. There are impacts that happen locally, of course. But carbon dioxide’s impact on climate change is

a global concern.

While many horror stories have been suggested about carbon

taxes or carbon control costs in the $25, $50, or $100 range per ton,

I think an effective mechanism could be established—probably

through a cap, but a lenient enough cap such that the effective

price of carbon were very small at a very small cost. I would rhetorically argue for perhaps 25 cents per ton.

The important thing is what you said before, Senator: Markets

work. Well, if markets work, let us get carbon in the market. Let

us not pat it on the head and give it some technology development

money and shoo it away. Let us get it in the market. Let us do so

in a way that is not terribly onerous with a cap that does not create a substantive burdens for Mr. Rogers’ company and other utilities. But let us let the market work on carbon.

Senator CARPER. Senator Voinovich was talking earlier about the

economic impact of what we are discussing here. To the extent that

we drive up the cost of energy for our consumers, including for industry, manufacturing businesses as well, there is a concern that

we hasten the exodus of manufacturing jobs from this country. We

ought to be concerned about that. I know that I am. We ought to

be concerned about the out-of-pocket costs for consumers for buying

their electricity. We are all mindful of that.

Earlier I said in my questioning of another witness, that the

Clean Energy Group has actually done an analysis of a 4–P bill

which includes carbon dioxide, and concluded that if we added a

fourth pollutant, carbon dioxide—to a 3–P bill, SOx, NOx, and mercury—that we would see over the next 15 or so years an increase

of about 1.5 percent the cost of adhering to emissions requirements.

It is not free, but it is 1.5 percent. It does provide a measure of

certainty. To this Senator and former Governor who cares a lot

about economic development and maintaining jobs, where do we do
76

reach a tradeoff? What is acceptable—a 1.5 percent increase? Those

are not my numbers. Those are the numbers from the Clean Energy Group.

But to have the kind of certainty and arguably taking real steps

toward addressing global warming, is that an unreasonable tradeoff? I would ask any of our witnesses to respond. Mr. Trisko?

Mr. TRISKO. Senator, my first question with respect to the economic impact that you cited from that study was whether the

Clean Energy Group had analyzed the impact of the proposal nationally or whether that was an impact related to its generation

sources. The Clean Energy Group is primarily fueled by oil, nuclear, and natural gas. It has some coal generation, but it is not

representative of the Nation’s coal-fired utilities.

Senator CARPER. I understand that it is national. It is not just

the Clean Energy Group. It is national, which I think makes it

even more of significance to us.

Mr. TRISKO. One of my previous responses to the committee’s

questions encouraged the committee to pursue analyses through

EIA, EPA, and others, of alternative approaches. We would certainly be interested in seeing that study when it is released.

My second point with respect to the reasonableness of the impacts is from a more global perspective. I have attended every

international negotiation session since the Rio Treaty was negotiated in 1992—Geneva, Bonn, Kyoto, Buenos Aires and others.

We have in the climate change arena an extremely serious breakdown of the negotiation process that must be remedied. If you believe in the seriousness of the problem, and you believe the science

in all good faith, that international breakdown must be remedied

if progress is to be made on this front. The developing countries,

led by the G–7 and China, essentially have repudiated any effort,

however offered in good faith to discuss future limits on the growth

of their emissions. These are not absolute constraints or cutbacks

or rollbacks, but merely to discuss future limits on the growth rates

of their emissions.

The United States put forward an ‘‘evolution’’ proposal in Kyoto

in 1997 that said, ‘‘Listen, we, Annex One industrial countries, we

are meeting here in order to agree on substantive emissions reductions. But we have a political problem. Recognize our political problem. We cannot go back to our capitals. We cannot go back to

Washington empty-handed and say, we have just agreed to negotiate among ourselves—Europe, the United States, and Japan—a

set of emission reductions. We need to have some sign from you,

from India, from China, from Brazil, from Korea, from Mexico. We

need some sign that after we meet our reductions, that you will

then be willing to sit down and talk about future limits so that we

can have a global agreement.’’

That proposal, which we put forward through New Zealand—

they tend to be more articulate than we are, and they sound a lot

more diplomatic—that proposal triggered a 5-hour filibuster. It

subsequently led to the removal of the issue of evolution from future United Nations meetings. We must solve this fundamental

problem at a global level before we can make progress on the issue

of climate change.
77

Senator CARPER. I think that is a good cautionary note. I do not

know these numbers off the top of my head. It would be interesting

to know, to the extent that there is carbon dioxide that is emitted

from manufacturers, from utilities, and from other sources, what

portion of global CO2 emissions from the U.S. versus some of the

other nations that you have mentioned.

That does not take away from the validity of the point that I

think you are making.

Mr. Hawkins, do you have a closing comment?

Mr. HAWKINS. Yes, I agree with Eugene Trisko that we need to

have an effective strategy for addressing the engagement with developing countries. But sitting back and telling them that they

should shape up is not an effective strategy. An effective strategy

is using good old fashion American know-how, applying it to the

job, showing the world that it is easier to solve this problem than

they think, and that they need not be afraid of it. We can do that.

We have the capacity in this country, the biggest economic power

on earth, to prove out these technologies. When you are out of the

room, Senator, I mentioned the Motiva Refinery in your own State,

which is operating gasification technology to convert a filthy fuel,

petroleum coke, into a clean energy source. That same technology

can be used, and would be used, if we start to apply the market

signal that Ken Colburn is talking about.

When we do that, we will have something to talk to China and

India about. China is going to build 500 gigawatts of new coal-fired

capacity in the next 30 years. We will have something to talk to

them about. We will say, ‘‘Look what we are doing in the United

States. We are evolving into modern technology. We are going to

use our coal without messing up the planet with climate change.

You can do it, too.’’ We are actually demonstrating that it is affordable. That is what

we can do and that is how we can start to break these logjams.

Senator CARPER. In response to what Mr. Hawkins has said, we

worry a lot about the exporting of manufacturing jobs. I know I do.

I know others do. Would it not be great if we could somehow export

technology to address these kinds of concerns.

Mr. Rogers, your quick comment.

Mr. ROGERS. Senator, let me make an observation with respect

to that study. While I have not studied it in great detail, I would

observe that it is a national number. Let us not forget that any

kind of legislation that adversely affects coal is going to have a disproportionate impact on the Midwest and the Southeast.

I think we really need to keep that in mind. Since I am in the

Midwest, I know we serve the steel industry, the auto industry,

and the chemical industry. They are going to be adversely impacted

in a dramatic way.

While it is interesting to have a national number, when you look

at the Midwest where 80 percent of its energy comes from the

burning of coal, we need to remember it is going to have a disproportionate impact on that part of our economy. That is the industrial heartland of this country.

With respect to the whole carbon issue worldwide, let us not get

fooled with even the European countries. While they stepped up

and gave lip service to Kyoto, countries like Germany, for instance,
78

have agreed with the Green Party to shut down their nuclear units.

How are they going to serve their demand in that country and reduce their emissions? They will not and they cannot.

The same is true with Spain. We used to own wind farms in

Spain. We saw that they started to change how they dispatch renewable. We started to discount it. We sold our assets and left.

While they pay lip service to it, the reality is that their day-to-day

behavior indicates anything but the capability to achieve those targets. We need to be circumspect in our approach and not get

tricked by the lip service that others may pay.

Senator CARPER. Mr. Chairman, I have no more questions.

I would like to make a quick brief comment. I am encouraged by

today’s hearing. I am encouraged by what I have heard here and

in other earlier witnesses. I am encouraged by the kind of comments that Mr. Rogers made today and his comments of September

2001. He spoke with sincerity then and today.

Mr. Trisko’s explanation and description of the kind of new technology which would enable us to pull coal out of places like West

Virginia and to use it in its abundance in ways that do not harm

our environment and our air in the way they do.

Jim Riley, who sits right behind me, reminded me of a visit that

we paid to W.L. Gore. They make Gortex, but they make a lot of

other products as well, including an infiltration system that is

being used on a demonstration model down in North Carolina. The

demonstration project is run by the EPA. They are removing mercury out of the air emissions by more than 95 percent. I am encouraged by that kind of technology and the potential of what they can

mean to us for cleaner air, and at the same time to enable us to

stay in business and to be competitive as a Nation.

Each and every one of you is most welcome. Thank you all.

Senator JEFFORDS. Mr. Chairman, I have a question. I ask that

three documents we have be made a part of the record. It is an

analysis of the bill and two lists of studies of mercury.

Senator VOINOVICH. Without objection.

[Material to be supplied follows:]

Senator VOINOVICH. Mr. Melewski, do you have a quick statement to finish up?

Mr. MELEWSKI. Yes, I have a quick statement. It is a more esoteric observation about climate change.

I testified today that in 1998 we were here and had asked for

similar changes to the Clean Air Act. My recollection is that the

representative from Cinergy testified that it saw no reason to see

a change in the Clean Air Act. Now we are here with Mr. Rogers

5 years later. We are both asking this committee to work together,

to put a bill together, and move it to the floor. I think that is a

significant climate change.

Mr. TRISKO. Evolution.

Senator VOINOVICH. Mr. Rogers said to us today, ‘‘It is time to

move forward.’’

With that, we are adjourned.

[Whereupon, at 5:08 p.m., the committee was adjourned, to reconvene at the call of the chairman.]

[Additional statements submitted for the record follow:
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1Except where otherwise noted, the projected emission levels, costs and benefits in this testimony are all based on analyses of the Clear Skies Act of 2002 conducted in 2002. EPA is currently analyzing the Clear Skies Act of 2003 using updated modeling assumptions and other

updated information. We expect that the new analyses will be very similar to the 2002 analyses,

but specific projections will likely change somewhat.

STATEMENT OF HON. CHRISTINE TODD WHITMAN, ADMINISTRATOR, U.S.

ENVIRONMENTAL PROTECTION AGENCY

I. INTRODUCTION

Thank you, Mr. Chairman and Members of the committee for the opportunity to

speak with you today about the Clear Skies Act of 2003. Based on one of the most

successful programs created by the Clean Air Act, Clear Skies is a proposal to substantially reduce emissions of the three most harmful pollutants from power generation and to do so in a way that is much faster and more efficient than under current

law. As President Bush said in the State of the Union Address, Clear Skies will advance our goal of ‘‘promot[ing] energy independence for our country, while dramatically improving our environment.’’ The Administration is committed to working with

this Subcommittee and Congress to pass legislation this year. The widespread support for multi-pollutant legislation to reduce power plant emissions is a strong indicator that the time for action on this critical issue is now. Failure to enact Clear

Skies this year will delay important public health and environmental benefits.

This country should be very proud of the progress we have already made in cleaning up our air. Since the Clean Air Act was first enacted in 1970, we have reduced

emissions of the six primary air pollutants by 25 percent. During the same time period, the economy has grown significantly the Gross Domestic Product increased 160

percent; vehicle miles traveled increased 150 percent; energy consumption increased

40 percent; and the U.S. population increased 35 percent.

Although we have made much progress since 1970, we still face major air quality

challenges in many parts of the country. Clear Skies is the most important next step

we can take to address these challenges and achieve healthy air and a clean environment for all Americans. Clear Skies would make great strides toward solving our

remaining air quality problems in a way that also advances national energy security

and promotes economic growth. It would reduce power plant emissions of SO2, NOx

and mercury by approximately 70 percent from today’s levels and do it faster, with

more certainty, and at less cost to American consumers than would current law.

Last year’s EPA estimates project that, over the next decade, all the programs of

the existing Clean Air Act would reduce power plant emissions of SO2 and NOx by

approximately 23 million tons. Over the same time period, Clear Skies would reduce

emissions of these same pollutants by 58 million tons a reduction of 35 million tons

of pollution that will not be achieved under current law1.

When fully implemented, Clear Skies would prolong thousands of lives each year,

providing billions of dollars in economic benefits, save millions of dollars in health

care costs, and increase by millions the number of people living in areas that meet

our new, more stringent health-based national air quality standards. Clear Skies

would also virtually eliminate chronic acidity in northeastern lakes, reduce nitrogen

loading in coastal waters, and help restore visibility in our national parks.

The Clean Air Act has been, and continues to be, a vehicle for great progress in

improving the health and welfare of the American people. The Clear Skies Act substantially expands one of the most successful Clean Air Act programs the Acid Rain

Program and reduces the need to rely on complex and less efficient programs. The

result would be significant nationwide human health and environmental benefits;

certainty for industry, States and citizens; energy security; and continuing low costs

to consumers.

II. CLEAR SKIES PROVIDES SIGNIFICANT BENEFITS

The heart of Clear Skies is a proven cap-and-trade approach to emissions reductions. Mandatory caps restrict total emissions and decline over time. Clear Skies

would continue the existing national cap-and-trade program for SO2, but dramatically reduce the cap from 9 million to 3 million tons. Clear Skies would also use

a national cap-and-trade program for mercury that would reduce emissions from the

current level of about 48 tons to a cap of 15 tons, and would employ two regional

cap-and-trade programs for NOx to reduce emissions from current levels of 5 million

tons to 1.7 million tons. The specific caps and their timing are set forth in Table

1.
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Table 1. Clear Skies Emission Reductions Timetable

Actual Emissions in 2000

Clear Skies Emissions Caps Total Reduction at Full Implementation First Phase of Reductions Second Phase of Reductions

SO2 ................. 11.2 million tons .......... 4.5 million tons in

20101.

3 million tons in 20181 73%

NOx2 ................ 5.1 million tons ............ 2.1 million tons in

20081.

1.7 million tons in

20181.

67%

Mercury ........... 48 tons .......................... 26 tons in 2010 ............ 15 tons in 20181 .......... 69%

1Because sources can reduce emissions early, earn allowances for those actions, and use those allowances later, actual emission levels

will be higher than the cap in the first years of these phases. 2The NOx cap is divided between two zones with separate trading programs under each zone. Zone 1 includes the 31 eastern states in the continental U.S. and eastern Texas. Zone 2 includes the remaining states participating in the WRAP process as well as Nebraska, Kansas,

Oklahoma, and some of Western Texas.

Although national in scope, Clear Skies recognizes and adjusts for important regional differences in both the nature of air pollution and the relative importance of

emissions from power generation. The eastern half of the country needs reductions

in NOx emissions to help meet the ozone and fine particle standards, which generally are not an issue in the western half of the county (with the exception of California, which does not have significant emissions from existing coal-fired power

plants). The western half of the country needs NOx reductions primarily to reduce

the regional haze that mars scenic vistas in our national parks and wilderness

areas, and the nitrogen deposition that harms fragile forests. Recognizing these regional differences, Clear Skies would establish two trading zones for NOx emissions

and prohibit trading between the zones to ensure that the critical health-driven

goals in the East are achieved.

Clear Skies also recognizes the special visibility protection measures that have

been developed by States participating in the Western Regional Air Partnership

(WRAP). Clear Skies would essentially codify the WRAP’s separate SO2 backstop

cap-and-trade program, which would come into effect only if the WRAP States did

not meet their 2018 SO2 emissions targets.

Finally, Clear Skies requires tough, technology-based new source standards on all

new power generation projects and maintains special protections for national parks

and wilderness areas when sources locate within 50 km of ‘‘Class I’’ national parks

and wilderness areas.

Significant Public Health and Environmental Benefits

The public health and environmental benefits of Clear Skies present compelling

reasons for its immediate passage. EPA projects that, by 2010, reductions in fine

particle and ozone levels under Clear Skies would result in billions of dollars in

health and visibility benefits nationwide each year, including as many as 6,400 prolonged lives. Using an alternative methodology, 3,800 lives would be prolonged by

2010. Under EPA’s base methodology for calculating benefits, Americans would experience significant benefits each year by 2020, including:

• 12,000 fewer premature deaths (7,000 under an alternative analysis),

• 11,900 fewer visits to hospitals and emergency rooms for cardiovascular and

respiratory symptoms,

• 370,000 fewer days with asthma attacks, and

• 2 million fewer lost work days.

Using the alternative methodology, by 2020 Americans would experience 7,000

fewer premature deaths each year.

Methodologies do not exist to quantify or monetize all the benefits of Clear Skies.

Still, it is clear that the benefits far exceed the costs. EPA estimates that the health

benefits we can quantify under Clear Skies are worth $93 billion annually by

2020—substantially greater than the annual costs of approximately $6.5 billion. An

alternative approach projects annual health benefits of $11 billion, still significantly

outweighing the costs. The Agency estimates an additional $3 billion in benefits

from improving visibility at select National Parks and Wilderness Areas. These estimates do not include the many additional benefits that cannot currently be monetized but are likely to be significant, such as human health benefits from reduced

risk of mercury emissions, and ecological benefits from improvements in the health

of our forests, lakes, and coastal waters.

Clear Skies would achieve most of these benefits by dramatically reducing fine

particle pollution caused by SO2 and NOx emissions, which is a year-round problem.

Of the many air pollutants regulated by EPA, fine particle pollution is perhaps the

greatest threat to public health. Hundreds of studies in the peer reviewed literature
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2These numbers are based on the most current monitoring data available to EPA. It is more

current than the data that was available at the time that EPA conducted its analyses last year

of the Clear Skies Act of 2002. The newer data confirms that we have serious air quality problems in many counties, but it shows improvement—fewer counties violating the ozone and fine

particle standards. As a result, compared to last year’s analyses, the new analyses may show

less residual non-attainment (counties out of attainment in 2010 and 2020).

have found that these microscopic particles can reach the deepest regions of the

lungs. Exposure to fine particles is associated with premature death, as well as

asthma attacks, chronic bronchitis, decreased lung function, and respiratory disease.

Exposure is also associated with aggravation of heart and lung disease, leading to

increased hospitalizations, emergency room and doctor visits, and use of medication.

By reducing NOx emissions, Clear Skies also would reduce ozone pollution in the

eastern part of the country and help keep ozone levels low in the western portion

of the country. Ozone (smog) is a significant health concern, particularly for children

and people with asthma and other respiratory diseases who are active outdoors in

the summertime. Ozone can exacerbate respiratory symptoms, such as coughing and

pain when breathing deeply, as well as transient reductions in lung function and

inflammation of the lung. Ozone has also been associated with increased hospitalizations and emergency room visits for respiratory causes. Repeated exposure

over time may permanently damage lung tissue.

Current estimates indicate that more than 350 counties fail to meet the healthbased fine particle and ozone standards. As a result, 45 percent of all Americans

live in counties where monitored air was unhealthy at times because of high levels

of fine particles and ozone.2 Clear Skies, in combination with existing control programs, would dramatically reduce that number, as shown in Figure 1. In areas

where attainment is not projected, Clear Skies would assist those areas in addressing the air quality problems. Even counties currently measuring attainment would

benefit from the reductions under Clear Skies. Throughout the West, Clear Skies

would hold emissions from power plants in check, preserving clean air in highgrowth areas and preventing degradation of the environment, even as population

and electricity demand increase.
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Clear Skies would also reduce mercury emissions from power plants. EPA is required to regulate mercury because EPA determined that mercury emissions from

power plants pose an otherwise unaddressed significant risk to health and the environment, and because control options to reduce this risk are available. Mercury, a

potent toxin, can cause permanent damage to the brain and nervous system, particularly in developing fetuses when ingested in sufficient quantities. People are exposed to mercury mainly through eating fish contaminated with methylmercury.

Mercury is released into the environment from many sources. Mercury emissions

are a complex atmospheric pollutant transported over local, regional, national, and

global geographic scales. EPA estimates that 60 percent of the mercury falling on

the U.S. is coming from current man-made sources. Power generation remains the

largest man-made source of mercury emissions in the United States. In 1999, coalfired power plants emitted 48 tons of mercury (approximately 37 percent of manmade total). These sources also contribute 1 percent of mercury to the global pool.
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Mercury that ends up in fish may originate as emissions to the air. Mercury emissions are later converted into methylmercury by bacteria. Methylmercury accumulates through the food chain: fish that eat other fish can accumulate high levels of

methylmercury. EPA has determined that children born to women who may have

been exposed to high levels may be at some increased risk of potential adverse

health effects. Prenatal exposure to such levels of methylmercury may cause developmental delays and cognitive impairment in children. Clear Skies will require a

69 percent reduction of mercury emissions from power plants.

In addition to substantial human health benefits, Clear Skies would also deliver

numerous environmental benefits. For example, under Clear Skies, we project that

10 million fewer pounds of nitrogen would enter the Chesapeake Bay annually by

2020, reducing potential for water quality problems such as algae blooms and fish

kills. In fact, the Chesapeake Bay States, including NY, VA, MD, PA, DE, WV and

DC, recently agreed to incorporate the nitrogen reductions that would result from

Clear Skies legislation as part of their overall plan to reduce nutrient loadings to

the Bay. Clear Skies would also accelerate the recovery process of acidic lakes, virtually eliminating chronic acidity in many Northeastern lakes. For decades fish in

the Adirondacks have been decimated by acid rain, making many lakes completely

incapable of supporting populations of fish such as trout and smallmouth bass. The

Acid Rain Program has allowed some of these lakes and the surrounding forests to

begin to recover; Clear Skies would achieve additional needed reductions. Clear

Skies would also help other ecosystems suffering from the effects of acid deposition

by preventing further deterioration of Southeastern streams. Finally, Clear Skies

would improve visibility across the country, particularly in our treasured national

parks and wilderness areas.

Clear Skies is designed to ensure that these public health and environmental benefits are achieved and maintained. By relying on mandatory caps, Clear Skies would

ensure that total power plant emissions of SO2, NOx and mercury would not increase over time. This is a distinct advantage over traditional command-and-control

regulatory methods that establish source-specific emission rates but which allow

total emissions to increase over time. Like the Acid Rain Program, Clear Skies

would have much higher levels of accountability and transparency than most other

regulatory programs. Sources would be required to continuously monitor and report

all emissions, ensuring accurate and complete emissions data. If power plants emit

more than allowed, financial penalties are automatically levied without the need for

an enforcement action. More importantly, every ton emitted over the allowed

amount would have to be offset in the following year, ensuring no net environmental

harm. This high level of environmental assurance is rare in existing programs;

Clear Skies would make it a hallmark of the next generation of environmental protection.

Reasonable Costs and Energy Security for Consumers and Industry

The President directed us to design Clear Skies to meet both our environmental

and our energy goals. Under Clear Skies, electricity prices are expected to remain

at or below current levels over the next decade. Our extensive economic modeling

of the power industry looked at a broad array of factors to gauge the effects of Clear

Skies on the energy industry and they all show that cleaner air and energy security

can go hand-in-hand.

Clear Skies would maintain energy diversity. With Clear Skies, coal production

for power generation would be able to grow by almost 10 percent from 2000 to 2020

while air emissions are significantly reduced. EPA’s extensive economic modeling for

Clear Skies demonstrates that the proposal’s emission reductions would be achieved

primarily through retrofitting controls on existing plants. Clear Skies’s timeframe

and certainty enable the power sector to meet aggressive emission reduction targets

without fuel switching. This is important not only to power generators and their

consumers who want to continue to rely on our most abundant, reliable, affordable

and domestically secure source of energy, but also to other consumers and industries

whose livelihoods could be hurt by a rise in natural gas prices. Our analysis shows

that Clear Skies would not cause a significant increase in natural gas prices.

Under Clear Skies by 2010, about three-fourths of U.S. coal-fired generation is

projected to come from units with billions of dollars of investment in advanced SO2

and/or NOx control equipment (such as scrubbers and Selective Catalytic Reduction,

which also substantially reduce mercury emissions). In 2020, the percentage is projected to rise to 85 percent. Cost effective strategies and technologies for the control

of sulfur dioxide and nitrogen oxides emissions exist now, and thanks in good part

to the Clear Skies market-based system improved methods for these pollutants, and

for mercury, are expected to become increasingly cost-efficient over the next several

years. In fact, the Institute of Clean Air Companies forecasts that the U.S. markets
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for most technology sectors will remain fairly strong, adding momentum to the air

pollution control technology industry. We expect that the Clear Skies Act will provide great benefits to American jobs in the engineering and construction industries.

One of the key reasons Clear Skies would be cost-effective is its reliance on capand-trade programs. Like the Acid Rain Program upon which it is based, Clear

Skies would give industry flexibility in how to achieve the needed emission reductions, which allows industry to make the most cost-effective reductions and pass

those savings on to consumers. Power plants would be allowed to choose the pollution reduction strategy that best meets their needs (e.g., installing pollution control

equipment, switching to lower sulfur coals, buying excess allowances from plants

that have reduced their emissions beyond required levels). Like the Acid Rain program, Clear Skies includes banking provisions, enabling companies to save unused

allowances for future use. Banking creates a tangible, quantifiable, economic incentive to decrease emissions beyond allowable levels, which EPA projects will result

in significant early benefits due to over-compliance in the initial years, particularly

for SO2. It also leads to gradual emissions reductions over time, and therefore a less

disruptive transition to tighter emission controls needed to address lingering problems. Based on past experience under the Acid Rain Program, by placing a monetary value on avoided emissions, Clear Skies would stimulate technological innovation, including efficiency improvements in control technology, and encourage early

reductions.

Assistance to State and Local Governments

Under the current Clean Air Act, State and local governments face the daunting

task of meeting the new fine particle and ozone standards. Clear Skies would substantially reduce that burden. By making enormous strides toward attainment of

the fine particle and ozone standards, Clear Skies would assist State and local governments in meeting their obligation under the Clean Air Act to bring areas into

attainment with these health-based standards, and provide Americans with cleaner

air.

Clear Skies’ assistance to States goes beyond ensuring that power plants will reduce their emissions. Clear Skies relies on a common-sense principle if a local air

quality problem will be solved in a reasonable timeframe by the required regional

reductions in power plant emissions, we should not require local areas to adopt local

measures. Under Clear Skies, areas that are projected to meet the ozone and fine

particles standards by 2015 as a result of Clear Skies would have a legal deadline

of 2015 for meeting these standards (i.e., will have an attainment date of 2015).

These areas would be designated ‘‘transitional’’ areas, instead of ‘‘nonattainment’’ or

‘‘attainment,’’ and would not have to adopt local measures (except as necessary to

qualify for transitional status). They would have reduced air quality planning obligations and would not have to administer more complex programs, such as transportation conformity, nonattainment New Source Review, or locally based progress or

technology requirements in most circumstances.

III. IMPROVING THE CLEAN AIR ACT WITH CLEAR SKIES

Clear Skies would improve the Clean Air Act in a number of ways. It would build

on the proven portions of the Clean Air Act like the national ambient air quality

standards and the Acid Rain Program and reduce reliance on complex, less efficient

requirements like New Source Review for existing sources. The mandatory emissions caps at the heart of Clear Skies guarantee that reductions will be achieved

and maintained over time. In contrast, uncertainties with respect to regulatory development, litigation, and implementation time make it difficult to estimate how

quickly and effectively current regulations would be implemented under the current

Clean Air Act. The level of SO2 and NOx reductions we expect over the next decade

with Clear Skies legislation could not be achieved under the existing Act. After that,

we know that Clear Skies would achieve significant reductions, while both the timing and level of reductions under the current Clean Air Act are unclear.

Early Reductions

One of the major reasons we need Clear Skies now is that adoption of Clear Skies

would provide greater protection over the next decade than the traditional regulatory path. The Clear Skies Act will result in significant over-compliance in the

early years, particularly for SO2, because sources are allowed to bank excess emissions reductions. For reasons described below, our analyses indicate that the cumulative SO2 and NOx emissions reductions achieved by Clear Skies over the next decade would not be achieved in the same timeframe under the current Clean Air Act.

Last year’s EPA estimates project that power plants would emit 35 million fewer

tons of NOx and SO2 over the next decade under Clear Skies than they would under
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the current Clean Air Act this more than doubles the reductions otherwise expected

and would ensure significantly larger human health and environmental benefits.

Our analysis suggests that the amount of pollution controls that the industry will

have to install under Clear Skies over the next decade will stretch the limits of

available labor and other construction resources, but can in fact be accomplished

while maintaining energy reliability and continuing the downward trend in electricity prices.

Legislation Now Is Better than Regulation Followed by Years of Litigation

Even if Clear Skies is not passed by Congress, power plants will be required to

reduce their emissions of SO2, NOx and mercury. There is no more cost effective

way than Clear Skies to meet the requirements of the current Clean Air Act or to

achieve our public health and environmental goals. We know that, absent new legislation, EPA and the States will need to take a number of regulatory actions, although it is unclear now when the requirements will come into effect or what their

control levels will be.

Clear Skies has several benefits over the regulatory scheme that will otherwise

confront power generators. Clear Skies is designed to go into effect immediately

upon enactment. Power plants would immediately understand their obligations to

reduce pollution and would be rewarded for early action. As a result, public health

and environmental benefits would begin immediately. Given Clear Skies’ design, it

is unlikely that litigation could delay the program (particularly since Congress

would decide the two most controversial issues the magnitude and timing of reductions). In contrast, under the current Clean Air Act, power plants would not know

what their obligations would be until after EPA and States started and completed

numerous rulemakings.

Past experience suggests that litigation delays on the regulatory path are likely.

Our experience with two cap-and-trade programs the legislatively created Acid Rain

Trading Program and the administratively created NOx SIP Call illustrates the benefits of achieving our public health and environmental goals with legislation rather

than relying solely on existing regulatory authority.

Though we project a great deal of benefits will arise from implementation of the

NOx SIP call, the journey has been difficult and is not yet over. The NOx SIP call

was designed to reduce ozone-forming emissions by one million tons across the eastern United States. The rulemaking was based on consultations begun in 1995

among States, industry, EPA, and nongovernmental organizations. A Federal rule

was finalized in 1998. As a result of litigation, one State was dropped and the 2003

compliance deadline was moved back for most States. Most States are required to

comply in 2004, although two States will have until 2005 or later. Meanwhile,

sources in these States continue to contribute to Eastern smog problems. Although

the courts have largely upheld the NOx SIP Call, the litigation is not completely

over. Industry and State challenges to the rules have made planning for pollution

control installations difficult, raised costs to industry and consumers, and delayed

health and environmental benefits.

In contrast, reductions from the Acid Rain Program began soon after it passed

(even before EPA finalized implementing regulations). There were few legal challenges to the small number of rules EPA had to issue and none of the challenges

delayed implementation of the program. The results of the program have been dramatic and unprecedented. Compliance has been nearly 100 percent. Reductions in

power plant SO2 emissions were larger and earlier than required, providing earlier

human health and environmental benefits. Now, in the ninth year of the program,

we know that the greatest SO2 emissions reductions were achieved in the highest

SO2-emitting States; acid deposition dramatically decreased over large areas of the

eastern United States in the areas where they were most critically needed; trading

did not cause geographic shifting of emissions or increases in localized pollution (hot

spots); and the human health and environmental benefits were delivered broadly.

The compliance flexibility and allowance trading has reduced compliance costs by

75 percent from initial EPA estimates.

[See 2001 Acid Rain Program Progress Report submitted for the record.]

It is clear from this example that existing regulatory tools often take considerable

time to achieve significant results, and can be subject to additional years of litigation before significant emissions reductions are achieved. Under this scenario, there

are few incentives to reduce emissions until rules are final and litigation is complete, posing potentially significant delays in achieving human health and environmental benefits.

The Clean Air Act contains several provisions under which EPA will be required

to impose further emission controls on power plants in order to allow States to meet

the new national ambient air quality standards (NAAQS) for PM2.5 and ozone. For
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example, Section 126 of the Clean Air Act provides a petition process that States

can use to force EPA to issue regulations to reduce emissions of SO2 and NOx from

upwind sources, including power plants. A number of States have indicated that

they intend to submit Section 126 petitions in the near future. However, compared

to Clear Skies, this approach will almost certainly involve years of litigation and uncertainty about reduction targets and timetables.

Additional reductions are required from power plants through the regional haze

rule’s BART (Best Available Retrofit Technology) requirements and forthcoming

mercury MACT (maximum achievable control technology) requirements. EPA is required to propose by the end of 2003 a MACT standard for utility mercury emissions

that must be met, plant-by-plant, by every coal-fired utility with unit capacity above

25 megawatts. EPA is required to finalize this rule by the end of 2004. The Act generally gives sources 3 years within which to comply with MACT standards. This

compliance obligation could be delayed by a court if EPA’s rule is challenged.

Because these regulations will be the product of separate Federal, State and judicial processes, comparable health and environmental protection is likely to cost more

under the current Clean Air Act than under Clear Skies. EPA estimates that a comprehensive, integrated approach relying on cap-and-trade programs could reduce

costs by one fourth as compared to the regulatory approach achieving comparable

emission reductions. These cost savings would be passed on to the public through

lower electricity prices and greater profitability to investors and owners of electric

generation.

New Source Review

Some have suggested that Clear Skies is an attempt to undermine the Clean Air

Act. This is simply not true. To achieve the next generation of environmental

progress, we must build on the successful provisions in laws that have served us

well and learn from those provisions that have not served us well, or have had only

limited success. New Source Review (NSR) is an example of a program that EPA

and stakeholders have long recognized is not working well.

There is a misconception that the principle goal of the NSR program is to reduce

emissions from power plants. This is simply incorrect. Reducing emissions from

power plants is the principle goal of Clear Skies. The NSR program is triggered only

when facilities emitting large amounts of air pollution are built, and when modifications at these facilities result in significant increases in air pollution. The NSR program is not designed to result in nationwide reductions of air pollution from power

plants. When it comes to reducing harmful air emissions from power plants, Clear

Skies would accomplish more than NSR.

Clear Skies would significantly modify the NSR program for power plants, but

contain some important backstops. We expect that existing power plants would not

have to go through NSR for modifications. New sources would no longer have to go

through the entire NSR process, but some aspects of the process would still apply.

Although we believe that with a tight cap on emissions, new sources will always

install good controls, we did not want to run the risk that a new source would be

uncontrolled. Therefore, as a backstop, Clear Skies would require all new power

plants to meet New Source Performance Standards that are set in the statute.

In addition, new power generators locating within 50 km of a Class I area (e.g.,

national parks or wilderness areas) would still be subject to the current NSR requirements for the protection of those areas. Finally, new power plants will also

have to meet the current NSR requirements that they will not cause or contribute

to a violation of the national ambient air quality standards.

IV. WINDOW OF OPPORTUNITY

Because of the lessons learned over the last decade, there is increasing support

for legislation such as Clear Skies that would significantly reduce and cap power

plant emissions and create a market-based system to minimize control costs. From

environmental groups to coal companies, there is increasing broad-based support

demonstrating that multipollutant legislation is a preferable path to cleaner air.

Such an approach would address an array of air pollution concerns associated with

power generation—including fine particles, smog, mercury deposition, acid rain, nitrogen deposition, and visibility impairment—at lower cost and with more certainty

than currently allowed by the Clean Air Act.

The Acid Rain Program is widely accepted as one of the most effective air pollution programs ever adopted and has consequently attracted worldwide attention and

emulation. The Program’s track record has encouraged Congress to consider broader

applications of cap-and-trade programs to address multiple air pollutants. The common elements of the proposals considered by Congress are mandatory caps on emis-
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sions of multiple pollutants from the power generation sector, implemented through

allowance trading programs modeled after the Acid Rain Program.

There is no better time for Congress to be considering multipollutant legislation.

President Bush has indicated that Clear Skies is his top environmental priority. The

number of proposals being considered by Congress also indicates a consensus behind

the basic idea of a multipollutant cap-and-trade approach. The Large Public Power

Council, Edison Electric Institute, Adirondack Council, and numerous individual

utilities have all expressed support for the scope and framework of Clear Skies. If

legislation passes quickly, we will begin achieving emissions reductions and related

health benefits now. Congress needs to act now so that we do not lose a decade’s worth of health and environmental benefits from reducing fine PM pollution, smog,

acid deposition, nitrogen deposition, and regional haze. Further, as EPA continues

to implement additional forthcoming regulations under the existing framework of

the Act, the likelihood of our ability to pursue an integrated program diminishes

and with it diminish the numerous advantages that I have delineated today of an

approach like Clear Skies.

Legislation is also needed now to help States with their air quality planning and

provide incentives for industry innovation, which, in turn, would lower costs and

emissions. Such incentives are particularly compelling this year as we approach the

task of reducing mercury emissions from the power industry. If designed correctly,

legislation could provide the incentive that spurs technological innovation. When

stringent yet flexible mechanisms exist, substantial technological improvements and

steady reductions in control costs can be expected to follow.

Congress obviously has much to consider as it weighs Clear Skies and other

multipollutant proposals this year. We anticipate and welcome a rigorous and

healthy debate on these issues.

RESPONSES OF HON. CHRISTINE TODD WHITMAN TO ADDITIONAL QUESTIONS FROM

SENATOR JEFFORDS

Question 1. In the last 4 years, has EPA performed any modeling or possess information which suggests that lower levels of emissions of SOx, NOx, and mercury,

than would be achieved by implementation of the Clear Skies legislation are feasible

and could be achieved with less than a $5 billion annual incremental cost beyond

the cost of Clear Skies? If so, please provide the Committee with the data, including

parsed model runs, and a summary of the data.

Response. During the development of the Clear Skies Act, the Administration

looked at a number of policy options, analyzing air quality and economic impacts

as well as the feasibility of installing the pollution controls necessary to comply with

the environmental requirements. Last year, EPA provided to Congress model outputs, parsed model runs and summary data for each of the multi-pollutant scenarios

that were analyzed for both air quality and economic impacts during the development of Clear Skies. EPA also provided the model outputs, parsed model runs and

summary data for the economic and air quality analysis of Clear Skies that was

done last year.

One of these modeling runs used during the development of Clear Skies is more stringent and has an incremental cost of less than $5 billion in annual costs. However, EPA’s analysis of engineering, labor and capital markets for the power sector

indicates that the ability of this sector to install the level of pollution controls required to meet the first phase requirements of this developmental scenario would

significantly stretch the available labor resources beyond that which is feasible. This

analysis raises concerns over the feasibility of requiring more pollution reduction

than Clear Skies does in its first phase and/or installing controls sooner than the

bill does. Notably, a program faced with a labor shortage would also be much more

expensive, a consideration modeled in the work we supplied Congress. Additionally,

we have found that the timing of the requirements in Clear Skies is an important

part of ensuring the pollution controls can be financed. Enclosed are summary results of our engineering study and financial analysis of Clear Skies for your further

consideration (Attachments 1 and 2).

Question 2. Please provide the Committee with any analysis, including parsed

IPM runs and summaries, that the Agency has performed regarding S. 3135, the

Clean Air Planning Act of 2002. The requested analysis does not need to represent

the official Administration position, the Committee would like to receive whatever

analysis EPA has performed using taxpayers dollars

Response. EPA analyzed S. 3135, the Clean Air Planning Act of 2002, using the

Integrated Planning Model (IPM) for sulfur dioxide (SO2), nitrogen oxides (NOx) and

mercury emissions. EPA analyzed the CO2 provisions in S. 3135 using an off-line
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analysis that relied on the same methodology that EPA used in 2001 to respond to

a request from Senators Smith, Voinovich and Brownback to analyze CO2 components of various multi-emission power plant policy options. We have provided the

modeling outputs and off-line spreadsheet analysis to your staff. EPA does not have

parsed IPM runs for S. 3135.

Question 3. If I understood Mr. Holmstead’s testimony correctly, he indicated that

it is possible that there could be a 1.5 percent cost differential or somewhat more

than that for implementation of S. 485 versus S. 3135, Senator Carper’s bill. Please

explain how larger emissions reductions, including carbon dioxide, could be accomplished with so little difference in cost.

Mr. Holmstead did not testify about the cost differential between S. 485 and S.

3135. However, EPA’s analysis of S. 3135 projected annual costs at about $5.6 billion and $9.0 billion in 2010 and 2020, respectively. This is approximately 53 percent and 38 percent greater than the cost of Clear Skies for those same years (based

on 2002 analyses).

Question 4. Please provide and compare a list of the assumptions used in the IPM

models already run, or in the process of being run, specifically on the Clear Skies

legislative proposal for three different periods: the period prior to introduction of S.

2815, the period prior to introduction of S. 485, and the period following introduction of S. 485.

Response. Extensive documentation regarding the Integrated Planning Model

(IPM), including every model assumption, can be found on EPA’s website (http://

www.epa.gov/airmarkets/epa-ipm/index.html). For the year prior to introduction of

S. 2815 until July 2003, EPA used modeling results from IPM V.2.1 to analyze the

projected economic impacts of that bill. A copy of the main documentation report

for that version of the model is enclosed (Attachment 3). Beginning in July 2003,

EPA has used an updated version of the model in its analysis of S. 485, the Clear

Skies Act of 2003. The documentation of this latest version of IPM (version 2.1.6)

is also enclosed (Attachment 4). This documentation explains all the changes in the

current version of IPM from the earlier version. A summary of all the changes can

be found at the beginning of the document. Since introduction of S. 2815, IPM has

undergone a routine update, and various IPM assumptions were revised. This

version of IPM (V.2.1.6) was used to model S. 485 and continues to be used today.

Documentation for the updated version of IPM can also be found on the website.

Question 5. The Clean Air Act Amendments of 1990 created strict attainment

deadlines in Federal law because the States were having difficulty in controlling regional pollution and achieving healthy air. Why does the Clear Skies legislation propose to loosen and extend attainment deadlines, since that would assure that more

people will live in areas with unhealthier air longer than required by the current

Act?

Response. If enacted, Clear Skies would deliver early human health and environmental benefits almost immediately compared to the current Clean Air Act. Asserting otherwise shows a fundamental misunderstanding of how a cap and trade program works. The cap and trade program would provide incentives to start reducing

emissions immediately. EPA projects that two-thirds of the counties currently out

of attainment with the fine particle standards would come into attainment by 2010

as a result of Clear Skies, the proposed non-road heavy duty diesel rule, and existing State and Federal control programs. Without Clear Skies, only half of those

counties are projected to attain in 2010 based on existing control programs and the

non-road diesel rule.

Areas that are projected to meet the ozone and PM 2.5 standards by 2015 as a

result of Clear Skies and other programs would have a legal deadline of 2015 for

meeting these standards (i.e., will have an attainment date of 2015). These areas

would be designated ‘‘transitional’’ areas.

Question 6. Would Clear Skies require additional legislation in the future to obtain greater reductions in mercury beyond the roughly 70 percent in 2018 (or later)

mandated in the bill, even if good science indicates more aggressive action is needed

to protect public health?

Response. Clear Skies would require approximately a 70 percent decrease in mercury emissions, as it does for SO2 and NOx. It is an expansion of the acid rain trading program, and, as in the acid rain trading program, the Congress holds the sole

power to adjust the caps. Due to the scientific and technological uncertainties regarding mercury, Section 410 of the Clear Skies Act would require a comprehensive

assessment of the Phase II cap for mercury, along with those for SOx and NOx by

2009. This assessment is to include an examination of the latest scientific and technical information related to mercury effects, environmental chemistry, and control
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approaches. Based on that assessment, the Administrator could submit any recommendations to Congress to revise the Phase II caps.

Question 7. Please provide a table comparing the proposed national emission

standards for affected units in section 481 of S. 485 with the emissions performance

required by permit for each new or modified—boiler or integrated gasification combine cycle plant, gas-fired combustion turbine, and any combustion turbine that is

not gas-fired or coal-fired, for the last 5 years.

Response. The Clear Skies Act calls for significant reductions due to the twophased caps. Thus, we believe that the section 481 values are redundant in the long

run. The review of available limited permit data demonstrates a range of values

both below and above levels set in section 481.

The EPA does not maintain a comprehensive record of the details of permit information for new and modified sources. Information is available on some, but not all,

facilities receiving permits over the past 5 years. A partial compilation for new

source permits for new or modified boilers, integrated gasification combine cycle

plants, gas-fired combustion turbines, and combustion turbines is contained in the

National Coal-Fired Utility Projects Spreadsheet. This compilation of information,

supplied by all 10 EPA Regions, about new utility projects was updated in May

2003, and can be accessed at http://www.epa.gov/ttn/catc/products.html#misc.

Question 8 What are the average emission rates for NOx and SOx for new coalfired power plants permitted over the last 5 years? What are the averages for modifications at existing coal-fired power plants permitted in the same period?

Response. In general the NSR program has been delegated to States, therefore

EPA does not track all permit applications for new or modified coal plants. See

question 7 for more details. Based on the permit information available, new coal

plants have been permitted at NOx levels ranging from approximately 0.07 lbs/

mmBtu to 0.15 lbs/mmBtu and SO2 levels ranging from approximately 0.13 lbs/

mmBtu to 0.30 lbs/mmBtu. We do not have comparable information on permits for

modifications at existing power plants.

Question 9 Does EPA disagree with the Abt Associates peer-reviewed study done

a couple of years ago which estimates about 30,000 people are dying prematurely

every year right now from power plant pollution? If so, why?

Response. EPA agrees that fine particle pollution contributes to premature deaths

as well as other serious health effects. That is why this Administration is seeking

the fastest method for achieving air quality improvements over the next decade.

EPA has not analyzed the total number of premature deaths attributable each year

to fine particle pollution, or the total contribution of a particular sector to health

effects associated with air pollution. Instead of calculating total premature deaths

from fine particles, EPA’S analyses have focused on quantifying the incremental

benefits of adopting particular regulatory strategies. In 1995, EPA projected the

human health benefits of Title IV of the Clean Air Act (the Acid Rain Program).

That analysis suggested that, by 2010, the Title IV program alone would prevent

approximately 10,000 premature deaths each year. While the Acid Rain program

has been very successful in reducing harmful emissions from utilities, Clear Skies

will provide even further health protection. We have estimated that Clear Skies reductions by 2020 could prolong as many as 14,100 lives annually (while an alternative approach would set this figure at 8,400 lives prolonged annually.)

Question 10. In a recent EPA briefing on Clear Skies for Senate staff, an Agency

presenter admitted that mercury reductions would be greater in 2008 under the

mercury MACT rule than under Clear Skies. Please explain how Clear Skies mercury controls would not lead to an increased health risk to newborns and pregnant

women, compared to completely carrying out the mercury MACT standards.

Response. Thank you for the opportunity to clarify this much-discussed issue. The

utility MACT rulemaking process and the underlying analyses are not yet completed, and therefore we cannot state definitively whether the ultimate mercury

emission reductions under MACT would be greater or less than those that would

be achieved under Clear Skies.

After the proposed rule is published in December, 2003, the Agency will assess

the public comments submitted before publishing the final rule in December, 2004.

The statute requires compliance 3 years following promulgation (i.e., December,

2007), although States have the ability to delay the requirement for a year (i.e.,

until December, 2008). While the statutory timing for the implementation of the

utility MACT is prior to the Clear Skies’ Phase I cap date, it is almost certain that

the utility MACT will be litigated. Therefore, the timing is highly uncertain.

In contrast, under Clear Skies we believe that mercury emission reductions will

begin as soon as Clear Skies is enacted because the cap-and-trade system provides

firms certainty in their business planning and an incentive to bank allowances in
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the early years of the program. What’s more, since Clear Skies is a multi-pollutant

approach to emissions reductions, some mercury reductions will be achieved as a cobenefit from the installation of SO2 and NOx controls. Clear Skies will therefore

likely result in earlier emissions reductions than the MACT rule, reducing the

health risk to newborns and expectant mothers sooner than MACT.

Question 11. Does Clear Skies eliminate the residual risk provisions of Section

112 with respect to mercury and electric utilities? Also, would these statutory provisions be eliminated or deferred for other hazardous air pollutants under the Clear

Skies legislation? Please justify.

Response. Under the Clear Skies Act of 2003 (CSA), the Administrator would conduct a comprehensive assessment of the Phase II caps pursuant to section 410

(Evaluation of Limitations) and then recommend to Congress whether changes to

the Phase II caps are appropriate. This evaluation and possible recommendation

and the required reduction in mercury emissions make the provisions of section

112(f) of the Clean Air Act as they apply to mercury from electric utility generating

units unnecessary. However, the section 112(f) provisions for hazardous air pollutants other than mercury, would remain in effect under the Clear Skies Act of 2003.

Clear Skies logically modifies the deadlines for addressing residual risk from nonmercury hazardous air pollutants from the power sector to run from the start of the

allowance requirement of section 472 rather than within 8 years of issuance of a

MACT standard under the current provisions of the Clean Air Act. This modification

will allow EPA to have sufficient emissions and exposure data after SO2 and NOx

allowance compliance strategies are in place to make the necessary determination

of the need for a residual risk standard for these non-mercury hazardous air pollutants.

Question 12. Please explain how Clear Skies will achieve greater reductions in

2018 in mercury emissions than would be achieved by MACT requirements in the

present law.

Response. EPA entered a settlement agreement to propose the Utility MACT in

December, 2003, after which the Agency will consider public comments submitted

on the proposal and issue a final rule in December, 2004. Until the entire rulemaking process is complete, it is not possible to determine whether the CSA would

obtain mercury reductions greater than or less than the Utility MACT. We can be

fairly certain, however, that Clear Skies will achieve reductions sooner than would

be achieved under MACT. Due to Clear Skies’ incentives for early reductions, reductions would start occurring as soon as the legislation passed. With MACT, the final

rule won’t be issued for another 15 months, and then with litigation uncertainties,

it is impossible to know when emissions reductions might begin.

Question 13. As I understand it, the National Park Service, Federal land managers, and EPA have documented that air pollution degrading visibility and causing

acid deposition in the National Parks and Wildlife Refuges is coming from power

plants many miles away, sometimes more than 50 or 100 miles away. For example,

dozens of power plants impact the Smoky Mountains National Park, but only one

falls within the 31 mile/50 kilometer perimeter of the park. That’s the limit contained in the Clear Skies proposal for use as a test to determine whether better control technology is required. Would Clear Skies allow new power plants to be sited

or old ones reconstructed in places that could degrade visibility or cause increased

deposition in the National Parks?

Response. Clear Skies would require individual new facilities to have, at a minimum, modern pollution controls as specified in section 481 (National Emission

Standards for Affected Units) of the Clear Skies Act. Subsequent review by the Federal Land Manger of facilities within the 50km limit would ensure that the potential

impacts of well controlled new sources do not result in significant local effects in

Class I areas.

Clear Skies would benefit the ecosystems and air quality in national parks across

the country, especially in the eastern States. The reductions in acid rain, eutrophication, mercury deposition and regional haze from Clear Skies would improve these

treasured resources. By addressing air pollution from a regional perspective, the

transport of air pollution into national parks and wilderness areas would be reduced.

An examination of our emissions projections for the Class I area in your question—the Great Smoky Mountain National Park (GSMNP)—serves to illustrate the

strength of the Clear Skies approach to these issues. Using air quality modeling approaches in our 2003 analysis, we forecasted emissions with and without Clear

Skies for the GSMNP air shed, which stretches over several hundred kilometers in

the eastern US. There are substantial overall reductions in SO2 and NOx emissions

affecting this air shed as compared to the base case that EPA modeled (which as-
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sumes continued implementation of existing control programs, but no new Federal

or State regulatory control programs). Under the base Case, EPA projects that emissions of SO2 in the Southern Blue Ridge Airsheds that encompass the GSMNP will

be approximately 5 million tons in 2020. Clear Skies will drop these acid rain-causing pollutants to less than 2 million tons in 2020.

NOx emissions will also drop dramatically under Clear Skies. We project that

Clear Skies will reduce emissions of NOx in these airsheds from approximately 1

million tons in the 2020 base case down to approximately 200,000 tons in 2020. We

believe that Clear Skies will result in approximately $600 million of benefits in the

Great Smokies in 2010 and $2 billion of benefits in the Great Smokies in 2020. And,

this figure does not include the many benefits for which we cannot assign a monetary value. These projected improvements include all forecasted growth in new

sources. Clear Skies would provide the regional reductions necessary to improve visibility and ecosystem protection of our National Parks and Wilderness areas.

Question 14. What measurable effects will Clear Skies have on episodically acidic

lakes and streams in the U.S.?

Response. When analyzing the effects of Clear Skies on lakes and streams, EPA

focused on the Northeast and the Southeast the areas of the country with most acidsensitive aquatic ecosystems. The results of our 2003 analysis are presented below.

From this analysis, we found a small improvement in reducing the percentage of

southeastern streams that are episodically acidic. This is primarily due to the long

period of time that Southeastern soils hold decades of acid loadings that continue

to be released, even as loadings are reduced. Thus, in the Southeast, Clear Skies

would slow the deterioration of stream health expected under the Base Case and

would prevent additional streams from becoming chronically acidic. In the Northeast, there is an initial appearance of a perverse effect of more lakes characterized

as episodically acidic, but actually most of these lakes have shifted from the more

serious chronically acidic category to episodically acidic. In fact, Clear Skies is projected to eliminate chronic acidity in Adirondack region lakes, whereas more than

1 in 10 is chronically acidic in the Base Case in 2020.

Question 15. How will conformity work in the transitional areas proposed to be

created in Clear Skies?

Response. Under the Clear Skies Act, transportation conformity (dealing with

highways and mass transit) and general conformity (dealing with all other Federal

actions) would not apply to areas designated as transitional for a specific pollutant

(for example, ozone or particulate matter), since these areas would not be designated as nonattainment for that pollutant. Conformity requirements would apply

only in nonattainment and maintenance areas. If an area is designated transitional

for one pollutant and nonattainment for another pollutant, then conformity would

apply for the nonattainment pollutant but not for the transitional pollutant. This

approach is based on the common-sense principle that we should not require local

areas to adopt local measures if their air quality problem will be solved in a reasonable timeframe by the reductions in power plant emissions required by Clear Skies.

Question 16. If the pending NSR enforcement actions against power plants were

all decided in EPA’s favor, the targeted facilities would make significant reductions

of SOx and NOx. Under the models run for Clear Skies, how much would each of

these targeted plants probably reduce annual emissions compared to the reductions

they would make if the NSR enforcement actions were decided in EPA’s favor?

Response. Because many of the enforcement actions are on-going, EPA is unable

to estimate the emission reductions that would be obtained at all of the plants currently subject to enforcement action. Furthermore, the enforcement actions that

have been settled have resulted in a range of reductions and timing, making the

outcome of future cases difficult to project. Aggregate emissions from the power sector under Clear Skies would be reduced by 70 percent beyond today’s emission levels. Under Clear Skies, total emissions are capped at this 70 percent reduction level

indefinitely. NSR enforcement does not provide you with that guarantee because

even if you have the most stringent standard at every plant, if the number of plants

keeps growing, the amount of emissions can grow as well.

Question 17. What would be the approximate emissions performance for NOx and

SOx for each of the power plants covered by the Agency’s NSR enforcement actions

if all the cases were decided in EPA’s favor?

Response. See answer to Question 16.

Question 18. If all power plants defined as ‘‘affected units’’ under Clear Skies were

required to apply BACT for the relevant technology and fuel source today, what

would be the total NOx and SOx emissions from those sources?

Response. EPA has not performed this analysis of emission reductions. But command and control regulations (such as BACT) have consistently been shown to be
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far more costly at achieving a given emission reduction target than a cap and trade

approach (such as Clear Skies).

Question 19. Administration witnesses have testified, and the Agency’s 90-day report on NSR, indicate that the application of NSR to new sources works well and

effectively. Why is it necessary in Clear Skies to eliminate it or replace it with something else?

Response. Given the tight caps and the backstop of technology standards for new

power plants, we believe that the significant governmental and industry resources

involved in the NSR program would no longer be needed for power plants if Clear

Skies were to pass. The Clear Skies legislation provides clear advantages over the

NSR program. The caps in Clear Skies guarantee emissions are capped indefinitely;

under NSR total emissions can still increase. The market-based mechanisms in

Clear Skies allow firms the most flexibility to reduce emissions at the lowest cost

possible. The program has inherent incentives for firms to begin reducing emissions

early. The administrative burden of Clear Skies is much lower than that of NSR.

Clear Skies provides the regulatory certainty that plant managers need when planning for the future. The tight caps in Clear Skies would provide an increasing economic incentive for new sources, as well as existing sources, to install good pollution

controls.

The caps would also provide economic incentives to drive technological innovations. To ensure that new power plants put on good controls in the early years of

the program, Clear Skies also sets technology-based standards that new sources

would be required to meet. Clear Skies also maintains protections for Class I areas

from power plants locating within 50 km of their boundaries. States are still required to ensure that constructions of new sources are consistent with plans for attaining the applicable National Ambient Air Quality Standards. Protection for other

local concerns can still be addressed by State programs because Clear Skies does

not preempt State authority to impose more stringent controls.

Question 20. According to current EPA material, in 2010, Clear Skies would bring

34 counties into attainment for the fine particle standard and 10 counties into attainment for the ozone standard. According to EPA, the existing schedule under the

Clean Air Act will require areas to achieve attainment by 2009. Based on EPA modeling, how many counties will not be in attainment in 2010 for either the PM2.5 or the ozone NAAQS primarily because of power plant emissions and how many people

will be living in them?

Response. Our most recent analysis projected that, in 2010, Clear Skies would

bring an additional 42 counties into attainment for the fine particle standard and

an additional 3 counties into attainment for the 8-hour ozone standard beyond the

number projected under the Base Case (i.e., existing control programs plus the proposed non-road diesel rule). Absent additional State or Federal regulation, 124 counties nationwide (with a population of 77.1 million people) would have monitoring

data showing that they were not attaining one or both of these standards in 2010.

This widespread non-attainment cannot wholly be attributed to any single source

category, but it is likely that the power generation and mobile sectors play a dominant role in most locations.

Our current model results do not allow us to quantify the contribution of power

plant emissions to nonattainment. But given that power plants are responsible for

about two-thirds of the emissions inventory for SO2 and about one-fifth for NOx,

and that large portions of nonattainment are due to regional transport, it is clear

that power generation plays a significant role in projected nonattainment throughout the eastern 35 States and DC. For this part of the country, absent additional

State or Federal regulation, 109 counties (with a population of 53.9 million people)

would have monitoring data showing that they were not in attainment with one or

both of these standards.

Question 21. Since Clear Skies eliminates the final MACT standard for mercury,

what provisions in the Administration proposal will ensure that toxic hot spots do

not result from using a cap-and-trade system for mercury emissions?

Response. Clear Skies would reduce nationwide mercury emissions by 70 percent

from current levels. As occurred under the Acid Rain Program, and as the Clear

Skies modeling indicates, under a cap-and-trade system the largest emission reductions tend to take place in the areas with the largest emissions. Therefore, sources

with the most mercury emissions are expected to reduce emissions the most. The

Administration proposal is not expected to create areas of increased mercury deposition. Additionally, if a State decides that local conditions warrant, it can impose

more stringent controls.

Question 22. If the Administration is certain that Clear Skies will be helpful in

achieving attainment on schedule, then why is it necessary in that legislation to de-
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lete (or diminish) State authorities such as section 126 that are intended to assure

attainment?

Response. We believe that the first phase reductions in NOx, SOx and Hg in Clear

Skies would push the power generation sector about as far and fast as is technically

and economically feasible. The cumulative reductions from Clear Skies would be

greater over the next decade than would be likely under current CAA authorities,

including section 126.

Question 23. EPA’s estimates say that in 20 years Clear Skies would leave the

Smokies with more than 2.5 times the amount of nitrogen deposition than would

allow recovery of the ecosystem. When would recovery of the Smokies ecosystem

occur under Clear Skies?

Response. EPA’s 2003 analysis shows that in 20 years, Clear Skies will reduce

nitrogen deposition in the Smokies region between five and 20 percent. The Agency

believes this would help the area’s acid-sensitive streams and nitrogen-sensitive forests recover. However, we are technically unable to model the environmental benefits of this reduction in nitrogen deposition at this time.

Question 24. Does the public and do companies’ shareholders have a right to know

about air emissions that may cause long-term damage like greenhouse gases?

Response. The Agency takes seriously its role to provide quality data to the public

and the scientific community. Greenhouse gas (GHG) information is provided in several of EPA outreach initiatives, reports, and on-line sources. For the power sector

specifically, in EPA’s annual Emission Scorecard we publish plant-level emissions

data for SO2, NOx and CO2 from the Acid Rain Program reported to us as required

under section 821 of the Clean Air Act Amendments. Another EPA product, E-Grid,

provides a data base of plant-level emissions that is designed to be highly userfriendly (www.epa.gov/cleanenergy/egrid). Finally, the US GHG Emission and Sinks

Report, published every April, is another source of information on aggregate GHG

emissions for those seeking information on emissions data for economic sectors of

interest. Copies of EPA’s latest Emissions Scorecard and GHG Emissions and Sinks

Report are enclosed (Attachments 5 and 6).

Other agencies are also working to make sure that greenhouse gas emissions information is readily available to the public. The Department of Energy has maintained a voluntary registry for emissions reductions since 1997. In 2001, 228 participants in 25 different industries or services reported 1,705 projects to the registry.

The DOE is currently working with a large interagency team, of which EPA is an

active participant to improve this registry, per President’s Bush’s February 2002 directive. The Energy Information Administration’s annual US inventory of GHG

emissions (published as required by section 1605(a) of the Energy Policy Act of

1992) is available at http://www.eia.doe.gov/oiaf/1605/ggrpt/index.html

Question 25. Under Clear Skies legislation if enacted, would States be able to retain their existing NSR programs for application to electric power plants? If so,

would a State be eligible for SIP credits if the application of that States NSR program resulted in more stringent requirements for power plants than are required

under Clear Skies?

Response. Yes, States would have the option of retaining their existing NSR programs as they apply to electric power plants. Nothing in the Clear Skies legislation

would preempt existing State authority in this regard. Moreover, there is nothing

in Clear Skies that would prohibit a State from receiving proper credit in its ozone

or other attainment demonstration for any State Implementation Plan requirements

beyond Clear Skies.

Question 26. Your testimony says that the new transitional areas allowed under

Clear Skies would have a legal deadline of 2015 to meet the national air quality

standards. But, the legislation says that EPA will review their attainment status

by the middle of 2016, and if they’re in nonattainment, then sometime in the next

4 years the area must submit a revised SIP. So it appears an area could easily get

an extra four or 5 years until 2021 before they have to adopt actual controls. Do

the current laws attainment deadlines have to be extended 6 to 10 years because

the caps in Clear Skies are too weak and too late?

Response. Clear Skies creates a transitional designation for those areas that,

based on modeling done after Clear Skies, are projected to come into attainment

with the power plant reductions from Clear Skies and other Federal measures. In

addition, if Clear Skies is projected to improve an areas air quality, but not enough

to bring it into attainment, those areas can be designated transitional if, by the end

of 2004, the State submits and EPA approves additional local measures and a demonstration that those local measures will bring the area into attainment by 2015.

If an area does not meet the criteria for transitional classification, then the attainment date will be governed by the existing Clean Air Act.
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The only areas that would be eligible for a 2015 attainment date are those that

have a combination of Federal and local measures that are projected to bring them

into attainment. Although the legal deadline for attaining the ozone and PM2.5

NAAQS would be 2015 for these transitional areas, as a practical matter, we expect

many of these areas to attain prior to 2015.

The provisions specifying what happens if an area does not attain by 2015 have

been created as a backstop in case actual circumstances and monitoring do not

match the modeling projections. These provisions are similar to the current provision of the Act contained in section 179(d) of the Clean Air Act, which requires a

State with an area that does not attain the standard by the legal deadline to submit

another State Implementation Plan to EPA within 1 year.

Question 27. According to your testimony, when Clear Skies is fully implemented,

85 percent of the coal-generated power will be from facilities that will have advanced pollution control technology in both the east and west. Please identify those

facilities that will not have advanced pollution control technology and the approximate share of the total emissions inventory for each pollutant that they will as a

group represent.

Response. The facilities that IPM projects to install advanced pollution control

technology can be identified using the IPM parsed output files available on our

website (http://www.epa.gov/airmarkets/epa-ipm/results2003.html). This website includes an explanation of the various types of pollution controls that sources may install in the model to meet the caps under Clear Skies, with additional details are

provided in the documentation (refer to QJ4). Notably, facilities that have ‘‘advanced

pollution control technology’’ for SO2, NOx and/or mercury are using scrubbers,

SCRs and activated carbon injection, respectively. Virtually all coal-fired units control particulates through highly effective electrostatic precipitators or baghouses. If

these units do not also have the above advanced controls, they are called ‘‘uncontrolled’’ for SO2, NOx and mercury. After the implementation of the Clear Skies Act,

the uncontrolled coal-fired plants are projected to emit just under 1.7 million tons

of SO2 (out of 4.26 million tons for all coal sources), 640 thousand tons of NOx (out

of 1.5 million tons for all coal sources), and 7.2 tons of mercury (out of 22.2 tons

for all coal sources). It is important to note that IPM best predicts the types of units

making changes and is not able to accurately predict every unit’s future situation,

even though the parsed runs show individual units that do not install these advanced controls. Results generally show that smaller, old, less efficient units that

are less likely to have advanced controls.

Question 28. When Clear Skies is fully implemented, will any coal-fired power

plant operate without pollution controls?

Response. Under the Clear Skies Act of 2003, by 2020, about 80 percent of coalfired capacity will come from plants with advanced pollution controls (scrubbers,

SCR and/or activated carbon injection). We expect more controls to be installed after

2020, but believe that the extent of additional controls is subject to a great deal of

uncertainty. As noted previously, almost all power plants operate with technology

to control particles. However, as with other multi-pollutant policy options using a

cap-and-trade, market approach (as well as under the current Clean Air Act acid

rain provisions), some coal-fired sources would operate without ‘‘advanced pollution

controls’’ as we have defined them (See QJ27), where lower cost emissions reductions are available from other facilities and emission allowances are purchased to

meet compliance needs. Clear Skies modeling, which takes into account that some

sources may operate without advanced pollution controls, still shows substantial

benefits from Clear Skies implementation throughout the country and widespread

advanced pollution controls in place.

Question 29. What are the current emissions characteristics of the coal gasification combined cycle power plants in the U.S., and at any of those abroad for which

EPA has data?

Response. There are two coal gasification combined cycle (IGCC) units in the

country. One is Tampa Electric Company’s Polk Power Station Unit #1 IGCC Power

Plant, a 250 MW unit that is located near Tampa, FL. The other is PSI Energy’s

Wabash River Generating Station Unit #1, a 262 MW plant in West Terre Haute,

IN.

Using data in EPA’s Emissions Scorecard 2001 (which includes emissions data for

power plants in the Acid Rain Program—see www.epa.gov/airmarkets/emissions/

score01/index.html), the following emissions data is provided for year 2001:

Polk unit: SO2 emissions 0.15 lbs/mmBtu

NOx emissions 0.10 lbs/mmBtu

Wabash River unit: SO2 emissions 0.14 lbs/mmBtu

NOx emissions 0.17 lbs/mmBtu
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Mercury emissions estimates for these plants in 1999 (based on 1999 EPA Mercury ICR data):

Polk unit: 61.9 lbs/yr

Wabash: 133.6lbs/yr

EPA does not have data for overseas coal gasification plants.

Question 30. The NOx SIP Call starts reductions in May 2004. Why does the

Clear Skies NOx cap start in 2008, rather than 2010, as the caps do for SOx and

mercury?

Response. Sources are largely expected to meet the Phase I NOx requirements of

Clear Skies by expanding their utilization of existing control equipment (equipment

that has been, or will be, installed in response to regional NOx reduction programs

such as the NOx SIP call ) from the 5 month ozone season to year round. In contrast, EPA analysis projects that it would be necessary for sources to install additional control technology to meet the SO2 and Hg caps of Clear Skies. As a result,

it is possible to begin the NOx reductions of Clear Skies earlier, because the potential for straining the capital, labor, and equipment markets for control equipment

construction is lower than it would be for SO2 and Hg emissions. In addition, the

NOx reductions of Clear Skies are needed earlier than those of SO2 and Hg in order

to meet the ozone attainment deadlines, which occur earlier than those for particulate matter.

It is important to note that Clear Skies provides incentives for early reductions,

so it is likely that plants will begin reducing emissions soon after the passage of

the legislation. In contrast, compliance with the NOx SIP call was prolonged by a

lengthy rulemaking process and lawsuits postponing implementation until 6 years

after the rule was finalized.

Question 31. In EPA’S written testimony, it says that the legislation will still require new power plants to meet the current NSR requirements that they will not

cause or contribute to a violation of the NAAQS. However, the legislation actually

says that the source must demonstrate that the emissions increase from the unit

will not cause, or contribute to, air pollution in excess of any NAAQS. That’s a different standard. Why is it necessary to change the existing test in law?

Response. EPA did not intend to suggest in its written testimony that the Clear

Skies legislation would result in a change to the existing test for determining

whether a new source would cause or contribute to a violation of the NAAQS. EPA

does not believe that this language in the Clear Skies Act would be interpreted in

our implementation, or by a court, as setting a different standard than do the current NSR requirements.

Question 32. Are there any electric generating units in the US that have never

installed pollution control equipment through the New Source Review process? If so,

please identify those facilities.

Response. Yes, there are electric generating units in the US that have never installed pollution control equipment through the New Source Review (NSR) program.

EPA does not have a comprehensive listing of which power plants have installed

control equipment as a result of this programs. Because there are multiple programs

that may apply to a particular plant—with New Source Review (NSR) requirements

applying only to new (or certain modified) sources—we are unable to attribute a

particular installation of a control technology to any one program.

While some power plants control their emissions using advanced SO2 or NOx pollution control equipment (i.e., end-of-the-stack equipment), many do not. Some

plants have not been subject to a regulatory program that requires the installation

of specific technology or sets a performance standard. Others have been subject to

a program, like the Acid Rain Program, which allows flexibility in choosing the most

cost effective compliance strategy (e.g. add-on controls, fuel switching, efficiency improvements). Of those plants that operate with advanced pollution control devices,

many installed that equipment for reasons other than NSR requirements. Unit level

information on NOx and SO2 controls for Acid Rain units can be found in Appendix

B at: www.epa.gov/airmarkets/emissions/score01/index.html

Question 33. Under current law, areas will need to attain for the fine particulate

matter standard by 2009, or they could, under certain limited circumstances get an

extension to 2014. According to a scenario in the 1997 impact assessment to accompany the PM2.5 NAAQS, getting close to attainment using power plant reductions

would require 60 percent reduction in SOx emission from those sources. In what

year would Clear Skies likely reach a 60 percent reduction in SOx emissions from

power plants?

Response. In the 1997 assessment which accompanied the revision of the PM

NAAQS, the analysis provided a broad implementation scenario for the purpose of

projecting both the costs and benefits of alternative NAAQS levels. In this analysis,
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EPA assumed that implementation of the new fine particle NAAQS would lead to

an initial reduction of SOx emissions from the electric power industry by lowering

the SOx emissions caps under the Title IV trading and banking program in order

to reduce the formation of sulfate particles. In one scenario, the Agency assumed

that power plant SOx emissions would be reduced by 60 percent to 3.58 million tons.

Under Clear Skies, power plants emissions are capped at a lower level of 3 million

tons in 2018. Due to the ability to bank early reductions under Clear Skies, this

emissions cap is projected to be achieved after the 2020 time period, but this is only

because emissions would be lower than the permissible cap level in the early years

of the program.

Just to clarify, if all areas are designated non-attainment by the end of 2004,

areas will have an attainment date no later than 2009, with possible extensions to

2014. In certain circumstances, areas can be given two additional 1-year extensions

to meet the standard.

Question 34. What is the impact on the zone 2 States of the addition of Kansas

and Oklahoma? Please justify the inclusion of these States in zone 2. What is the

impact of the change on non-attainment in areas east of these two States?

Response. By placing Kansas and Oklahoma under the Zone 2 NOx emissions cap,

the effective NOx emission rate will change slightly from 0.24 lbs/mmBtu to 0.21

lbs/mmBtu in 2020. Different control levels are appropriate in the eastern and western sections of the country because each faces different types of environmental problems. NOx reductions in the East are needed to address ozone and fine particulate

matter nonattainment issues, as well as acid rain and eutrophication of water bodies. NOx reductions in the West are primarily aimed at improving visibility in national parks and ensuring that the West continues to meet ozone and fine particulate matter standards. (The exception is California which has some counties currently in non-attainment.) Kansas and Oklahoma were grouped with the western

States because they are not believed to be significant contributors to nonattainment

in eastern States.

Question 35. Please submit the cost-benefit analysis that EPA has performed on

a proposal that has been described to the Committee: a 2 million ton cap on sulfur

dioxide emissions by 2013. Please describe in detail the costs and benefits of this

target and timetable, and include a comparison of costs and benefits of this alternative with the costs and benefits of the SOx target and timetable included in the

Clear Skies Act.

Response. Over the last 2 years, EPA has focused on analysis of strategies to reduce SO2, NOx, and mercury emissions and not strategies addressing a single pollutant, especially in the more detailed analyses that have been done. Cost-benefit

analyses of multi-pollutant approaches limiting emissions from power plants require

specification of the cap levels and deadlines for all pollutants.

Although during the development of the Clear Skies Initiative EPA performed a

preliminary analysis of a multi-pollutant scenario in which the SO2 cap of 2.25 million tons in 2010 was specified (along with caps for NOx and mercury) for use in

internal Administration discussions, we have not performed an analysis of a standalone 2 million ton SO2 cap. As explained in QJ1, however, there were several feasibility concerns raised by seeking such stringent reductions in the first phase of a

multipollutant program.

Question 36. Under Clear Skies, it seems possible that the new so-called transitional areas allowed in the proposed legislation would have until 2020 before they

would need to have a SIP adopted and implemented. That’s well after the 2009 or

2010 attainment date that the Act requires following designation. Under S. 485,

what’s the latest possible date at which a transitional area would be absolutely required to have a SIP adopted demonstrating attainment?

Response. SIPs are meant to contain those State control measures that are necessary to bring an area into attainment based on projections of future air quality

and economic activity. If EPA modeling projects that transitional areas come into

attainment with Federal control measures and State control measures that are already adopted, then there is no need to have additional State control measures to

bring the area into attainment, and thus nothing new is required for an approvable

SIP.

Under Clear Skies, if an area that is forecast to attain the standard does not do

so by the end of 2015, it then would be required to be designated as nonattainment

and to submit a SIP demonstrating attainment no later than June 2020. The process for these areas is similar to that under the existing CAA section 179(d) provision

for areas that fail to attain the standard by their attainment dates.

For additional information on transitional areas, please see the answer to Question 26.
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Question 37. Is it accurate to say that low-income families and the elderly, who

generally have less access to health care, suffer disproportionate harm from ambient

air pollution? If so, what does the Agency’s estimate is the aggregate and per capita

quantified harm experienced by this population from ambient air pollution?

Response. Certain groups may be more susceptible to harm from ambient air pollution. Older people are especially vulnerable to air pollution because (1) the immune system weakens with age, (2) chronic conditions (e.g., chronic bronchitis or

heart attacks) may be more likely to develop in those who have experienced a lifetime of elevated exposure, and (3) older people are more likely to have pre-existing

heart and lung conditions that may be exacerbated by elevated short-term exposures

to fine particles and ozone.

To the extent that individuals with lower incomes experience higher rates of some

cardiovascular and respiratory diseases than other groups, they may experience

more adverse effects, as exposure to air pollution can exacerbate these existing conditions.

EPA has not analyzed the per capita number of premature deaths or other health

impacts attributable each year to ambient air pollution for the entire population or

for certain subpopulations. Rather, EPA has focused on quantifying the benefits of

adopting particular regulatory strategies. This gives us an indication of the potential

magnitude of the benefits that could be achieved by reducing air pollution under a

given regulatory strategy. For example, EPA’s analysis of the benefits of the 2003

Clear Skies Act projects substantial benefits for older Americans. By 2020, Clear

Skies would prevent 14,100 premature deaths each year. (An alternative methodology for calculating health benefits projects approximately 8,400 premature deaths

prevented each year). In addition, EPA projected that each year, by 2020, Americans

would also experience approximately 30,000 fewer visits to hospitals and emergency

rooms, 23,000 fewer non-fatal heart attacks, and 8,800 fewer cases of chronic bronchitis. Many of these benefits would accrue to older Americans.

EPA has not apportioned the benefits of Clear Skies or other regulatory strategies

to people of different income classifications. We do not have an example of the magnitude of benefits that could be achieved by reducing air pollution for low-income

families.

Question 38. Please compare the reductions in total tons of sulfur dioxides and nitrogen oxides emissions required by the Clean Air Act Amendments of 1990 from

1990 to 2010 and those required under the Clear Skies legislation from 2004 to 2024.

The CAA amendments of 1990 achieved considerable reductions from the power

sector. EPA’s data and analysis suggests that SO2 emissions will have gone from

15.7 million tons in 1990 to roughly 9.7 million tons in 2010, achieving a reduction

of 38 percent. Some of the SO2 reductions are attributable to various State rules.

For NOx, emissions will have gone from 6.7 million tons in 1990 to 3.9 million tons

in 2010 (42 percent reduction). NOx reductions are attributable to the amendments

of 1990, the NOx SIP call, the OTC trading program, and various State rules.

With Clear Skies, reductions of SO2 and NOx for the first 2 decades after enactment would be even greater than those projected to be achieved from 1990 through

2010. From 2000 to 2020, EPA projects that, with Clear Skies, SO2 emissions would

decrease by 62 percent (from 11.2 to 4.2 million tons) and NOx emissions would decrease by 66 percent (from 5.1 to 1.7 million tons). In addition, mercury emissions

would decrease by 54 percent (from 48 to 22 tons). Ultimately, Clear Skies will reduce annual emissions of these three pollutants by an average of 70 percent. It is

difficult to calculate the reductions in total tons of SO2 and NOx because of the difficulty in determining what emissions would have been in the absence of Title IV

and what they will be in under the Clean Air Act in the absence of Clear Skies.

Question 39. In testimony, Mr. Holmstead said that the Agency thinks that under

Clear Skies there will be less fuel-switching, from coal to natural gas, than under

the current Clean Air Act. How much fuel switching does the Administration project

will occur between now and 2020 if there are no statutory changes in the Clean Air

Act?

Response. Past EPA analysis indicates that industry makes different compliance

strategy decisions when all emission reduction requirements are known up front, as

with Clear Skies. This contrasts to situations when the requirements are identified

over time and compliance with some is required before all are specified, as under

the current Act. EPA performed an analysis of a hypothetical ‘‘business-as-usual’’

case that was similar to the Straw Proposal EPA was evaluating in Fall 2001 in

order to show this comparison. This past analysis indicated that fuel switching is

a more likely compliance option when industry learns the specifics of requirements

over time rather than up-front, even when control requirements are similar. Uncertainties created by litigation even further complicate the second scenario.
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Thus, compared to Clear Skies, EPA’s full implementation of the current CAA will

likely result in considerably greater disruption to industry including additional fuel

switching and a more substantive impact on gas consumption and prices—due to the

less efficient, piecemeal approach to these regulations (e.g., MACT, NSR, BART, and

other efforts to achieve the NAAQS). However, EPA cannot predict how much fuel

switching would occur under the current Act because that would depend on the specific requirements the industry will face, which are dependent upon numerous State

and Federal rulemakings that have not yet been completed and are not possible to

reliably predict (the above mentioned analysis was meant to be illustrative of the

drawbacks of sequential rulemaking and never intended to represent how EPA and

States would implement the existing Clean Air Act).

Question 40. Please describe how, if at all, Clear Skies provides a market incentive for owners or operators of fossil-fuel power plants to—1) increase their efficiency (MmBtu input per MWh output), 2) invest in the development and siting of

coal gasification combined cycle plants in the next 20 years.

Response. The cap-and-trade approach of Clear Skies inherently encourages fuel

efficiency, including investment in new generation technologies that are more efficient than their predecessors. A plant that can create a marketable product, such

as electricity, steam, or hydrogen, using less fuel, will produce less pollution for a

given quantity of product. As a result this efficient plant will have to retire less (or

purchase fewer) emission allowances a valuable commodity for a given amount of

product. Clear Skies makes it more expensive to emit NOx, SO2, and Hg, thereby

making more efficient plants, such as IGCCs, more economically competitive.

Question 41. Do you believe that the current statutory language or the consent

decree regarding the MACT requirements for hazardous air pollutants could result

in a rule that controls mercury only at the co-benefits level—in the 40–50 percent

range per unit?

Response. The current statutory language regarding mercury emissions from coalfired electric utility units defines existing source MACT to be‘‘. . . the average emission limitation achieved by the best performing 12 percent of the existing sources

(for which the Administrator has emissions information) . . .’’ There is no language

in the settlement agreement that would change this statutory direction. At the current time, any appropriate subcategorization scheme and the assessment of the individual floors for the MACT proposal have not been completed. Moreover, after the

utility MACT rule is proposed in December, 2003, EPA will evaluate public comments submitted in response to the proposal before finalizing the rule in December,

2004. Thus, it is premature to speculate whether the Utility MACT standard would

impose controls more or less stringent than achieved as a co-benefit provided by imposing reductions of other pollutants.

Question 42. Please explain how the alternative methodology for presenting quantified benefits of Clear Skies (i.e. $11 billion in 2020) complies with the Agency’s

data quality guidelines under the Data Quality Act.

Response. The purpose of the alternative methodology was to explore how sensitive EPA’s main analytic conclusions (that the benefits outweigh the costs) were

to changes in scientific and economic assumptions in the estimate of the Clear Skies

approach. This type of sensitivity analysis is fundamental to sound and comprehensive analysis of major environmental issues. Notably, we have found that even with

these alternative assumptions for key variables, the benefits outweigh the costs.

EPA’s report on its analysis of the Clear Skies approach summarized the foundation

for this alternative estimate. EPA’s data quality guidelines were still being developed at the time the Clear Skies analysis was completed, but conducting this type

of sensitivity analysis would not have been inconsistent with the objectives of those

guidelines for rigorous analysis.

Question 43. When does the Agency plan to deliver to the participants of the utility MACT FACA/work group the modeling and economic analysis that was promised

to them for delivery on April 11, 2003?

Response. The Utility MACT Working Group was a Federal advisory committee

organized for approximately 1 year as a working group under the Clean Air Act Advisory Committee (CAAAC). The Working Group finished its work when it delivered

its final report to the CAAAC on October 30, 2002. The meetings and report were

very informative and helpful to the rulemaking process. The agency is committed

to do all the necessary analysis in order to propose a rule in accordance with our

obligations under the Clean Air Act and Administrative Procedure Act. All of this

analysis will be available to the public.
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RESPONSES OF HON. CHRISTINE TODD WHITMAN TO ADDITIONAL QUESTIONS FROM

SENATOR VOINOVICH

Question 1. Much has been said by critics that Clear Skies is not as environmentally protective as future Clean Air Act requirements would be—that it in fact

would ‘‘roll back the Clean Air Act.’’ It seems to me that one of the major advantages to Clear Skies is that it provides both regulatory and environmental certainty—that is, the fact that significant emission reductions are locked in according

to statutory deadlines in 2008, 2010 and 2018 that cannot be circumvented or delayed the way that most requirements are now. How would you respond to those

critics?

Response. Clear Skies would provide dramatic environmental benefits by reducing

emissions from the power sector more than any control program any other Administration has ever proposed. It does so while allowing the downward trend in energy

prices to continue and while promoting energy independence.

It is correct that one of the most important benefits of Clear Skies is that it would

provide both regulatory and environmental certainty. Clear Skies builds on the successes of the Clean Air Act and would significantly improve air quality across the

Nation by requiring power plants to reduce their emissions of SO2, NOx and mercury by 70 percent. The mandatory emissions caps at the heart of Clear Skies are

a sure thing and guarantee that reductions will be maintained over time. Because

cap-and-trade programs include economic incentives for early action, Clear Skies

would begin improving public health immediately. Through the end of this decade,

the Clear Skies Act would clearly reduce power plant emissions more than would

the current Act. Clear Skies also allows firms to make the reductions in the most

cost-effective means possible. We do not have confidence in what would occur under

the current Act after this decade, so we are unable to make a definitive statement

about how reductions under the current Act would compare to reductions under

Clear Skies in the out years. We do know, however, that the statutory caps in Clear

Skies would provide certainty of reductions that could not be delayed by litigation.

Without Clear Skies, we also know that, under the current Act, EPA and States will

need to develop and issue regulations to reduce power plant emissions, but the levels and timing of these regulations are unknown. The uncertainties regarding regulatory development, litigation, implementation time, etc. under the current Act compare unfavorably with the certainty provided to this sector by Clear Skies.

Question 2. The threat of fuel switching—utilities switching from coal based generation to natural gas based generation—is a major concern that must be addressed.

What effect will Clear Skies have on this problem—will it cause more utilities to

fuel switch?

Response. The emissions reductions in the Clear Skies proposal would be achieved

through the installation of emissions controls, rather than fuel switching. Under

Clear Skies, 68 percent of U.S. coal-fired generation is projected to come from units

with advanced SO2 and/or NOx control equipment (such as scrubbers and SCR,

which also substantially reduce mercury emissions) by 2010. In 2020, the percentage

is projected to rise to 81 percent. In addition, the regulatory certainty provided by

Clear Skies would likely result in fewer sources using repowering as a compliance

strategy in the face of the complex requirements of the existing CAA.

We believe that fuel switching is more likely under the current Clean Air Act

than under Clear Skies. Past EPA analyses have indicated that industry makes different decisions about how to make specified emission reductions when it knows all

of the requirements up front (which would happen with Clear Skies) as compared

to a situation where it learns about the requirements over time and has to start

meeting some requirements without knowing specifics of future additional requirements (which would happen under the current Act). These past analyses have indicated that fuel switching is a more likely compliance option when industry learns

the specifics of requirements over time rather than at once even when the control

requirements are similar. Thus, we believe that, compared to Clear Skies, EPA’s full

implementation of the current CAA will likely result in considerably greater disruption to industry including additional fuel switching and a more substantive impact

on gas consumption and prices—due to the less efficient, piecemeal approach to

these regulations and litigation uncertainty (e.g., MACT, NSR, BART, and other efforts to achieve the NAAQS). EPA cannot predict how much fuel switching would

occur under the current Act because that would depend on the specific requirements

the industry will face, and those depend on numerous State and Federal

rulemakings that have not yet been completed.

Question 3. How will the Clear Skies Act affect electricity prices and natural gas

prices?
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Response. EPA analysis projects that Clear Skies would not significantly impact

electricity prices or gas prices. Forecasted trends would continue with or without

Clear Skies. Clear Skies gives industry the certainty and flexibility it needs to make

the most cost-effective investment decisions for reducing pollution. Costs are sometimes passed on to electricity ratepayers in the form of higher electricity prices, and

modeling projects prices to be 2 percent higher in 2020 with Clear Skies compared

to the base case. Also, Clear Skies ensures that coal-fired generation remains one

of the cheapest methods for generating electricity, and does not have a major impact

on natural gas supplies. Natural gas prices are projected to be less than 2.5 percent

higher in 2020 with Clear Skies compared to the base case.

Question 4. Critics of Clear Skies have claimed that it would be possible to have

greater emission reductions in a faster timetable during Phase I of Clear Skies. As

evidence of this claim, these critics have pointed to a straw proposal that I understand was a staff proposal that leaked out of EPA during Administration consideration of the Clear Skies Initiative. How would you respond to those critics?

Response. The Administration discussed a number of policy options in the process

of developing the Clear Skies proposal, including a straw proposal that EPA management presented as a way of initiating the inter-agency discussions necessary to

develop an Administration position. EPA no longer believes that the straw proposal

is feasible. In large part, this is because EPA’s analysis of engineering, labor and

capital markets for the power sector indicates that their ability to install the level

of pollution controls required to meet the Phase I requirements of Clear Skies would

significantly stretch the available labor resources. The Administration proposed different emissions caps and timing in Phase I of Clear Skies out of consideration for

the engineering and construction markets ability to respond to the added demand

for the installation and operation of emission control equipment.

Question 5. If our goal is to reduce harmful emissions from power plants—should

we be focusing our attention on NSR or on Clear Skies?

Response. There is no doubt that we should be focusing on Clear Skies if our goal

is to bring cleaner air to Americans as quickly and cost-effectively as possible. Clear

Skies would bring vast improvements in air quality due to its substantial reductions

in power plants emissions. Clear Skies sets forth a mandatory program that would

dramatically reduce and permanently limit power plant emissions.

The dramatic emission reductions required by Clear Skies—70 percent reductions

in SO2, NOx and mercury—will drive new power plants and virtually all large existing power plants to install good controls. Our modeling projects that 80 percent of

the coal-fired generation in 2020 would come from units with advanced SO2 and/

or NOx controls.

In contrast, New Source Review (NSR) does not require emission decreases—it

prohibits emission increases and will be largely redundant when Clear Skies is fully

implemented. The NSR program is not designed to result in nationwide reductions

of air pollution from power plants. NSR is triggered only when facilities emitting

large amounts of air pollution are built, or when modifications at large facilities result in significant increases in air pollution. In fact, NSR cannot be expected to decrease significantly nationwide emissions because facility operators will avoid the

type of project that makes the facility subject to the program. In addition, given the

nationwide cap on power plant SO2 emissions, compliance with NSR should not reduce national SO2 emissions.

RESPONSES OF HON. CHRISTINE TODD WHITMAN TO ADDITIONAL QUESTIONS FROM

SENATOR THOMAS

Question 1. As you know the mercury characteristics of coal burned in western

power plants is very different than coal in other regions. How does the Phase 1 mercury cap, which will supposedly be achieved through co-benefits, take into consideration these regional distinctions in coal chemistry?

Response. Different types of coal may achieve different mercury reductions from

units with PM, SO2 and NOx controls installed. Recent test data indicates that the

installation of NOx and SO2 controls on plants burning bituminous coals resulted

in greater mercury reduction on average than plants burning subbituminous coals

or lignite coals. Likewise, the test data indicated that installation of NOx and SO2

controls on plants burning subbituminous coals resulted in somewhat greater mercury removal than plants burning lignite coals. On average, units burning lignite

coal showed the least mercury removal of the three coal types. However, there is

limited data on mercury removal from lignite coal.
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In an effort to recognize the difference in mercury control among coal types, Clear

Skies attempted to help equalize the cost of reducing mercury emissions across coal

types—and the easiest way to do this was to adjust the allocation scheme. The adjustment factors of 1 for bituminous, 1.25 for sub-bituminous, and 3 for lignite coals

reflect this variation in coal types. We believe the adjustment factors we used are

directionally correct based on the test data currently available. EPA and others are

currently collecting more information, and expect that this information will inform

the debate on allocations further. We look forward to further discussion on this and

other subjects.

Question 2. The Administration has incorporated the western SO2 program adopted by the Western Regional Air Partnership (WRAP) into Clear Skies. Given that

the WRAP program does not call for significant SO2 reductions until the 2013–2018

timeframe, what co-benefits are being used to calculate the 2010 mercury cap in the

west? Specifically, from where does the Agency specifically see those reductions

being realized?

Response. Western sources would be required to meet NOx and SO2 reductions

under Phase I of Clear Skies. Clear Skies was designed to allow much of the first

phase mercury reductions to be achieved through installation of NOx and SO2 con- trols (selective catalytic reduction (SCR) and scrubbers, respectively) because such

controls also remove mercury.

Under EPA’s updated 2003 modeling results, much of the Phase I mercury reductions needed to meet the 26 ton cap would be achieved through the installation of

such controls. A small portion of the Phase I reductions would likely need to be

achieved through mercury-specific control technologies (e.g., activated carbon injection). With the mercury cap, we would expect the power industry to optimize their

NOx and SO2 controls for the greatest mercury removal. Because Clear Skies uses

a cap-and-trade approach to reducing emissions, sources have an incentive to install

controls that achieve reductions of both mercury and one or both of the other pollutants, to engineer these controls for greater mercury removal and to operate the

plants that achieve the greatest mercury co-benefit removal a little more than they

might without a mercury cap. Further, Clear Skies contains a safety valve price in

order to protect against unexpected volatility in the mercury market.

Question 3. As it affects the Western U.S., help the Committee walk through the

calculations of the Phase 1 mercury cap that is supposed to be achieved through cobenefits. The Phase 1 national cap of 26 tons represents a 46 percent reduction. If

western mercury emissions of 4.3 tons were reduced by that amount it would result

in a western cap of 2.0 tons. However, if all of the available sources in the west

were scrubbed at an unrealistic level of 100 percent, the remaining western emissions would be 3.61 tons, much above the Phase I cap. Thus western sources would

have no choice but to buy allowances in the market in order to comply. How, does

this represent a realistic view of co-benefits?

Response. We are uncertain how some of the numbers contained in the question

were derived. We would be happy to have EPA staff explore this issue with Senator

Thomas’ staff .

STATEMENT OF HON. GLENN MCCULLOUGH, JR., CHAIRMAN, TENNESSEE VALLEY

AUTHORITY

Thank you, Mr. Chairman and members of the Subcommittee. On behalf of the

TVA Board of Directors and our employees, I would like to thank you for the opportunity to appear today to discuss the Tennessee Valley Authority’s views on clean

air and more specifically S. 485, the Clear Skies Act of 2003. In our role as both

steward of the environment and provider of electricity in the Tennessee Valley, TVA

is uniquely positioned to comment on clean air issues facing our region and the Nation, and we appreciate the opportunity to share these views today.

TVA, and 158 power distributors, serves the 8.3 million people of the Tennessee

Valley by producing affordable, reliable electricity while supporting sustainable economic development and maintaining stewardship of the region’s natural resources.

TVA’s unique mission gives us the opportunity to see first hand the importance of

finding the best balance between fueling a sustainable and vibrant economy and enhancing the quality of our natural environment. The TVA Board works every day

to find that balance as it relates to many issues, and no aspect of that balance is

of greater importance than the issue you are considering today—clean air.

TVA was created by Congress in 1933 to enhance the quality of life in the Tennessee Valley region. We do that by providing flood control and maintaining navigation on the Tennessee River, the nation’s fifth largest river system, and by generating and transmitting electricity in the seven–State area that is the Tennessee Val-
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ley. TVA meets the power needs of the region’s homes, businesses, schools, and industries through 158 power distributors and by directly serving 62 large industries.

TVA’s electric power system includes 59 coal-fired units at 11 plant sites, three nuclear plants, 29 hydro-power plants, six combustion-turbine plants, three wind turbines, and 15 solar installations. The President’s National Energy Policy recognizes

the importance of diversity in energy supply including new emphasis on promoting

nuclear energy, clean coal technologies, and renewable energy sources. TVA’s mix

of fossil, nuclear, hydroelectric and renewable generation not only helps ensure the

reliability of the TVA system but also illustrates the value and benefits of such diversity for our Nation.

TVA is committed to its stewardship of the environment in the Tennessee Valley.

I am proud to say that TVA has reduced sulfur dioxide (SO2) emissions by 76 percent since 1977. In addition, we have reduced ozone-season emissions of nitrogen

oxide (NOx) by 50 percent in the past 8 years. Through 2001 TVA has invested more

than $3 billion to achieve these reductions even as the population, the economy and

the energy needs of the Valley continue to grow at rates faster than the national

average.

Since 1990, the population in the Tennessee Valley has grown by more than 15

percent, gross regional product by nearly 50 percent, and demand for electricity by

more than 10 percent. In the past decade TVA has achieved historically high levels

of operational performance and reliability in our power system and maintained affordable power rates—all while reducing emissions of sulfur dioxide and nitrogen

oxide from our power plants. These actions demonstrate TVA’s commitment to air

quality and to finding the right balance between fueling the region’s economy and

continuing air quality improvements.

Today, TVA is in the midst of one of the most aggressive emissions reduction programs in the Nation. In November 2002, TVA approved plans to construct five more

flue-gas desulfurization systems, or scrubbers, to reduce sulfur-dioxide at coal-fired

power plants in Kentucky, Alabama, and Tennessee. These scrubbers will cost about

$1.5 billion and collectively will reduce emissions of sulfur dioxide by an additional

200,000 tons per year. When construction is complete, we will have installed FGD

scrubbers on more than half of our coal-fired generating capacity. This action, in

combination with switching to low sulfur coal, will reduce TVA’s total sulfur dioxide

emissions by 85 percent since 1977 (see attachment GRAPH 1). In addition to sulfur dioxide controls, we are investing more than $1.1 billion to

reduce nitrogen oxide emissions by constructing controls such as selective-catalyticreduction systems or SCRs on 25 coal-fired generating units. By 2005, TVA will

have installed SCRs or similar technologies on more than 60 percent of its coal-fired

generating capacity. These SCRs, in combination with low NOx burners and other

controls, will reduce nitrogen oxide emissions by 75 percent during the ozone season

(see attachment GRAPH 2). Between now and the end of this decade, we are committed to spending almost $1 million per day to accomplish these emission reductions. By 2010, TVA will have invested nearly $5.6 billion in cleaner air.

We believe this investment to reduce emissions from our coal-fired plants will pay

significant dividends while providing a cost-effective return on that investment to

continue air quality improvements in our region. We also know, however, that emissions from all sources—stationary and mobile—must continue to be reduced. For

that reason I am pleased today to appear before this subcommittee to endorse the

Clear Skies Act of 2003.

The current Clean Air Act has done much to reduce emissions and as a result

the air quality we enjoy in this country has been improved significantly. However,

the current Act is plagued with problems that could threaten the reliability and affordability of the nation’s electric power supply. Low-cost, reliable electric power results, in part, from the power industry’s ability to use a variety of energy sources,

including coal. Today, the Tennessee Valley region depends on coal for approximately 60 percent of its power supply. Coal is also our nation’s most abundant energy source for the future. Unfortunately, this critical energy resource faces a complicated web of overlapping, duplicative, and unnecessarily costly emission control

requirements that do not provide the greatest return on investment and, furthermore, create enormous uncertainty for future investment. For example, there are

now more than a dozen separate regulations for sulfur dioxide and nitrogen oxides

alone and more regulations are just around the corner. At times, disputes over these

regulations have significantly delayed the very air quality progress they were designed to achieve, thereby creating enormous uncertainty for future investment.

TVA believes this piecemeal approach to regulating power plant emissions should

be replaced with a set of emission reduction targets and timetables for sulfur dioxide, nitrogen oxides, and mercury. We believe that Clear Skies, a well-designed

multi-emission approach, will continue the national trend of better air quality and
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provide additional benefits. These benefits include a streamlined regulatory process;

sustained diversity in the nation’s fuel supply; and more flexible, market-based

mechanisms for achieving emissions reductions that are fair for both private and

public power providers. This approach would also reduce compliance costs; and give

the utility industry the certainty it needs to effectively plan and finance emission

reductions without unduly burdening ratepayers. Such results have been well demonstrated by the very successful Acid Rain Program and they can and should be replicated elsewhere in the Act. Clear Skies appropriately allows continued use of SO2

and NOx allowances that are guaranteed under existing programs. This is an important feature of the bill and should be preserved because companies will be encouraged to reduce emissions early and achieve greater levels of environmental benefit.

We do not believe, however, that Clear Skies or other market-based programs

should replace all features of the Clean Air Act that regulate electric utility emissions. The National Ambient Air Quality Standards have been a vital part of the

improvement in national air quality and they should be preserved as is done in

Clear Skies.

While TVA endorses the Clear Skies Act’s reduction targets and timetables, we

believe there are some provisions of the current bill that can be improved to achieve

better overall results. Specifically, we urge you to ensure that the interim 2010 mercury target reflect the Administration’s intent of reducing mercury to levels achievable via a cap and trade system through co-benefits with sulfur dioxide and nitrogen

oxide control technologies. This would allow TVA and other utilities that have already reduced mercury through investments in sulfur dioxide and nitrogen oxide reductions to realize credit for their early actions. Otherwise, some may be required

to install very expensive and as yet unproven mercury-specific controls, such as carbon injection and finishing baghouses.

Before I close, I want to emphasize that Clear Skies is a very aggressive proposal.

As I mentioned earlier, TVA knows from first hand experience that extensive resources—time, equipment and skilled workers—will be necessary to make the reductions Clear Skies will require. Many of the critics of Clear Skies have never

planned, designed, constructed, operated or financed these massive pollution control

systems.

At TVA, we will soon have SCR or similar systems on 25 units and scrubbers on

18 units raising TVA’s total investment in cleaner air to $5.6 billion. Achieving the

results contemplated by Clear Skies would require us to construct 23 additional

SCR systems and install scrubber technology on 40 more units at an additional cost

of $4 billion between now and 2018. To do more, sooner than what Clear Skies requires would increase costs considerably while placing an unrealistic burden on the

economy of the Tennessee Valley and our ratepayers.

I appreciate the opportunity to talk with you today about this important legislation. We at TVA are committed to improving the quality of life for the 8.3 million

people of the Tennessee Valley. The TVA Board is setting a new standard of excellence for TVA’s business performance and in our public service. On our watch at

TVA, we are striving to find the best balance between providing the affordable, reliable supply of electricity that sustains a vibrant economy and continuing to improve

the environmental quality of the Valley. Thank you again for allowing me to address

these issues with you today and I am pleased to answer any questions you may

have for me.
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RESPONSES OF GLENN MCCULLOUGH TO ADDITIONAL QUESTIONS FROM SENATOR

VOINOVICH

Question 1. Do you think that Clear Skies will have a positive effect or negative

effect on the air quality in the Great Smoky Mountains National Park?

Response. The emission reductions required by the Clear Skies Act will have a

positive effect on the air quality and resources of the Smokies. In my testimony, the

emission reductions targets and timetables in Clear Skies were noted as being very

aggressive. The reduction targets will result in deep cuts in emissions of nitrogen

oxides (NOx) and sulfur dioxide (SO2) from utilities, and the timetable for these reductions is both short and certain. Unlike many requirements of the existing Clean

Air Act that are prone to prolonged litigation, Clear Skies provides a logical and

tested framework for achieving these reductions rapidly.

In my testimony, I also noted that TVA has already reduced its NOx emissions

by over 50 percent since 1995 and has made a 76 percent reduction in SO2 since

1977. TVA’s reductions undoubtedly have contributed to the improvements in air

quality here in the Tennessee Valley. Yet air quality challenges remain, particularly

in the Park. Clearly all air emission sources will have to reduce their emissions if

we are to see overall improvements to the Park’s air quality. With its national focus,

Clear Skies should prove more effective in improving mountain air quality than any

regional or single-source programs.

Question 2. As I mentioned in my opening remarks, fuel switching is a major concern of mine. I noticed in your testimony that you have a pretty diverse fuel mix

for electric generation at TVA. What impacts do you think Clear Skies would have

on your ability to maintain that diverse fuel mix?

Response. Clear Skies will enable us to maintain a diverse mix of generation assets and fuel sources. Make no mistake; Clear Skies will require a continuation of
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major investments in pollution control technologies for our coal-fired plants. Yet,

with these investments, TVA will be able to continue to provide affordable, reliable

electrical power that is needed to support sustainable economic development while

advancing TVA’s stewardship of the region’s natural resources.

Question 3. What impact would passage of the Clean Power Act (S. 366) have on

TVA’s ability to provide reliable affordable electricity to its consumers?

Response. Our review of the Clean Power Act indicates that the nation’s infrastructure for generating and delivering energy in our region would be severely compromised. Sharp reductions of CO2 by 2007 would require a drastic shift from coalfired generation to natural-gas-fired and nuclear generation. The enormity of this

shift in fuel sources stretches the ability to realistically predict the consequences of

such a change. Estimates from both DOE and EPA are shocking. Apart from a large

increase in the cost of power, extensive reliance on natural gas as a primary fuel

for electricity generation throughout the Nation would undoubtedly result in serious

reliability and availability problems. It could also have devastating impacts on the

use of natural gas for residential uses.

We have estimated that this legislation could require TVA to shut down over 3900

MW of our coal-fired generation, or more than 25 percent of the coal-fired generation on our system.

RESPONSES OF GLENN MCCULLOUGH TO ADDITIONAL QUESTIONS FROM SENATOR

JEFFORDS

Question 1. What impact would passage of the Clean Air Planning Act (S. 3135)

have on TVA’s ability to provide reliable affordable electricity to its consumers?

Reponse. Our review of the Clean Air Planning Act prompted, in part, a statement in my testimony that to do more sooner than what Clear Skies requires would

increase costs considerably while placing an unrealistic burden on the economy of

the Tennessee Valley and our ratepayers.

Question 2. What amount of reductions will Clear Skies require TVA to make in

2010 and in 2020 that aren’t already planned or expected by TVA planners and

management under the current Clean Air Act? In your response, please include any

planning documents that discuss possible reductions required to be made in order

to achieve attainment with the ozone or fine particulate matter NAAQS.

Reponse. As I testified, TVA currently is in the process of installing selective catalytic reduction (SCR) NOx controls on 25 of TVA’s 59 units and 5 more scrubbers

to control SO2 emissions from 12 of our units. We are installing these controls to

meet requirements of the current Clean Air Act. Under Clear Skies, we project that

we will have to install 23 additional SCRs on our system and scrubbers to control

emissions from 40 more units. Some of these latter controls could be required when

EPA issues additional regulations, but the number and schedule for additional control systems depends on the requirements of any future regulations and the resolution of the litigation that inevitably follows EPA rulemakings under the current

Clean Air Act.

Question 3. In your testimony, you stated that if Clear Skies were implemented,

TVA would have to install pollution controls on 23 additional units at a cost of another $5 billion by 2018. How much would TVA electricity consumers rates rise as

a result of Clear Skies implementation?

Reponse. I stated that TVA will soon have SCR or similar systems on 25 units

and scrubbers on 18 units raising TVA’s total investment in clean air to $5.6 billion.

Achieving the results contemplated by Clear Skies would require us to construct

23 additional SCR systems and install scrubber technology on 40 more units at

an additional cost of $4 billion between now and 2018.

Spending an additional $4 billion between now and 2018 would impose a significant financial burden on TVA. TVA’s goal has always been to pay necessary expenses out of existing revenues rather than increase rates and this would be our

first response to costs incurred under Clear Skies. We have historically resisted rate

increases unless absolutely necessary, as evidenced by the fact that the rate increase that is being discussed for fiscal year 2004 would only be our second in the

last 16 years.

Question 4, What are TVA’s projected annual pollution control capital and operating costs for the next 10 years? Please distinguish between the two categories in

your answer.

Reponse. Through 2010, TVA forecasts capital expenditures for air pollution control equipment of over $2.3 billion dollars. This translates to an average annual
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amount of approximately $300 million per year. Annual operating and maintenance

costs associated with these controls are expected to average $34 million per year.

Question 5. What percentage of the TVA electricity consumers rate ($/kwh) does

each of the categories in the previous question represent? Please reply for each of

the last 3 years and the next 3 years.

Reponse. The rates that TVA charges its distributor customers and directly served

customers are bundled rates that include all components of TVA’s cost structure.

The contributions of these individual components are not singled out. The spending

levels discussed in the above response represent about 3.8 percent of TVA revenue

over this period.

Question 6. Based on the Southern Appalachian Mountains Initiative analysis,

utilities close to the Great Smoky Mountains National Park are having the greatest

impact on air pollution problems. In order to return the Smokies to the natural visibility range of 77 miles in the summer, haze pollution would need to be reduced

by 90 percent. But, as I understand it, Clear Skies would only provide a visibility

improvement of 4 or 5 miles (that takes it from an average of 14 to 18 or 19 miles).

Will TVA support or make deeper SOx reductions than Clear Skies would require

in order to improve the visibility problems plaguing the park?

Reponse. The work done by the Southern Appalachian Mountains Initiative indicates that sources in States closest to the Smokies have a greater impact than

sources in more distant States but this same research also shows that the closer

sources account for less than 50 percent of the emissions that impact the Park. In

other words, as a group, more distant sources are contributing substantially to air

quality conditions in the Park. This is one reason why TVA supports national legislation like Clear Skies that will produce emission reductions from these more distant sources. I testified that Clear Skies is a very aggressive proposal. It will require

deep cuts in emissions on top of what TVA and other utilities are already making.

Because of limitations on necessary equipment and skilled labor, we think it would

be very difficult to either accelerate the schedule or level of reductions called for by

Clear Skies.

Question 7. How many TVA plants are located more than 50 kilometers from

Great Smoky Mountains National Park?

Reponse. Our Bull Run Fossil Plant is approximately 46 kilometers from the nearest park boundary, and our Kingston Fossil Plant is approximately 49 kilometers

from the park boundary. TVA is installing SCRs and scrubbers at these plants as

part of our current system reductions. All of our other nine coal-fired plants are located greater than 50 kilometers from the park boundary.

Question 8. About 3 years ago, Joe Bynum of TVA testified before this Subcommittee. He said that TVA is a Federal agency and corporation. If that’s the case,

it seems inappropriate if not illegal for TVA to be suing EPA in court over New

Source Review. Why hasn’t TVA complied with EPA’s administrative order on NSR,

since all Federal agencies are required to comply with such orders under the Clean

Air Act unless national security is invoked?

Reponse. There is nothing inappropriate or unlawful about TVA requesting the

Eleventh Circuit Court of Appeals to review the EPA administrative order on NSR.

EPA challenged the propriety of TVA’s lawsuit and asked the Eleventh Circuit to

throw TVA out of court. By unanimous decision, the Court found that TVA could

sue EPA over the order and has allowed TVA’s lawsuit to continue. Unlike other

targeted electricity providers, TVA did not have an opportunity to contest EPA’s allegations of NSR violations before an independent trial court. The Court of Appeals

is the only entity to which TVA could turn to afford us and our ratepayers an opportunity to make our case before an independent entity and show that our efforts to

maintain the reliability, availability, and safety of our power plants did not and does

not violate NSR.

Question 9. If TVA fully complied with the EPA order on NSR as soon as possible,

what would be the approximate reduction in TVA plant emissions annually and

what would be the emissions performance at each of your fossil plants?

Reponse. If TVA had to comply with the EPA NSR administrative order as soon

as possible, we do not know what the approximate emission reduction would be.

This uncertainty is due in part to the order because it does not identify specific levels of control (these are to be determined by the States that regulate TVA’s plants)

nor does it identify specifically all of the units that TVA may have to control. I testified to the reductions that TVA is already making on its system and is committed

to make. These reductions are very close to the level of reductions (on a proportional

basis) that EPA has required of other utilities that have now settled EPA’s NSR

claims or litigation. However, EPA in these settlements has generally required that
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the agreed-to reductions be made by 2012. TVA plans to complete similar reductions

underway on its system by the end of the decade.

Question 10. Your testimony was that TVA will spend $5.6 billion by 2010 in

cleaner air. In 2010, how many tons of pollution will TVA be emitting generally and

at each plant?

Reponse. Estimates for future emissions (as opposed to emission reductions) depend on generation levels on our entire system and at each plant in the system.

However, ignoring this uncertainty, we estimate that after we complete the installation of the additional SCRs on the TVA system, annual NOx emissions from our system will be about 230 thousand tons per year. When we complete the installation

of the five additional scrubbers on our system, we estimate system SO2 emissions

will be near 360 thousand tons per year. Attached are tables showing our estimates

of emission rates by plants for both NOx and SO2.

Question 11. How many tons of allowances did TVA plants need to buy to ‘‘trueup’’ in each of the last 5 years, meaning that TVA facilities had emitted more pollution than their allocation under Title IV?

Reponse. Unlike some utilities, TVA decided to install emission controls and employ other strategies to comply with Title IV rather than buying SO2 emission allowances. Since the inception of the Title IV program of the Clean Air Act Amendments 1990, TVA has maintained a bank of SO2 allowances and has not purchased

allowances to ‘‘true-up’’. Part of our strategy was to create a ‘‘bank’’ of allowances

to help us better schedule the installation of necessary controls. TVA’s bank was

created by reducing emissions earlier than required, including the installation and

operation of scrubbers on our two largest units. While TVA has periodically bought

and sold allowances in the market, the net effect has been that TVA is effectively

neutral in the emissions allowance market.

Question 12. TVA has recently announced plans to increase customer rates by

about 8 percent. Are these increases to pay for restarting Brown’s Ferry Unit 1 nuclear reactor or for NOx and SOx pollution controls?

Reponse. TVA’s recently announced plan to increase its wholesale rates by an average of 5.9 percent is necessary to cover the increasing costs of NOx and SOx pollution controls while continuing to pay down the debt. By 2010, TVA will have invested nearly $5.6 billion in clean air. While these investments to date have been

made out of existing revenues, the enormity of future clean air investments makes

a rate increase necessary.

The rate increase that is being discussed is not an attempt to pay for the costs

of restarting TVA’s Browns Ferry Unit 1. By 2015, the investment in Brown’s Ferry

Unit 1 is projected to pay for itself from operating cash-flows. Additionally, TVA is

exploring alternative financing arrangements to pay a portion of the restart costs.

Question 13. You stated that TVA is spending $527 million this fiscal year on

clean air. Please describe the projects (>$5 million) that TVA defines as clean air

and how they will contribute to cleaner air.

Reponse. These clean air related projects consist of SCR projects to reduce NOx

emissions at seven TVA plants (Allen, Bull Run, Colbert, Cumberland, Kingston,

Paradise, and Widows Creek) and SO2 reduction projects consisting of scrubber and

fuel switches at three plants (Colbert, Johnsonville, and Paradise).

ATTACHMENT

Tennessee Valley Authority

Projected 2010 Annual SO2 Emission Rates

Plant Unit

SO2 Expected 2010

SO2 Rate (lb/

SO2 Control Technology Status MMBtu)

Allen ..................................................... 1–3 ................................... ................................... 0.9

Bull Run ............................................... Scrubber ......................... By 2010 .......................... 0.3

Colbert ................................................. 1–4 ................................... ................................... 1.0

Colbert ................................................. 5 Scrubber ......................... By 2010 .......................... 0.3

Cumberland ......................................... 1 Scrubber ......................... Existing ........................... 0.3

Cumberland ......................................... 2 Scrubber ......................... Existing ........................... 0.3

Gallatin ................................................ 1–4 ................................... ................................... 1.0

John Sevier ........................................... 1–4 ................................... ................................... 1.4

Johnsonville .......................................... 1–10 ................................... ................................... 1.4

Kingston ............................................... 1–4 Scrubber ......................... By 2010 .......................... 0.3

Kingston ............................................... 5–9 Scrubber ......................... By 2010 .......................... 0.3
109

Tennessee Valley Authority—Continued

Projected 2010 Annual SO2 Emission Rates

Plant Unit

SO2 Expected 2010

SO2 Rate (lb/

SO2 Control Technology Status MMBtu)

Paradise ............................................... 1–2 Scrubber ......................... Existing ........................... 0.5

Paradise ............................................... 3 Scrubber ......................... By 2010 .......................... 0.3

Shawnee 1–9 ....................................... 1–9 ................................... ................................... 1.0

Shawnee 10 ......................................... 10 ................................... ................................... 0.6

Widows Creek ....................................... 1–6 ................................... ................................... 1.2

Widows Creek ....................................... 7 Scrubber ......................... Existing ........................... 0.5

Widows Creek ....................................... 8 Scrubber ......................... Existing ........................... 0.5

Tennessee Valley Authority

Projected 2007 Ozone Season NOx Emission Rates

Plant Unit

NOx Expected 2010

NOx Rate (lb/

NOx Control Technology Status MMBtu)

Allen ..................................................... 1–3 SCR ................................. Existing ........................... 0.1

Bull Run ............................................... SCR ................................. By 2005 .......................... 0.1

Colbert ................................................. 1–4 SCR ................................. By 2006 .......................... 0.1

Colbert ................................................. 5 SCR ................................. By 2005 .......................... 0.1

Cumberland ......................................... 1 SCR ................................. Existing ........................... 0.1

Cumberland ......................................... 2 SCR ................................. By 2005 .......................... 0.1

Gallatin ................................................ 1–4 LNB & OFA ..................... Existing ........................... 0.3

John Sevier ........................................... 1–4 LNB & OFA ..................... Existing ........................... 0.4

Johnsonville .......................................... 1–10 BLR OPT 1–6 ..................

LNB U7–10 .....................

Existing ...........................

Existing ...........................

0.6

0.5

Kingston 1–8 ....................................... 1–8 SCR ................................. By 2005 .......................... 0.1

Kingston ............................................... 9 OFA ................................. Existing ........................... 0.45

Paradise ............................................... 1–2 SCR ................................. Existing ........................... 0.1

Paradise ............................................... 3 SCR ................................. Existing ........................... 0.1

Shawnee 1–9 ....................................... 1–9 LNB ................................. Existing ........................... 0.4

Shawnee 10 ......................................... AFBC ............................... Existing ........................... 0.3

Widows Creek ....................................... 1–6 LNB ................................. ................................... 0.5

Widows Creek ....................................... 7 SCR ................................. Existing ........................... 0.1

Widows Creek ....................................... 8 SCR ................................. By 2005 .......................... 0.1

Expected Technology—Other control technology may be installed. SCR—Selective Catalytic Reduction OFA—Over-fired Air ANCT—Advanced NOx Control Technology LNB—Low NOx Burner AFBC—Atmospheric Fluidized Bed Combustion

STATEMENT OF JIM ROGERS, CEO AND PRESIDENT, CINERGY CORPORATION, ON

BEHALF OF THE EDISON ELECTRIC INSTITUTE

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
110

1Testimony 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.

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 pollutantby-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 percent 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
111

2Wall Street Journal, February 28, 2003 ‘‘Effects of Gas Shortage Rip Through Economy

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 tech-
112

nology 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 3-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 3-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 3 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 nar-
113

3Statement 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

row 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.
114
115

STATEMENT OF BRADLEY CAMPBELL, DIRECTOR, NEW JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION, ON BEHALF OF THE NORTHEAST STATES FOR COORDINATED AIR USE MANAGEMENT (NESCAUM)

Good afternoon. My name is Brad Campbell. I am Commissioner of the New Jersey Department of Environmental Protection. I speak today for the eight Northeast

States that make up the Northeast States for Coordinated Air Use Management

(NESCAUM). I understand that many of the views I will offer are also shared by

the States of the larger Ozone Transport Commission. I appreciate the opportunity

to testify before the committee today to present a Northeast States’ perspective on

the critically important issue of Federal action to reduce power plant pollution.

I want to begin by emphasizing that the Northeast States strongly support efforts

to enact multi-pollutant legislation, and have so testified before this committee in

the past. We applaud the Administration and this committee for making passage

of such legislation a priority for the 108th Congress. It has been over a decade since

the last Clean Air Act Amendments, and the time has clearly come for a new national policy to address the broad array of public health risks and environmental

harms caused by power plant emissions.

In the Northeast, where sulfur dioxide and nitrogen oxides emissions from upwind

power plants contribute significantly to problems ranging from fine particle and

ozone pollution to acid rain, eutrophication of surface waters, and poor visibility in

our parks and wilderness areas, we have long appreciated the need for concerted

Federal action. With mercury contamination necessitating fish consumption

advisories for most of our lakes and rivers, we see an urgent need for new measures

to curb the continued buildup of this persistent, potent neurotoxin in our environment. And we see the problem of climate change as presenting unprecedented challenges for our ecosystems and quality of life, but also great economic opportunity

for those who develop and provide the clean energy technologies of the future.

For all of these reasons, the Northeast States have followed with keen interest

the development of several multi-pollutant initiatives now before Congress, including the Administration’s ‘‘Clear Skies’’ proposal. In evaluating each initiative, we

have asked three core questions:

• Is it comprehensive?
116

• Is it adequate to address the significant public health and environmental challenges we face?

• Does it strengthen our ability to ensure continued clean air progress, not only

at the national level, but also at the local, State and regional levels?

Recognizing Clear Skies as a starting point for the committee’s deliberations, I

want to focus my remarks today on where and how we believe Clear Skies needs

to be improved to meet these tests.

First, emissions reductions can and must happen sooner. As you know, many

areas of the country need to attain new, more stringent health-based Federal standards for ozone and fine particles in the next 4–7 years. Yet the emissions caps in

Clear Skies won’t be fully implemented until 2018. Delaying necessary cuts for another 15 years is problematic for States trying to reach attainment, but it’s even

more problematic for the tens of thousands of people who experience serious health

effects associated with unnecessarily high levels of fine particle and ozone pollution.

Second, we can and must do more to reduce mercury emissions. Given the persistent, bioaccumulative threat posed by this neurotoxin and the availability of highly effective control technologies, power plant mercury emissions should be capped

at levels at least 50 percent lower than the 15 ton figure proposed in Clear Skies.

Third, national multi-pollutant legislation must address the intractable problem

of interstate pollution transport in a concrete and effective manner, and must not

weaken or remove crucial regulatory tools that States rely on to improve air quality

at the local, State, and regional levels.

Clear Skies offers no guarantee that long-standing regional transport concerns

will be solved under a new national emissions trading program, yet States would

be prohibited from petitioning for Federal action to address transport until after

2012. Even then, the new hurdles Clear Skies establishes for Federal intervention

would make the current transport provisions of the Clean Air Act practically unenforceable.

States support constructive reform of the Clean Air Act, provided it genuinely advances our clean air objectives and is strictly tied to the actual implementation of

new reduction requirements. Clear Skies appears to go too far in the name of regulatory reform, however, proposing to substantially weaken or even eliminate several

provisions of the current Clean Air Act. A list of several such concerns—including

New Source Review, regulation of non-mercury toxins, potential local impacts, and

protection of States’ rights—is attached to my written testimony. The bottom line

is that when it comes to protecting public health, it is far better to have too many

tools and not need some than to have too few tools and come up short regarding

our citizens’ quality of life.

The final issue I want to address is carbon dioxide. We believe it belongs in multipollutant legislation because without it, the market signals and business certainty

needed to promote sound long-term resource choices and investment decisions by the

electric power industry will remain absent. The inevitable long-term result is greater climate risk—and higher costs—for both industry and consumers. The Northeast

States feel so strongly about the need to act on climate change that many have

made State-level commitments to reduce greenhouse gas emissions and/or have included carbon in their own, more aggressive 4-pollutant initiatives. The several such

efforts already in effect show that the Northeast States are willing to lead by example, but as downwind States, we can’t do it all by ourselves.

In short, we support multi-pollutant legislation that cost-effectively does both

more and less than Clear Skies proposes. More—and sooner—in terms of pollution

reductions; less in terms of changing the Clean Air Act.

This is precisely how the ‘‘Straw Proposal’’ that EPA originally drafted as the Administration’s multi-pollutant initiative could be described. The Straw Proposal

called for emissions reductions closer to 85 percent (compared to Clear Skies’ 70 percent) and, importantly, for reductions to be fully implemented by 2010–12. Moreover, EPA’s own analysis showed that the health benefits of this substantially more

aggressive approach far outweighed its costs. EPA’s analysis showed that implementing the Straw Proposal would cost $3.5 billion more than Clear Skies in 2020,

but it would produce $59 billion in additional health benefits. We urge the committee to re-visit EPA’s Straw Proposal and other current legislative alternatives

that go further toward capturing these benefits.

In closing, let me thank you for considering our views and again commend the

Administration for pushing forward on multi-pollutant legislation. The issues are

complex, and the debate will no doubt be intense. But the Northeast States look forward to playing a constructive role, and we hope all sides can agree that the opportunity and need for real progress on these issues is as great as the public health,

environmental and energy challenges we face are daunting.
117

Technical Concerns of the Northeast States Regarding S. 485, the Clear Skies Act

of 2003

Clear Skies diminishes or repeals entirely some of States’ most important tools

for achieving Federal, health-based air quality standards:

• New Source Review (NSR)

• The utility Maximum Achievable Control Technology (MACT) rule as it applies

to hazardous air pollutants (HAPs) other than mercury

• Residual risk requirements for mercury

• Lowest Achievable Emission Rate (LAER) and offset requirements and conformity for most areas of the country

• Use of Section 126 until 2012, and only then under a higher burden of proof

• Some Prevention of Significant Deterioration (PSD) requirements

• Protection of visibility in Class I airsheds.

• Clear Skies appears to undermine, if not preempt entirely, State and local authority to adopt and to take State Implementation Plan (SIP) credit for more stringent requirements for power plants.

• Clear Skies provides no protections against adverse local health and environmental impacts that could arise, and does not require even a minimum level of control at each power plant.

• Regulatory relief under Clear Skies is provided expeditiously, but corresponding emission reduction requirements are delayed for years—a serious

unbalancing of these dual policy objectives.

• Clear Skies’ approach to allocating allowances appears to continue the practice

of rewarding past high emitters, rather than encouraging economic efficiency

through output-based allocation approaches and/or approaches that reward combined heat and power (CHP) applications.

STATEMENT OF DAVID HAWKINS, CLIMATE CENTER PROGRAM DIRECTOR, NATURAL

RESOURCES DEFENSE COUNCIL

Summary

Mr. Chairman and members of the Subcommittee, thank you for inviting me to

testify on behalf of NRDC, the Natural Resources Defense Council, and its more

than 500,000 members regarding S. 385, the Administration’s bill to amend the

Clean Air Act. We have examined the Administration proposal and we conclude it

would harm public health, weaken current pollution fighting programs and worsen

global warming.

In my testimony today, I will emphasize three major policy failures in the Administration’s bill. S. 385 would do the following to our nation’s clean air program:

• Allow power plant pollution to continue to inflict huge, avoidable health damages on the public.

• Repeal or interfere with major health and air quality safeguards in current

law.

• Worsen global warming by ignoring CO2 emissions from the power sector.

NRDC supports good legislation to amend the Clean Air Act. We worked with the

first Bush Administration in 1989 and supported the cap and trade program that

was enacted in the 1990 amendments to the law. But the current Administration

proposal is not good legislation: it would take two enormous steps backward and fail

to take a critical step forward on global warming.

Fortunately, your choices are not limited to accepting the Administration’s plan

or taking no action. As Senators you have the right to ask the Administration to

explain the policy choices in the bill it has sent to you. If you conduct a thorough

inquiry into the Administration plan and alternatives we believe you will conclude

that the Administration’s bill should not become law. Congress can do much better

and the public deserves much better. We want to work with you to deliver that better solution to the public.

I. THE ADMINISTRATION PLAN IMPOSES UNACCEPTABLE AND AVOIDABLE HEALTH COSTS

ON THE PUBLIC

Air pollution from power plants imposes a staggering toll of death, disease, and

environmental contamination on the American people.

Sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions from power plants create dangerous concentrations of fine particles and ozone (soot and smog) in the air

that 175 million people breathe. Soot and smog caused by power plant emissions

is causing 30,000 premature deaths, hundreds of thousands of asthma attacks, and

millions of days of illness and lost work each year.
118

1U.S. EPA, ‘‘Comprehensive Approach to Clean Power: Straw Proposal and Supporting Analysis for Interagency Discussion,’’ August 3, 2001. (‘‘EPA August 2001 Analysis’’) Available at

http://www.catf.us/publications/other/EPA—Straw—Proposal.pdf. 2The results shown in the figures below are based on EPA analyses with the Integrated Planning Model (IPM), the standard modeling tool used by all stakeholders in the power plant debate. They show the pattern of emissions expected under the two plans, including the impact

of ‘‘banking,’’ which results in some reductions below the caps in early years in order to emissions at levels above the caps in later years.

Mercury emissions from power plants fall from the air and wash into lakes, rivers,

and coastal waters, where they concentrate in fish. Mercury is a potent brain poison

(neurotoxin) even in very small amounts. Forty-four States have issued warnings

against eating local fish because of mercury contamination.

Power plant pollution is causing a major, ongoing public health crisis. The Bush

Administration’s proposed air pollution plan fails to stem this crisis.

By any comparison, the Administration’s plan allows power plant owners to continue an unacceptable and unjustifiable toll of preventable death and illness. Measured against alternative legislative proposals including an alternative proposal developed within the Administration itself in 2001 the Administration plan would result in more than 100,000 additional early deaths and millions of additional asthma

attacks and other illnesses between now and 2020. The Administration’s plan also

would result in hundreds of tons more mercury released into the atmosphere over

this period. The same conclusions emerge when the Administration’s plan is measured against faithful enforcement of the current Clean Air Act.

The Administration rejected an alternative proposal, developed by EPA in August

2001, that would have dramatically reduced this toll of death, illness, and environmental contamination. When expressed in monetary terms, the benefits of the EPA

proposal dwarf its cost. But the Administration has submitted to you the much

weaker plan found in S. 385. By sending you its weaker plan, the Administration

is asking you to vote for a program that saves power plant owners $3.5 billion per

year in pollution control costs but imposes at least $61 billion per year in additional

avoidable health costs on the American people.

In our view, the Administration owes you and the American people some straight

answers to these questions:

Why should the public accept the enormous toll of preventable death and illness

from power plant pollution that will still occur under the Administration’s plan?

Why should Americans suffer tens of billions of dollars each year in health costs

that could be avoided at a fraction of that cost?

Why don’t the American people have a right to expect whether from the current

Clean Air Act or any new legislation much deeper and quicker reductions in power

plant pollution than the Administration’s plan would provide?

The Administration Plan vs. the EPA Proposal

The original ‘‘Clear Skies’’ proposal was developed in 2001 by the Environmental

Protection Agency.1 The EPA proposal was developed with the goal of delivering at

least as much clean-up of sulfur, nitrogen, and mercury emissions as required under

the current Clean Air Act with the purported advantages of a cap and trade program. Unfortunately, while the Administration’s plan before you today keeps the

title, the program has been converted from one that speeds clean air to one that

shields power plant owners from faster cuts in their pollution.

After intense lobbying by power plant owners, the White House rejected the targets and timetables in the EPA proposal and proposed a plan allowing much greater

continuing pollution from this industry. The larger pollution loads allowed by the

Administration’s CSI plan are summarized in the following chart:

Bush Administration Plan (CSI) v. EPA Proposal (Aug. 2001)

Sulfur Dioxide (SO2) Nitrous Oxide (NOx) Mercury (Hg)

EPA Proposal .................... 2 million tons in 2010 ........... 1.9 million tons in 2008 ........

1.25 million tons in 2012 ......

24 tons in 2008

7.5 tons in 2012, with 70

percent facility-specific reduction

Administration Plan ......... 4.5 illion tons in 2010 ...........

3 million tons in 2018 ...........

2.1 million tons in 2008 ........

1.7 million tons in 2018 ........

26 tons in 2010

15 tons 2018

The differences in the amount of pollution allowed by these two plans, both year

by year and cumulatively out to 2020, are huge.2 The Administration’s plan would
119

3EPA calculated the incidence of premature death and illness for both its August 2001 proposal and the Administration CSI plan using the same peer-reviewed methods and summarized

the results in its technical analysis documents. The health comparisons in this testimony are

taken from the incidence figures presented in those documents. See, EPA August 2001 Analysis,

Continued

result in 42 million tons more pollution than the EPA proposal: For SO2, 18 million

tons more through 2012 and 34 million excess tons out through 2020. For NOx, 3

million tons more through 2012 and 8 million excess tons out through 2020. The

Administration’s plan would also allow 58 tons more mercury through 2012 and 163

tons more out through 2020.

Health Consequences of Administration Plan’s Excess SO2 and NOx. The Administration’s plan means large numbers of Americans will continue to die prematurely

or suffer illness caused by the excessive pollution power plants would continue releasing under the plan. Figure 7 shows EPA’s estimates of the additional premature

death toll and illness in 2020 under the Administration’s plan:3
120

supra, note 1, Appendix A at 3, and EPA CSI Technical Support Package, September 2002 at

29, at www.epa.gov/clearskies. 4Clean Air Task Force, ‘‘Health Damages Estimates for Clear Skies Initiative and Straw Proposal,’’ April 2003.

• 7100 additional premature deaths

• 4600 additional chronic bronchitis cases

• 5100 additional hospital stays and ER visits

• 7 million additional days of respiratory illness

While EPA has not presented the cumulative additional premature deaths and illnesses allowed under the Administration’s plan, those numbers are even larger.

Using EPA methods, the Clean Air Task Force calculates that between 2008 and

2020, the Administration’s plan would allow more than 100,000 additional premature deaths and would allow millions more asthma attacks and other illnesses.4

While we have fundamental concerns about attempting to reduce human death,

illness, and misery into dollars, it is important to note EPA’s estimate of the costs

the Administration’s proposal would impose on the public in monetary terms. EPA

analyses show that the Administration proposal would result in $61 billion more in

premature death and disease costs per year by 2020 than the EPA August 2001 proposal. While the EPA August 2001 proposal would cost industry $3.5 billion dollars

more per year to implement, it would achieve over $15 in health benefits for every

clean-up dollar spent. For some as yet unexplained reason, the Administration chose

a plan that would inflict an additional $61 billion a year in health damages on the

public in order to save power plant owners $3.5 billion in compliance costs. See Figure 8.
121

5U.S. EPA, 1997f. Mercury Study Report to Congress, Volume V: Health Effects of Mercury

and Mercury Compounds. EPA–452/R–97–007; Toxicological Effects of Methylmercury, National

Academy Press, Washington, DC, 2000.

The additional pollution from power plants under the Administration’s plan will

leave dozens of cities and counties out of attainment of the national ambient air

quality standards for fine particles (soot) and ozone (smog) the Clean Air Act’s bedrock measure of public health protection.

The Administration’s analysis shows that its plan would leave 107 counties home

to 77 million Americans in violation of these public health standards in 2010. 64

counties with 60 million residents would remain in violation even in 2020 after the

plan’s delayed second-phase requirements in 2018.

The stronger power plant emission curbs in EPA’s 2001 proposal would bring 85

percent of eastern counties with unhealthy soot levels into compliance with the fine

particle standard, and 90 percent of eastern counties with unhealthy smog levels

into compliance with the ozone standard. Greater power plant pollution reductions

would reduce population exposure in the remaining counties and make it substantially easier for them to reach the health standards with reasonable controls on

other sources.

Health Consequences of Administration Plan’s Excess Mercury. Coal-burning

power plants are the largest industrial source of mercury air pollution, and the only

one still not subject to clean air safeguards. Mercury emissions from power plants

fall from the air and wash into lakes, rivers, and coastal waters, where they concentrate in fish. Mercury is a potent neurotoxin even in very small amounts. Fortyfour States have issued warnings against eating local fish because of mercury contamination.

Methylmercury (the form of mercury that is absorbed in tissue) is highly toxic,

interfering with the development and function of the central nervous system. Infants can ingest methylmercury from breast milk when mothers have eaten contaminated fish. Children who eat such fish are exposed that way as well. Children

and infants are at higher risk of mercury poisoning because their nervous systems

continue to develop until about age 14. Health effects linked to prenatal

methylmercury exposure include:5

• poor performance on tests of attention and language

• impaired memory

• inability to process and recall information

• impaired visual and motor function
122

6Centers for Disease Control, January 2003. Second National Report on Human Exposure to

Environmental Chemicals; Susan E. Schober, et. Al, ‘‘Blood Mercury Levels in U.S. Children and

Women of Childbearing Age, 1999–2000,’’ Journal of the American Medical Association, 289:

1667–74 (2003) 7Derived by the Clean Air Task Force from 2000 census data and fertility data from the National Center for Health Statistics. 8Toxicological Effects of Methylmercury, National Academy Press, Washington, DC, 2000.

9High levels of mercury in seafood linked to infertility. BJOG: an International Journal of

Obstetrics and Gynecology. 109:1121–5, 2002; Toxicological Effects of Methylmercury, National

Academy Press, Washington, DC, 2000. 10While most mercury comes from coal-fired power plants, the IPM runs reveal that several

tons of mercury come from oil-fired plants that would not be covered under the Administration’s

plan (or under the EPA 2001 proposal). These tons of mercury are also of concern and should

be covered by mercury controls under either new legislation or existing law. 11Mr. Holmstead so characterized the Administration’s baseline assumptions in a presentation to the National Association of Regulatory Utility Commissioners in Washington on February 24, 2003.

One in 12 women of childbearing age has mercury levels above EPA’s safe health

threshold, according to a Centers for Disease Control and Prevention report published in January 2003 and a Journal of the American Medical Association published last week.6 Nationally, this translates into nearly 4.9 million women of childbearing age with elevated levels of mercury from eating contaminated fish and more

than 300,000 newborns at risk of neurological impairment from exposure in utero.7

An estimated 60,000 children are born each year at a significantly increased risk

of adverse neurological effects from mercury and current exposure levels increase

the number of children ‘‘who have to struggle to keep up in school and who might

require remedial classes of special education,’’ according to the National Academy

of Sciences.8 Eating mercury-tainted fish also can harm cardiovascular and immune

systems in adults.9

Every ton of mercury emissions from power plants adds to the cumulative and

persistent mercury loadings in our lakes and streams. EPA’s IPM runs show that

under the Administration’s plan, power plants would add loadings of 163 tons more

mercury through 2020 than under the EPA proposal.10 Because mercury is an accumulative toxin, these added tons will do their damage for scores of years after they

are released.

The cumulative and persistent nature of mercury contamination underscores the

need to minimize emissions from all sources. The weak and delayed mercury provisions in the Administration’s plan will result in a failure to apply technology capable of removing power plants as a significant source of mercury. This means more

continued mercury pollution not only from U.S. sources but from power plants

worldwide. As we have demonstrated with another brain poison, lead, when the U.S.

shows leadership in advancing policies to cut dangerous pollution, the rest of the

world follows. The United Nations has identified global mercury pollution as a priority but the signal by the Administration’s plan is that the U.S. will go slow. This

will almost certainly translate into a global go-slow approach, meaning higher mercury emissions from the rest of the world continuing to be deposited in the U.S..

The Administration Plan vs. the Clean Air Act

It is also appropriate to assess whether the Administration’s plan would deliver

more pollution reduction than the current Clean Air Act, or less. In fact, the Administration’s plan would result in millions of tons more pollution than faithful enforcement of the current law.

SO2 and NOx: The Administration claims that its plan would reduce SO2 and

NOx emissions by 35 million tons more than the current Clean Air Act through

2012. In fact, just the opposite is true: compared to enforcing the current law, the

Administration’s plan actually would allow major increases in SO2 and NOx in the

next ten to 15 years.

What accounts for these different assessments of the Administration’s plan? The

secret is in the Administration’s yardstick. The Administration is comparing its proposal with a misleading ‘‘baseline’’ that expressly assumes EPA does not enforce the

Clean Air Act. EPA Assistant Administrator Holmstead has candidly called this the

‘‘Rip Van Winkle scenario.’’11 The Rip Van Winkle scenario includes only the power

plant pollution limits that are on the EPA books at this moment principally the SO2

reductions already required by the Title IV 1990 acid rain program and NOx cuts

ordered under the ‘‘NOx SIP call’’ in 1997. The Rip Van Winkle scenario assumes

that EPA goes to sleep, doing nothing more for more for a decade.

But the existing Clean Air Act requires much more than that. It requires the

States and EPA to bring our cities and counties into compliance with the national

ambient air quality standards for fine particles and ozone (soot and smog pollution)
123

12The deadline for ozone designations is set forth in a consent decree entered in American

Lung Ass’n, et al. v. Whitman, D.D.C. Civil Action No. 02–2239 (March 13, 2003). EPA has committed to an end-of–2004 deadline for fine particle designations as ‘‘one of the Agency’s highest

priorities, due to the serious health implications of PM2.5 fine particle exposure....’’ Memorandum from Jeffrey R. Holmstead, Assistant Administrator, to Regional Administrators (Nov.

14, 2002), at 3. 13Clean Air Act §7502(a)(2)(A). See Sierra Club v. EPA, 294 F.3d 155, 162–63 (D.C. Cir. 2002)

(State must adopt all reasonably available measures capable of advancing the date on which

the polluted area will attain the NAAQS). ‘‘In order for the EPA to determine whether an area

has provided for implementation as expeditiously as practicable, the State must explain why the

selected implementation schedule is the earliest schedule based on the specific circumstances

of that area. Such claims cannot be general claims that more time is needed but rather should

be specifically grounded in evidence of economic or technologic infeasibility.’’ Memorandum from

John S. Seitz, director of EPA’s Office of Air Quality Planning and Standards, to EPA regional

air division directors (November 2, 1999), at 1 14Clean Air Act §7502(a)(2)(A). EPA also may grant a maximum of two 1-year deadline extensions if an area has met all its requirements and experiences ‘‘no more than a minimal number’’

of violations of the health standards in the otherwise applicable deadline year. 15Clean Air Act §7410(a)(2)(D)(I), §7426. 16U.S. EPA, Engineering and Economic Factors Affecting the Installation of Control Technologies for Multipollutant Strategies, October 2002.

before the end of this decade, unless accomplishing that task can be shown to be

not possible. EPA concedes that meeting health standards will require steeper and

faster reductions in power plant SO2 and NOx emissions than assumed in the Rip

Van Winkle scenario or required by the Administration’s plan.

Undr the current Clean Air Act the pathway for meeting public health standards

begins with the designation of which cities and counties across the country do not

attain the standards, based on several years of pollution measurements. These ‘‘nonattainment designations’’ will take place in early 2004 for ozone and by the end of

2004 for fine particles.12

The Clean Air Act then requires the States and EPA to implement the emission

reduction measures needed to meet these public health standards within 5 years of

these designations, by 2009, or sooner if feasible the law says ‘‘as expeditiously as

practicable.’’13 Deadline extensions are allowed only if a State rigorously demonstrates that pollution control measures to meet health standards on time are not

available or feasible.14 No such demonstrations have been made. While the States

have primary responsibility to address local pollution sources, the Clean Air Act

gives EPA special responsibility for interstate pollution that interferes with attainment of the health standards in areas downwind. EPA is required to order pollution

reductions from upwind power plants where needed to bring areas in downwind

States into timely compliance with the health standards.15

Administration spokesmen refuse to say how much reduction in power plants’ SO2

and NOx pollution is needed under current law to meet the public health standards

on time. But EPA’s analyses of the Administration’s plan show that it will not result

in sufficient clean-up to attain the standards on the schedule required by current

law.

As I have already noted, the weak emission reductions in the Administration’s

plan leave 107 counties in nonattainment in 2010 and 64 counties in 2020. As mentioned above, current law requires attainment by 2009 or sooner unless this schedule is not practicable. But the Administration has presented no analysis arguing

that its 2018 schedule for completing SO2 and NOx reductions is the fastest practicable schedule. Indeed, analyses on EPA’s web site show that while there may be

some labor constraints between now and 2005, those constraints disappear well before 2010.16

In short, current law requires more reductions sooner than the Administration’s

plan and EPA’s analyses show deeper and faster reductions are feasible.

The Administration may claim to be making a 35 million ton advance over the

Rip Van Winkle scenario, but that is a phony measure. In fact an objective reading

of the current law and EPA’s analyses show that the Administration’s plan would

result in far more power plant SO2 and NOx air pollution compared with enforcing

the existing Clean Air Act

Mercury: The Clean Air Act also requires faster and deeper reductions of mercury

than the Administration’s plan. The current Act requires each mercury-emitting

power plant to cut its emissions by installing the maximum available control tech-
124

17Clean Air Act §7412(n)1)(A) provides that EPA shall issue MACT standards for power

plants if the Administrator determines, after a study, that such standards are ‘‘necessary and

appropriate.’’ The Administrator made this determination for power plant emissions of mercury

in 2000. 65 Fed. Reg. 79,825 (December 20, 2000). 18Puruant to a consent decree in NRDC v. EPA, et al., Case No. 92–1415 (D.C. Circuit), EPA

is required to propose a mercury MACT standard by the end of 2003, and to promulgate the

standard by the end of 2004. 19Clean Air Act §7412(i)((3)(A). Under certain circumstances, EPA may allow a specific facility

one extra year for compliance. Id. §7412(i)((3)(B). 20U.S. EPA, ‘‘Discussion of Multipollutant Strategy, Meeting with Edison Electric Institute’’

(Sept. 18, 2001), available at http://cta.policy.net/currentstatus.pdf.

nology (‘‘MACT’’).17 EPA must issue mercury standards in 2004.18 Compliance with

the MACT standard is required 3 years later, at the end of 2007.19 Given the extreme toxicity of mercury, the current law does not permit emissions trading between mercury-emitting sources.

Because EPA has not yet issued the MACT standard, the Administration argues

that no one can say how much mercury it will allow. Mercury MACT controls on

other sources, however, provide a good indication of what is feasible. The MACT pollution controls on municipal and medical waste incinerators, for example, eliminate

at least 90 percent of these sources’ mercury emissions.

In December 2001, EPA told the Edison Electric Institute, the power sector’s main

trade association, that an equivalent MACT standard for power plants would reduce

mercury emissions from 48 tons to 5 tons nationwide by the end of 2007.20 In the

regulatory development process now underway, EPA is evaluating performance requirements that would achieve a reduction to 5 tons per year. The weakest option

being analyzed by the agency (at the request of the utility industry) is a level only

slightly higher than the Administration’s plan second-phase target of 15 tons.

No one, including the Administration, has contended that a standard as weak as

the Administration’s plan first-phase target 26 tons could pass muster under the

MACT requirement of current law. Even a MACT standard that reduced emissions

by only 70 percent would cut mercury pollution to 15 tons 10 years earlier than the

Administration legislation.

The Administration’s plan, however, would repeal the MACT requirement and

delay any initial mercury reductions to 2010. After that, the Administration’s plan

would allow 26 tons per year from 2010 through 2017, and 15 tons every year thereafter. Compared to the 5-ton level, the Administration’s plan would allow more than

five times as much mercury pollution through 2017, and three times as much each

year after. From 2008 through 2020, that would be 284 tons more cumulative loading of mercury under the Administration’s plan.

II. THE ADMINISTRATION PLAN REPEALS AND WEAKENS CRITICAL CLEAN AIR ACT

PROTECTIONS

The Administration’s bill takes with one hand while it also takes with the other.

In addition to allowing more pollution than needed to protect public health or allowed by current law, the Administration’s bill repeals or weakens each of the specific programs and requirements in the current Clean Air Act that are effectively

reducing power plant pollution today and that will reduce it further tomorrow.

The repealers, exemptions and weakening provisions in the Administration’s bill

do great damage to fundamental precepts of the Clean Air Act that have helped deliver cleaner air for over thirty years.

• The current law requires cleanup of polluted areas as quickly as practicable

but the Administration’s plan would grant automatic delays to 2015.

• The current law requires new sources locating in polluted areas to meet stateof-the-art pollution standards and avoid making existing health problems worse but

the Administration’s plan would exempt all sources (even those not covered by any

cap) from those requirements until 2015, allowing more than a decade’s worth of

new pollution sources to make air quality worse.

• The current law gives States victimized by interstate pollution effective rights

to remedy that pollution but the Administration’s plan makes those remedies ineffective against power plants and prohibits any reductions from power plants under

these provisions until 2012.

• The current law requires new and modified power plants to limit pollution increases to avoid turning clean air areas into polluted areas but the Administration’s

bill repeals this safeguard except for a narrow 30 mile circle around certain national

parks and wilderness areas.

• The current law requires new and modified power plants to meet up to date

emission performance standards to protect areas with clean air but the Administra-
125

21H.R. 999 I.H. (‘‘Sec. 3. Other Amendments’’), at 227 lns. 5–22. 22See 42 U.S.C. §7502(a)(2). 23Current law permits limited postponement of the 2009 deadline only where the EPA makes

an appropriateness determination ‘‘considering the severity of nonattainment and the availability and feasibility of pollution control measures.’’ Id. §7502(a)(2)(B). See also id.

§7502(a)(2)(C), (D). The Administration’s bill does not condition the availability of the 2015 postponement on any such determination. See H.R. 999 I.H. at 227 lns. 5–22. 2442 U.S.C. §§7502(c)(5), 7503(a)(2), (c). 25Id. §7502(c)(5).

tion repeals this safeguard for nearly all existing plants and replaces it with a more

polluting performance standard for new plants. • The current law requires EPA to adopt rules to minimize toxic pollution from

power plants but the Administration’s bill repeals most of those requirements and

replaces them with a weak performance requirement for mercury that is delayed 10

years from the current law’s schedule.

The Administration defends all of these dismantling provisions as eliminating programs that are not required since its plan establishes national caps for certain

power plant pollutants. But the current Administration ignores what the first Bush

Administration recognized that national caps cannot protect local air quality and

must not override the tools that are in the law to protect communities from pollution increases that harm local air quality. Neither the first Bush Administration nor

Congress sought to repeal the tools that protect local air quality when the acid rain

cap program was enacted in 1990. Repeal of those tools is no more justified now.

Delaying Attainment of Public Health Standards. Section I of this testimony sets

forth EPA’s legal obligations under the current Clean Air Act to assure the attainment of the national ambient air quality standards for fine particles and ozone (soot

and smog) by 2009 at the latest, or sooner (‘‘as expeditiously as practicable’’).

The Administration’s bill would postpone the attainment deadline for the country’s unhealthy air areas by 6 years or more. As long as States could show that their

polluted areas would attain the smog and soot standards by 2015, those areas would

be labeled ‘‘transitional’’ rather than ‘‘nonattainment’’ and be granted automatic extensions of the deadlines to meet health standards.21 Since the requirement to attain the standards ‘‘as expeditiously as practicable’’ applies only to nonattainment

areas,22 States would be under no obligation to bring air quality into line with the

health-based standards any earlier than 2015. In other words, the Administration’s bill would force as many as 175 million Americans to breathe harmful amounts of

air pollution for at least 6 years longer than current law allows.23

By labeling hundreds of polluted counties ‘‘transitional’’ rather than ‘‘nonattainment,’’ the Administration’s bill also would allow every major industrial source built

or modified in those areas to make health problems worse by evading the lowest

achievable emissions rate (‘‘LAER’’) and offset requirements of current law. Under

current law, anyone wishing to build or modify a major source of air pollution in

a ‘‘nonattainment’’ area must ensure that the source employs state-of-the-art methods to minimize its pollution (LAER) and must offset any added emissions so as not

to degrade the already poor air quality in the area.24 This requirement applies not

just to power plants, but to all other major air pollution sources (oil refineries,

chemical plants, manufacturing facilities, etc.) as well.25

Under the Administration’s plan, these health safeguards would no longer apply

in areas relabeled as ‘‘transitional.’’ In other words, the Administration’s bill would

make it easier for the owners of oil refineries, chemical facilities, paper mills, and

power plants to churn out additional pollution in hundreds of counties where the

air is already unhealthy to breathe. It is important to emphasize that while the Administration’s plan caps only power plant emissions the bill would create this loophole for all major industrial sources. Amazingly, the Administration has not offered

a word of justification for this remarkable assault on the Act’s public health safeguards.

Weakening Safeguards Against Upwind Pollution. Pollution from power plants in

upwind States is responsible for violations of the soot and smog standards in many

downwind States. The delay of attainment deadlines through the ‘‘transitional area’’ scheme described above would assure that many such downwind States receive

more pollution transported from upwind areas over the next 12 years. The Administration’s bill exacerbates this problem by eliminating, as a practical matter, the

rights of downwind States under section 126 of current law to remedy pollution

transported from upwind sources. Now that Federal courts have upheld the rights

of States to combat interstate pollution, the Administration’s bill would effectively

eliminate these rights by establishing a series of new, insurmountable tests before

a harmed downwind State can gain relief. And even if the State is able to pass these

new extreme tests, the bill prohibits any emission reduction from power plants be-
126

26See §3(r)(6)(D) (adding CAA §126(d)(2)(B)(i) & (ii)). 2763 Fed. Reg. 57356 (Oct. 27, 1998) (NOx SIP Call rulemaking); 64 Fed. Reg. 28250 (May

25, 1999) and 65 Fed. Reg. 2674 (Jan. 18, 2000) (Section 126 rulemakings). 28See Michigan v. EPA, 213 F.3d 663 (D.C. Cir. 2000) (upholding NOx SIP Call approach);

Appalachian Power Co. v. EPA, 249 F.3d 1032 (D.C. Cir. 2001) (upholding same approach in

section 126 rulemaking). 29See Michigan, 213 F.3d at 675–680; Appalachian Power at 249 F.3d at 1044–1051. 30U.S. EPA, ‘‘Rulemaking for Section 126 Petitions—Responses to Comments Which are Outside the Scope of the June 24, 1999 Notice of Proposed Rulemaking,’’ Docket A–97–43, XII-A–

01, 65 Fed. Reg. 52931 (Aug. 31, 2000). 3165 Fed. Reg. 2674, 2681 (Jan. 18, 2000). 32States may control these mobile sources of emissions only by adopting California standards.

CAA §§177 & 209(e)(2). 3365 Fed. Reg. at 2681/1 (emphasis added). 34H.R. 999, (‘‘Sec. 403. Allowance System’’) at 14 ln. 15 15 ln. 18.

fore 2012, no matter how compelling the case is that the power plants are creating

serious health problems that can only be abated with stronger emission controls.

Even if EPA itself believes that better controls are warranted and essential, it too

is prohibited from requiring any cleanup from power plants before 2012.

Section 3(r)(6) of the Administration’s bill amends section 126 of the current

Clean Air Act to prohibit EPA from ordering reductions in power plant pollution

transported from upwind States unless EPA makes a series of new, onerous findings: EPA must find that every cheaper reduction (in terms of cost per ton of emissions and in terms of cost per microgram of air quality improvement) has already

been made from industrial boilers, on-road mobile sources, off-road mobile sources,

and any other category identified by EPA.26

These provisions would effectively override key court decisions that have upheld

EPA’s reasonable interpretation of the Act set forth in two rulemakings addressing

interstate transport of NOx pollution.27 These cases upheld EPA’s determination to

require reduction of upwind emissions that ‘‘contribute significantly’’ to downwind

pollution. While it was necessary for EPA to show that these reductions are costeffective, the agency was not required to show that all other more cost-effective

ways to reduce emissions and concentrations had been exhaustively required first.28

In doing so, the courts upheld EPA’s rejection of far more onerous and unmanageable approaches pushed by industry and opposing upwind States.29

In particular, EPA found in 1998 that the second approach demonstrating costeffectiveness per microgram of air quality improvement would be utterly impractical. Furthermore, it would be inconsistent with an emissions trading approach,

which requires emissions to be treated as equivalent on a ton-for-ton basis, and cannot work if each ton of emissions must be weighted differently depending on its distance from a particular spot where air quality improvement per microgram is assessed.30

In addition to imposing new, essentially insurmountable tests, the bill would block

EPA from granting downwind States any relief from upwind power plant pollution

until after 2012. This stands in stark contrast to the extremely expedited relief

structure of the current Clean Air Act. As EPA has noted:

Section 126 provides a tool for downwind States, the entities with most at stake,

to force EPA to confront the issue directly. It also sets up an abbreviated, and hence

potentially faster, process to achieve emission reductions. . . . . In contrast [to the

SIP process] Congress required very expeditious EPA action on a [section 126] petition and from 3 months up to 3 years for sources to comply.31

In an example of ‘‘Catch–22,’’ section 3(r)(6) of the Administration’s bill states that

before giving a State relief from transported pollution from power plants, EPA must

first determine that the State has achieved all more cost-effective emissions reductions (on both a per-ton and per-microgram basis) from both on-road and off-road

mobile sources. But this places States in an impossible situation, since the Clean

Air Act elsewhere preempts States from controlling emissions from on-road vehicles

and engines, CAA §209(a), and nonroad vehicles and engines, CAA §209(e).32

As EPA has previously recognized, ‘‘Congress provided section 126 to downwind

States as a critical remedy to address pollution problems affecting their citizens that

are otherwise beyond their control, and EPA has no authority to refuse to act under

this section.’’33 But the Administration’s legislative response to the problem of transported air pollution is to saddle downwind, polluted States with insurmountable

barriers to relief.

Eliminating Safeguards Against Pollution Hotspots. Under the Administration’s

bill, a power plant can pollute at any level so long as it buys sufficient pollution

allowances credits from other plants.34 The fact that power plant pollution may decline nationwide, however, provides no protection to the communities affected by a
127

3542 U.S.C. §§7475, 7501–7503. Current law requires a company to demonstrate that the

planned construction or other change will not cause or contribute to pollution in excess of certain maximum allowable increases and maximum allowable concentrations that are separated

from the NAAQS by a safety margin. 42 U.S.C. §7475(a)(3)(A). The administration’s bill simply

requires a demonstration that the planned activity will not cause or contribute to a violations

of or inability to achieve the NAAQS itself. H.R. 999 I.H. (Sec. 483(c)(1), (2)) at 224 ln. 15 225

ln. 8. 36Current law requires a company to demonstrate that the planned construction or other

change will not degrade visibility or other air quality related values at any national park. 42

U.S.C. §7475(a)(5), (d). If the administration’s bill were enacted, such a demonstration would

not be required unless the plant in question were located within fifty kilometers of a park. H.R.

999 I.H. (Sec. 483(b)) at 224 lns. 8–14. This despite the fact that emissions from major pollution

sources have been shown to have a negative impact on parks as far as 700 kilometers away.

See Gebhart, K., ‘‘Preliminary Particulate Sulfur Source Attributions for BRAVO by Trajectory

Mass Balance Regressions’’ (presentation for BRAVO conference call on November 21, 2002)

(analysis on file with the Clean Air Task Force). 37See H.R. 999 (‘‘Sec. 483. Exemption from Major Source Preconstruction Review Requirements and Best Available Retrofit Control Technology Requirements’’) at 223 lns. 10–14 (‘‘An

affected unit shall not be considered a major emitting facility or major stationary source, or a

part of a major emitting facility or major stationary source for purposes of compliance with the

requirements of parts C and part D of title I.’’). 38Id. (Sec. 481(b)(1), (c)(1), (d)) at 205 lns. 1–9, 207 ln. 9 211 ln. 7. 39Id. (Sec. 481(c)(1)((A)) at 207 lns. 17–18. 40Wygen 2 plant in Wyoming; Roundup plant in Montana; IPP plant in Utah. 41H.R. 999 (Sec. 481(c)(1)(B)) at 207 lns. 19–20. 42Wygen 2 plant in Wyoming; Roundup plant in Montana; IPP plant in Utah. 43H.R. 999 (Sec. 481(c)(1)(C)) at 207 lns. 21–22. 44Wygen 2 plant in Wyoming; Roundup plant in Montana; IPP plant in Utah.

plant whose emissions stay the same, or even increase, because of its owner’s reliance on emissions trading. The ‘‘New Source Review’’ (NSR) provisions in the Clean

Air Act provide important protection against the emergence of ‘‘pollution havens’’ or

‘‘hotspots’’ in response to an emissions trading system. NSR requires any person

planning to build a new major pollution source, or to change an existing one in a

way that will cause an emissions increase, to demonstrate that the source will use

the most effective pollution control methods available and that its emissions increase will not degrade air quality either locally or in downwind communities35 or

national parks.36

The Administration’s bill would eliminate Federal New Source Review provisions

for power plants, however.37 If the bill were enacted, a company would be free to

cause even massive pollution increases by building a new plant or expanding an old

one without adopting up-to-date pollution controls or determining whether air quality will get worse locally or downwind.

To replace the Federal NSR program, the Administration’s bill calls on States to

submit State Implementation Plan (SIP) revisions to create a new and less protective State New Source Review program. The bill sets no deadlines for these SIP revisions. The bill does not clearly provide that the public must have an opportunity

to comment on a permit application. The bill authorizes new loopholes for such

State programs that would allow existing power plants to increase emissions by tens

of thousands of tons each with no public process. And the bill exempts existing and

new power plants everywhere in the country (except within a narrow 30-mile circle

around national parks) from the current law’s safeguards for clean air areas.

Replacing Up–To–Date Technology with Obsolete Standards. In place of repealed

requirements for case-by-case determination of up-to-date pollution control performance, the Administration’s bill would substitute a requirement that EPA establish

certain emissions standards that would apply to new power plants.38 The bill sets

these standards at much more polluting levels, however, than the emissions levels

of plants being built today. In other words, these standards are already obsolete and

behind the curve of current requirements. For example:

For boilers and integrated gasification combined cycle (‘‘IGCC’’) plants, the bill

sets a SO2 emissions limit of 2.0 lb/MWh.39 Three recently issued permits for coalfired boilers set SO2 emissions limits of 1.0, 1.2, and 1.0 lb/MWh, respectively.40

For boilers and IGCC plants, the bill sets a NOx emissions limit of 1.0 lb/MWh.41

Three recently issued permits for coal-fired boilers each set NOx emissions limits

of 0.7 lb/MWh.42

For boilers and IGCC plants, the bill sets a PM emissions limit of 0.2 lb/MWh.43

Three recently issued permits for coal-fired boilers set PM emissions limits of 0.12,

0.15, and 0.15 lb/MWh, respectively.44

The bill does not place any obligation on EPA to update these already-obsolete

emissions standards until 8 years after the agency incorporates them into its regula-
128

45H.R. 999 (Sec. 481(e)(1)) at 211 lns. 8–18. 46Id. (Sec. 481(e)(2)) at 212 lns. 3–8. 47See http://cfpub1.epa.gov/rblc/cfm/basicsearch.cfm. 48See, e.g. Letter from Richard L. Goodyear, permit programs manager, State of New Mexico

Air Quality Bureau, to Larry Messinger, Mustang Energy Company (December 23, 2002), at 1– 2 (‘‘The analysis must include a discussion of the technical feasibility and availability of IGCC

and CFB for the proposed site in McKinley County ....’’). 49See ‘‘Background Statement on the Environmental Protection Agency’s Top-Down Policy’’

(June 13, 1989) (citing S. Rep. No. 95–252, 95th Cong., 1st Sess. 31 (1977)), reprinted in, 3 A

Legislative History of the Clean Air Act Amendments of 1977 at 1405; 123 Cong. Rec. A9171

(remarks of Senator Edmund G. Muskie), reprinted in 3 Legislative History at 729. See also

WEPCO v. EPA, 893 F.2d 901, 909 (7th Cir. 1990). 50Testimony delivered Assistant Administrator Jeffrey Holmstead to the U.S. Senate Committee on Environment and Public Works on July 16, 2002.

tions.45 Even then, the bill gives the agency discretion to avoid reviewing and updating the standards.46

This is a sharp contrast with current law, under which the case-by-case review

of LAER and (in areas other than nonattainment areas) ‘‘best available control technology’’ (BACT) assures that emission performance for new and modified plants

keeps pace with improvements in pollution control capabilities. Because of BACT

and LAER, the state-of-the-art in industrial pollution control has repeatedly graduated to successively higher levels of environmental performance as sources were

built or modified over the last two decades.

For example, a review of EPA’s data base for BACT and LAER determinations

reveals that over just the past 10 years, the state-of-the-art in NOx emissions controls for utility boilers and furnaces has advanced from no controls (‘‘good combustion practices’’) to low NOx burners to selective catalytic reduction (‘‘SCR’’) to selective non-catalytic reduction (‘‘SNCR’’) and circulating fluidized bed (‘‘CFB’’).47 Recent

determinations by permitting authorities show that further improvements are in the

wings.48

As EPA and the courts have recognized, Congress intended the Clean Air Act to

perform this ‘‘technology-forcing’’ function.49 The Administration’s bill erases that

function, leaving in its place static emissions standards that do not even represent

the state-of-the-art in pollution control today.

EPA Assistant Administrator Holmstead has acknowledged in testimony delivered

before this committee that the New Source Review requirements have not adversely

impacted construction or investment associated with new power plants. He testified

that:

With regard to the energy sector, EPA found that the NSR program has not significantly impeded investment in new power plants or refineries. For the utility industry, this is evidenced by significant recent and future planned investment in new

power plants.50

This committee should recall that in 1990, the first President Bush did not seek

to repeal these safeguards when he sought a cap and trade program for SO2 from

power plants and Congress did not enact such a repeal. Those programs have

worked in tandem for the past 13 years. The Act’s safeguards for local air quality

have not interfered with the acid rain cap and trade program and have not prevented the very large economic savings provided by the cap and trade mechanism.

Experience proves that both programs can work together and this Congress should

not ignore that fact.

Eliminating Protections for National Parks. The Administration’s bill would exempt owners of new and modified power plants from the obligation to meet up to

date pollution performance standards (BACT) and examine the impacts of any

added pollution on national parks or wildernesses—called ‘‘Class I areas‘‘—(except

those within 30 miles of the plant). The bill also eliminates the role of the Federal

land manager (typically the National Parks Service superintendent for a national

park) in assuring that the air quality of these treasured lands is protected.

Under current law, if a new or expanded pollution source could affect a Class I

area, the Federal land manager has an opportunity to review the draft permit and

an accompanying air quality analysis to assure that factors relevant to protecting

national parks and wilderness areas are taken into consideration, and that harmful

effects are mitigated. The Federal land manager’s review would be eliminated under

the Administration’s bill for all plants outside the 30 mile cordon around each park

or wilderness.

The Administration’s bill would also repeal the current Clean Air Act program to

lift the haze shrouding the nation’s parks by obligating the States to require the

best available retrofit technology (‘‘BART’’) on all major sources of air pollution built
129

5142 U.S.C. §7491(b)(2)(A). 52H.R. 999 (Sec. 483(a)) at 223 lns. 10–18. 53MSB Associates, analysis using EPA list of BART eligible sources exceeding 750 MW (analysis on file with the Clean Air Task Force). 54§3(a)(5). 55See U.S. EPA, ‘‘Technical Support Package for Clear Skies,’’ Section B: Human Health and

Environmental Benefits, at 44.

between 1962 and 1977 that contribute to the haze.51 The Administration’s bill exempts all power plants the primary contributor to park haze from the BART requirement.52 In so doing, the bill lets off the hook those intransigent companies that

have not yet installed the best available retrofit technology on their plants.

If the Administration elected to enforce the requirement, instead of lifting it, the

installation of BART on just the largest power plants would reduce annual SO2

emissions by 4.5 million tons, and annual NOx emissions by 1.9 million tons.53

Those reductions alone would be equivalent to what the Administration’s bill would

purportedly achieve in its entire 8–10 year first phase.

Eliminating Protections for Other Areas With Clean Air. The Administration’s bill

weakens air quality safeguards across the rest of the country. Except in the 30 mile

cordon around our national parks and wildernesses, the bill eliminates any case-bycase review of proposed new power plants anywhere in the country. Under current

law, plants locating in the vast majority of the country areas classified as ‘‘Class

II PSD areas,’’ with air quality better than the national health standards must undergo New Source Review and demonstrate that they will be equipped with ‘‘best

available control technology’’ (BACT) and will not cause excessive degradation of air

quality (‘‘pollution increment consumption’’) in the surrounding area. And, as already mentioned, plants locating in nonattainment areas must meet the ‘‘lowest

achievable emission rate’’ (LAER) and must offset any additional pollution.

The Administration’s bill repeals these requirements, creating a vacuum where

there is no federally enforceable obligation for new or modified power plants to provide anyone with notice of their intent to build or expand, no requirement to review

air quality impacts, and no requirement to case-by-case review of emission control

performance. The only requirement would be to meet the obsolete national standard

described above.

Weakening Safeguards Against Hazardous Air Pollution. I have already described

how the Administration’s bill would repeal the current Clean Air Act’s requirement

for applying ‘‘maximum achievable control technology’’ (MACT) to power plants to

curb their mercury emissions. The bill requires no mercury controls until 2010 (a

2-year delay over the current law) and substitutes much weaker mercury caps in

place of the plant-by-plant MACT requirement. For 2010 through 2017, the bill’s 26

ton cap represents merely the mercury reductions incidental to the bill’s phase-one

caps for SO2 and NOx. Mercury cuts beyond these incidental reductions are not

achieved until 2018. In other words, the Administration’s 3-pollutant bill is effectively a 2-pollutant bill until 2018.

Also repealed with mercury MACT is the current law’s requirement that EPA establish MACT standards for all hazardous air pollutants emitted by power plants,

not just mercury. For hazardous pollutants other than mercury, the bill leaves only

the authority to set ‘‘residual risk’’ standards through a complex risk-based process,

but the earliest that those regulations are permitted to take effect is 2018 a full 11

years after the MACT compliance deadline of the current Clean Air Act. Moreover,

the bill repeals the Clean Air Act’s ‘‘residual risk’’ protections entirely for mercury

without regard to any health risks that remain under the bill’s weaker mercury

caps.54

The Administration’s bill allows unrestricted emissions trading of mercury, something never before allowed under the Clean Air Act for a hazardous air pollutant.

The current Clean Air Act requires mercury reductions at each power plant, based

on the emissions reductions achievable through advanced technologies applied to individual emissions units. By allowing mercury trading, the bill would allow some

power plants not to reduce their emissions at all. Instead, they could buy mercury

emission allowances from other power plants and do nothing to stop contamination

of local lakes and streams. Some plants could even increase their mercury emissions.

Indeed, EPA’s own analyses of the Administration’s bill acknowledge mercury pollution increases above today’s levels from ‘‘specific sources in some States,’’ due to

the trading features of the bill and the bill’s repeal of the 2007 MACT standard.55

This dirtier outcome would not be allowed if the plant-specific MACT standard were

to remain in effect. EPA’s data also show that parts of New England, the Great
130

56Id. 57Testimony of Jeffrey Holmstead, Assistant Administrator, Office of Air & Radiation, U.S.

EPA, Before the Subcommittee on Public Health of the Committee on Health, Education, Labor

and Pensions, U.S. Senate, at 4–5, September 3, 2002. 58§405(a)(2)(B)(ii).

Lakes, Gulf Coast region and other areas will receive only very small reductions in

mercury deposition under the bill.56

Because unrestricted trading of mercury emissions could lead to toxic hotspots

where mercury contamination increases, the Clean Air Act as well as other legislative proposals (notably the Clean Power and Clean Smokestacks Acts)—bar trading

in mercury emissions. Hotspot risks under the Administration’s bill are made worse

by the fact that the bill does not require continuous emissions monitoring (CEMS)

for mercury. EPA itself has identified continuous monitoring and reporting as design features essential to the environmental integrity of the acid rain trading program.57 Mercury emissions trading is allowed even without continuous monitoring

so long as the Administrator determines that ‘‘CEMS for mercury with appropriate

vendor guarantees are not commercially available.’’58 The responsible approach

would be to make any mercury trading (if some carefully limited program were

shown to prevent hotspots) contingent on the development of reliable continuous

monitoring systems for the pollutant.

III. THE ADMINISTRATION BILL ALLOWS UNLIMITED GROWTH IN CARBON DIOXIDE FROM

POWER PLANTS, WORSENING GLOBAL WARMING

As you know, even though electric power plants are responsible for 40 percent of

U.S. carbon dioxide (CO2) emissions, the Administration’s bill does not contain any

provision to reduce or even limit the growth in these emissions. This feature of the

Administration’s bill is not just an omission; it is a serious affirmative mistake that

will make it more difficult for the U.S. to take responsible action in the near future

to begin addressing the real dangers of global warming.

The Administration’s bill would set in motion major capital expenditures at existing power plants over most of the next two decades. To implement such a program

without addressing CO2 emissions is to invite shortsighted investment decisions and

promote even greater resistance to proposals to limit CO2 when we do decide to act.

A choice to ignore CO2 emissions in a power plant bill is not just a choice to leave

this decision open for tomorrow. It is a decision that will raise the cost and difficulty

of beginning to address the nation’s largest source of global warming pollution.

Such a choice is not responsible. Delay will turn what is still a manageable threat

into a runaway, unmanageable problem. In the national security context, the current Administration has no difficulty understanding that waiting until a danger has

fully developed runs the risk of foreclosing our ability to avert that danger. This

logic applies strongly to the danger posed by global warming. If we wait until this

danger has fully developed, it will be too late to prevent.

Global warming is a problem that has enormous built-in inertia. The most important global warming gas, CO2, stays in the atmosphere for hundreds of years. The

largest sources of CO2, fossil-fueled power plants, have lifetimes of 50 years and

more. Managing the threat of global warming is like navigating a supertanker to

avoid running aground we have to start altering course long before we arrive at the

reef. While in the global warming context we may not have identified exactly how

close we are to the reef or how severely our ship will be damaged from striking it,

it is a fact that if we steam ahead with our current energy systems until we have

all the evidence required to satisfy the skeptics, we run very large risks of locking

ourselves into very large-scale unavoidable damage.

We are already unalterably committed to a future in which the concentration of

global warming gases will be substantially higher than pre-industrial levels. To

avoid reaching concentrations that are several times pre-industrial levels, we will

need to change the technology we use to generate power and for transportation. In

the decision whether to include CO2 in a power plant emission control bill, this Congress will either stimulate investors to get serious about developing and using new

climate-friendly power technology or it will send a signal to procrastinate.

Advocates of delay argue we should not act until we know exactly how sensitive

the climate is to added CO2 and exactly how harmful a given temperature rise will

be. Unfortunately, we cannot put the world on ‘‘pause’’ while we do more research.

We cannot afford to wait for resolution of these uncertainties before we begin to

change energy investments. The CO2 we emit may cause a temperature rise at the

high end of published estimates, the low end, or in between; the damage done by

a specific temperature rise also may be larger or smaller. But once we know for
131

59K. Caldeira et al., ‘‘Climate Sensitivity Uncertainty and the Need for Energy Without CO2

Emission,’’ Science 299, 2052 (2003). 60International Energy Agency, World Energy Outlook 2002, October 2002. 61U.S. Energy Information Administration, Annual Energy Outlook 2003.

sure, it will be too late to change course. The fact is that continuing on our current

path will commit us to an outcome that we will not be able to undo.

A paper by Ken Caldeira and colleagues published 2 weeks ago in Science magazine demonstrates the danger of continued procrastination. Using mid-range estimates of climate sensitivity, the authors conclude that we would need to be building

the equivalent of about 20 CO2-emission-free power plants a week worldwide, starting now, to keep global temperatures from increasing more than 2 Centigrade.59

Consider that global temperature in the last ice age was 5 C cooler than today and

you can appreciate that 2 would be a very big change. On our current path, however, the world is on track to add the equivalent of less than 2 CO2-emission-free

plants per week between now and 203060. The authors go on to demonstrate that

even assuming a best-case outcome for these uncertainties, we still need a massive

increase in CO2-emission-free energy resources compared to current forecasts.

Today people talk about the need to design climate policy to avoid ‘‘premature retirement’’ of existing capacity. But tomorrow’s ‘‘existing’’ capacity is being designed

and financed today and it is not being designed to be climate friendly. Policy procrastination just locks us in to more high-carbon capacity that will either have to

be retired ‘‘prematurely’’ or will emit amounts of CO2 that could make it impossible

to stabilize concentrations of global warming emissions at safe levels.

The U.S. Energy Information Administration forecasts that the United States will

build the equivalent of over 1350 medium-sized fossil energy power plants between

now and 2025 (405,000 MW).61 The path we are on today will result in skyrocketing

emissions of CO2 in the U.S. and globally. Figure 9 shows current forecasts for the

U.S. and the world over the next 25–30 years: U.S. emissions are projected to increase by 40 percent and world emissions by nearly 70 percent over year 2000 levels. These emissions will stay in the air for hundreds of years making the task of

protecting the climate that much harder and more expensive.

The Need to Set Real Policies Now

The problem of delay is particularly intense with respect to the electric power sector. As we know, power plants have extremely long lives. There are plants in the

U.S. more than 60 years old that are still operating today. New plants built in the

next decade or two will be operating in the third quarter of this century, and their

cumulative emissions will determine how much the climate warms. While we procrastinate, energy demand keeps growing and more investments are made in power

plants that are no less carbon-emitting than yesterday’s plants.
132

62See Testimony of David G. Hawkins on S. 556, June 12, 2002. 63A number of flaws in the administration’s analyses of ‘‘four-pollutant’’ bills are described

in NRDC’s testimony of June 12, 2002 at the full Committee hearing on S. 556, the Clean Power

Act. Testimony of David G. Hawkins at 12–16. 64Energy Information Administration, ‘‘Reducing Emissions of Sulfur Dioxide, Nitrogen Oxides, and Mercury from Electric Power Plants,’’ September 2001. (‘‘EIA S-V-B report’’) and U.S.

EPA, ‘‘Analysis of Multi-Emissions Proposals for the U.S. Electricity Sector,’’ October 2001. 65Letter of June 8, 2001 from Senators Smith, Voinovich, and Brownback to John Weiner,

EIA, reproduced in EIA S-V-B report at Appendix A. Compliance with the CO2 cap could be

achieved with on-system reductions or credits for ‘‘sinks’’ enhancements or reductions from other

source categories. EIA’s report calculated costs assuming that only CO2 emission reductions

from U.S. energy facilities would be used for compliance. 66While this result represents a decrease in coal consumption from no-control forecasts, EIA’s report assumed no penetration of coal-gasification technology in the electric sector, even by

2020. This is inconsistent with the Department of Energy’s programmatic goals for this technology. EPA’s report on the S-V-B scenario forecasts smaller price and fuel impacts than EIA’s,

due to EPA’s broader assumed trading options than EIA assumed.

Which brings us to the choice before you. Including provisions to limit CO2 in a

power plant bill can speed the process of bringing advanced technologies to market;

leaving CO2 out will keep that activity on the back burner. Analyses discussed in

NRDC’s testimony to the full committee in June 2002 show that it is possible to

craft legislation that limits power plant CO2 with modest impacts on the economy.62

The Administration and many in Congress have resisted including a binding limit

on CO2 in power plant legislation out of an apparent belief that any binding cap

will have unacceptable impacts on electricity rates and fuel diversity. That is not

correct.

For example, even the Administration’s own analyses conclude that some versions

of binding CO2 caps would have very modest impacts on electricity rates and fuel

use, even when using a number of conservative (and we believe, flawed) assumptions.63 In September and October 2001, both EPA and EIA analyzed a binding carbon cap for the electric sector using a set of requirements specified by Chairman

Voinovich, former Senator Smith, and Senator Brownback.64 Among the scenarios

examined by EIA and EPA were requirements to cut SO2, NOx, and mercury emissions by 75 percent from 1999 levels in two stages (2007 and 2012) and to cap power

sector CO2 emissions at forecasted 2008 levels.65

EIA’s report calculated this set of requirements would result in an average electricity rate of 7.1 cents per kwh, compared to a 1999 average electricity rate of 6.7

cents per kwh. EIA projected coal consumption in 2020 would be the same as in

1999.66

While power sector CO2 emissions need to decline below 2008 levels, the key point

is the need to set a schedule now for limiting and then decreasing emissions of CO2. By adopting a schedule now, you can provide the maximum lead-time for the industry and achieve long-term reductions at the most gradual rate of change. By adopting a schedule for limiting carbon emissions you put market forces to work to deliver the clean energy resources we will need to meet economic growth without disrupting the climate that strongly influences the quality of life in our country and

others around the globe.

We can do three things to limit carbon emissions from energy use. First, produce

and use energy more efficiently. Second, dramatically increase our reliance on renewable energy resources. Third, pursue methods to capture and permanently store

CO2 from the fossil energy sources we continue to use. All three of these methods

will be stimulated by adopting a program to limit CO2 emissions from the power

sector. All three will languish if Congress ignores CO2 in a power plant bill.

Members of this committee and others in Congress are concerned about the impact of climate policy on coal. The U.S. and other large countries, including China,

India, Russia (to mention just a few) have abundant coal resources. While coal and

other fossil fuels have continuing environmental impacts, including global warming

emissions, the reality is that large amounts of coal will continue to be used.

Fortunately, technologies in commercial operation today demonstrate it is feasible

to capture CO2 from coal-based power plants in a form that can be kept out of the

atmosphere provided that suitable geologic repositories are developed. As I mentioned in my June 2002 testimony to the full committee, in the U.S. today we inject

over 30 million tons of CO2 annually into oil fiqelds to recover additional oil. Yet,

none of that CO2 is supplied by power plants. Rather it is pulled out of natural CO2

reservoirs and piped hundreds of miles to be stuck back in the ground.

Because industrial CO2 can still be emitted to the air in unlimited amounts for

free, there is not an adequate economic incentive to use and optimize existing technology to capture these emissions. Nor is there an adequate incentive to invest to

bring down the costs of today’s gasification and CO2 capture systems.
133

67IEA, World Energy Outlook 2002, October 2002. 68GW=gigawatt, which is 1000 MW of capacity. Current U.S. coal capacity is just over 300

GW.

Ironically, the current policy procrastination has made the U.S. coal industry’s

posture a very uncertain one. No one believes that action on global warming can

be delayed indefinitely and this causes investors to be leery of large new investments in conventional coal-fired power plants. On the other hand, without a policy

resolution, setting forth a program to limit CO2 emissions over time, the uncertainty

is too great for most investors to develop and plan to deploy advanced coal technologies like gasification and capture systems.

In sum, failure to include CO2 limits in a power plant bill has real costs. It would

keep the U.S. and the world on a path of accelerating CO2 emissions a path that

is unacceptably risky given what we already know about the potential of global

warming to change our lives for the worse. It would steer investments at the margin

to patching up old, existing capacity that should be replaced with modern, efficient

systems. And it would continue the policy uncertainty that operates as an obstacle

today to business planners considering what energy investments they should pursue.

The good news is that by acting now to adopt a schedule for limiting CO2 emissions we can change behavior and make it easier to address global warming. For

example, the International Energy Agency forecasts that nearly the world will build

new coal plants equal to nearly five times the current U.S. coal plant capacity between now and 2030.67 While seemingly a daunting prospect, this projection really

means that two out of every three coal power plants forecasted to be operating in

2030 are not yet designed or built. With U.S. leadership, we can design new energy

projects to rely on climate-friendly technology. Doing so will expand our options to

reconcile aspirations for improved economic well-being around the world while preserving the climate we all depend on to provide us with a hospitable place to live.

FIGURE 968

In conclusion, let me suggest it is time for all sides to stand down from the posturing of past years on this issue and adopt a more pragmatic approach. There are

many sensible policies that can be adopted to start limiting CO2 emissions and there

are many compelling reasons to do so. Working together, members of both parties

and the Administration would be able to identify a path forward that all could embrace and all could point to as a real accomplishment. NRDC will work with you

to help make that happen.
134

STATEMENT OF EUGENE TRISKO, UNITED MINE WORKERS OF AMERICA

Mr. Chairman and members of the committee: I am Eugene M. Trisko, an attorney in the District of Columbia. I am pleased to be here today to testify on behalf

of the United Mine Workers of America (UMWA), the labor union representing the

nation’s organized coal miners. I have worked with the UMWA for some 20 years

on issues related to the Clean Air Act and global climate change, including the development and implementation of the Clean Air Act Amendments of 1990, the Byrd– Hagel climate resolution, and the proposed Clear Skies Act.

The UMWA supports additional reductions in sulfur dioxide (SO2), nitrogen oxides

(NOx) and mercury from coal-fired power plants, provided that the reductions are

achieved in a way that preserves coal miners’ jobs. UMWA members mine, process

and transport coal in their daily jobs. Their economic interests are entwined with

energy and environmental issues in a very direct manner.

Since 1990, the UMWA has lost thousands of coal mining jobs as a consequence

of fuel-switching in response to the acid rain provisions of Title IV. Coal production

in major eastern coal producing States declined by more than 113 million annual

tons between 1990 and 2000, while more than 30,000 coal mining jobs were lost.

Most of these reductions and job losses were the result of switching from higherto lower-sulfur coals to meet the emission reductions required by Title IV. Dozens

of mining communities have all but ceased to exist across economically depressed

Appalachia and the rural Midwest. The union is understandably sensitive to the

risk of additional job losses through new multi-emission legislation.

For these reasons, the UMWA appreciates the concerns that the Administration

has expressed toward its members’ interests in the development of the proposed

Clear Skies Act, and is gratified that the proposal reflects UMWA’s suggestions

about the need for incentives to encourage the early installation of control technologies. Our statement today is intended to point out some remaining concerns

about the design of multi-emission legislation.

Background: The Role of Coal in America’s Energy Supply

Coal is an indispensable part of America’s energy supply. The U.S. has a demonstrated coal reserve base of over 500 billion tons, with an estimated 275 billion

tons of recoverable reserves. At current production rates, this represents about 275

years of recoverable reserves.

Coal represents some 95 percent of all U.S. fossil fuel energy reserves. About onequarter of global known coal reserves are found in the United States. U.S. recoverable coal reserves have the energy equivalent of about one trillion barrels of oil, an

amount comparable to the world=s known oil reserves.

More than one-half of our nation’s electricity is generated by coal. To back coal

out of our energy supply mix means that we would have to find another fuel to replace it, most likely natural gas. Such a fundamental shift in U.S. energy policy

would bring into question not only the cost but also the availability of natural gas

supplies. Substantial increases in demand for natural gas inevitably would lead to

higher costs and greater dependence on foreign sources for supply. At the margin,

our gas supplies are imported from Canada and other sources in the form of LNG. Natural gas futures prices now exceed $4 per million BTU at the wellhead, and

persist at that level for contract purchases several years into the future. Gas prices

exceeded $10 per million BTU in many markets this winter. Environmental policies

that drive electric utilities away from coal which costs about $1 per million BTU

at the mine—and toward natural gas conflict with our energy policy goals of maintaining a reliable, low-cost mix of generating sources.

The UMWA also recognizes that Americans demand a cleaner environment at the

same time they demand low-cost, reliable and available energy. For coal to continue

to play the vital role that it can and should play in our energy mix, we must ensure

that coal is consumed with minimum emissions consistent with the use of available

technologies. The United States must continue to develop highly advanced technologies to convert coal to a cleaner and more efficient form of energy.

The UMWA Supports a Three–Pollutant Approach

The UMWA supports in principle the emission reduction tonnage targets contained in the proposed Clear Skies Act. The UMWA has some suggested changes

intended to improve the environmental effectiveness of the proposal, while reducing

the risk of large-scale, disruptive fuel-switching.

The union consulted with the Administration during the development of the Clear

Skies Act. UMWA engaged this issue in August 2001 in response to the release of

EPA’s initial ‘‘strawman’’ proposal, calling for, inter alia, a 2.0 million ton cap on

sulfur dioxide emissions to be achieved by 2010. Through a process of inter-agency

negotiations, that proposal was modified to a two-phase program with a 3.0 million
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ton final cap. The UMWA supported the 3.0 million ton final cap, but argued for

a single-phase program.

The positions that UMWA has taken on the Clear Skies Act can be summarized

as follows:

1) A single phase approach to reducing SO2 emissions can be developed in a manner that reduces the risk of fuel-switching by encouraging extensive use of available

emission control technologies, thereby maximizing the ‘‘co-benefits’’ of mercury reductions;

2) Two-phase proposals for SO2 control may encourage fuel-switching and resulting job losses, while reducing the use of control technologies that also achieve mercury reductions;

3) A 2.0 million ton cap on SO2 emissions is excessively stringent and could lead

to the shut-down of smaller units forced to install emission controls;

4) Differentiating NOx control requirements between eastern and western States

makes sense in light of OTAG modeling results showing the minor contribution of

western NOx emissions to ozone affecting eastern States; and

5) An initial target for mercury reductions should be set based on expected ‘‘cobenefit’’ reductions from a single-phase SO2/NOx control program, with a subsequent target based on the results of these reductions, and advances in available

mercury control technologies.

In November 2001, UMWA President Cecil E. Roberts testified before this committee:

‘‘An SO2 and NOx control plan along these lines could be implemented as a first

step in a longer-range plan to reduce mercury emissions. The experience in mercury

‘‘co-benefits’’ achieved by the first phase controls for SO2 and NOx emissions would

be vital in assessing the feasibility of ultimate mercury reduction targets. In light

of this, the committee may want to consider early reduction allowances for SO2 controls that also reduce mercury emissions on the theory that such reductions are

more valuable than those strategies that only reduce SO2 alone. There is precedent

for such extra credit in Title IV of the 1990 Amendments, which allocated 2:1 bonus

allowances to utilities that chose to install control technology.’’

With this background, the UMWA respectfully requests the committee to consider

constraining the eastern SO2 reductions called for by the Clear Skies Act to a single

phase control program with a reasonable final deadline, perhaps similar to the 10-

year deadline provided by the Title IV SO2 control program.

A single-phase SO2 program would serve to maximize the use of emission control

technologies such as flue gas scrubbers that also reduce mercury. More important,

emission reductions would be achieved in time to assist States in attaining the new

PM2.5 standard. A longer-term, two-phase program may not deliver sufficient reductions in time for States to demonstrate attainment by the expected 2015 attainment

deadline.

Because NOx controls tend to be added incrementally, from low–NOx burners to

selective catalytic reduction, there is less need for a single-phase NOx control program. The targets and timetables for NOx reductions also may take into account

the longer-term attainment schedule for the 8-hour ozone standard that EPA is developing, modeled on the 17-year schedule that Congress approved for the 1-hour

ozone standard.

Eliminate Allowance Auctions

The UMWA urges elimination of the emission auction provisions of the Clear

Skies Act. Requiring sources both to reduce emissions and to pay for auctioned allowances is a form of double taxation whose rates rise in relation to the sulfur content of coal. Auction ‘‘tax rates’’ would be highest in West Virginia, Pennsylvania,

Ohio, Kentucky, Indiana, Illinois and other States producing higher-sulfur coals.

Over time, this new energy tax would create a major disincentive to the use of coal

reserves in these States.

Avoid Entanglement with Climate Issues!

The UMWA does not support reduction schemes that force or encourage electric

utilities to switch away from coal, thereby causing economic harm to coal miners

and their communities. UMWA is particularly concerned that efforts to craft new

multi-emission control legislation should remain focused as the Clear Skies Act is—

on reducing the air pollutants contributing to air quality problems such as nonattainment with EPA’s new 8-hour ozone and PM2.5 standards.

The union is strongly opposed to efforts to use the Clean Air Act as a vehicle for

regulating greenhouse gas emissions.
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Regulating greenhouse gases under the air quality framework of the Clean Air

Act is not feasible. It is not possible to set enforceable limits on domestic atmospheric concentrations of greenhouse gases generated and transported globally. Carbon dioxide, the principal greenhouse gas, is not harmful to human health and could

not properly be classified as a ‘‘criteria’’ air pollutant.

There are no commercially available means to reduce carbon emissions from the

electric generation sector. Limits on carbon emissions would require switching from

coal to natural gas or other higher-cost energy sources, with potentially devastating

impacts on the economies of coal-producing States.

The Kyoto Protocol exempts rapidly growing developing nations from limits on

greenhouse gas emissions, and unilateral actions by the United States to reduce carbon emissions would have no measurable impact on future concentrations of greenhouse gases. Global greenhouse gas concentrations are projected to increase into the

foreseeable future, irrespective of ratification and implementation of the Kyoto Protocol. These increases will be driven predominately by the economic growth of developing nations.

The U.N. Framework Convention on Climate Change calls for the United States

and other parties to establish global atmospheric greenhouse concentration targets

to prevent ‘‘dangerous’’ anthropogenic interference with climate. To date, the U.N.

FCCC process has failed to engage this debate. Indeed, the FCCC’s ‘‘second review

of adequacy of commitments’’ has been stalled since November 1998 when China

and other developing nations refused to discuss the adequacy of developing country

commitments. In Kyoto, developing countries staged a 6-hour filibuster against the

U.S. ‘‘evolution’’ proposal, calling for subsequent negotiation of developing country

commitments. These subsequent negotiations were contingent upon full and complete performance of all Annex I country obligations under the Kyoto Protocol.

The deficiencies of the Kyoto Protocol and the U.N. FCCC process should be resolved through multilateral negotiations involving developed and developing countries, potentially leading to a new global agreement on greenhouse gases that recognizes the ‘‘common but differentiated’’ responsibilities of parties to the FCCC, with

an equitable apportionment of emission limitation targets among all parties.

The UMWA’s concerns about including greenhouse gas emission restrictions within domestic Clean Air legislation are shared by other labor unions. On October 24,

2001, the presidents of seven labor unions conveyed their views on this issue to this

committee. A copy of their letter is attached to this statement.

Need to Consider Financial Impacts

The failure of many State utility restructuring efforts and other economic forces

have degraded the financial health of the electric utility industry. The industry is

littered with companies in or teetering on the edge of bankruptcy. Credit downgrades are daily news.

The multi-billion dollar annual cost associated with new emission control legislation raises questions about the ability of the utility industry to raise needed debt

and equity capital. In many States, it is no longer possible to simply pass through

the costs of new emission controls to utility ratepayers.

Under these circumstances, UMWA recommends that the committee consult with

the congressional Research Service or the General Accounting Office on the financial

implications of proposed emission control legislation. Both the tonnage reductions

and the timetables for compliance should reflect sound financial and economic assumptions about the ability of the industry to comply.

UMWA appreciates the opportunity to share its views on the proposed Clear Skies

Act with the committee, and looks forward to the opportunity for further input to

the development of multi-emission legislation as your deliberations proceed.

Thank you.

RESPONSES OF EUGENE TRISKO TO ADDITIONAL QUESTIONS FROM SENATOR

VOINOVICH

Question 1. Obviously, fuel switching is an issue that is important to you—as your

members will be forced out of their jobs if utilities switch to natural gas as their

primary fuel for electricity generation.

How does Clear Skies affect your industry?

Response. EPA’s current analyses of Clear Skies show relatively little overall impact on domestic coal production compared to EPA’s base case business-as-usual scenario, with a slight shift from western to eastern bituminous coals by 2020. For reference, see Jeff Holmstead’s recent article in Electric Perspectives at: http://

www.eei.org/ep/editorial/May—03/0503ClearSkies.htm
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This shift reflects the increased use of control technologies needed to meet CSA

emission targets, and the relative ease of removing mercury from high-chlorine content eastern coals.

UMWA has been advised by EPA staff that the main risks of fuel switching under

Clear Skies would exist in the early years of the program, following enactment. Utilities would be able to bank SO2 allowances against future reduction requirements,

and would have a strong incentive to switch to lower-sulfur western coals in order

to reduce their current emissions.

Many subbituminous western coals have emission rates of 0.6–1.0 lb SO2/

MMBTU, while there are virtually no eastern coals with a sulfur content less than

1.0 lb. SO2. The lower the sulfur content of the coal feed, the larger the number

of allowances that can be banked relative to the nominal 1.2 lb. allocation formula

employed in Title IV, Phase II.

These considerations led UMWA to propose a system of early reduction bonus allowances in Clear Skies, similar to the ‘‘Byrd-Bond’’ amendment to Title IV, which

the bill now incorporates. CSA provides 250,000 tons of SO2 allowances as a set

aside for plants that install scrubbers prior to the initial 2010 Phase I cap.

UMWA’s initial proposal for this early action program was 500,000 tons of allowances in each of the years 2007, 2008 and 2009. Any increase in the 250,000 ton

early action reserve would be helpful in encouraging the early use of control technologies that reduce SO2 as well as mercury as a cobenefit.

The risk of early fuel switching also underlies UMWA’s proposal for a single

phase SO2 control program, as explained in my direct testimony. Such a program

would create incentives for early scrubbing to reduce both SO2 and mercury, and

minimize the risks of short-term fuel switching that would not be consistent with

preservation of eastern coal mining production capacity.

Question 2. Is Clear Skies better for your industry in the long run than other alternatives—including business as usual, the Clean Power Act (S. 366) and the Clean

Air Planning Act (S. 3135)?

Response. Clear Skies is significantly more favorable to coal production and consumption in the long-run than either S. 366 or S. 3135. The principal reason for

this is that these alternatives include requirements for carbon emission reductions,

which would serve as an impediment to coal use.

For the reasons set forth in my direct testimony, UMWA would not support an

amendment to the Clean Air Act including carbon dioxide limits on coal power

plants. The international climate change process must first be redirected to embrace

all major greenhouse gas emitting nations. Unilateral actions by the U.S. would

have no meaningful impact on global concentrations of greenhouse gases, and could

impose unacceptable economic hardships on coal producing and consuming States.

Further, as stated in response to the Committee’s hearing questions, UMWA welcomes analyses by EPA, EIA or other agencies of the potential fuel market impacts

of alternative bills before the Committee.

RESPONSES OF EUGENE TRISKO TO ADDITIONAL QUESTIONS FROM SENATOR JEFFORDS

Question 1. As it has been explained to me, the future for new coal generation

and consumption in the next 20 years or so is pretty dim. According to EIA, most

new capacity is going to be natural gas, unless we quickly bring in coal gasification

technology. What are the projections for employment in the coal mining field over

the next 10 years or so, if cleaner, more efficient coal fired generation is not installed within that period?

Response. EPA and DOE projections for coal mining employment show a general

downward trend, reflecting increased productivity. This is a continuation of an historic trend based on increased mechanization at mines. EPA’s projections of mining

employment for Clear Skies may be referenced at: http://www.epa.gov/air/clearskies/

tech—sectiond.pdf

EPA’s analysis suggests a small positive increase in coal jobs (900–1,400) due to

Clear Skies relative to the reference case in 2005 and 2020. This is mainly due to

increased production in the Midwest.

EIA’s projections of future natural gas capacity additions may not be realistic in

view of recent increases in the wellhead price of gas, and poor experience in finding

rates for new gas. A business as usual scenario for coal over the next 10 years reflecting realistic gas price assumptions likely would indicate substantial increases

in generation from existing plants, especially those with relatively low capacity factors, in order to supply increased electric demand. This would imply a beneficial impact on coal mining jobs.
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Question 2. Do you believe that the current statutory language or the consent decree regarding the MACT requirements for hazardous air pollutants could result in

a rule that controls mercury only at the co-benefit level—in the 40–50 percent range

per unit?

Response. The statutory language of section 112 will control EPA’s determination

of an appropriate MACT for coal-fired units. The consent decree impacts only the

timing of the proposal and its promulgation as a final rule. The MACT may subcategorize by coal type, and under applicable precedent should reflect consideration of

worst case operating conditions.

It is UMWA’s understanding that the ICR data collected by EPA can be interpreted to support a MACT that is consistent with a cobenefit level of reduction. The

MACT determination under section 112 looks at the performance of the top 12 percent of units, based on controls actually in use. It is unlike a section 111 NSPS determination, which considers what may reasonably be anticipated as state-of-the-art

control technology.

Thus, in determining MACT, EPA may not consider the effectiveness of activated

carbon injection and other emerging mercury control technologies that are not in actual commercial use. Instead, the agency must focus on the effectiveness of controls

in place among its ICR sample of 80 plants.

Because these controls remove mercury as a co-benefit of other emission control

technologies for SO2, NOx and particulates, it is reasonable to expect that EPA’s

MACT proposal(s) should be consistent with a cobenefit level of mercury reduction.

STATEMENT OF BERNARD MELEWSKI, ADIRONDACK COUNCIL

Good Morning. My name is Bernard Melewski. I am the Deputy Director and

Counsel of the Adirondack Council. I would like to thank the chairman, and the

Members of the committee for the opportunity to be here with you this morning and

to provide testimony regarding Senate Bill 485-the Clear Skies Act.

The Adirondack Park is the largest park of any kind in the contiguous United

States. It is nearly three times the size of Yellowstone National Park and covers

one fifth of the State of New York, making it equal in size to the State of Vermont.

The Adirondack Park is roughly six-million acres of public and private land containing the largest assemblage of old growth forest east of the Mississippi River.

The Adirondacks include the headwaters of five major drainage basins. Lake Champlain and the Hudson, St. Lawrence, Mohawk and Black rivers all draw water from

the Adirondack Park. Within the Park are more than 2,800 lakes and ponds, and

more than 1,500 miles of rivers fed by an estimated 30,000 miles of brooks and

streams. The Park contains 46 mountain peaks more than 4,000 feet in elevation.

Forty-five percent of the Park is publicly owned Forest Preserve protected as ‘‘Forever Wild’’ by the New York State Constitution since 1895. One million acres of

these public lands are further protected as Wilderness.

The Adirondack Council was founded in 1975. It is a private, not-for-profit organization dedicated to enhancing the natural and human communities of the Adirondack Park through research, education, advocacy and legal action. We receive no

Federal or State funding.

Our interest in The Clean Air Act and the problem of acid rain is long held. We

helped craft the first acid rain law in the country which was adopted in 1984. The

New York law identified both sulfur dioxide and nitrogen oxide as precursors to acid

rain, sought limits on total emissions from power plants within the State and even

proposed an innovative trading mechanism that Congress adopted nationwide in the

Clean Air Act Amendments of 1990.

The Adirondack Council was also an active participant in the national debate that

led to the adoption of the acid rain program in Title IV of the Clean Air Act Amendments of 1990. Our publication, ‘‘Beside the Stilled Waters,’’ which was produced

and distributed in cooperation with our member organizations, brought the problem

of acid rain to the attention of the Nation and to Congress. (See Also ‘‘Acid Rain

and the Adirondacks: A Legislative History.’’ Albany Law Review. Vol 66 Number

1 2002)

The acid rain program, as adopted, was not without controversy. Congress adopted an innovative ‘‘cap and trade’’ program, modeled after the New York legislation,

which would abandon the so-called ‘‘command and control’’ approach to regulation,

in favor of a free wheeling pollution allowance trading program that would provide

utilities with the flexibility to make compliance strategies part of their long-term

business planning. The Adirondack Council, among others raised concern that the

cap on total emissions might not be low enough to protect sensitive areas. Others

debated both the need for and the cost of the program
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The Adirondack Council was also one of the most severe critics of the program

EPA designed to implement Title IV. We had concerns about the initial allocation

of credits, the adequacy of the continuous monitoring systems, and, together with

the Natural Resources Defense Council sought changes in Federal court. (Cases consolidated under EPA v. Browner) We are pleased to say that years of good-faith negotiation between the USEPA, the affected industry and the conservation community resulted in very positive changes. Unfortunately, EPA now administers an efficient mechanism that will accomplish a goal that, in hindsight, was too modest.

In 1992, a deputy administrator for the EPA grandly pronounced in a press release that the regulations implementing the new Clean Air Act Amendments would

mean ‘‘the end to acid rain in the Adirondacks.’’ Certainly that was the intention

of the Senate and the House. But wisely, Congress had ordered a series of reports

that would advise the members of the success or failure of the goals of the acid rain

program.

Sadly the news has nearly all been bad.

Due to its location and its thin soils, the Adirondack Park has suffered the worst

environmental damage from acid rain in America. It is the region where the problem was first documented in the United States. Prevailing winds carry power plant

emissions from the Ohio Valley into the Adirondack Mountains, where they fall as

acid rain, acid snow, acid fog and dry acidic particles. The acidity alters soil chemistry, inhibits plant growth and releases heavy metals that are toxic to plants, animals and fish.

Reports conducted by a host of Federal agencies have shown that more than 500

of the Park’s 2800 lakes and ponds have become too acidic to support their native

life over the past 40 years. The same is true for 28 percent of the Park’s 2,000 miles

of navigable rivers. Each spring the percentage of acidic rivers explodes to almost

60 percent over the course of several weeks as the winter’s acidic snowpack melts.

The Park’s high elevation spruce and fir and its spectacular maples, are disappearing at an alarming rate. Similar damage to forests is worsening across the

East Coast, as well as the Colorado Rockies and the coastal mountains of California.

Every report issued by the Federal Government in the past 10 years reflects these

observations, and worse, predicts continuing damage if more is not done to control

power plant emissions. The dire predictions are also reflected in a host of other reports from scientists in the field which we discuss later in this testimony.

In 1998, the Adirondack Council was invited by this committee to testify about

Senate 172, the Acid Rain Control Act, proposed legislation then sponsored by the

late Senator Patrick Moynihan. We said at that time that any legislation that seeks

to address the acid rain problem should, at a minimum contain two provisions. The

same holds true today: • Build on the successful sulfur dioxide cap-and-trade program by creating a

third phase of reductions further along the current time line. All of the advantages

of the current program can be preserved in a predictable, flexible, and cost-effective

manner while reducing sulfur-dioxide emissions by an additional 50 percent or

more.

• Create a new year-round cap-and-trade program for nitrogen-oxide emissions

from utility smokestacks that mirrors the successful program already in place for

sulfur. The role of nitrogen deposition both in high elevation waters and forests and

in our coastal estuaries is now much better understood and accepted by the scientific community. This cap and trade program should reduce nitrogen emissions

from utilities nationwide by approximately 70 percent or more of 1990 levels, resulting in a substantial and beneficial cut that is also reasonably achievable.

It is our conclusion that the bill before you now, Senate 485, the Clear Skies Act,

meets and exceeds those two minimum provisions. The bill embraces the cuts envisioned in the Moynihan–D’Amato–Schumer–Clinton proposals over the past several

sessions of Congress and then goes beyond those levels in an additional phase of

reductions We believe that adoption of the caps proposed for sulfur dioxide and nitrogen oxide in the Clear Skies Act will set the course for recovery of the Adirondacks, and the many other acid rain ravaged sections of the country.

Just last week, final approval was granted for the State of New York to adopt

the toughest acid rain regulations in the country. The New York initiative was announced by Governor Pataki 3 years ago, when I last testified before this subcommittee. Senator Voinovich was presiding that day. The Senator, upon hearing

the news of the announcement, said, as I recall, that it was an important step. That

New York had to show that it was willing to do what we were asking of the rest

of the country. Well Senator, it is done, and we are back. The adoption of the regulations reaffirms once again New York’s commitment to this issue, despite the fact

that more than 80 percent of our acid deposition problem originates outside our borders. We are doing what we can, but we need your help.
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The Pataki rules are modeled to implement the provisions of the Acid Deposition

Control Act authored by the late Senator Moynihan in 1997, which was reintroduced

in the last session of Congress by Senators Schumer and Clinton. New York will

require over the next several years a 50 percent reduction from its power plants of

sulfur dioxide emissions and a 70 percent cut in emissions of nitrogen oxides from

current levels.

The new rules in New York raise an important issue that should be considered

as an amendment to the Clear Skies Act. New York is part of the EPA brokered

22 State SIP Call compact that will reduce nitrogen emissions significantly during

the summer ozone season by 2004. Under the new rules, however, New York power

plants will be required to implement year-round controls in 2004.

USEPA has established a 22–State utility cap-and-trade program for nitrogen

emissions as the preferred response for State compliance with its new ozone program. The EPA SIP call, which is only summer seasonal, will not address in a significant way, the acid rain problem. The acid rain dilemma is the total loading of

nitrogen to sensitive areas. For high elevation areas the main concern stems from

the buildup of nitrogen in the snow pack and the subsequent ‘‘acidic shock’’ to

aquatic systems in the spring of the year. Year-round controls will be necessary to

address the nitrogen problem. Furthermore, only nationwide reductions will address

the problems outside of the 22–State region covered by EPA’s plan.

Congress can level the competitive playing field for the utility industry by enacting national controls which will permit an expanded allowance trading market that

will be more efficient and cost effective. The Congressional Budget Office, in its report, Factors Affecting the Relative Success of EPA’s Nox Cap-and-trade Program

(June 1998), identified similar benefits to providing additional statutory authority

in a report on the proposed rules this summer.

The Clear Skies Act as currently drafted does not impose those year-round controls until 2008 for the SIP Call States. The Adirondack Council requests that the

committee to take a look at whether the imposition of year-round controls could be

advanced for the States in that eastern trading region.

The Adirondack Council would appreciate consideration of two other amendments

to the Clear Skies Act today as well. The second amendment has already been considered once by this committee. In a mark-up of then Chairman Jefford’s bill last

session, Senator Clinton offered up an amendment which was adopted by the committee. The amendment was similar to a provision of Senate 588 of last year, which

would ensure that measurements of water chemistry were conducted in acid sensitive areas of the country. If by a date certain the benefits anticipated by the legislation were not occurring in sensitive areas, the Administrator would have the authority to reduce emissions from contributing sources to reduce acid deposition in

the affected area to levels where the affected water bodies have the capacity to neutralize acids sufficiently to avoid additional damage.

We have every reason to expect that, with the level of reductions proposed in the

Clear Skies Act, that such a provision might never need be invoked. But we prefer

a belt and suspenders in this case. Neither our region of the country, nor any other

that suffers from acid rain, should need to wait another 12 years to solve this problem. We urge you to consider adding language that allows a limited reopener by the

Administrator to protect sensitive resource areas. We appreciate that Senator Jeffords has retained the provision in the reintroduction of his bill this session.

Our third request is that the committee examine whether there can be faster

timetables, especially in the out years for the second phases of SOx and NOx reductions. One of the remarkable aspects of the 1990 Amendments was that the industry

was able to fully comply with two phases of sulfur dioxide reductions only 5 years

apart. New York is requiring our power plants to implement year-round reductions

of nitrogen oxides very rapidly. While we concede that our generators had a very

public ‘‘notice’’ 3 years prior, the committee should examine whether a more ambitious timetable can be accomplished in the out years. The faster we lower emissions,

the quicker we will see recovery.

There are many issues ahead to resolve, including the timing and depth of the

reductions in emissions of the target pollutants. We encourage you to adopt the

deepest cuts in the faster manner that can be accomplished in negotiations with

your colleagues. We are excited by the fact that this bill which you sponsor, Mr.

Chairman, and that of Senator Jeffords and the bill anticipated from Senators Carper and Chafee all will solve the acid rain problem. Every year that can be gained

and every ton that can be saved will hasten the biological recovery of our parks,

our rivers and our coastal estuaries, and will save thousands of lives.

Last spring, President George W. Bush visited the Adirondack Park on Earth

Day. He said he was committed to solving our acid rain problem and we believe

him. We were pleased to see the President chose the solemn occasion of the State
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of the Union message to renew that commitment. The introduction by the leadership

of this committee of the Administration’s proposal is an important step forward. The

Clear Skies Act is a good point at which to begin your deliberations Congress now

has the historic opportunity to stop acid rain, smog and haze from harming our environment and our health.

I want to extend at this time, on behalf of the Board of Directors of the Adirondack Council, an invitation to all the members of this committee to visit the Adirondack Park and see what a wonderful resource you will have saved. Perhaps, you will

hear the haunting call of the loon in the wilderness and know that you have acted

to ensure that future generations will share the experience.

This nation committed itself to the task of ending the destruction of acid rain over

a decade ago. We think it is time to finish the job. We urge the earliest consideration of measures to improve Title IV of the Clean Air Act and bring an end to acid

rain this year.. Thank you again.

Reports to Congress have shown the need for more cuts in emissions

The first report was due in 1993, from the USEPA (ordered under sec. 404, Title

IV appendix B of the 1990 CAAA). Entitled the Acid Deposition Standard Feasibility

Study Report to Congress, the report (dated October 1995) was finally released in

1996 under the threat of litigation from the Adirondack Council and the State of

New York.

The report concluded that the pollution reductions accompanying the 1990 Clean

Air Act Amendments would not be sufficient to allow recovery of certain sensitive

ecosystems and that some would continue to get worse. The report was particularly

compelling for New Yorkers because it revealed that, despite the reductions expected from the 1990 CAA Amendments, the loss of nearly fifty percent of its lakes

and acidification of most streams in the Adirondack Park could be expected.

The second of two reports to Congress, the Report of the National Acid Precipitation Assessment Program, NAPAP Biennial Report to Congress: An Integrated Assessment, was submitted to Congress during the August recess in 1998 (ordered

under Sec. 901J of the 1990 CAAA). It was due in 1996 and it too was released

under pressure from then Senators Moynihan and D’Amato and the threat of litigation from the State of New York. The NAPAP report confirmed and substantially

elaborated upon the findings of the earlier report to Congress submitted in 1996

from the EPA.

We believe that a fair reading of both reports to Congress lead to the same two

findings:

First, the mechanism of a national cap in emissions coupled with the pollution

allowance trading program has been an outstanding success. Facilities are in compliance with Title IV and on schedule. The administrative and implementation costs

of the program are less than projected at the time of adoption. The simple, efficient

design of the program, coupled with large automatic penalties for exceedences, and

the diligence of EPA Administrators and the regulated community are all factors in

this success.

The administrative and implementation costs are far below those associated with

traditional regulatory approaches because in many ways the program is self-implementing. Devices known as Continuous Emissions Monitors (CEMS) count each ton

of pollution as it is emitted from the smokestack. At the end of each year a utility

must have enough credits (either initially allocated or purchased) to cover those

emissions. The accounting of allowance holdings and trading is in a data base maintained by EPA. Each pollution credit is tracked with its own serial number.

The compliance costs of the program are proving to be far below those estimated

when Title IV was adopted. EPA estimated that the fully implemented program

would cost four billion dollars a year, and industry estimates were much higher. A

report by the the Massachusetts Institute of Technology found compliance costs of

less than one billion dollars per year. Again, the design of the program helped

achieve these relatively low compliance costs. Other factors, such as rail transportation improvements that reduced the cost of transporting low-sulfur coal were crucial here as well.

The market for trading allowances is improving as well. Each year there are more

‘‘economically significant’’ trades occurring and the value of each allowance is rising

steadily. In fact, the Adirondack Council is a market participant. We have acquired

thousands of pollution allowance credits, most of them donated as a community

good-will gesture by utilities in New York. Unlike most other holders of allowances,

it is our intention to retire all credits we may obtain by transferring them to a retirement account we maintain with USEPA. Thousands of individuals around the

Nation, have ‘‘Clean Air Certificates’’ on their home or office walls, assuring them
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that the Adirondack Council has permanently retired, in their name, one-ton of sulfur dioxide emissions.

There is a real need for emission reductions beyond those called for in the 1990

Amendments. Projections (by EPA and ICF Resources) of what new SO2 and Nox

reductions would cost indicate that deep new reductions could be achieved at or

near the initial four billion dollar estimate made by the House and Senate in 1990.

The second major finding of both reports to Congress was that despite the success

of the regulatory scheme, the overall cap in emissions is too high to accomplish one

of the primary goals of Congress, which was to protect sensitive resource areas from

the harmful effects of acid rain.

The NAPAP report also confirmed that acid rain is not just an Adirondack problem.

Ecological damage is significant and widespread

The damage that sulfur and nitrogen pollution causes is far from a regional issue.

It is an issue of national importance. Excess nitrogen in waters and in soils—‘‘nitrogen saturation‘‘—can be found in the North East and in West Virginia’s Allegheny

Mountains, Tennessee’s Great Smoky Mountains, Colorado’s Front Range of the

Rockies and even as far west as the San Bernardino and San Gabriel Mountains.

High levels of nitrogen deposition are causing nitrate to leach in stream water from

these watersheds. This nitrate leaching acidifies streams and strips base cations

from soils. In snow covered areas, the flush of nitric acid stored in the snowpack

is the leading cause of ‘‘acid pulses’’ or ‘‘spring shock’’, which is responsible for fish

kills during spring thaws.

NAPAP found that high elevation areas in the Northeast and the Appalachians

are bathed in acidic cloud water for extended periods of time. Sulfuric acid from sulfur dioxide emissions is the significant cause of the widespread loss of red spruce

trees in these areas. The reason for the die back is the leaching of calcium from

the spruce needles and aluminum from the soils by the acidic fog which makes the

trees susceptible to frost and winter injury.

The coastal estuaries of the entire east coast suffer from airborne inputs of nitrogen that can make up nearly 40 percent of the total nitrogen loaded into their systems. In estuary systems such as the Long Island Sound, Narragansett Bay, the

Chesapeake Bay and Tampa Bay in Florida, nitrogen-based pollution is overloading

the water with nutrients. This causes ‘‘eutrophication,’’ an overabundance of algae.

When algae dies and decays, it depletes the water of precious oxygen needed by all

aquatic animals. This condition is known as hypoxia. Algae blooms are also associated with fin fish kills, shellfish kills and human illness.

NAPAP also concluded that areas of the United States that are not seeing damage

now are likely to in the future, due to an effect known as soil acidification. Over

the long term, acidic deposition is slowly leaching away key soil nutrients, like calcium and magnesium (known as base cations) that are essential for plant growth.

This nutrient depletion is occurring in high-and mid-elevation forests in New England, New York and the Southern Appalachians. NAPAP cited studies which concluded that fifty-nine percent of the commercial pine forest soil in all of the South

East has low enough reserves of these chemicals to warrant concern.

Acid deposition, whether from sulfur-or from nitrogen-based pollution, not only

leads to base depletion, but also results in the release of toxic compounds from soils

to living things. For example, the release of aluminum from soils rapidly accelerates

when pH drops below 5. The release of aluminum interferes with plant biochemistry. It is also the leading cause of fish mortality in affected lakes. In other

words, it is not only the acidity directly, but also the aluminum toxicity that is responsible for the damage. This effect is very widespread. NAPAP cited studies, conducted in the Shenandoah National Park, show that fish species richness, population density, condition, age distribution, size and survival rate were all reduced

in streams no longer able to neutralize acidity. Another NAPAP study of streams

in the Adirondacks, Catskills and Northern Appalachians in Pennsylvania showed

that episodic acidification ‘‘acid pulses’’ had long term adverse effects on fish populations including significant fish mortality.

Lake acidification, whether from sulfur or nitrogen is also clearly implicated in

the increase in mercury concentrations found in fish. Acidity leads to greater conversion of mercury from its less toxic elemental form to methyl mercury, which is much

more toxic. Fish consumption warnings due to mercury contamination are common

in many states and are on the rise. The bio-accumulation of mercury in some species

of fish in New York has reached levels that threaten our loon population, which are

dependent on the fish as a primary food source. In dozens of lakes in the western

mountains of the Adirondack Park and in the Catskill Mountain reservoirs of New

York City’s water supply, the levels of mercury in some fish species exceed that
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which is safe for human consumption, and children and women of child-bearing age

are urged to avoid perch and bass altogether. The acid rain problem is now a public

health problem.

The cost to Americans from acid rain is not just the loss of pristine lakes in one

of its greatest parks, or the almost imperceptible die out of sensitive species of trees,

or even the haze obscures the views of four national parks, it is also in the loss of

our great monuments, our collective tribute to our ideals and to those who have

come before us.

The Capitol building is crumbling. The corrosive effects of acid rain are eating

away at its marble and that of many of the great monuments on the mall. The Lincoln memorial corrodes more every year. So it is with buildings and monuments

throughout the Capitol, so numerous and so obvious that until recently you could

purchase an illustrated guide to the acid rain damage to our nations capitol,

thoughtfully provided free of charge to the public by the U.S. Park Service. (Acid

Rain and our Nation’s Capital, U.S. Dept. of the Interior/U.S. Geological Survey,

1997)

The monuments to the fallen on the great battle sites of the Civil War, Gettysburg

and Vicksburg, are dissolving from the acid bath they endure each rainy day. The

Statute of Liberty stands melting on its solitary island.

This is why the fight to stop acid rain has been joined by many of the nation’s prestigious organizations dedicated to historic preservation, such as the National

Trust For Historic Preservation and the ‘‘Save Our Sculpture’’ Project of the Smithsonian.

All of this disturbing information was been exhaustively peer reviewed and

verified by the May 1998 National Acid Precipitation Assessment Program Biennial

Report to Congress.

Other studies have found similar results.

Environment Canada, in its 1997 report ‘‘Toward a National Acid Rain Strategy’’, said that reducing sulfur emissions significantly beyond the current Clean Air Act

requirements in both countries would be needed for all of eastern Canada to be protected from acid rain. In southern Canada, an area the size of France and Britain

combined continues to receive harmful levels of acid deposition. As many as 95,000

lakes in the region will remain damaged.

A study released by Trout Unlimited in 1998, that was conducted by the University of Virginia found that without deep additional deposition reductions up to 35

percent of Virginia trout streams would become ‘‘chronically acidic’’ and would no

longer support trout populations. The study further estimated that thousands of

trout stream miles in the Southern Appalachians may be lost to acidification.

While we hold no special expertise in the field of the health effects of air pollution,

a brief review of the literature reveals some interesting facts. EPA’s 1995 study,

Human Health Benefits from Sulfate Reductions Under Title IV, estimates that

every dollar spent reducing SO2 emissions could generate ten dollars in savings

from reduced health care costs. Considering the steep rise in asthma cases, acting

to reduce air pollutants now is an important health initiative.

In 1999, Nature, perhaps the most respected journal of its kind, published the

broadest geographical study of acid rain to date. Written by 23 scientists, all of

them top acid rain researchers, and taking samples from roughly 200 sites, the

study again confirmed and elaborated on the disturbing findings of earlier works.

Unfortunately, the next scheduled report by NAPAP to Congress is again 2 years

overdue. It is easy to predict that its findings will only stimulate more demand for

action by Congress on acid rain. Several studies released since that time only reinforce the desirability of moving ahead.

In May of 2000, the Ecological Society of America released it workshop report

from its 1999 conference of 50 of North America’s top research scientists. The report

States that parts of New Hampshire, Maine and California were suffering lake

acidification and forest death as severe as those observed in New York’s most sensitive areas. Major findings of the report included:

• More cuts are needed in sulfur dioxide and nitrogen oxides to protect sensitive

areas of the country from environmental damage; • The White Mountains of New Hampshire and the lake country of Maine were

showing little or no recovery;

• Nitrogen oxides can be equal in destructive power to sulfur dioxides;

• Nitrogen saturation, already begun in the Adirondacks, is actually worse in the

San Gabriel and San Bernardino Mountains of southern California, which had the

highest concentrations of nitrogen in North America;

• Acid shock is more widespread than previously believed; and

• It is very important to continue the long-term research into the effects of acid

rain, including studies of cloud water, dust particles, rain, sleet and snow.
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At the beginning of the last session of Congress, the Hubbard Brook Research

Foundation released a new summary report, Acid Rain Revisited of its findings of

the scientific advances since the 1990 Clean Air Act Amendments. The report’s main

conclusions are that our soil problems are getting worse and the forests are dying

faster than we thought. The Hubbard Brook study is one more brick in a huge wall

of evidence that acid rain must be stopped as soon as possible.

Briefly stated, the findings include:

• Acid rain is still a problem and has a greater environmental impact that previously projected;

• Acid deposition has altered soils and stressed trees in areas of the Northeast

and has impaired lakes and streams;

• The Clean Air Act has had positive effects, but emissions and deposition remain high compared to background conditions; and

• The rate and extent of ecosystem recovery from acid deposition are directly related to the timing and degree of emission reductions.

And in January of 2003, the US Environmental Protection Agency’s Office of Research Development issued a report showing that the cuts in air pollution since

1990 have produced corresponding modest-but—encouraging improvements in concentrations in lake water across the Northeast, including the regions’s hardest-hit

area, the Adirondack Park. The good news from that report is that we have been

taking the right approach by reducing sulfur dioxide and nitrogen oxide emissions

from power plants. We are targeting the right sources and the right pollutants. Our

natural ecosystems are beginning to show signs of chemical recovery, but is a long

road from the start of chemical recovery to full biological recovery-the point where

you see the fish, trees, and other native species coming back in healthy numbers.

We need to continue down this road and act this year to make significant new cuts

that will not only turn the corner but also accelerate the natural healing process.

The call for additional action on acid rain is not just a New York plea.

The problems these pollutants bring are felt from Maine to Florida and beyond.

The actions we call for will improve the environment and public health to the benefit of virtually every American.

In May 1998, the Conference of New England Governors and Eastern Canadian

Premiers recommended additional reductions in utility emissions of SO2 and NOx,

similar to the provisions of the Moynihan legislation.

In August of 2002, the unanimous report of the Southern Appalachian Mountains

Initiative, released by representatives of eight southern States (North Carolina,

South Carolina, Kentucky, Virginia, West Virginia, Tennessee, Georgia and Alabama), concluded that its mission cannot be accomplished without emissions reductions in States outside the region. The final report also States that ‘‘The SAMI

States support and will promote national multi-pollutant legislation for electric utility plants to assure significant sulfur dioxide and nitrogen oxide reductions, both inside and outside the SAMI region. This national multi-pollutant legislation should

result in no less than the reductions for sulfur dioxide and nitrogen oxides represented by the Administration’s Clear Skies Initiative’’. We concur. congressional

action is the best solution

The sad alternative of more delay is continued destruction of the nations most

pristine resources and treasured monuments. The failure to act now will also

heighten the desire to find alternative, and more confrontational, routes to stop acid

rain.

The disturbing and overwhelming evidence of the destruction of the streams,

lakes and forests on public lands, protected by New York’s State Constitution as

‘‘Forever Wild’’ and the pollution of our coastal estuaries has raised grave concern

in New York. Absent clear movement by Congress to adjust the sulfur program and

deal with the companion problem of nitrogen as long-range transport of pollutants,

there have already been numerous efforts in New York to mitigate the problem

through any other avenue available. In the past several years, the Office of the Attorney General of the State of New York has sought legal redress via other provisions of the Clean Air Act. Most recently, Attorney General Eliot Spitzer has

brought suit against 17 utilities in five States, using the long arm of the Clean Air

Act to force change.

In 2000, New York’s State Senate passed unanimously a bill that is intended to

discourage the trade or sale of excess pollution allowances that our own utilities

may own for the eventual use in 12 upwind States. I assure you, the New York

State Senate is not known for its hostility to business or to the free market. The

State Senate action, we believe, reflects a consensus that something must be done.

The State Assembly did adopt the same measure, which was signed into law that

year. Not surprisingly, a coalition of utilities challenged the measure on constitu-
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tional grounds, winning at the Federal district court level. The lower court decision

is currently under appeal by the State, where an opinion is pending. (See Clean Air

Markets Group, 194 F.Supp. 2d.147 NDNY 2002)

We believe that the greater the delay in action by Congress to repair the flaw in

the acid rain program, the more likely that you will see actions like those just mentioned in New York taken in other affected States. The better alternative is to fulfill

the original intent of Congress to solve the acid rain problem by taking action soon.

RESPONSES OF BERNARD MELEWSKI TO ADDITIONAL QUESTIONS FROM SENATOR

JEFFORDS

Question 1. The Hubbard Brook Research Foundation, the preeminent institution

for the study of acid rain, has said that cuts in sulfur dioxide of at least 80 percent

beyond phase II (that’s down to about 1.8 million tons) will be necessary if we are

to see biological recovery in the lakes and streams of the Adirondacks by mid-century. You probably know that Clear Skies stays above that level, at the 3 million

ton level, until at least 2061. Is that acceptable to your members?

Response. Our members are interested in stopping the damage from acid rain as

soon as possible. We would prefer an elimination of all power plant emissions

upwind of the Adirondacks. Reductions of an additional fifty percent in emissions

of acid rain precursors from power plants, which is the minimum that needs to be

done, has been proposed in Congress virtually every year since the passage of the

1990 Clean Air Act Amendments without success.

The Hubbard Brook Foundation report is not a revelation to scientists in the field,

but is a logical outcome. The faster we cut emissions and the deeper the cuts the

more rapid the chemical change and then biological recovery. Thus an 80 percent

reduction promotes full recovery at a faster rate than a 50 percent reduction.

Recent studies published by the USEPA and others provide scientific certainty

that Congress targeted the correct pollutants from the appropriate sources in enacting Title Four of the Clean Air Act Amendments of 1990. Signs of chemical recovery

are there in the waters of the Adirondacks ans elsewhere. But more must be done

and soon.

But every year of delay means more damage to sensitive areas like the Adirondack Park. That is why our testimony puts emphasis on the need to reach agreement on the fastest timetable with the deepest cuts that can move out of Committee

and pass the Senate this year.

Question 2. EPA’s climate assessment work indicates that virtually all brook and

brown trout habitat, as well as fifty to seventy percent of maple forests, could be

lost throughout New York due to global warming. And, as a result, the character

of heavily visited areas like the Adirondacks may change. Do you believe that there

is a significant risk of substantial ecological and economic harm facing the Adirondacks due to global warming?

Response. The Adirondack Council, in the fall of 2002, held a major conference

entitled AClimate Change and the Future of the Adirondacks.@ The conference reaffirmed that climate change is real and could eventually have profound impacts on

the natural resources, weather patterns and tourism industry within the Adirondack Park.

As we testified, the Adirondack Council is supportive of the addition of provisions

on climate change in any bill that the Committee and the full Senate may choose

to advance. There are a number of proposals from mandatory controls to phased decreases in carbon dioxide emissions that provide an opportunity for compromise. We

do not support, however, further inaction on sulfur and nitrogen emissions from

power plants due to disagreement in the Senate over the appropriate provisions on

climate change. We need action on acid rain as soon as possible.

It is also important to acknowledge that stopping acid rain is an integral part of

any climate change strategy. Recent studies from NAPAP to the Hubbard Brook

Foundation acknowledge that acid deposition is disrupting the life cycle of our forests. From Maine to Georgia, our forests are in poor health due to the complex and

damaging impact of acid deposition. Healthy forests are critical to carbon sequestration and to moderate the affects of global warming by cooling the landscape. The

Adirondack Park, with its AForever Wild@ Constitution protection, may be a model

for future climate change programs.

Restoring the vitality of our forests should be a critical element of any climate

change strategy, and that means bringing and end to acid deposition as rapidly as

possible.
146

RESPONSE OF BERNARD MELEWSKI TO AN ADDITIONAL QUESTION FROM SENATOR

VOINOVICH

Question. In your testimony, you mentioned that adoption of the caps proposed

for sulfur dioxide and nitrogen oxide in the Clear Skies Act will set the course for

recovery of the Adirondacks, and the many other acid rain ravaged sections of the

country.

Critics of Clear Skies claim that the bill will actually roll back the Clean Air Act.

Would the recovery you talk about in your testimony be faster under current

Clean Air Act provisions?

Response. The existing provisions of the Clean Air Act are not adequate to solve

the acid rain problem. First, it is an unreliable assumption that the law will be expeditiously executed. The historic reality of Clean Air Act implementation has been

erratic enforcement, prolonged litigation and fits and starts in implementation. This

pattern has endured over a number of Democratic and Republican Administrations.

Notably, there has been one exception and that has been the implementation of the

cap and trade market-based provisions of Title Four of the Clean Air Act Amendments of 1990, the Acid Rain Provisions. The Clear Skies Act, S. 485 , and other

major proposals before the Committee seek to capitalize on the success of that program which to date has met or exceeded all deadlines with virtual 100 percent compliance by the affected industry, at significantly below projected cost.

While the mechanism has been shown to be worth emulating, the caps on emissions established in 1990 were too high to achieve the fundamental goal of the program: to stop the damage to sensitive resources from acid rain. This gap between

goal and performance has been documented in several Reports to Congress since

1990. The Act must be amended to lower the emission caps on sulfur and to establish a new cap-and-trade program on nitrogen year-round. A similar cap-and-trade

approach was recently proposed for carbon dioxide emissions for the northeast by

New York Governor George Pataki.

Recent efforts to discredit the Clear Skies Act have compared projected outcomes

from full implementation of the existing Act, with the projected levels of sulfur dioxide and nitrogen emissions predicted for the Clear Skies proposal. If one extends the

comparison to other bills sponsored in the Committee, one readily finds that none

of the major proposals are as effective in both nitrogen and sulfur reductions as the

predicted outcome of faithful implementation on of the Clean Air Act. Either one

presumes that nobody knows what they doing on Capitol Hill or one has to conclude,

as we do, that hypothetical scenarios should not be the basis for establishing national policy.
(147)

CLEAR SKIES ACT OF 2003

THURSDAY, MAY 8, 2003

U.S. SENATE, COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS, SUBCOMMITTEE ON CLEAN AIR, CLIMATE CHANGE AND

NUCLEAR SAFETY,

Washington, DC.

The subcommittee met, pursuant to notice, at 9:35 a.m. in room

406, Dirksen Office Building, Hon. George Voinovich [chairman of

the subcommittee] presiding.

Present: Senators Voinovich, Carper, Jeffords [ex officio] and

Inhofe [ex officio].

OPENING STATEMENT OF HON. JAMES M. INHOFE,

U.S. SENATOR FROM THE STATE OF OKLAHOMA

Senator INHOFE. The hearing will come to order.

We have an awkward situation this morning that I will explain

to you. That is we have a vote beginning in about 5 minutes. I have

a conflict with the Senate Armed Services Committee where we are

currently marking up that bill, so I will go ahead with an opening

statement. By the time I am through, I believe the members will

be coming in. If not, we will recess until they come in and I won’t

be able to stay. Let me than you for coming, Mr. McSlarrow. It is

always a pleasure working with you in many, many capacities and

this is another.

I also want to extend my appreciation to Richard Metz who made

the trip here today from Oklahoma to explain the pressures facing

the natural gas industry.

This hearing will help us understand the relationship of clean air

requirements to natural gas supplies, price levels and price volatility. Natural gas is a vital fuel source in meeting our Nation’s energy requirements. Natural gas heats homes, creates electricity for

power, plants and industrial users, and is used as a feedstock in

the production of many goods and services.

In 2002, these sectors consumed almost 22 trillion cubic feet of

natural gas. Powerplants generating electricity for the grid consumer consume about one fourth that amount, as does the residential market. The remaining half is largely consumed by commercial

and industrial users.

I am committed to maintaining a diverse fuel mix in the generation of our Nation’s electricity. Natural gas is an important an integral fuel in maintaining that diversity. Unfortunately, over the last

decade due to clean air requirements, virtually all powerplants

coming on-line has been gas-fired. One of the strengths of natural
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gas historically was that it provided needed supplies at fairly stable and reasonable prices. I am concerned this strength has been

eroded by the over-reliance on gas to meet our electricity needs.

The effects are already becoming clear. While natural gas prices

were fairly stable through the 1990’s, the prices have become more

volatile in recent years. As this chart shows, in 2000 and early

2001, average monthly natural gas wellhead spot prices climbed

from about $2 to $9, then settled down to $2 at the end of that

year. Earlier this year, average prices climbed to more than $7

with prices spiking at $19 on February 25.

As this next chart shows, gas prices are not only becoming more

volatile, but are projected to increase in real terms. As you can see,

according to Energy Administration reports, the 2003 projected

prices through 2005 are higher for the same period than had been

forecast for just the year before. Even 2003 projections now look

overly optimistic given current prices of $6.
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Of course these price swings and hikes do not occur in a vacuum.

Part of this is due to limits on production and restrictions on constructing pipelines which are issues I believe need to be resolved

to help the industry continue to supply this critical fuel source.

At the same time as gas production is facing increased challenges, demand has increased and that demand is projected to increase more in the future as this chart shows. This spike in demand has had adverse impacts on small businesses, many fertilizer

manufacturers and plants have gone out of business as a result of

the price spikes over the last few years. Many manufacturers use

natural gas not only to power their facilities but in the production

process itself. U.S. chemical producers are now the world’s highest
150

cost producers because they are dependent upon natural gas prices

and prices are higher here than elsewhere in the world.

I remain concerned that with the large amount of investment

needed by coal plants to comply with significant emissions reductions contemplated under Clear Skies, fuel switching could become

even worse despite the rising prices. As I have said before, one of

my top priorities is to ensure that quality science drives policy and

not the other way around. We have had some bad experiences in

the past where policies were derived and concluded and then they

come up with the science to justify the policy positions.

It is imperative that this committee be sure the modeling assumptions used to justify the bill related to fuel switching, natural

gas markets, and control technologies are accurate and objective. In
151

future hearings on Clear Skies, I hope the Administration will provide us with the necessary data to make these evaluations.

I have testimony from the Aluminum Association and Fertilizer

Institute and will submit them for the record. Without objection, it

will be submitted.

With that, we have a vote in progress and I believe probably the

members of the committee are going to vote and then come here.

I appreciate the indulgence of the audience, of you Mr. McSlarrow

and you Mr. Metz for having to proceed in this manner. Thank you

very much.

We are now in recess subject to the call of the chair.

[Recess.]

OPENING STATEMENT OF HON. GEORGE V. VOINOVICH,

U.S. SENATOR FROM THE STATE OF OHIO

Senator VOINOVICH. The hearing will come out of recess.

I understand from talking to the chairman of the committee that

he began the hearing this morning and shared his opening statements with you.

I would like you to know this is the second hearing we have had

on the Clear Skies Act, S. 485 and continues the discussion we in

this committee have had for several years on the complex issue of

how to clear our air by reducing emissions without putting our

economy in a stranglehold.

Today’s hearing will focus on the issues surrounding our use of

natural gas to generate electricity. There is perhaps no greater illustration of our need to harmonize our environmental and energy

policies than the effects of fuel switching from coal-based generation of electricity to natural gas-based generation on our economy.

Americans consumed 22.6 trillion cubic feet of natural gas in 2001;

currently we consume approximately 25 trillion cubic feet annually

and are projected to consume 37.5 trillion cubic feet in 2025. Natural gas is used to heat homes, generate electricity and in the commercial, industrial and transportation sectors.

Historically, the industrial sector has been the largest natural

gas consuming sector, consuming 7.5 trillion cubic feet in 2001, followed by residential use for home heating, water heating and cooking and natural gas consumption in the industrial and residential

sectors is roughly about what it was in the 1980’s. Natural gas for

electricity generation, however, has risen considerably during the

last two decades to 5.3 trillion cubic feet in 2001 and is projected

to grow even more dramatically over the next 2 years. EIA projects

that 30 percent of the electricity generated in 2025 will be natural

gas-based, a significant increase over the 17 percent of our electricity that was generated by natural gas in 2001 and 2002.

Reliance on natural gas for even this much generation has put

a tremendous strain on natural gas supplies and pushed prices on

available gas to record high prices. The President’s National Energy Policy Task Force projected that over 1,300 new powerplants

will be needed to be built to satisfy America’s energy needs over

the next 20 years. Because of the emissions limits and regulatory

uncertainty triggered by the Clean Air Act, the Department of Energy currently predicts that over 90 percent of these new plants

will be powered by natural gas.
152

Just this week, I was told by the CEO of a major utility in Ohio

that does business not only in Ohio but in the Midwest, that due

to regulatory uncertainty, surrounding coal-based generation that

confronts him, the only option he has when building new capacity

is to switch to natural gas because of where we are today in terms

of the uncertainty of the future.

We do not have enough natural gas to power all these new facilities and we do not have the capability to increase our supply to

meet this demand. We do, however, have major domestic reserves

of natural gas in the Rockies, off the East Coast, off the West Coast

and in the Gulf of New Mexico that are off limits for development.

We have tremendous reserves of natural gas in Alaska without the

ability to pipe it down to the lower 48. Perhaps most disturbing,

we have seen a 5.6 percent decline in natural gas supplies in the

continental United States in 2002 and a 2.3 percent decline in domestic natural gas production in 2002.

Unless Congress develops a plan to deal with the situation, we

are looking at major natural gas shortages and enormous increases

in natural gas prices which will inevitably lead to higher electricity

prices. Shortages of the natural gas supply result in increase in

natural gas prices and do not just affect utilities. This is very important. Many other industries rely on natural gas such as the agriculture community, the steel and metal industries, the plastic

manufacturing industry which is being devastated in Ohio because

of the high cost of natural gas, polymer manufacturers and the food

processing industry.

A major shortage of natural gas coupled with skyrocketing energy prices will ensure that many of our companies will no longer

be able to remain competitive in the global marketplace. Today we

will hear from Jim Krimmel, the President of Zaclon Chemical,

Inc., an Ohio-based chemical manufacturer with worldwide sales

who will discuss the enormous burdens that increased energy costs

have placed on his business and threatened the very existence of

his company.

Although high natural gas prices have severely affected businesses and their ability to compete in the global marketplace, they

have an even more profound impact on low income families and the

elderly. Each year, many Americans are forced to make choices between paying to heat their homes, for food or other essentials such

as medicine and energy prices are very, very high.

In order to diffuse the time bomb of skyrocketing natural gas and

electricity prices that is sitting in our lap, Congress must enact a

comprehensive energy policy that will increase our development of

natural gas supplies and ensure that we have a diverse fuel mix

for electricity generation that includes nuclear renewables, natural

gas and coal. To get there, the Senate must pass both comprehensive energy legislation that promotes domestic natural gas development and multi-pollutant legislation that will streamline the regulatory process, maintain the diversity of our fuel mix and achieve

greater emissions cuts to protect our environment.

I am pleased to note that our distinguished Majority Leader,

Senator Frist, has brought the Energy bill to the Senate floor this

week in order to address our Nation’s need for a comprehensive energy policy. It is no coincidence that we are considering both energy
153

legislation and environmental legislation at the same time as they

really are two sides of the same coin. Any worthwhile energy policy

must take into account protection of the environment and at the

same time any worthwhile environmental policy must take into account protection of our economy.

The Clear Skies Act, S. 485, I believe is an example of environmental legislation that will protect our economy, will improve the

Clean Air Act by providing greater certainty that emissions are reduced while providing a stable, regulatory environment that allows

utilities to install necessary pollution controls without the fear that

those controls will be obsolete before they are paid for. It will result

in cleaner air, less regulation, and litigation. It will lower energy

costs to manufacturers and American consumers. Simply put, this

legislation will provide tremendous benefits to the environment

and is crucial to the long term survival of our economy and our

manufacturing base.

I want all of you to note here that manufacturing in this country

is really under pressure today. It is more vulnerable today and

more at risk than at any time in my career in government.

The flexibility of the Clear Skies market base cap and trade program and the certainty of emissions reduction targets will ensure

that the real emissions reductions called for in this bill can be

achieved without forcing utilities to fuel switch and without forcing

electricity and natural gas prices through the roof. Perhaps more

importantly, Clear Skies will help ensure that the least of our

brothers and sisters will not be forced to forego heating their

homes and that our companies will not be forced to move overseas

to remain competitive in the global marketplace due to high cost

of electricity and natural gas.

As I mentioned at the beginning of my remarks, this is the second hearing we are holding in this subcommittee on Clear Skies.

It is my intention to hold a third hearing on this legislation in the

near future that will focus on emissions reduction technology and

issues surrounding the financial stability of the utilities that are

required to install such equipment in order to complete with the

Clean Air Act requirements.

I also intend to mark up Clear Skies at the subcommittee level

following the Memorial Day recess and I want to restate my firm

commitment to push hard to have the full committee report to the

floor and have the Senate pass this bill in this Congress.

I want to thank our first witness this morning, Deputy Secretary

McSlarrow for coming to present the Administration’s take on natural gas supply and pricing issues to the subcommittee. I look forward also to the testimony of our other witnesses and to working

with members of the subcommittee as we move forward on legislation to address these critical issues.

Senator Jeffords, the ranking member of the committee, has

joined us. Senator Jeffords?

OPENING STATEMENT OF HON. JAMES M. JEFFORDS,

U.S. SENATOR FROM THE STATE OF VERMONT

Senator JEFFORDS. Thank you.

It is always important that the committee collect information on

the effects of legislation on various sectors of the economy, includ-
154

ing energy, industry and natural gas. Of course, however, the committee’s first and foremost responsibility is to be sure the Nation’s

laws are protective of public health and the environment. It is our

job to set performance standards for industry that are adequately

productive and wherever possible, fuel neutral. These standards

should not be skewed to protect any one industry but should encourage sustainable, economic development.

The Clear Skies proposal does not fit that criteria. As one analyst

said, ‘‘It is the best case scenario for coal.’’ The proposal was designed to protect 40 or 50 year old coal-burning plants from any

risk of having to meet modern environmental standards or needs.

That is hardly fuel neutral and so it does nothing to stimulate the

development of technology to burn coal more cleanly and efficiently.

I have grave concerns that Clear Skies will do a much worse job

than the current Clean Air Act when fully and faithfully implemented. Clear Skies caps are too weak, the deadlines are too late,

and the State authorities are to degraded. Because of these flaws,

the bill will delay the attainment in many areas forcing millions of

people to breathe unhealthy air longer than the current Air Act allows. That is the outcome that I am not willing to accept.

As I have noted in previous hearings, quality and timely information is crucial if we are going to work out a compromise on multipollutant legislation that can be supported by this committee. Unfortunately, such information has been hard to come by from this

Administration. I am starting to believe that this is because they

are not interested in compromise.

Governor Whitman promised me in February that the information flow would improve but I am still waiting on answers to questions from March. Perhaps Mr. McSlarrow can explain today why

the Department of Energy has completely failed to provide an NSR

document log that it promised on September 25, 2002 would be delivered to the committee on October 24, 2002. In addition, at some

point very soon, the Administration will have to explain why they

are not allowing EPA to run emissions and economic modeling for

the Federal Advisory Committee working on the Utility MACT

Rule.

Without objection, I would like to place in the record

NESCAUM’s effort to analyze what EPA won’t.

Senator VOINOVICH. Without objection.

[The information referred to follows:]

MERCURY MACT UNDER THE CLEAN AIR ACT: AN ASSESSMENT OF THE MERCURY

EMISSIONS OUTCOMES OF STAKEHOLDER GROUP RECOMMENDATIONS

NESCAUM—MAY 8, 2003

1.0 Background

Mercury is a persistent, bioaccumulative, neurotoxic pollutant. When released into

the environment and deposited or carried into water bodies, mercury is easily converted to methylmercury, a particularly toxic mercury compound, and accumulates

in sediments. Methylmercury is readily transmitted up the food chain and accumulates in the tissues of animals. Exposure to mercury can cause numerous adverse

effects in plants, birds, and mammals, including humans.

In humans, methylmercury is transported across the placenta into the brain of

the developing fetus. In young children and fetuses, methylmercury inhibits the normal development of the nervous system, an effect that may occur even at low exposure levels. This damage frequently is not apparent until later in the developmental

process, when motor and verbal skills are found to be delayed or abnormal. Develop-
155

1U.S. EPA. 1998. Study of Hazardous Air Pollutant Emissions from Electric Utility Steam

Generating Units—Final Report to Congress. 2State and Local Agency Stakeholders included NESCAUM, STAPPA/ALAPCO, the State of

New Jersey, and the Regional Air Pollution Control Agency (RAPCA) based in Dayton, Ohio.

(The State of Texas also participated in the Working Group, but preferred to offer a separate

opinion on several issues.) 3Environmental Stakeholders included the Clean Air Task Force, National Wildlife Federation, National Environmental Trust, Natural Resources Defense Council, and Environmental

Defense. 4The Clean Energy Group was represented in the Working Group by PG&E National Energy

Group. Two of its members, Consolidated Edison and Public Service Enterprise Group, also participated in the Working Group. Other Clean Energy Group members include Conectiv, Exelon

Corporation, KeySpan, Northeast Utilities, and Sempra Energy. 5The Majority Industry Group was represented principally by Cinergy, the Class of 85 Regulatory Response Group, Latham & Watkins, the National Mining Association, Seminole Electric

Cooperative, Southern Company Generation, the United Mine Workers, the Utility Air Regulatory Group, West Associates, the American Public Power Association, and the National Rural

Electric Cooperative Association. 6‘‘Areas of Agreement Among Stakeholders in the Utility MACT Working Group,’’ Memorandum dated October 30, 2002.

mental effects have been found in children exposed in utero, even though their

mothers did not experience any symptoms of adult toxicity. States are sufficiently

concerned about the public health impacts of mercury exposure that most have posted advisory warnings about fish consumption—the primary exposure route in hu- mans. In 1998, the U.S. Environmental Protection Agency (EPA) identified mercury as

the hazardous air pollutant of ‘‘greatest potential concern’’ associated with coal-fired

electricity production.1 Moreover, coal-fired power plants were identified as the largest remaining source of airborne mercury emissions in the U.S. following the regulation of other important mercury sources, such as municipal and medical waste incinerators, in the late 1990’s. Under a legal settlement reached pursuant to the Clean

Air Act Amendments of 1990, EPA is required to promulgate mercury emissions

standards for electricity generating utility boilers by December 2004. These standards—which according to the explicit language of the Clean Air Act must reflect the

utilization of ‘‘Maximum Achievable Control Technology’’ for mercury—are expected

to be implemented by December 2007.

To assist in the development of Maximum Achievable Control Technology (MACT)

standards for power plant mercury emissions, EPA convened a multi-stakeholder

group known as the Utility MACT Working Group (hereafter, Working Group). The

Northeast States for Coordinated Air Use Management (NESCAUM) has participated in this group since its inception. NESCAUM is an interstate association of air

quality control agencies in the eight Northeast States (the six New England States,

New York, and New Jersey). Together with other Working Group participants,

NESCAUM worked to develop a set of specific recommendations to EPA concerning

issues related to the setting of MACT standards for mercury emissions, consistent

with the requirements of the Clean Air Act.

Ultimately, the stakeholder groups participating in the Working Group could not

agree on a single set of recommendations for mercury emissions standards. Instead,

the Working Group’s deliberations resulted in separate recommendations from a

range of stakeholders, including distinct recommendations from four major stakeholder groups: the State and Local Agency Stakeholders,2 the Environmental Stakeholders,3 the Clean Energy Group (CEG),4 and multi-industry stakeholders under

the name ‘‘Majority Industry Group.’’5 The first three of these groups reached significant consensus, however, jointly signing a memorandum to the members of the

Clean Air Act Advisory Committee indicating that there were, in fact, broad areas

of agreement among them.6 This memorandum also expressed concern that the final

report of the Working Group had obscured the extent to which consensus had been

achieved among many of the stakeholders on important issues.

Throughout the Working Group’s deliberations, EPA represented its intention to

model the impact of stakeholder group recommendations on mercury emissions from

the electric power sector using ICF’s IPM model. Recently, however, EPA indicated

that it will delay—and perhaps forego entirely—any IPM analysis of stakeholder

recommendations. In light of this decision, NESCAUM decided to analyze the emissions impacts of the recommendations of these four stakeholder groups participating

in the Working Group.

Each of the stakeholder groups submitted recommendations for mercury reductions in terms of a specific rate-based emission standard or an alternative approach

allowing sources to meet either a specific rate-based emission standard or a specific

percentage reduction requirement. NESCAUM undertook this analysis in order to
156

7This was necessary because certain data were not available for a small subset of the facilities

in the EPA Utility Air Toxics Study data base. 8‘‘Plant by Plant Emissions Estimates,’’ Wordperfect file downloaded March 26, 2002 from

http://www.epa.gov/ttn/atw/combust/utiltox/utoxpg.html. 9Data base compiled by Michael Aucott of the New Jersey Department of Environmental Protection.

translate each group’s recommendations into the annual tons of mercury that would

be released to the environment. Notwithstanding this analysis, NESCAUM urges

EPA to model the stakeholder group recommendations with IPM, consistent with its

original representations, in order to provide a more complete picture of the emissions impact of implementing various policy options for regulating mercury from

power plants.

2.0 Methodology

The total mercury tonnage that would be emitted under each stakeholder group’s

MACT recommendation was calculated using the underlying fuel consumption data

and uncontrolled mercury emissions information reported in EPA’s Utility Air

Toxics Study data base. This analysis does not attempt to project growth in fuel consumption, nor does it model changes in the methods of electricity production. Such

a dynamic analysis would require the use of a system dispatch model like IPM.

However, we are confident that this analysis provides reasonable estimates of the

annual tons of mercury that would be emitted by the electric power sector under

each of the scenarios considered.

All of the stakeholder group recommendations were analyzed using a subset of the

power plants in the EPA Utility Air Toxics Study data base.7 Plant-by-plant mercury emissions estimates were downloaded from EPA’s website.8 These data were

compared with mercury input concentrations in the coal purchased by power plants,

which was compiled from first, second, third and fourth quarter 1999 coal data

downloaded from the same source.9 There were 412 power plants for which both coal

data and EPA plant emissions estimates existed for mercury. These 412 facilities—

emitting an estimated 44.6 tons of mercury in 1999—were included in the analysis.

EPA estimates that the entire universe of facilities in its Utility Air Toxics Study

data base emitted approximately 48 tons of mercury in 1999.

Because the State and Local Agency Stakeholder group recommendation did not

include lignite, coal-fired power plants that reported lignite as their primary coal

type were excluded from the analysis of that group’s recommendations, eliminating

11 facilities. These 11 facilities generated an estimated 3.1 tons of mercury emissions in 1999. Eliminating these 11 facilities left 401 coal-fired power plants available for the analysis of this stakeholder group’s MACT recommendation. In 1999,

these 401 power plants emitted an estimated 41.5 tons of mercury.

In converting the stakeholders’ recommendations to annual mercury emissions in

tons, the analysis assumes that those sources whose emissions are already below

the recommended limits will not increase their emissions to the maximum allowable

level.

3.0 Analysis of Stakeholder Group Recommendations

Annual emissions in tons of mercury from electric power plants after the MACT

standard is implemented are estimated below for each of the recommendations of

the four stakeholder groups. The results of this assessment are summarized in Appendix A.

3.1 State and Local Agency Stakeholder Group

Recommendation: The State and Local Agency Stakeholders recommended a

plant-by-plant standard equivalent to the less stringent of 0.4–0.6 pounds per trillion British thermal units (lbs/TBtu) or a 90 percent reduction (from the mercury

content in coal). This standard would only apply to bituminous and subbituminous

coal. This stakeholder group did not submit a recommendation for plants burning

primarily lignite.

Two approaches were analyzed. The first allowed sources to choose between complying with a rate-based emission standard of 0.6 lbs/TBtu or a 90 percent reduction

from the mercury content in coal. It was assumed that sources would select the less

stringent of these two compliance paths. Using this approach, of the 401 facilities

included in this stakeholder group’s analysis, 47 facilities would continue to emit

at current levels (i.e., current emissions are below the proposed standard), 188

would choose to comply with the 90 percent control efficiency option, and 166 would

choose to comply with the emission rate standard of 0.6 lbs/TBtu. Overall, this

would result in annual mercury emissions of approximately 6.7 tons.
157

10This coalition included PSEG Power Connecticut, Clean Water Action, the Connecticut Coalition for Clean Air, and the Clean Air Task Force.

The second approach allowed sources to choose between a rate-based emission

standard of 0.4 lbs/TBtu or a 90 percent reduction. Using the method applied above,

43 of the 401 facilities included in the analysis would continue to emit at current

levels (i.e., current emissions are below the proposed standard), 306 would choose

to comply with the 90 percent control efficiency option, and 52 would choose to comply with the emission rate standard of 0.4 lbs/TBtu. Overall, this would result in

annual mercury emissions of 6.3 tons.

3.2 Environmental Stakeholder Group

Recommendation: The Environmental Stakeholders recommended a plant-by-plant

standard of 0.19 lbs/TBtu for fluidized bed combustion (FBC) facilities and 0.21 lbs/

TBtu for all other facility types. This standard would apply to all coal types.

The Environmental Stakeholder Group’s recommendation applied to all coal types,

allowing the 11 lignite-burning plants to be included in this analysis, yielding a

total of 412 facilities for which adequate data were available to assess the emissions

impact of the recommended standards. Overall, the Environmental Stakeholder

Group’s recommended standards would result in annual mercury emissions of 1.9

tons.

3.3 Clean Energy Group Recommendation

Recommendation: The Clean Energy Group recommended a plant-by-plant standard of 0.320 lbs/TBtu for FBC facilities burning bituminous or subbituminous coal,

1.223 lbs/TBtu for all other boiler types burning bituminous or subbituminous coal,

11.984 lbs/TBtu for FBC facilities burning lignite, and 9.091 lbs/TBtu for all other

boiler types burning lignite. Although CEG has indicated it would support a standard allowing sources to comply with either a specified emission rate or a specified

control efficiency, CEG made emission rate recommendations only based on its understanding that IPM cannot model control efficiency standards.

The Clean Energy Group’s recommendation was applied to all 412 facilities for

which adequate emissions data were available. Overall, the Clean Energy Group’s recommended standards would result in annual mercury emissions of 13.1 tons.

3.4 Majority Industry Group Recommendation

Recommendation: The Majority Industry Group recommended a plant-by-plant

standard of 3.7 lbs/TBtu for hot stack facilities burning bituminous coal, 2.2 lbs/

TBtu for saturated stack facilities burning bituminous coal, 3.2 lbs/TBtu for wet

stack facilities burning bituminous coal, 4.2 lbs/TBtu for facilities burning subbituminous coal, 6.5 lbs/TBtu for facilities burning lignite, and 2.0 lbs/TBtu for FBC facilities.

NESCAUM did not have access to data regarding the stack characteristics of the

facilities burning bituminous coal (i.e., hot, saturated, or wet), and thus was unable

to precisely convert the Majority Industry Group’s recommendation into total tons

of mercury emitted annually. We bracketed the range of annual emissions, however,

by calculating tons emitted from facilities burning bituminous coal assuming: (1)

that for the low (most stringent) end of the range, all such facilities would comply

with the lowest recommended emission rate of 2.2 lbs/TBtu, and (2) that for the

high (least stringent) end of the range, all such facilities would comply with the

highest recommended emission rate of 3.7 lbs/TBtu. Emission rates for other facilities and fuel types were applied as recommended. Overall, the Majority Industry

Group’s recommended standards would result in annual mercury emissions between

25.0 and 30.0 tons.

4.0 Discussion

Under the Federal Clean Air Act, the mercury MACT standard for the electric

generating sector is required to be proposed by December 2003, promulgated in final

form by December 2004, and is expected to be implemented by December 2007.

Thus, under the existing Clean Air Act (i.e., unmodified by any Federal multi-pollutant legislation applicable to the power sector), the public can expect reductions in

mercury pollution from power plants to occur by the end of 2007.

It is difficult to predict the level at which EPA will ultimately set the mercury

MACT standard. However, it is worth noting that some States have already moved

to adopt mercury standards in the range of stringency recommended by the State

and Local Agencies Stakeholder Group and on a similar timeline to that expected

under the Clean Air Act for implementation of a Federal MACT standard. In March

2003, for instance, a coalition10 of an electric generating company and several environmental groups publicly issued a joint recommendation to the Connecticut Gen-
158

11‘‘Evaluation of the Technological and Economic Feasibility of Controlling and Eliminating

Mercury Emissions from the Combustion of Fossil Fuel,’’ Massachusetts Department of Environmental Protection, December 2002.

eral Assembly calling for legislation establishing stringent mercury emission standards for Connecticut’s coal-fired power plants. Specifically, their proposal would require coal-fired plants in Connecticut to achieve either a mercury emission rate of

0.6 lbs/TBtu or a 90 percent control technology efficiency by July 2008. The proposal

further directs the Connecticut Department of Environmental Protection to consider

new emissions standards for mercury in 2012. Similarly, the Massachusetts Department of Environmental Protection has concluded that the removal of at least 85– 90 percent of mercury in flue gas has been demonstrated to be technologically and

economically feasible.11

5.0 Conclusion

This analysis was conducted to facilitate comparisons among different Stakeholder

Group recommendations within the EPA Utility MACT Working Group process and

several legislative proposals currently before Congress to reduce multiple types of

pollutant emissions from the power sector, including mercury. Most of these legislative proposals would set aside the MACT process authorized under the Clean Air

Act and would address power plant mercury emissions directly, in most cases by establishing a national cap on power sector mercury emissions and (in some cases)

also establishing facility-specific minimum mercury reduction requirements. An important dimension of all of these proposals is the timeframe over which mercury reductions would be implemented. As noted several times in this discussion, under

current law new MACT standards will be implemented by the end of 2007. By comparison, at least one proposal now before Congress delays full action on mercury for

more than a decade compared to the mercury MACT process.

The consequences of delay in implementing new mercury control requirements are

potentially significant in terms of foregone reductions in the quantities of this persistent, bio-accumulative toxin that will be released to the environment over the

next 10 to 15 years. Compared to the MACT recommendations of the State and

Local Agency Stakeholder Group, for example, the more delayed legislative proposal

noted previously would result in the allowable emission of an additional 258 tons

of mercury between 2007 and 2020. Even assuming EPA picks a less stringent

MACT standard representing a middle ground between the more centrist Stakeholder Group recommendations summarized in Appendix A, foregone emissions reductions relative to the more delayed legislative proposals now before Congress

could be significant. For example, utilizing the same comparison as above, a MACT

standard equivalent to an annual cap of 11 tons—if implemented in 2008—would

likely reduce cumulative emissions by more than 180 tons by 2020, compared to a

phased approach that delays similar levels of control for another 10 years. This represents approximately 4 years worth of mercury emissions at current emission rates

(44.6–48.0 tons per year). Due to its persistence in the environment, any additional

mercury emitted as a result of delaying new control requirements will remain bioavailable for years, needlessly accumulating in the food chain that ultimately

reaches humans.

We hope that the results of this analysis will help avoid lost opportunities of this

nature by providing useful guidance both to EPA in reaching its final mercury

MACT determination for power plants and to policymakers in Congress as they consider multi-pollutant legislation incorporating mercury emission limits.

APPENDIX A.

SUMMARY OF ANALYSIS RESULTS

NESCAUM—May 5, 2003

Stakeholder Group Recommended Mercury Emission Standard

Relevant Annual Baseline (tons)Post-MACT

Annual Emissions (tons)

Environmental Stakeholders ............................ 0.19 lbs/TBtu for FBC facilities.

0.21 lbs/TBtu for all other facility types for

all coal types

44.6 .................................................................. 1.9

State and Local Agencies ................................ 0.4–0.6 lbs/TBtu or a 90 percent reduction,

applied to bituminous and subbituminous

coal.

41.5 6.3–6.7
159

SUMMARY OF ANALYSIS RESULTS—Continued

NESCAUM—May 5, 2003

Stakeholder Group Recommended Mercury Emission Standard

Relevant Annual Baseline

(tons)

Post-MACT

Annual Emissions (tons)

Clean Energy Group ......................................... 0.320 lbs/TBtu for FBC facilities burning bituminous or sub-bituminous coal.

1.223 lbs/TBtu for all other boiler types burning bituminous or sub-bituminous coal

11.984 lbs/TBtu for FBC facilities burning

lignite

9.091 lbs/TBtu for all other boiler types burning lignite

44.6 .................................................................. 13.1

Majority Industry Group ................................... 3.7 lbs/TBtu for hot stack facilities burning

bituminous coal.

2.2 lbs/TBtu for saturated stack facilities

burning bituminous coal

3.2 lbs/TBtu for wet stack facilities burning

bituminous coal

4.2 lbs/TBtu for facilities burning subbituminous coal

6.5 lbs/TBtu for facilities burning lignite

2.0 lbs/TBtu for FBC facilities

44.6 .................................................................. 20.0–30.0

Senator JEFFORDS. The Administration’s behavior on this issue

makes me think they don’t want information in the public domain

if it might show the mercury caps in Clear Skies are above what

is achievable and cost effective with today’s technology. This failure

to deliver promised information looks like intentional derailing of

the Utility MACT Rule. At the right time, I hope the court enforcing the consent decree will note the Administration’s bad faith on

this

Mercury is a potent air toxic emitted by coal burning powerplants. Emissions must be reduced quickly and deeply. I ask that

a letter on mercury from more than 200 State and local conservation organizations and officials be included in the hearing record.

Senator VOINOVICH. Without objection.

[The information referred to follows:]

205 STATE AND LOCAL CONSERVATION ORGANIZATIONS, BUSINESSES AND ELECTED

OFFICIALS

May 7, 2003.

U.S. Senate and House of Representatives,

Washington, DC 20003.

DEAR SENATORS AND MEMBERS OF CONGRESS: As the Senate and House begin consideration of the President’s air pollution proposal, introduced on February 27 by

Senators James Inhofe and George Voinovich and Representatives Billy Tauzin and

Joe Barton, it is critical that you are aware of our concerns that the bill moves the

Nation backwards rather than forwards on air pollution. Rather than build on a

firm foundation of the Clean Air Act, the President’s bill severely undermines that

foundation, leaving the public to rely solely upon a system of pollution caps that will

allow higher emissions over a much longer period of time than current law. We

strongly urge you to reject this approach.
160

This unfortunate reality is especially evident in the sections of the President’s bill

that address emissions of mercury, an extremely toxic heavy metal. Much of the

mercury pollution emitted into our air ends up in our food chain, accumulating in

fish, a staple of the American diet. The problem is widespread: 44 States have posted mercury advisories warning people to limit consumption of fish from 10,179, 247

acres of lakes and 414, 973 miles of rivers.

For those who eat mercury-tainted fish, the health risks are serious, especially for

unborn infants and very young children whose neurological systems are developing.

• A recent study by the Centers for Disease Control Prevention estimates that

8 percent of women of child-bearing years in the U.S. have unsafe levels of mercury

that put their children at risk for developmental delays, neurological damage and

other health problems.

• As many as 300,000 children are born in the United States each year with a

heightened risk for health effects related to mercury exposure.

As mercury contamination becomes a more pressing public health issue, businesses that support the recreational fishing industries stand to lose. The sport fishing industry alone generates more than $100 billion per year in revenues. This figure does not even begin to calculate the risk of mercury contamination to American

businesses that depend on a robust market for fish sold in the grocery stores or at

restaurants all across the Nation, nor does this number begin to value the loss of

fish as a source of food for those who rely on it for their families or their way of

life.

After years of research, EPA concluded in 2001 that it was necessary and appropriate to set mercury standards under Section 112 of the Clean Air Act for power

plants, the largest industrial source, and a source which is currently unregulated.

These standards, which are due to be proposed this year, will be based on technologies that can remove as much as 90 percent of the mercury in coal from power

plant smokestacks before it is released into the air, bringing the national power

plant mercury load down to roughly five tons per year by 2008. This level of protection is not only possible but absolutely warranted by the severity of the health concerns and the level of the economic threat.

It is therefore alarming that the President’s pollution plan eliminates these standards entirely. Instead, the President proposed to impose a national cap on mercury

emissions. However, that cap would allow power plants to emit 26 tons of mercury

until 2018, after which time they could continue to emit 15 tons of mercury each

year. Even at this late date, the mercury levels allowed by the President’s plan are

three times higher than levels that would result from vigorous enforcement of current law.

The President’s plan weakens mercury protections in several other important

ways:

• Under current law, coal-fired power plants would have stringent emission limits written into a permit. The President’s bill would repeal source-by-source permitting, allowing polluters to ‘‘trade’’ mercury. It also would likely result in mercury

emissions increasing at specific power plants, according to EPA.

• Under current law, EPA is required to impose stricter standards if risks to

public health remain. The President’s bill removes that public health safeguard.

• Under current law, new sources of mercury are required to meet stringent

mercury emission limits. Under President’s bill, controls would be imposed on new

power plants only if ‘‘economically and technologically feasible’’ for the plants to

comply.

Please take these concerns into consideration as you prepare to legislate on power

plant emissions policy. We strongly urge you to reject any policy that weakens current law for any power plant pollutant and instead insist upon building on the

strong foundation of the current Clean Air Act to strengthen public health safeguards.

Sincerely,

AL

Alabama Environmental Council Jayme Hill, Executive Director

Birmingham, AL

AR

Eugene Levy, Rabbi Temple Banai Israel

Little Rock, AR

Timothy Reeves, Pastor
161

First Presbyterian Church, Stuttgart

Stuttgart, AR

June Simmons

All Our Children, Inc. West

Memphis, AR

CA

Evan Paul Environment California

Sacramento, CA

Hanan Obeidi

Southern California Public Health Association President

George Luna Mayor Pro Tem

City of Atascadero

Carolyn Jackson

Board Member, Park, Recreation, and Community Services Board

City of Burbank

Susan R. Ellis

Environmental Commissioner

City of Calabasas

Robert Yalda

Traffic and Transportation Division Manager

City of Calabasas

George Chapjian Mayor

City of Duarte

Connie Boardman, 8Mayor

City of Huntington Beach

Bonnie Lowenthal Councilmember

City of Long Beach

Dan Baker Councilmember

City of Long Beach

Christine Mulholland Vice-mayor

City of San Luis Obispo

Kenneth E. Schwartz, FAIA Councilman

City of San Luis Obispo

Kevin McKeown Mayor pro tem

City of Santa Monica

Michael Feinstein Councilmember

City of Santa Monica

Philip Gatch

Director

Community Development Agency

City of Thousand Oaks

Ben Wong Councilmember

City of West Covina

CO

Chris Cooper, Owner

Pearl Street Software 1630A 30th St. 106

Boulder, CO 80301

Mark Rogers, Owner

Conservation Consulting 433 Chestnut Way

Broomfield, CO 80020

Heidi Cies, Owner

Heidi Cies Graphic Design 5440 Conley Way

Denver, CO 80222

Mark Stamper, Owner M

ark Stamper Construction

13284 W. 65th Drive

Arvada, CO 80004.

Ann S. Egan, Owner

Awnings by Annie

P.O. Box 2103
162

Eagle, CO 81631

William W. Gray, Owner

Brush Creek Caretaking and Housesitting

P.O. Box 2103

Eagle, CO 81631

Christopher N. Tennis

Sanchez Tennis & Associates, LLC

470 Fountaintree Lane Boulder,

Colorado 80304

Matthew Lancaster, ASMP

Remarkable Earth Photography

2855 Ash Street

Denver, Colorado 80207

Bill Clymer President

CFV!

P.O. 142

Victor CO, 80860

Robin Hubbard

Environment Colorado Field Director

Denver, CO

Huron Bait and Tackle 866

Washington St

Thornton, Co. 80229

Intermountain Communication Services, Inc.

Dave Moore, Owner

1416 Grand Ave.

Glenwood Springs, CO 81601

Ted Pascoe

Physicians for Social Responsibility,

Colorado Chapter 1738 Wynkoop #1

Denver, CO 80202

Amanda Champany, Community Organizer

Colorado People’s Environmental and Economic Network

2332 E. 46th Ave

Denver, CO 80206

A–1 Scuba and Travel Center

1800 W. Oxford Ave

Englewood, CO 80110

George Ewing, Manager

Great Outdoor Clothing Company

14500 W. Colfax Ave, #514

Lakewood, CO 80401

Mike Gilbert, Manager

303 Boards

14500 W. Colfax Ave 371

Lakewood, CO 80401

SPORTSFAN

Scott Meyer, Manager

14500 W. Colfax Ave

Lakewood, CO 80401

Carlos Santana Jr., Manager

Just Sports USA

14500 W. Colfax Ave #329

Lakewood, CO 80401

Mike Whitney, Manager

The Athlete’s Foot

14500 W. Colfax Ave 407

Lakewood, CO 80401

Amanda Champany

The Colorado People’s Environmental and Economic Network

2332 E 46th Ave

Denver CO 80206
163

Ted Pascoe

Physicians for Social Responsibility-Colorado 1738 Wynkoop 1

Denver, CO 20202

CT

Susanne Brazauskas

Collaborative Center for Justice

40 Clifford Street

Hartford, CT 06114–1717

Kelly Benkert

Connecticut Public Interest Research Group

Hartford, CT

DE

Michael E. Riska Executive Director

Delaware Nature Society

Hockessin, DE

FL

Ronald Saff M.D.

Allergy & Asthma Diagnostic Treatment Center

2300 Centerville Rd.

Tallahassee, FL. 32308

Doreen Archer, Co-President

League of Women Voters of Space Coast

1265 St. George Rd.

Merritt Island, FL 32952

Mark Ferrulo

Florida Public Interest Research Group

Tallahassee, FL

Harley Gutin Attorney at Law

5190 North U.S. 1

Cocoa, FL 32927

Dr. D.K. Cinquemani, Ph.D., Chair

Safe Earth Alliance 7100 Ulmerton Rd. 174

Largo, FL 33771

Southern Alliance for Clean Energy

Ulla Reeves, Regional Air Director

Pensacola, FL

National Environmental Trust

Tom Sadler

Florida Representative

Miramar, FL

Legal Environmental Assistance Foundation

Cynthia Valencic

Vice President

Tallahassee, FL

Florida Consumer Action Network

Bill Newton

Executive Director

Tampa, FL

Southeastern Fisheries Association

Bob Jones

Executive Director

Tallahassee, FL

Florida Wildlife Federation

Manley Fuller President

Tallahassee, FL

Allen Broussard Conservancy

Dr. Wm. J. or Margaret Broussard

3660 N. Riverside Drive

Indialantic, FL 32903

Friends of the Scrub
164

Contact: Edwina R. Davis 430 Bahama Dr.

Indialantic, FL 32903

American Birding Association

Dr. Wm. J. or Margaret Broussard, 321–777–0839

St Cloud, FL

GA

Benjamin E. Mays Center

8307 Creek Street Jonesboro, GA 30236

Felicia Davis, executive director

Georgia Kids Against Pollution Hunter’s Bay Activity Center

225 Johnson Road

Forest Park, GA 30297

John Taylor (Director)

Jennifer Giegerich

Georgia Public Interest Research Group

Atlanta, GA

Physicians for Social Responsibility/Atlanta

Ed Arnold,

Executive Director

Atlanta, GA

IL

American Friends Service Committee

Chicago, IL

Beverly Area Planning Association

Chicago, IL

Bolingbrook Earth Watch

Bolingbrook, IL

Chicago Recycling Coalition

Chicago, IL

Citizen Action/Illinois

Chicago, IL

Citizen Advocacy Center

Elmhurst, IL

Coalition for Consumer Rights

Chicago, IL

Community Action Group

Chicago, IL

Community Renewal Society

Chicago, IL

Crossroads Christian Youth Center

Big Rock, IL

Delta Institute

Chicago, IL

Human Action Community Organization

Harvey, IL

Illinois Audubon Society

Danville, IL

Illinois Center for Citizen Involvement

Champaign/Urbana, IL

Illinois Citizen Action

Libertyville, IL

Illinois Public Interest Research Group (Illinois PIRG)

Chicago, IL

Illinois Student Environmental Network

Champaign/Urbana, IL

Jensen Environmental Management

Glen Ellyn, IL

Lake County Conservation Alliance

Grayslake, IL
165

League of Women Voters of Illinois

Chicago, IL

Lyons Incineration Network

Lyons, IL

MCS: Health & Environment

Evanston, IL

Metro Seniors in Action

Chicago, IL

National Council of Jewish Women

Prairie Sun Consultants

Naperville, IL

Protestants for the Common Good

Chicago, IL

Save the Prairie Society

Westchester, IL

Sheil Center

Chicago, IL

South Austin Coalition

Chicago, IL

South Cook County Environmental Action Coalition

Blue Island, IL

South Suburban Citizens Opposed to Polluting Our Environment

Chicago Heights, IL

IN

Valley Watch, Inc.

John Blair, President

Evansville, IN 47713

Save the Dunes Council

Michigan City, IN

South Bend-Elkhart Audubon Society

South Bend, IN

Knob and Valley Audubon Society

New Albany, IN

LA

Susan Spicer Owner/Chef

Bayona Restaurant

New Orleans, LA

Patrick Singley, Owner

Gautreau’s Restaurant

New Orleans, LA

John Harris, Owner/Chef

Lilette Restaurant

New Orleans, LA

Gulf Restoration Network

Cynthia Sarthou, Executive Director

New Orleans, LA

Citizens for a Clean Environment

Bill Herke, Ph.D.

Board Member and AFS Certified Fisheries Scientist

Rene Bajeux, Owner/Chef

Bingo Starr, Chef

Rene Bistrot Restaurant

New Orleans, LA

Margaritaville Cafe

New Orleans, LA

The Alliance for Affordable Energy

Micah Walker, Program Director

New Orleans, LA

Informed Choices
166

Nancy Hirschfeld, President

Slidell, LA

Citizens Against Hazardous Waste Clarence Chandler

DeQuincy, LA

Louisiana Environmental Action Network (LEAN)

Marylee Orr, Executive Director

Baton Rouge, LA

ME

Natural Resources Council of Maine

Sue Jones, Air and Energy Project Director

Augusta, ME

MA

Clean Water Action/Fund

Brian Carlson Energy/Climate Organizer

Boston MA 02108

Frank Gorke

Massachusetts Public Interest Research Group

Boston, MA

MI

American Lung Association of MI 25900

Greenfield, Suite 401

Oak Park, MI 48237

Michigan Environmental Council 119

Pere Marquette Drive, Suite 2A

Lansing, MI 48912

National Environmental Trust

Vicki Levengood

Lansing, MI

ACCESS

2651 Saulino Court

Dearborn, MI 48120

Sierra Club

3423 Charing Cross Road

Ann Arbor, MI 48108

Ecology Center

117 N. Division St.

Ann Arbor, MI 48104

MI Council of the Environment and Jewish Life

Bloomfield Hills, MI

West Michigan Environmental Action Council

1514 Wealthy St., SE, Suite 280

Grand Rapids, MI 49506

East Michigan Environmental Action Council

21220 West 14 Mile Road

Bloomfield Hills, MI 48301

League of Conservation Voters

Ann Arbor, MI

League of Women Voters of Michigan

200 Museum Drive, Suite 104

Lansing, MI 48933–1997

Grey Panthers

Huron Valley

Arthur Parris

2115 Nature Cove Court, Apt. 106

Ann Arbor, MI 48104

SWDEV

Detroit, MI 48209

Catholic Archdioces

305 Michigan Ave.

Detroit, MI 48226–2605
167

National Wildlife Federation

Great Lakes Field Office

213 W. Liberty, Suite 200

Ann Arbor, MI 48104–1398

Brian Imus

PIRGIM

Ann Arbor, MI

MO

Learning Disability Association of Missouri

Springfield, MO

Citizens for Missouri’s Children

St. Louis, MO

Shannon Baker

Missouri PIRG

St. Louis, MO

MN

Clean Water Action Alliance of MN

Patience Caso, Water Program Coordinator

Minneapolis, MN

Rochester’s Energy Future Coalition

Gael Entrikin

Rochester MN

Mankato Area Environmentalists

Sister Gladys Schmitz, SSND

Mankato, MN

Izaak Walton League of America, Minnesota Division

Steve McNaughton, President

St. Paul, MN

Friends of the Boundary Waters Wilderness

Sean Wherley

Policy and Education Coordinator

Minneapolis, MN

St. Croix River Association

Richard Meierotto Board of Directors

Afton, MN

Mississippi Corridor Neighborhood Coalition

Amy Luesebrink and Randy Kouri, Co-Presidents

Minneapolis, MN

St. Croix Valley Interstate Group, Sierra Club

Kathleen Vollmer, Executive Committee Member

Stillwater, MN

Environmental Association for Great Lakes Education (EAGLE)

Craig Minowa, Technical Director

Duluth, MN

NC

Appalachian Voices

Scott Gollwitzer, Staff Attorney/Clean Air Campaign Coordinator

Asheville, NC

North Carolina Public Interest Research Group

Elizabeth Ouzts

Chapel Hill, NC

NJ

New Jersey Environmental Lobby

Marie A. Curtis

Executive Director Trenton, NJ

New Jersey Public Interest Research Group

Dena Motolla

Trenton, NJ
168

NY

Environmental Advocates of New York

Val Washington

Executive Director

Albany, NY

OH

Ohio Environmental Council

Kurt Waltzer

Clean Air Program Coordinator

Columbus, OH

Ohio Public Interest Research Group

Amy Simpson

Cleveland, OH

PA

Joseph Otis Minott Executive Director

Clean Air Council

Philadelphia, PA

PennEnvironment

David Masur

Philadelphia, PA

RI

Childhood Lead Action Project

Roberta Hazen Aaronsen

Innovative Product Systems

Len Pichea, President

A Wish Come True

Lee Green

Rhode Island Public Interest Research Group

Kate Strouse-Canada

Clean Water Action

Sheila Dormody, RI Director

SC

SC Wildlife Federation

2711 Middleburg Drive, Suite 104

Columbia, SC 29204

SC Environmental Watch

Rainie Jueschke

Columbia, SC 29202

State Rep. Joe Neal

309B Blatt Bldg.,

Columbia, SC 29211

SC Department of Natural Resources

Charlie Moore

Rembert C. Dennis Building 1000 Assembly Street

Columbia, SC 29201

SC Nurses Association

1821 Gadsden Street

Columbia, SC 29201

TN

Tennessee Environmental Council

Will Callaway, Executive Director

Nashville, TN

Southern Alliance for Clean Energy

Stephen Smith, Executive Director

Knoxville, Tennessee
169

TX

Friends of the Sabine

Richard LeTourneau, Chairman

Longview, Texas

Texas Environmental Democrats

Darby Riley, President

San Antonio, Texas

Galveston—Houston Association for Smog Prevention (GHASP)

John D. Wilson, Executive Director

Houston, TX

Texas Black Bass Unlimited

Ed Parten, President

Texas Association of Bass Clubs

SMART (Sensible Management of Aquatic Resources)

John Spicer

Long Supply Company

April Plaza Marina and Hotel

Ron Werner, Owner

Fly Angler’s Edge

Kenny Murph, Manager

Honey Hole Fishing Magazine

Jerry and Debra Dean, Owners

UT

American Lung Association of Utah

1930 South 1100

East Salt Lake City, UT 84106–2317

American Cancer Society

941 E. 3300 S

Salt Lake City, UT 84106 (801)483–1500

Wasatch Clean Air Coalition

Salt Lake City, UT

Dr. Richard E. Kanner

Director of the Pulmonary Function Lab at the University of Utah; former

member and Chairman of the Utah Department of Environmental Quality’s Air

Quality Board

J.E.D.I. WOMEN

352 South Denver St. (440E) Suite 260

Salt Lake City, Utah 84111

Save our Canyons

68 South Main Street, 4th floor

Salt Lake City, UT 84101

Utah River Keepers

Salt Lake City Council Member Nancy Saxton

451 South State Street

Salt Lake City, Utah 84111

Utah State Representative Mark Litvack

181 East Edith Avenue

Salt Lake City, Utah 84111

Professor John Veranth

Research Assistant Professor of Pharmacology and Toxicology

University of Utah Health Sciences Center 50 North Medical Drive

Salt Lake City, Utah 84132

Utah State Representative Jackie Biskupski

753 East Roosevelt Avenue

Salt Lake City, Utah 84105

Wayne Samuelson, M.D.

University of Utah School of Medicine 308 Park Building

Salt Lake City, Utah 84112

Great Salt Lake Audubon

P.O. Box 520867,

Salt Lake City, Utah 84152–0867
170

Families Against Incinerator Risk

165 South Main Street

Salt Lake City, UT 84111

HEAL UTAH

68 S Main St, Suite 400

Salt Lake City, UT 84101

WA

Washington Toxics Coalition

Seattle, WA

Northwest Energy Coalition

Seattle, WA

Washington Physicians for Social Responsibility Environment and Health Committee,

Seattle, WA

Washington Association of Churches

Seattle, WA

RE Sources

Bellingham, WA

Coalition For Environmentally Safe Schools

Olympia, WA

Lutheran Public Policy Office

Tacoma, WA

Seattle Audubon Society

Seattle, WA

Dr. Don Johnson

Okanogan County PUD Commissioner

Okanogan, WA

Transportation Choices Coalition, Spokane Chapter

Spokane, WA

NW Sustainable Energy for Economic Development

Seattle, WA

WI

Trout Unlimited—Fox Valley Chapter Tom Deer, President

1271 Maple St.

Neenah, WI 54956

Trout Unlimited—Oconto River Chapter

Dave Brunner

5473 Cardinal Rd.

Gillett, WI 54124

Wisconsin Conference of the United Methodist Church

Reverend Dave Steffenson, Ph.D., Eco-Justice Coordinator,

Board of Church & Society PO Box 21

Columbus, WI 53925

Lutheran Office for Public Policy

Reverend Sue Moline-Larson

322 E. Washington Avenue

Madison, WI 53703

Family Farm Defenders

John Peck, Executive Director

PO Box 1772

Madison, WI 53701

Lake Superior Greens

Jan Conley

2406 Hughitt

Superior, WI 54880

River Alliance of Wisconsin

Diana Toledo, Acting Director

306 E. Wilson Street

Madison, WI 53703

Citizens Utility Board

Steve Hinicker, Director
171

16 N. Carroll Street

Madison, WI 53703

Melissa K. Scanlan

Executive Director

Midwest Environmental Advocates 702 East Johnson Street

Madison, Wisconsin 53703

Laura Olah

Executive Director

Citizens for Safe Water Around Badger

E12629 Weigands Bay S

Merrimac, WI 53561

Bob Olsgard

Lake Superior Waterkeeper

The Lake Superior Alliance

Spooner, WI

Senator JEFFORDS. I would also like to place into the record a letter from a coalition of public health and environmental organizations stating their support of the current Clean Air Act.

Senator VOINOVICH. Without objection.

[The information referred to follows:]

AMERICANS FOR CLEAN AIR

May 7, 2003.

The Honorable JAMES INHOFE, Chair,

Committee on Environment and Public Works

U.S. Senate

Washington, DC 20510

The Honorable BILLY TAUZIN, Chair,

Committee on Energy and Commerce

U.S. House of Representatives

Washington, DC 20515

Dear Chairman Inhofe and Chairman Tauzin: For over three decades, the Clean Air

Act has worked to improve public health and protect the environment. We, the undersigned health, senior’s, religious, labor, civil rights, children’s, parent’s, women’s,

consumer and environmental organizations strongly support the Clean Air Act and

vigorously oppose legislation that will weaken or delay the implementation of the

law.

The Clean Air Act is working. By enforcing the law, air pollution levels have

dropped at the same time the nation’s economy has grown dramatically. The Clean

Air Act amendments that you have introduced at the request of the administration

would disrupt this progress, harm public health and worsen global warming. If the

Clean Air Act is changed, it should be strengthened, not weakened.

Today, the Clean Air Act is designed to protect the health of all Americans. Pregnant women, children, people with heart disease and lung diseases (such as asthma

and emphysema), seniors and other populations at risk for diseases like cancer must

be protected from the harmful effects of poisonous mercury in our waters, toxic air

pollution, smog and soot. America’s National Parks and other unique landscapes

must be protected from air pollution, haze and irreversible damage to our environment.

The Clean Air Act sets strong standards to cut pollution from power plants and

other industrial sources to meet the health-based air quality standards for soot and

smog. Power plants are required to sharply reduce their sulfur and nitrogen emissions by the end of this decade. Current law also requires power plants to install

state-of-the-art technologies that will deeply cut mercury contamination by 2008.

The Bush Administration’s air pollution proposal weakens the Clean Air Act in

several important ways. The bill delays deadlines to meet the health standards and

relaxes pollution reduction requirements for power plants and other major pollution

sources. The proposal repeals the requirement for power plants to install state-ofthe-art pollution controls to reduce toxic mercury emissions. Critical states’ authority to set strong clean-up standards is repealed. The plan also makes global warming worse by allowing carbon pollution to increase.

The current Clean Air Act provides critical tools that the states and the Environmental Protection Agency can use to achieve clean air. Please do not weaken industry’s responsibility to clean up power plants and other smokestacks. Do not postpone
172

the requirements to meet health-based standards. Do not diminish the rights of

downwind states to protect themselves from pollution produced outside their borders.

All Americans have a right to breathe clean, healthful air. That is the promise

of the landmark Clean Air Act. This promise should never be broken.

Sincerely,

Alpha-1 Foundation.

American Association of People with

Disabilities.

American Cancer Society.

American Heart Association.

American Lung Association.

American Public Health Association.

American Thoracic Society.

Asthma and Allergy Foundation of

America.

Breakthrough Technologies Institute.

Center for International Environmental

Law.

Central Conference of American Rabbis.

Children’s Environmental Health

Network.

Citizens Coal Council.

Citizens for a Better Environment.

Clean Air Task Force.

Clean Air Trust Education Fund.

Clean Water Action.

Clear The Air.

Climate Solutions.

Coalition on the Environment and

Jewish Life (COEJL).

Consumer Action.

Defenders of Wildlife.

Environmental Defense.

Environmental Defense Center.

Environmental Integrity Project.

Friends Committee on National

Legislation.

Friends of the Earth.

Green House Network Greenpeace.

Healthy Schools Network.

International Primate Protection League.

Kids Against Pollution.

League of Conservation Voters.

League of United Latin American

Citizens.

League of Women Voters of the United

States.

National Adult Day Services Association.

National Association for the

Advancement of Colored People

(NAACP).

National Association of the County and

City Health Officials.

National Audubon Society.

National Consumers League.

National Council on the Aging.

National Environmental Trust.

National Parks Conservation

Association.

National Wildlife Federation.

Natural Resources Defense Council.

OMB Watch.

Our Children’s Earth Foundation.

The Ocean Conservancy.

Physicians for Social Responsibility.

Presbyterian Church (USA) Washington

Office.

Public Citizen.

Public Employers for Environmental

Responsibility.

Religious Action Forum.

Sierra Club.

Trust for America’s Health.

Union of American Hebrew

Congregations.

Union of Concerned Scientists.

United Church of Christ Justice and

Witness Ministries.

United Methodist Church General Board

of Church and Society.

United Steelworkers of America.

U.S. Environmental Watch.

U.S. Public Interest Research Group.

Wildlands CPR.

Women’s Environment and Development

Organization.

Women’s International League for Peace

and Freedom.

Woman’s National Democratic Club.

Working Assets.

20/20 Vision.

Senator JEFFORDS. Finally, most projections indicate that new

electricity generation will come largely from natural gas for mainly

economic reasons. Most of that generation will be for peaking

power and those natural gas facilities that are new baseload will

be replacing older, inefficient natural gas-fired plants and not replacing coal.

According to the testimony of today’s witnesses and the experts

in the natural gas industry, there will be plenty of natural gas to
173

meet the projected growth of demand for electricity but if coal

wants to expand its market share beyond the current 55 percent

it now enjoys and really grow, then the test is simple, produce

power that meets public health and environmental needs of America today and into the future.

Thank you, Mr. Chairman.

Senator VOINOVICH. Thank you, Senator Jeffords.

Mr. McSlarrow, we apologize for holding you up this morning.

We had a very important vote in the U.S. Senate that I was particularly interested in, the legislation to open up NATO to seven

new nations. It is a historic day for those nations and for our country and the future of NATO organizations. I apologize for not getting started on time.

We are very happy to have you here today and look forward to

your testimony.

STATEMENT OF HON. KYLE E. MC SLARROW, DEPUTY

SECRETARY, U.S. DEPARTMENT OF ENERGY

Mr. MCSLARROW. Thank you, Mr. Chairman.

With your permission, I would like to briefly summarize my testimony and submit it in full for the record.

I am pleased to appear before you today to discuss the Administration’s National Energy Policy and to discuss why we think Clear

Skies is a critical component as you said of the President’s strategy

to confront both our energy and environmental challenges. We are

pleased the Senate is now considering a comprehensive energy bill

and commend Chairman Domenici and the members of his committee for acting so swiftly. We commend you, Mr. Chairman and

this committee for moving aggressively to consider the Clear Skies

legislation.

The Nation’s demand for electricity is projected to grow significantly over the next 22–25 years. Between now and 2025, the

United States will likely have to add between 446 and 665

gigawatts of new generating capacity to meet growing demand.

This is equivalent to adding the entire power generation sector in

Germany and Japan combined to the U.S. power grid. Concurrently, with this expansion of the Nation’s power fleet, power generators will also be called upon to make new investments in pollution control technologies to meet tightening environmental standards.

Over the past 25 years, America’s electricity utility industry has

invested billions of dollars in advance technologies to improve the

quality of our air. In terms of long term energy trends, we long ago

ceased to fully provide for our petroleum needs domestically and

though most of our natural gas demand can be met with North

American production, the trend here is also toward a greater share

of imported natural gas. Coal, our most abundant energy resource,

is actually projected to reduce its percentage share of electricity

generation.

President Bush recognized that to prevent these problems from

becoming a permanent feature of American life, we needed a long

term plan. President Bush’s National Energy Policy released in

May 2001 reflected a few fundamental principles. First, we need to

maintain a diversity of fuels from multiple sources. Second, we
174

should seek opportunities for increased investment trade, exploration and development which are increasing every year far beyond

the traditional markets of the last 50 years. Third, we should focus

research and development on initiatives that seek long term solutions to our energy challenges as we have done with energy efficiency, renewable energy, hydrogen, fusion and nuclear energy as

well as the recently announced zero-emission FutureGen coal

project.

The National Energy Policy also highlighted the growing need for

attention to the Nation’s electricity markets and infrastructure. We

strongly believe that Clear Skies is a key component to meet that

goal as is a comprehensive energy bill that includes a sound electricity title to modernize our wholesale electricity markets. A well

functioning, wholesale market brings its own rewards. As confidence is gained that the system is reliable and capable of coping

with the high demand for electricity, there will increasingly be less

need for restrictive and prescriptive regulation. That is the point

when much needed investment is likely to be attracted—investment in new technologies and improved generation and transmission facilities that produces additional energy and environmental benefits.

When the opposite is true, when uncertainty reins, when reliability is questioned, when prices seem detached from market

forces, investment vanishes. The present uncertainty in the wholesale electricity market is not simply affected by policy choices that

center on transmission assets and market designs. The uncertainty

extends to the generation of electricity itself and that is why it is

so important to provide greater regulatory certainty about the

kinds of investment choices the generating industry will have to

make over the next two decades. We believe the Clear Skies proposal does just that.

It is difficult to quantify what the cost to our energy impacts will

be if multi-pollutant legislation is not enacted. The Energy Information Administration from which most of our numbers are drawn,

the EIA baseline, includes all future legislation and regulations

that have been specified or enacted but does not include regulations not yet promulgated. Therefore, we know in the absence of

this legislation before the committee, mercury regulations will be

promulgated by December of next year but we do not know what

those regulations will be. We can anticipate that additional regulations on SO2 and NOx will be required but we do not know what

those regulations will be either. We can anticipate additional regulations to reduce regional haze, but again, we don’t know what they

will be.

What we should be concerned with is this. Uncertainty, delay

and litigation which are the chief hallmarks of the current process

under the Clean Air Act are not likely to produce greater environmental benefits but instead are likely to lead to more costly solutions and risk affecting the energy fuel mix in ways that are unwarranted and unforeseen. Although we have not contrasted Clear

Skies to this unknown regulatory future, we have compared it to

a future predicated on current control programs.

Under Clear Skies natural gas consumption, which is currently

projected to increase to about 35 trillion cubic feet in 2025 in-
175

creases to 36 trillion cubic feet, 1 tcf additional. However, we do

not project that a significant change in natural gas supply is needed due to the implementation of Clear Skies. Wellhead natural gas

prices follow the baseline pattern after decreasing from the unusually high prices that occurred in 2001.

Clear Skies helps maintain coal as an important fuel source,

thereby avoiding excessive pressure on natural gas prices. In our

baseline, coal consumption would increase about 38 percent

through 2025. Under Clear Skies, it increases to a lesser extent but

still an increase of 26 percent. EIA also projects electricity prices

will lower throughout the projection period for both the baseline

scenario and under Clear Skies. The effect of emission reductions

is roughly a 0.3 cents per kilowatt hour price increase.

In closing, one of the concerns we have is the ever increasing reliance on natural gas. Because our marginal supply of natural gas

will increasingly come imported liquefied natural gas, we should be

concerned that we not place too much stress on the natural gas

supply by forcing a level of fuel switching from coal to gas that

leads to higher volatility and higher prices. Natural gas supply as

a low cost, reliable source of electricity is not automatic. One only

has to witness the winters of 2000, 2001 and the one we just experienced to see the point. It is therefore critically important that we

maintain a balanced, diversity of fuels to provide low cost and

abundant electricity. The key to this is that we not assume that all

policy objectives can be achieved simply by unlimited reliance on

natural gas.

Thank you.

Senator VOINOVICH. Again, we want to thank you for being here

this morning.

I understand the Natural Petroleum Council is currently working

on a natural gas report that was requested by Secretary Abraham

last year. This report follows a similar report issued by the NPC

in 1999 which I will, without objection, enter into the record.

[The document is printed in the appendix to this hearing record:]

Senator VOINOVICH. Can you give us any idea of the scope of that

report and when it is going to be released?

Mr. MCSLARROW. I believe the target for release is September.

The scope of the report is much the same as the 1999 report which

is a comprehensive look at both the supply and the demand side

of the natural gas equation, as well as a look at technologies for

exploration and production.

The reason it was asked for is because as you know there is a

significant debate going on right now in the natural gas industry

about the future of supply and demand in this country. There are

increasing concerns about whether or not and to what extent we

are going to meet our needs with domestic or at a minimum, North

American production. I can’t tell you at this point obviously the

conclusions of that report will be. I have been briefed on interim

analyses but I would say this. Nothing I have seen right now leads

me to any other conclusion than that we have a looming problem

in natural gas supply.

Senator VOINOVICH. What does the Administration believe are

the potential effects on our manufacturing sector of any policy or

legislation that will result in massive fuel switching from coal to
176

natural gas? Have you calculated what impact that would have on

the economy of this country?

Mr. MCSLARROW. I am unaware.

Senator VOINOVICH. For that matter, what is already happening?

Mr. MCSLARROW. I am unaware of a calculation but I will go

back and check and see if EIA has something and something for

you for the record. There is no question that those industries with

huge variable fuel costs, particularly with what has happened in

natural gas, experience a huge crunch. If we have quantified it, I

will get that to you.

Senator VOINOVICH. It is interesting because last week I had the

man who is in charge of Bayer in the United States, with 22,000

employees in the U.S., who fundamentally said the cost of natural

gas here was so much higher than it is in Europe and frankly, he

was giving consideration to moving some of his operations back to

Europe because of the high cost of natural gas. They are competing

with these products in the global marketplace.

Who would have information on that type of thing, the Department of Commerce or who?

Mr. MCSLARROW. It is possible the Department of Commerce and

also it is possible that our Energy Information Administration

would have that as well as manufacturing groups themselves. We

will do some research and get back to you.

Senator VOINOVICH. I would like to find out if there is anybody

monitoring this at all in the Federal Government and we can get

some statistical information.

Mr. MCSLARROW. There is usually a statistic for everything in

the government, so I am sure it is there.

Senator VOINOVICH. an article in the Akron Beacon Journal last

Sunday, which I will without objection enter into the record.

[The information referred to follows:]

[From the Akron Beacon Journal, May 4, 2003]

NATURAL GAS OUTLOOK: COSTLY

(By Jim Mackinnon)

This past long, cold winter, if followed with a long, hot summer, may leave Northeast Ohio natural gas users more under the weather than usual.

Natural gas supplies, already sharply depleted by a frigid winter that drove up

heating usage, will come under even more pressure if prolonged hot weather this

summer causes natural gas-powered ‘‘peaking’’ electric plants to fire up more than

usual to meet air-conditioning demand. Those plants use a lot of natural gas and

may be needed for sustained periods just when gas companies want to fill their underground storage systems ahead of next winter.

And it looks like Mother Nature may not provide much help. The latest National

Weather Service long-range outlook says it is likely much of the Nation will have

above-normal temperatures this summer.

The result may be higher-than typical prices for natural gas users, though producers and sellers such as Dominion East Ohio say we won’t have to worry about

running out of the fuel.

‘‘This past winter is going to have a lot of repercussions,’’ said Jeff Murphy, director of pricing and regulatory affairs for Dominion East Ohio. ‘‘All things considered,

we’re seeing a lot of upward pressure on prices.’’

Basically, that means tight supply, low production and increasing demand.

And while that may be good for natural gas producers, it’s not for those who buy

gas.

The latest Federal information shows 741 billion cubic feet of natural gas in underground storage nationally as of April 24—well below the more than 1.6 trillion
177

cubic feet stored in the same period a year ago. The 5-year average of natural gas

storage for this time of year is about 1.3 trillion cubic feet, according to the Energy

Information Administration.

To get some idea of how weather can play havoc with natural gas supplies as well

as household heating bills, look at Dominion East Ohio customers.

They burned a lot more gas on average this past winter than during the previous

year, Dominion East Ohio spokesman Neil Durbin said.

The average Northeast Ohio household from December 2001 through February

2002 burned 42.3 thousand cubic feet of gas, he said. From December 2002 through

February this year, that average household burned 63.5 thousand cubic feet of gas,

he said.

The end result: Way less natural gas left in underground storage by the time

spring arrived. ‘‘We’re going to have to scramble to put gas in the ground. That will keep gas

prices high,’’ said Chuck Faber, director of corporate development for Twinsburgbased natural gas and oil explorer North Coast Energy Inc. The natural gas industry will want to have about three trillion cubic feet of gas stored in time for next

winter to be comfortable, he said. ‘‘We could see $7 (wholesale natural) gas in the summertime,’’ Faber said. The

wholesale price now is about $5 per thousand cubic feet. Residential customers pay

more—there are taxes, and utilities tack on additional charges for transporting and

delivering the gas to households, which is where they make their profit.

There could be price spikes, too, if hurricanes temporarily shut down natural gas

production platforms in the Gulf of Mexico, Faber said.

Gas producers have been increasing well drilling, but North Coast and other companies remain reluctant to ramp up production dramatically, Faber said. The cost

of drilling a 4,000-to 5,000-foot-deep well is between $160,000 to $180,000, while a

10,000-foot well can cost between $1.5 million and $2 million, he said.

In addition, it’s been harder for drillers to get financing to put in new wells, said

FirstEnergy Corp. spokeswoman Kristen Baird. The Akron utility produces, buys

and sells natural gas for its own gas-fired peaking plants as well as for retail customers. ‘‘We anticipate pricing will continue to be on the high end,’’ Baird said.

The Energy Information Administration reports that natural gas production in

the U.S. fell by 2.6 percent last year, but should increase by 1.5 percent this year.

Even so, demand is expected to increase by 2.7 percent this year compared to last. ‘‘The big gas wells are being depleted,’’ said Peggy Laramie, spokeswoman for the

American Gas Association, which represents the natural gas utility industry.

Because of supply and demand imbalances, the association feels that natural gas

prices are going to fluctuate a lot more than they did in the late 1990’s, Laramie

said. To increase supply, the association and its members are lobbying the Federal

Government to relax regulations and allow them to drill for natural gas in places

now off limits to them.

The Federal Government, meanwhile, is looking to ensure that companies don’t

engage in price fixing or other illegal means to boost prices and profits.

It’s not all bad news for consumers out there.

John Tobin of the Colorado-based Energy Literacy Project said North America gas

supplies are vast. But while the supply is there, getting it to customers by drilling

and putting it in pipelines is proving more difficult, he said.

Tobin said he thinks competition from lower petroleum prices will help moderate

natural gas prices. Energy sources have to compete against each other, he said.

But Faber at North Coast Energy said his outlook is that natural gas will trade

and sell at a premium relative to oil, even though traditionally oil has been more

expensive than gas. Part of that has to do with the increased demand for gas, which

burns more cleanly than oil, and the ability of oil to be more easily transported, he

said.

Wellhead prices—basically, wholesale prices—are well down from their peaks in

February and early March.

Nationally, the wellhead price of natural gas in the 2002–2003 winter heating

season averaged $4.44 per thousand cubic feet, $2.08 more than the previous winter,

according to Federal data.

But don’t expect to see the return of $2 per thousand cubic feet wellhead prices,

energy analysts and others said. They estimate wellhead natural gas will range between $4.50 and $5.50 per thousand cubic feet through at least the summer and

probably into 2004.

For huge industrial consumers of natural gas, the higher costs eat away at profits.

Besides its use in heating buildings and making electricity, natural gas is a key

component for fertilizer makers, polymer companies and the steel industry.
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The Timken Co. burns about 8 billion cubic feet of natural gas a year, said Peggy

Claytor, senior government affairs specialist for the Canton maker of bearings and

specialty steel. Claytor, the company’s former energy purchaser, specializes in energy and environment issues for Timken.

About 92 percent of the gas Timken uses is used to heat treat bearings and steel,

with the remainder used for such things as heating boilers, she said.

While Timken and other companies can hedge the financial costs of gas, they

often have to eat the higher energy costs, she said,

‘‘You do not have the luxury of shutting down (a plant) because you have customer obligations to meet,’’ Claytor said.

The higher prices have been a strong incentive for Timken and other companies

to become more energy efficient, she said. Timken’s changes have lowered the its

natural gas consumption by 34 percent, she said.

The recession and slow economic growth have also moderated natural gas prices

by reducing industrial and business demand, she said.

‘‘An economic recovery will put more pressure on prices,’’ Claytor said. ‘‘In a sense,

we are fortunate that our economic recovery has been anemic.’’

Senator VOINOVICH. Highlights the pressures placed on natural

gas supplies by the frigid winter that we had in Ohio and notes

that the National Weather Service is predicting that much of the

Nation will have above normal temperatures this summer. If hot

weather this summer causes natural gas power plants to operate

at higher than average levels, what impact will that have on our

natural gas supplies and prices?

Mr. MCSLARROW. It will have a huge impact. We have a problem

right now. We are coming out of a season in which we had low storage. This is the time when you traditionally build storage all the

way through the summer to get ready for the next winter heating

season. The last numbers I saw were that we were about 700 billion cubic feet in storage which is about 500 billion cubic feet below

the 5 year average.

If we have a hot summer and natural gas is consumed in greater

amounts for the generation of electricity for air conditioning and

the like, we are going to go into the next winter even lower than

we did the last. That puts us at risk for a lot more higher and volatile prices.

Senator VOINOVICH. We have been joined by Senator Carper.

Senator, would you want to make a statement or ask Mr.

McSlarrow some questions?

Senator CARPER. Is Senator Jeffords next in line to ask questions?

Senator JEFFORDS. Yes, but I will defer.

Senator CARPER. Let me defer to you and then I have some welcoming comments for Mr. McSlarrow. I have just had an exciting

train ride from Delaware this morning. I want to calm down just

a little bit before I say anything.

Senator VOINOVICH. Senator Jeffords?

Senator JEFFORDS. I just have one question. How many coal

plants does the Administration project are going to switch to natural gas due to the environmental regulations over the next 10

years?

Mr. MCSLARROW. I don’t have a number off the top of my head.

We will get that for the record.

Senator JEFFORDS. I would appreciate that because obviously this

is a very difficult question in the sense of the future of this country

and our energy costs.
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Senator VOINOVICH. Senator Jeffords, I can say this to you. All

of the new powerplants in Ohio that have been built, and there

have been a lot of them, are all fueled by natural gas.

Senator Carper?

OPENING STATEMENT OF HON. THOMAS R. CARPER,

U.S. SENATOR FROM THE STATE OF DELAWARE

Senator CARPER. I have calmed down.

Deputy Secretary McSlarrow, how are you doing?

Mr. MCSLARROW. Very well, Senator.

Senator CARPER. Glad you are here and glad you are in your position.

I get to come over and spend some time with your boss this afternoon. I am looking forward to that as well. It has to be a busy time

for you with the energy bill coming to the floor. A good deal of what

we will discuss there actually has some ramifications for what we

are covering here as you know.

I have introduced, along with Senator Chafee and Senator Gregg,

legislation to attempt to slow the growth of emissions of CO2 principally from our utilities in this country. I did not have a chance

to hear your testimony this morning but I am mindful of the concern that some have raised and I hear a little here today about if

we adopt a fourth pollutant, address CO2 in clean air legislation

this year, we will exacerbate the shift from coal to natural gas.

Let me say by way of a disclaimer, I know I am the only United

States Senator who was born in West Virginia and I still have a

lot of family there and a lot of affection for that State and its economy. It is not driven entirely by coal but it is still a major part of

the economy of my native State. I am not interested in doing anything that is going to harm that industry or West Virginia, for that

matter.

I just heard the chairman say in Ohio all the new utility plants

that have come on line of late have been natural gas in nature. I

think the same is true in Delaware. That has happened with a

three pollutant bill. It just happened because of concern of States

and industry to clean up the air. For the most part, it is easier and

maybe cheaper for them to move toward natural gas than coal.

I want to make a couple of points and I would be interested in

your thinking on this as well. There is a fair amount of uncertainty

within the investment community on whether or not they ought to

invest in utilities that are making major investments in coal-fired

plants. We have heard testimony about the emissions from clean

coal technology that are really just as good as what you are going

to find in natural gas-fired plants but there is a reluctance on the

part of investors to invest in companies or utilities that are going

to bring those on line because they don’t know if we are going to

pass a 3-P or 4-P bill. They don’t know if it is going to be a market

driven system, will there be caps and trades available, and are just

uncertain of the nature of what we are going to do legislatively and

what you will be doing regulatorily. Are we going to make any

changes in new source review. There is a lot of uncertainty.

One of the reasons why I am interested in a 4-P bill that addresses carbon dioxide is I want to provide some certainty. I want
180

to provide some certainty to the utilities and I want to provide

some certainty to the investors as well.

I have seen information that suggests if our legislation, the legislation that Senators Chafee, Gregg and I have introduced, were to

become law there would be I am told a 3 percent further shift from

coal to natural gas. I don’t want to even see that.

That is a round about way of asking this question. Let’s talk

about the willingness of investors to invest in clean coal technology

and how that willingness might be driven, increased, enhanced by

some certainty with respect to what we are going to be doing on

new source review and whether or not we are going to be regulating carbon.

Mr. MCSLARROW. There is no question that certainty is in some

ways at the center of much of the debate and at the center of much

of the concern, both in terms of those who would invest in utilities

and in particular kinds of plants and those who actually have to

operate them and those who have to produce fuels.

My initial point would be we can provide certainty about passing

Clear Skies, that would provide certainty, but to be fair to the

question you asked, I think we really do have a concern. The numbers I have seen on your bill are a little larger in terms of the fuel

switching but I also understand you just introduced a new version,

so it’s possible there is a difference between last year and now.

This is about marginal costs. This entire energy debate whether

natural gas, coal or anything else in terms of what drives the cost

of fuel in the electricity generation sector and the more we switch

to natural gas and the more we have that effect, and there is no

question that any bill that has a carbon cap is going to have some

effect in a way that 3-P bill won’t, is going to increasingly place

this kind of pressure on natural gas at a time when it’s already

volatile in our view, and not very well understood as a driver of all

the generation costs for all the other fuels.

There is no question that we have uncertainty surrounding the

new source review rulemakings but again, as soon as we complete

them, we will have certainty. The great thing about Clear Skies is

that by making very clear the targets and allowing people the kind

of time to make the investment decisions, not so much in the assets

themselves but in the technologies that can control the emissions,

we think gives the kind of confidence at least in the discussions I

have had with market analysts, then the kind of confidence that

this is worth investing in. They understand the rules of the road

and are pleading for them. They also know that they are reasonable and achievable. I think we have a game plan right now that

does that.

Carbon caps, putting aside the entire policy debate about carbon

and focusing on energy impacts, the scary thing about carbon caps

is we don’t understand the control technologies necessary to deal

with it. We do have some understanding, and are putting a lot of

money into, carbon sequestration. For example, as you well know,

the President has proposed a billion dollar FutureGen coal plant,

not just to produce electricity and hydrogen but also to demonstrate how you can divert a carbon stream and sequester it.

I think we need to do those things first. We have a lot of work

to do to understand how to deal with these things let alone before
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you get to the policy debate of whether or not you should deal with

it.

Senator VOINOVICH. I’d like to point out, Senator Carper, our

third hearing will deal with emissions technology and the issues

surrounding financial stability.

Senator CARPER. Great.

Senator VOINOVICH. What the investors have to say about the

current situation as contrasted to Clear Skies or hopefully we will

even get into talking about what Senator Jeffords offered last year

with his legislation. Do you have more questions?

Senator CARPER. Maybe a point and maybe a short question.

I mentioned the numbers I have heard, 3 percent increase in

terms of shifting from coal to natural gas that might be driven by

our legislation. While I am not interested in seeing a 1 percent

shift, it is not as great as some had feared.

The other number I would share is if we pass a 4-P bill or a 3-

P bill, there are going to be certain costs incurred by generators of

electricity that will be driven by that. If we add a fourth P or add

carbon to that, there are some additional costs. The numbers we

understand have been driven not by us but by more objective people than the authors of the bill, suggest that the additional cost to

utilities would be about 2 percent.

If those numbers are indeed correct, a 2 percent additional cost

by adding a fourth P, and a 3 percent shift from coal to natural

gas, I think it is important that we figure out with some certainty

if those numbers are correct and if they are, then we have to make

the judgment of whether that is worth a tradeoff in terms of reducing the threat of global warming and what that poses for our country and for our planet.

My own view is those are costs that are worth assuming given

the benefit although that is one about which reasonable people will

disagree.

Let me ask you more of a personal question. Senator Voinovich

has heard me talk about this before. I was not one to put a lot of

stock in global warming for a long time. Kyoto accords came and

went and I didn’t pay a lot of attention to it. I didn’t pay much attention to it until we had a couple of researchers from Ohio State

University who came to Delaware a few years ago to receive a recognition and a major award.

The research they had done was for the last 20 years going

around the world and climbing to the top of some of the tallest

mountains in the world and measuring the disappearance of the ice

caps and charting it for the last couple decades. I sat up and took

notice. I have continued as we have gone forward since then.

Now I am in a position where we have the opportunity to do

something about it and we have the President’s proposal which is

not to address it now but to do more research. We have Senator

Jeffords’ approach which is to do even more than utilities can do

in a realistic manner.

Take off your hat as Deputy Secretary of Energy and do you

think at all about global warming? Do you worry at all about what

it poses to us? Is it something that has crossed your mind? Where

are you as a human being on this one?

Mr. MCSLARROW. It is hard to testify as a human being.
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Senator CARPER. It is hard for us to ask questions as human

beings too.

Mr. MCSLARROW. Of course. I really don’t know of anybody that

doesn’t think about it, debate it or argue it.

Senator CARPER. I think there are plenty of people who don’t.

Mr. MCSLARROW. I would say this. The issue is one where I think

on a personal level and I suspect for a lot of people it is one where

you want to be right. You described a couple of alternatives but you

left one out and that is what the President is doing on the subject.

It is not like we are standing still. We have an aggressive, 18 percent greenhouse gas intensity reduction target in a decade.

Senator CARPER. I’m sorry, say that again?

Mr. MCSLARROW. An 18 percent reduction in greenhouse gas intensity.

Senator CARPER. It is an 18 percent reduction in growth and we

are not talking about cutting it below what it is this year or next

year?

Mr. MCSLARROW. Right.

Senator CARPER. But whatever it is going to be x number of

years from now, we are going to reduce that growth by 18 percent?

Mr. MCSLARROW. Right. To the issue you raised which is where

are you in terms of what you are worrying about. I think there is

enough uncertainty about the science and on the effects and how

we deal with it. We are spending $4 billion a year. This is what

the President has requested to do the R&D on the science and technology but in addition to that, we are actually trying to at least put

us in a position if down the road we get some certain answers to

these questions we are in a position to deal with it.

I am comfortable with that as a human being and most importantly as the guy who works for the President because at the end

of the day there is enough uncertainty about this that if we go another direction and risk not your bill but other proposals that I

have seen, really devastating the coal industry and really placing

us in a position where we are relying on natural gas which we are

forecasting even without those kinds of measures is going to be

doubling in terms of the liquefied natural gas imports we are going

to have in another 20 years.

Senator CARPER. Mr. Chairman, I would like to say this as much

to you as to our witness. I am a native of West Virginia but I represent Delaware now and have lived there for over 30 years. We

have a lot of farming in our State and I know you do in Ohio. We

have a lot of chemical plants, Dupont, Hercules and others in our

State and I know you do in Ohio. I am mindful of the cost pressures that are coming to bear on those industries as well as others

because of the jump in the price of natural gas. I am mindful of

that and I know we need to keep our eye on the availability of natural gas and the price.

We are going to have an opportunity when we debate the energy

bill over the next couple of weeks to consider things like a natural

gas pipeline from Alaska and whether or not we should support

that. We are going to have the opportunity to actually consider

whether we ought to seriously study looking at some places off our

coast for natural gas, places we haven’t looked for a while. Those
183

are factors that need to come to this discussion as well. I am sure

they will.

Thank you. It’s good to see you.

Senator VOINOVICH. Thank you, Mr. McSlarrow. Thanks for

being here.

Mr. MCSLARROW. Thank you, Mr. Chairman.

Senator VOINOVICH. Our next panel of witnesses consists of Mr.

Jim Krimmel, President, Zaclon Chemical. Mr. Krimmel has testified before on the spike in gas prices in 2000–2001. Our next witnesses will be Mr. Richard Metz, Co-Executive Officer, UNIMARK,

L.L.C., Mr. Steve Thumb, Principal, Energy Ventures Incorporated,

Mr. Joel Bluestein, President, Energy and Environmental Analysis,

Inc.

I would like the witness to know that we’d like you to limit your

statements to 5 minutes. We would welcome to the record your

complete statements.

We will start this morning with Mr. Krimmel.

STATEMENT OF JAMES KRIMMEL, PRESIDENT, ZACLON

CHEMICAL

Mr. KRIMMEL. Thank you. It is very nice to see you again.

I want to thank the subcommittee for allowing me to speak here

today. What I have to tell you is very simple. If you look at my testimony it is very simple stuff but it is very vital as well. It is vital

to me, vital to my family, my employees and my employees’ families. It is the story of the effect of the escalating natural gas cost

on one small manufacturer, Zaclon Inc.

Zaclon is my company. We are located in Cleveland, Ohio. We

are a producer of specialty chemicals as well as some bulk chemicals. We sell worldwide. We are the world’s largest producer of zinc

ammonium chloride galvanizing fluxes and we sell in 19 countries.

We are a small company, 35 employees, less than $12 million in

annual revenues, unfortunately. We not only have domestic competitors but our primary competitor is European and has been historically. Increasingly we are seeing the Asian competitors starting

to penetrate the markets we are serving as well.

I am also currently the chairman of the Board of Directors of the

Ohio Manufacturers Association. The OMA, with its 2,500 member

companies, is the voice of manufacturing in Ohio and a vital part

of the strength of Ohio’s economy.

In the interest of time, I would like to the graphs I have included. I am kind of a visual person. If you would take a look at

my first graph, it shows the energy costs for Zaclon Inc. over the

past 15 years, the company has been in existence for 16 years. I

don’t know what happened to the data in our first year. I guess we

weren’t very efficient in those days.

This is an interesting chart in that it shows our energy costs,

utility costs by medium, water, electricity, natural gas and you can

see by far natural gas is our highest utility cost. You can also see

that from 1999 to 2002, it shows a 63 percent increase in our natural gas costs.

This is interesting enough but it is much more telling if you combine it with sales. My next chart superimposes our product sales

over our total energy costs. You can see here that despite declining
184

sales, our total energy costs have been increasing over the past 10

years.

The reason is largely fuel switching in my opinion coupled with

inadequate exploration of natural gas. The fundamentals of natural

gas have changed in the last 3 years. The volatility is unbelievable.

It adds a level of uncertainty in our business that is very difficult

to deal with. In the long run, as manufacturing recovers, as it will,

and additional fuel switching occurs, the problem is only going to

get worse. It is ont going to get better. That threatens the very existence of companies like mine, Zaclon and all 35 of our employees.

It is not a huge number of employees but to all of us who have jobs,

it is very important that we continue to be in business.

To further illustrate the changes in energy cost to Zaclon Inc. I

included a couple pie charts and the pie charts show that in 1999,

and this is true for the years prior to 1999, energy was 10 percent

of my total cost picture, raw materials were 44 percent, labor 21

percent and all other costs amounted to another 25 percent.

The cost structure in 2002 shows energy is now 15 percent of my

total cost. While we have been able to reduce raw material cost to

39 percent, labor has remained roughly steady and we haven’t had

to reduce people. I am trying desperately not to have to reduce people as a way of offsetting some of the increased energy costs. We

are trying to improve efficiencies, we are doing that but it is just

not enough. As natural gas continues to escalate, it is going to be

more of a challenge for my company and my employees.

The final chart I show is a bunch of data points, 172 data points

over 15 years of Zaclon’s natural gas delivered price. If you look at

data points starting at 134, 2001, you can see how the volatility

and the price has increased, our delivered price for natural gas.

Prior to that time, we had seasonal peaks. We had the predictable winter peaks, some lower areas at lower prices during the

summer but since 2001, that is simply not the case. The peaks are

much higher and the average pricing is much higher. The last

peak, the end of February, our delivered price of natural gas in

March was over $11 per 1,000 cubic feet. I basically curtailed operations, I just couldn’t afford to make product and sell it at that natural gas price.

In closing, I strongly urge you to serious consider what you do

here and how it impacts the price of natural gas because it is so

vitally important to my company and to others across the Nation,

small, medium and even large manufacturers. We really want to

keep these companies going, we want to keep the jobs there but we

need some help too.

Thank you very much.

Senator VOINOVICH. Mr. Metz, Senator Inhofe asked me to welcome you as a resident of Oklahoma. I don’t know whether he had

a chance to say hello to you or not when he was here. We are glad

to have you here today.

STATEMENT OF RICHARD METZ, CO-EXECUTIVE OFFICER,

UNIMARK, L.L.C.

Mr. METZ. I represent a small company, 11 employees. I have

been in the EMP side and the marketing side of oil and gas for 35

years and have concentrated over the last 10 years with the cre-
185

ation of UNIMARK. Our focus and function is to help small producers market their gas and at the same time, they will be discussing with me where the price of gas is going and what we can

expect. As a result of that, I have tried to follow the marketplace

and help them understand what my future forecast would be for

prices or demand for gas so they can decide whether they want to

put their funding capital into drilling additional wells and would

they be able to get an economic return over the life of those.

I, like the gentleman to the right, have put together some graphs

and included those with my testimony. If you look at Exhibit A of

that, it is a graph of the production in the U.S. in bcf per day. Over

time, we used to see a summer curtailment or decline in the consumption, therefore we had to have a summer curtailment or decline in the production. As additional demands are made on gas,

that summer curtailment as you can see is going away.

Senator CARPER. Would you go back and take it from the top of

Exhibit A?

Mr. METZ. Exhibit A is taking the EIA dry gas production data

that is published monthly and determining a bcf per day. What are

we producing? If you do it on a monthly basis, you get some

strange things when February comes along and that kind of stuff.

I revised the data to 1 billion cubic feet per day. This is the U.S.

dry production after they process and treat it. That’s what ends up

in the pipeline to be consumed.

You can see back in the late 1980’s, every summer there was a

falloff in the production because there was a falloff in the demand.

We had excess capacity. Prices reflected part of that. As the system

has gone forward, we have trouble running in place, keeping up

with our production last year because every year, those wells that

are there are declining. So you have to add so many new wells to

make up for the difference.

You can see starting in the early to mid 1990’s, we are basically

running wide open 365 days a year. Statistically, the same numbers in a table form says that since 1996, we have been producing

97 plus percent of the total peak production each year. So if you

hiccup, you are in trouble. I am seeing that happening.

I am marketing as for 400–500 small producers primarily in

Oklahoma. They are not curtailing gas, we are moving all the gas

they have and they are out trying to find more. On the other hand,

what is the future price going to be, what is the demand going to

be. Those things are impacting their decisions. The energy business

has been through a little turmoil in the last couple of years starting with Enron and others that things aren’t a guarantee that

what people say is going to happen will so they are a little more

conservative.

Our drilling in the last 12 to 18 months has been more conservative and therefore, we are having trouble keeping just our gas levels where they are.

Exhibit C is somewhat like Senator Inhofe’s graph showing

where prices are and extreme volatility. When you have those

kinds of numbers going up and down, he has trouble figuring out

how he’s going to market his product or make it a reasonable

amount and the producer has trouble figuring out which prospects

he should drill and will he get a reasonable return.
186

From that graph you can see the real deal is that people are

more concerned there is going to be enough because the price goes

up when a scarcity of the commodity. With those kinds of volatility,

I want to say in the last week the price of gas as varied by more

than 10 percent. That makes everyone nervous.

As the Administration witness discussed, the storage levels are

extremely low. We are going to have to put in over 12 billion cubic

feet a day between now and the end of October to get back to last

year’s levels. You can see on Exhibit D where we can be ready to

meet the winter needs of a normal winter or colder in some areas

as we had last year. Even though we drew down storage to the lowest levels than they have since they started keeping this information, last winter was not an abnormally cold winter across the U.S.

Certain areas were, but on average we were 4 percent warmer than

normal. So we have a real problem in filling up that storage. That

is why we don’t have summer curtailments anymore in production.

The bottom line, the producers would like obviously to see better

prices; at the same time, they don’t want those prices to cause displacement of industry and consumers. I think the biggest thing

from the supply side is to be sure we don’t make off limits certain

onshore and offshore areas that could lead to additional production.

That is the bottom line of where I am coming from.

Senator VOINOVICH. Thank you.

Mr. Thumb?

STATEMENT OF STEVE THUMB, PRINCIPAL, ENERGY

VENTURES INCORPORATED

Mr. THUMB. I am Steven Thumb and I appreciate the opportunity to present testimony before you today.

I am Energy Ventures Analysis’ principal that is in charge of

their oil and gas practice and have followed and participated in the

industry for over 30 years.

You have written copies of my testimony, so I thought I would

merely go forward with some major points. I am focusing on the

impact of the proposed Clean Air requirements on the natural gas

supply sector.

First, with respect to the current status of the natural gas supply

sector, over the last 2 years, the gas supply has been challenged

to meet the Nation’s natural gas demand levels. This in turn has

caused natural gas prices to reach record levels and demand destruction in the nonelectric sectors.

For example, in the industrial sector, natural gas consumption

has declined 26 percent or 5.5 bcfd a day since 2000. Because a series of companies had to go bankrupt, idle capacity or essentially

cut back production because they can’t pass through the high cost

of natural gas. In addition, the residential customer is seeing gas

supply costs increase $17 billion.

The primary reason for the situation is U.S. production is declining and western Canada production can no longer fill the gap. More

specifically, U.S. production has been declining for each of the last

six quarters and the cumulative to date is a 3.5 bcf per day decline

or 6 percent. As a way of comparison, that is out of an average consumption for the U.S. on an average basis of about 57 bcfd a day.
187

More important than this current challenge and its associated

impacts is it is not going to go away for an extended period of time

as a result of the combination of high decline rates for existing production and the limited increases in drilling activity. These latter

two items have basically put the industry on a treadmill to maintain production, let alone to try and increase it.

The high decline rates of existing production in essence have reduced the average practical well life from about 10 years in the

early 1990’s to about 3 years today. With respect to the limited increases in drilling activity we have had despite these record gas

prices, two of the major reasons are environmental restrictions and

moratoria and the lack of scale for the remaining undiscovered reserves.

Concerning the latter item, this is the reason the major EMP

firms left the shelf region of the Gulf of Mexico which historically

has been the most prolific region we have had in the U.S. Basically,

the large scale plays just aren’t there. As a result, it is becoming

increasingly clear that the U.S. gas supply sector just cannot depend on traditional sources of supply to meet projected increases in

demand.

Instead, in the longer term, U.S. gas supply sector will have to

rely on a series of emerging gas supply sources of which I noted

six in my written statement to fill any gap between supply and demand. One of the key dilemmas with these emerging sources of

supply is that they are for the most part very large, complex and

capital intensive projects that will require an extended timeframe

to develop.

My written testimony provided several examples of the complex

and risky nature as well as the lengthy timeframe to develop these

emerging resources. Included in these examples were industry’s

current delay in developing offshore eastern Canada, the long period of time it takes to permit and build new LNG terminals, and

the fact the earliest the lower 48 will receive Arctic gas supplies

will be 2009 and that will be from Canada’s McKenzie Valley Pipeline Project.

With respect to the two Arctic gas pipeline projects, namely the

McKenzie Valley and Prudhoe Bay projects, let me note that their

combined initial capacity, net of incremental Canadian demand, is

only 1.3 bcfd a day greater than the loss in current production levels over the last six quarters identified in my opening comments.

That is a very small increase. The basic point is we are going to

need that just to replace what we’ve lost.

Senator CARPER. Would you say that again? I want to make sure

I understand what you just said.

Mr. THUMB. You have two projects, one coming down from

McKenzie Bay and the other from Prudhoe Bay. Their combined

initial capacity net of what Canada will need primarily for its

heavy oil to sands projects will only be 1.3 bcfd a day greater than

the loss in production we have seen from existing in the last six

quarters.

With respect to the proposed Clean Air requirements, one of the

significant impacts of those requirements is the proposed increases

in the Clean Air requirements is that they will cause coal-fired

generation to be reduced and as a consequence, gas-fired genera-
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tion to increase. This has already happened under existing regulations. For example this year we had closure of the Possum Point

coal plant in Virginia and the Gannon plant in Florida both of

which were replaced by gas units on the same site. This increasing

dependency on electric sector gas-fired generation which will only

serve to exacerbate the problems or the challenge for the U.S. gas

supply sector is already happening. Electric sector gas demand has

increased, 45 percent or 4.7 bcfd a day since 1996. Of particular

concern for the U.S. gas supply sector is the accelerated timetables

and the higher emission requirements contained in some of the proposed initiatives as both will serve to only overload an already

overloaded gas supply sector.

With respect to the increased production levels, of particular concern to the supply sector are the carbon dioxide limitations since

the power industry has no viable control option and as a result

must rely totally on switching generation to lower carbon containing fuels, primarily natural gas.

Of the various clean air initiatives you all are considering, S. 366

and S. 843 with their accelerated timetables for emission reductions and their larger emission reduction requirements, particularly CO2 requirements, would represent an overload for the U.S.

gas supply sector which would force the rest of the U.S. economy

into hardship.

With respect to S. 485, it also represents a challenge for the U.S.

gas supply sector. However, by eliminating the mandatory CO2 requirements that are included in the other bills and by providing a

longer implementation period for the required emission reductions,

it may be at least manageable from a natural gas supply standpoint.

In summary, the U.S. gas supply sector is really struggling to

meet existing demand. The acceleration of the proposed Clean Air

requirements timelines and higher emission levels will only further

raise gas prices. The empirical evidence to date clearly suggests

that the net results of accelerated Clean Air requirements would

be very high gas prices with all their attendant cost increases on

the other sectors and demand destruction within the non-electric

sectors.

Thank you for your time.

Senator VOINOVICH. Thank you, Mr. Thumb.

Mr. Bluestein?

STATEMENT OF JOEL BLUESTEIN, PRESIDENT, ENERGY AND

ENVIRONMENTAL ANALYSIS, INC.

Mr. BLUESTEIN. Thank you.

I have submitted more detailed testimony but for the sake of

brevity I would like to summarize the key points.

Thank you for the opportunity to testify today. My name is Joel

Bluestein, President of Energy and Environmental Analysis, Inc.

EEA has been providing energy and environmental consulting services since 1974. Among our major areas of expertise are analyzing

and forecasting supply, demand and price of natural gas, the impacts of regulatory policy on energy markets and energy technologies. We have done this work for natural gas producers, pipelines, local distribution companies, power generators, technology
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developers, the U.S. Department of Energy, the U.S. Environmental Protection Agency and other public, private and institutional clients.

The key points of my testimony are largely what you have heard

already, the gas supply/demand balance has gotten tighter and will

remain tight; gas prices will be higher than in recent history, perhaps significantly higher; power generation will be the major

growth sector for gas demand. All of this will happen independent

of any new environmental regulation of the power sector. However,

multi-pollutant regulation of the power sector can be accomplished

I believe without exacerbating the gas supply/demand balance and

it can be designed to reduce the gas issue by encouraging development of new, clean and more efficient coal and gas technologies

through gradual implementation and allocation of allowances to

new plants.

There is a figure at the beginning of my testimony which summarizes our most recent 20 year forecast of North American natural gas prices and it shows that we expect gas prices at the Henry

Hub to average about $5.70 per million btu for the next 2 years

and decline to a level around $4.50 per million btu in constant dollars for the remainder of the forecast. This is substantially higher

than historical prices as you have heard.

The roots of this change reflect the tighter balance of supply and

demand for natural gas resulting in higher prices and increased

volatility. It does not mean that we are running out of natural gas

but it does mean that gas producers need to look farther afield and

spend more money to meet the demand for gas and that is reflected

in the price.

Our forecast involves a scenario that requires very large investments of capital, a lot of positive policy decisions such as support

for Alaskan gas pipeline, development of new drilling areas, development of LNG terminals, et cetera. If these don’t occur, then there

is more upside potential than downside on gas prices.

The question of how we can best ensure an adequate gas supply

is complex and important. It is already being discussed in other forums as mentioned earlier and it probably needs a lot more discussion. I think the question for today is how does the gas supply price

and supply outlook affect environmental regulation of the power

generation sector? My short answers are that multi-pollutant regulation of NOx, SO2 and mercury should and can be accomplished

without exacerbating the gas supply balance and that multi-pollutant regulation should and can be designed to allow and encourage

a new generation of cleaner, more efficient coal plants that will

allow continued use of coal for power generation in an environmentally sound manner.

I think the concern that air regulations will push gas demand for

power generation inexorably until it threatens our economy is overstated. The EPA modeling of the Clear Skies Act and many separate mercury control scenarios does not show significance switching

from coal to gas, even though it was done assuming much lower

gas prices than we currently project. Under our higher projected

gas prices, we would expect even less switching to gas.

While a lot of new gas generating capacity has been built recently, in certain areas, these new gas plants actually reduced gas
190

consumption by replacing older, less efficient gas generation. We

have seen old gas powerplants retired in Texas because they cannot compete with the new, more efficient gas plants and it has been

estimated that replacing all the old gas plants in Texas with new

state-of-the-art gas combined cycle plants could reduce gas consumption for power generation in the State by over 200 bcf per

year.

Use of even more efficient combined heat and power could make

this reduction even greater and could apply in other parts of the

southwest as well as parts of the west, south and north east. So

new, efficient gas plants can be part of the solution.

At the same time, the higher gas prices go, the better the economics of coal look. Coal plants today with SO2 and NOx controls

are highly competitive in the market. New coal plants being built

are even cleaner. New coal technologies being developed such as

fluidized bed and integrated gasification combined cycle plants are

cleaner and more efficient yet. This kind of new technology is vital

to addressing additional pollutants such as mercury or even CO2. Multi-pollutant programs such as proposed here will help the development of new, clean coal technologies by providing increased

regulatory certainty and flexibility to find effective compliance solutions.

One shortcoming of the Clear Skies Act in supporting new technology is that the grandfathering approach to allowance allocation

disadvantages new plants in general and new coal plants in particular. The failure to allocate allowances to new coal plants creates

a disincentive for companies to develop these plants and drives the

power sector more toward gas.

An allocation approach that includes new plants through updating the allocation and rewards efficiency is one way to help ensure

that we can continue to rely on our substantial coal resources.

Phased implementation of emission caps is also important for the

development of new technology. Command and control programs

and cap and trade programs with large reduction steps don’t provide enough time for technology development. On the other hand,

delaying the imposition of the regulation doesn’t provide a sufficient driver for technology development. A series of more gradual

steps can jump start technology development, keep it moving and

avoid economic disruption.

I believe that an appropriately designed, gradual cap and trade

approach could even be used to address CO2 reductions by promoting a long term, balanced mix of gas renewables, advanced coal

technology such as IGCC with sequestration, combined heat and

power and other efficiency measures. This is illustrated in my testimony with an approach in which the emission caps actually increases for the first several years and then levels off and begins a

very gradual decline to an end point in 2060.

In conclusion, we do see higher gas prices in the future regardless of what regulations are imposed on the power generation sector. This increase and its implications need to be addressed separately from the effect of multi-pollutant regulations. Higher gas

prices will increase the value of new, clean, efficient coal technologies and multi-pollutant legislation can encourage the development of these technologies and limit reliance on gas by providing
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allowance allocations for new, clean coal and efficient gas technologies through updating and by setting gradually declining emission caps from an early starting point.

Thank you again for this opportunity to speak.

Senator VOINOVICH. Thank you, Mr. Bluestein.

We will start a series of questions. I will try and limit mine to

5 minutes. Then I will give Senator Carper a chance and keep

going back and forth.

Mr. Krimmel, you mentioned it is essential that American manufacturers have access to affordable, reliable energy in order to compete in the global marketplace. I noticed in your testimony that you

really are concerned about this.

Could you share with us your experiences in that global marketplace and how it has impacted your business and as chairman of

the Ohio Manufacturers Association, how it has impacted some of

your other associates in that organization?

The thing I remember most from your testimony when we had

the listening session in Cleveland was that but for your energy

costs, you had a profitable year and because of the spike in the

cost, you lost money. I have commented I think the beginning of

the recession in Ohio started with the spiking of gas prices during

that period of time which sent a real chill through the manufacturing sector.

Mr. KRIMMEL. Yes, I certainly agree. In fact, when I arrived in

Washington today I saw a graph of manufacturing jobs in Ohio and

while my testimony indicates there are over 1 million direct manufacturing jobs in Ohio, I am sad to say it has crossed below a million just recently. The graph really begins dropping precipitously in

2001 the number of manufacturing jobs in Ohio. If you do the inverse of that and track natural gas, that is when the natural gas

became very high priced and volatile. I think it was a major contributor to the loss of these jobs.

I can’t emphasize enough that there are certain things I can do

better than my European competitors, better than my Asian competitors. I am not afraid of paying my people $20 a hour while the

Asians are paying $20 a week because my workers are much more

productive than their workers and I am investing in productivity

improvement. That is an important asset. I can offset that.

I cannot offset the natural gas difference and I wasn’t certain before I came here today what the difference in price of natural gas

in Asia and here was but I heard earlier testimony that indicated

our prices here are nearly double what they are, what my competitors in Asia are paying.

My strategy to reverse the trend of declining sales which I

showed in the one chart and we started to turn around in 1997 was

through increased exports, mainly to Latin America. We currently

export about 17 percent of our materials to Latin America. Prior

to that time, it was just a declining domestic market that was affecting my sales.

My ability to continue to grow that export market was severely

affected by the run-up in natural gas, I just couldn’t compete with

the materials coming over from Asia and Europe in Latin America.

So it has had that type of impact. It is life threatening to a company like Zaclon and I have heard Henry Hub prices of $5.70. You
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have to understand that translated into delivered prices to a company like Zaclon of about $7.50 and that is exactly twice what it

has historically been.

How can I offset that? I am not certain how I can offset that. I

will do everything I can but I don’t know.

Senator VOINOVICH. Have you heard the same complaints or do

you have any statistics on the price of natural gas on the other

manufacturers?

Mr. KRIMMEL. I certainly have heard the same complaints. Natural gas is a major cost factor for all manufacturers in Ohio, not

only the chemical manufacturers but yes.

Senator VOINOVICH. Does the Manufacturers Association maintain any kind of statistical analyses on its impact?

Mr. KRIMMEL. I don’t think we have done an in-depth analysis

of the impact of natural gas prices on the loss of jobs in Ohio. I

am not certain. I will check into it and if there is, I can provide

that.

Senator VOINOVICH. It would be interesting to me. I would be interested in having a survey of your membership to get an on-thestreet appraisal of what impact it has had on their businesses, not

only in this country but also in the global marketplace in terms of

international competition and what indication they have of the

costs their competitors are having to pay for natural gas.

Mr. KRIMMEL. I will see, Senator, whether we have anything

first, I don’t think so, and if not, I will see what we can initiate

and get information to you.

Senator VOINOVICH. Thank you.

Senator Carper?

Senator CARPER. Mr. Thumb, I think I understood you to say

earlier in your testimony that electric generators have no other alternative than switching to natural gas to meet CO2 limits. I am

wondering if there are maybe some other alternatives than just

that one. Among the alternatives are becoming more efficient and

one of those opportunities might be through co-generation, another

could be coal gasification.

Yesterday, I went for a drive in Washington. I don’t normally do

that, I normally jump on a train and come down here and go home

every night to Delaware. I drove a car and I saw Senator Voinovich

doing the same thing. I don’t often see him driving around Washington.

Senator VOINOVICH. Because I don’t have a car here.

Senator CARPER. The folks from GM were good enough to loan

us both a car for a few minutes and we went for a short drive. The

cars we drove were powered by hydrogen and used fuel cells and

there is a fair amount of interest and focus on fuel cell technology,

mobile fuel cell technology in our cars, trucks and vans as we look

toward to having those on the road in some numbers by the end

of this decade.

Not as much attention has been given to the use of fuel cells as

a stationary source of power within the manufacturing business or

it could be in a home and the ability for us to generate the electricity we need through fuel cells and even sell electricity onto the

grid.

Did I hear you correctly when you said that, Mr. Thumb?
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Mr. THUMB. If I said that, I spoke incorrectly. I thought I said

primarily natural gas was the alternative. In my written testimony, I did try to make that point that substantially a change will

have to come and then went through the other potential fuels, the

possibility of increasing hydro, the possibility of our getting new

and I went into the renewables potential and tried to point out

those. I do think the one footnote tries to clarify that. My apologies,

I thought I said primarily.

It is a big shift. Every time we model it a huge percentage of that

shift goes to natural gas and hopefully I used the word primarily.

I was interested in your point on fuel cells. If you would allow

me, natural gas is a big contributor if you are going to fuel cell

technology. I think only 5 percent of hydrogen comes from natural

sources and then you have to get it from others and natural gas

is one of the big ones to generate that kind of hydrogen.

Again, I am deeply concerned about the supply sector and that

is the only thing I came to testify to you about.

Senator CARPER. I don’t know if any of our witnesses are up to

speed on clean coal technology and what you see waiting in the

wings or what has been developed at the R&D level, pilot technology level. Are any of you able to share with us some up to date

reports with respect to clean coal technology, particularly as it pertains to levels of emissions we are able to achieve? Mr. Bluestein?

Mr. BLUESTEIN. I can give a small report. I think we are all

aware of integrated gasification combined cycle technology which is

certainly not the newest technology. As mentioned earlier, criteria

pollutant levels comparable to natural gas combined cycles and also

offers the opportunity for lower cost method of removing CO2 which

could be sequestered. Deputy Secretary McSlarrow mentioned the

zero generation coal technology being pursued. There is a new

plant in Pennsylvania, a company called WMPI that is going to be

used coal waste that has been left around for many years to generate electricity and steam and clean diesel fuel and potentially

could be shifted to generate hydrogen from coal.

I think if we are looking at controlling CO2, clearly the answer

in the long term is that we have to be able to use these clean coal

technologies and generate electricity with sequestration or generate

hydrogen. Mr. Thumb is correct, right now most hydrogen comes

from natural gas. In the long term, it could come from coal and

that technology is known. It is an issue of making it less expensive.

I think the key issue here is how does multi-pollutant regulation

facilitate that change. How is the legislation written to encourage

that technology conversion? I think for example the Carper-ChafeeGregg bill makes some good steps in that direction. There are also

aspects of Clear Skies that help that.

Senator CARPER. In the second round, I want to come back to

that point with you, Mr. Bluestein, and with others on the panel.

I would like to discuss what do we need to be doing legislatively

in order to encourage the investment in those kinds of technology,

not just by the Government, not just by the Federal Government,

but what do we need to do to encourage investment in those kinds

of technologies by the utilities and by those who invest in utility

companies?
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Mr. THUMB. Senator, on your question, you said any of us. I am

not an expert in those clean coal technologies but if you would

allow, one of my colleagues with whom I work closely is here and

could provide additional response if you choose. He happens to be

sitting in the first row. That is up to you if you would like to hear

his response.

Senator CARPER. That is fine with me. Would you identify yourself for the record?

Mr. HEWSON. My name is Tom Hewson.

I would just like to reiterate what Mr. Bluestein said as well,

that obviously we have been making a large investment in doing

research, in trying to improve clean coal technologies. We are trying to push the limits and get more and improved technologies.

IGCC, which I think you mentioned, is one of the technologies in

which we are spending a lot of time and effort and has the potential to reduce or improve the fuel efficiency of coal fired generation

significantly above more conventional technologies today.

We are still pursuing, we still have a ways to go before we make

them competitive with existing conventional technologies.

Senator CARPER. Thank you.

Mr. THUMB. You specifically mentioned co-gen and I just wanted

to let you know in all the analysis we have done, including the

analysis that I tried to summarize for you today does include

25,000 megawatts of co-gen which the industry is planning to do,

so we already have that in our numbers. Even with that, we still

see this problem for the supply sector.

I would encourage you that the timelines are what concerns the

gas supply sector the most, to the extent those timelines can be extended even slightly to allow more time to come in so things other

than natural gas that would help the sector. We have a real problem.

Senator VOINOVICH. Are you familiar with the comparison of our

natural gas prices with those overseas?

Mr. THUMB. Probably cannot do those off the top of my head. To

do what comes out of Zeiberg and Germany and those in Asia,

those are well published and I would have to go back and look

them up. I cannote to you that we have done research in this battle

between naptha and oil for ethylene which we used to have an advantage in the 1990’s and 1980’s has switched and the latest numbers I have is we have now gone to a 23 percent switch. We were

23 percent less competitive than we were before because of the

change in the naptha/oil/gas. That is just on the ethylene crackers.

Then you have to go through the whole chain to figure out the rest.

The chemical industry is hurting and I tried to put some of that

in my testimony about this fundamental shift between the competition between Europe and Asia, particularly Asia. We were at one

time the world’s largest exporter of chemicals and it doesn’t look

like that past is going to happen. Asia and Europe are definitely

going to intrude upon that with this fundamental shift in the raw

material feedstock.

Senator VOINOVICH. That is the same type of information I have

gotten from some people who have stopped by to see me. Does anyone know why is it that their prices are so much lower than ours?
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Mr. METZ. My scope is a lot smaller than Oklahoma versus the

world but I would say they are closer to the sources and they have

been importing LNG and the pipelines have been built from the

former Soviet Union and that kind of thing, those things are in

place and those supplies. In the world we have more gas than we

consume. It is just trying to get it to the customer.

Senator VOINOVICH. Mr. Thumb, do you have any comment on

that?

Mr. THUMB. I was trying to do the specifics. I don’t think I can

recall from memory the specifics but the fundamental situation

particularly in Europe is you do have the supplies, you do have

supplies coming in from several different sources and that has been

able to hold it.

We don’t have the multitude of supply options they do and plus

we are a very mature region. We are going to have to build those

and we talked about some of these projects, LNG and the Arctic

gas supplies that will come in hopefully in time.

They do have the Russian, they do have the Norwegian gas, the

UK gas as well as that which is on shore that has helped them.

Asia, I can’t do off the top of my head because it is very much broken into pieces. It is such a huge area, I would have to do research

for you.

Senator VOINOVICH. Any information you would like to submit

after this hearing, I would like to see. I think too often when we

look at some of our things, we just think of the United States and

whether we like to admit it or not, we are in the global marketplace. It is impacting our standard of living and it gets back to how

do you balance your environmental concerns with your economic

concerns.

As Senator Carper mentioned, we will have the energy bill on the

floor for discussion and the issue is, are there areas we should be

looking at that would be reasonably productive in terms of natural

gas, the whole issue of bringing the gas line down from Alaska.

That is not something around the corner but we certainly have to

look at those issues. Then you have to look at the issue of this balance between went does a utility or someone who has to make a

decision decide to switch to natural gas from something they are

now doing.

Mr. Bluestein your comment was if we put more pressure on people that you would see more use of clean coal technology. How fast

do you do that over a period of time. I keep hearing that if you

have these caps that are unrealistic or realistic but don’t give people enough time to comply with it, the only choice someone has is

to switch to natural gas.

I guess my point is that I keep hearing from our people in Ohio,

with the uncertainty we have out there today, and we both agree

on uncertainty, the only thing I am looking for is any new facilities

are going to use natural gas. Do you want to comment on that?

Mr. BLUESTEIN. Yes, I think you touched on several key points.

To take the last, we have heard a variety of situations directly and

indirectly from large power generating companies that with uncertainty over CO2 regulation, they are not willing to take a risk. That

suggests to me that they need to get some certainty through some

legislative action.
196

At the same time, I agree with you and others here that unless

something on CO2 or any other pollutant is done cautiously it can

have grave consequences for the economy. I don’t know if you had

a chance to look at the second chart in my testimony but I think

the key is timing, as in many things. On the one hand, there are

these new technologies and people will agree that they are not

quite ready today, the costs are a little too high and we need to

work on them more.

On the other hand, the key driver for those technologies is regulation. If we delay the regulation for 10 years, most likely we will

find ourselves at exactly the same point again. If you look at the

conventional cap and trade program, it is kind of like a cliff. There

is an emission level, you come along to some point and everybody

jumps off the cliff. That is a little scary for people.

The alternative I think is to build a staircase. If we replace that

cliff by a stair step of gradual reductions, it doesn’t mean that the

bottom has to be any further away in terms of the timeline but

phase in things gradually, then what you do is give people the certainty of where they are going, give those people certainty that

they need to go somewhere.

Our history has been that U.S. industry has been very effective

at finding ways to meet environmental regulations given a decent

warning. If we could phase it in gradually, then I think that would

jumpstart these technologies but with no timing, I agree, it can be

very difficult and probably have dire circumstances, particularly for

CO2. I think it can be done with the proper program design.

Senator VOINOVICH. Mr. Metz, you said we have had a tough

winter and by this time, we should be building reserves for the

next one. What is your prediction? If we do have a very hot summer, what impact do you think that is going to have relative to the

prices we have experienced this last winter?

Mr. METZ. Today the price for this time of year are higher than

they have ever been. With a very hot summer, the people who have

to fill the storage to keep the residential people warm next winter

don’t know what next winter is going to be like, so they have to

get to the historic levels. So they become a buyer of gas out there

like the manufacturer is trying to do. When there are more buyers

than sellers, the price is going to increase. I don’t think it will be

quite as dramatic if it was 20 below zero on a day but those people

have a lot of pressure to get back to those 3.1 trillion cubic feet of

gas in storage by the end of October. That puts more and more

pressure on the marketplace.

Senator VOINOVICH. There is no way that the supply can compensate at all for that?

Mr. METZ. No, I don’t. To me the price, when it was at high levels in the year 2001, there wasn’t this massive amount of new gas

supply that came to the marketplace under those price scenarios.

It was a little growth and trying to maintain which is very hard.

As Mr. Thumb said, the places to drill in the U.S. are very mature,

so there is not a lot of big reservoirs waiting to happen. The biggest

reservoir you can think of is the North Slope and that is a long

term process to get that gas down to the U.S.

Senator VOINOVICH. Some say that don’t worry about it, we will

have liquefied natural gas. That isn’t cheap, is it?
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Mr. METZ. If the current price, the things I have read, is $3 plus

for gas on a long term basis can make those more viable, but the

current level of imports of LNG is 1.2 percent of the total consumption we have. They are talking about increasing that 15 fold over

the next 10 or 12 years. That is a major increase. I keep seeing

people who want to site an LNG import facility have problems getting that done. I think that is a very strong goal to try to reach,

so I am not sure it is going to be as significant in the timeframe

people are predicting.

Senator VOINOVICH. It is relatively expensive?

Mr. METZ. It is expensive to a degree. When LNG first started,

the people who had it were the Algerians and that kind of thing

and they wanted to price it at a much higher price, so all that business fell apart. A lot of those were mothballed and not used.

I think now the biggest supplier of LNG is Trinidad, so that is

much closer to the U.S. and there has been a lot of rethinking of

how it should be priced. So it is more viable today I believe but it

still has a cost. You can’t instantly have enough ships to haul it

in because they take special ships to do that. You have to have unloading facilities and regasifying facilities and you have to get past

the permitting to be able to do that.

Even though it is out there, gas in the world is greater than we

consume, it is just not easy to move across the ocean.

Senator VOINOVICH. It would be interesting to measure. We have

an economic stimulus bill we are considering now and I have discussed that with a lot of people in my State and they have said to

me if you could do something about the natural gas prices, it would

have more effect on my business than any stimulus package you

could pass here in Washington.

We have an economy that is pretty fragile right now. It seems

to me that we have to start looking at some of these other costs

that we have that are bringing us down. For example, I have been

hearing more and more complaints from manufacturers about competition from China. People are complaining about litigation costs

and some of the other things out there impacting on our economy.

I think so often we just don’t face up to some of the real problems

we have. It would be wonderful if somehow we could compromise

to get people in a room and work out some of these issues that

have been around for a long time and we don’t address them. I

don’t think we are making great progress in improving the quality

of the environment, nor are we doing very much in terms of providing reasonable energy for our businesses and our people and our

country.

Senator Carper?

Senator CARPER. Mr. Krimmel, I meant to as you this question

earlier but it slipped my mind. How long have you lived in or

around Cleveland?

Mr. KRIMMEL. Fifty-six years. I am from Cleveland, went to

school in Cleveland and started my business in Cleveland.

Senator CARPER. I presume you have seen a number of mayors

of Cleveland come and go over that time?

Mr. KRIMMEL. I have, yes.

Senator CARPER. Were there any you thought did an especially

good job?
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Mr. KRIMMEL. As I recall, the real turnaround in Cleveland came

under Senator Voinovich. I have to give him some credit for that.

Senator CARPER. I have heard that from many people. Every

time they visit the Rock and Roll Hall of Fame, they come back

singing his tune.

On a more serious note, Mr. Bluestein, you talked a bit about

steps versus cliffs and said our experience as a Nation is when we

put in place environmental regulations and give reasonable

amounts of time for compliance, then usually with Yankee ingenuity and a lot of hard work and some good investment, our companies and businesses can get there and stay in business and remain

profitable and do the right thing for the environment.

We have introduced the legislation I have referred to a couple of

times along with Senator Chafee and Senator Gregg. When you

characterize the approach we have taken with respect to CO2, we

don’t mandate. I think in Senator Jeffords’ bill he mandates getting

back to 1990 emission levels I think within this decade. In our legislation, we say by 2009, CO2 emissions have to be where they were

in 2005. By the year 2013, we call for ratcheting down CO2 emissions where they were in 2001. Is that a cliff or is that a staircase

approach?

Mr. BLUESTEIN. I think the key issue in that legislation is that

you also allow off-sector reductions. I think in doing any kind of

CO2 mitigation, there are two safety valves. One is off-sector reductions which you incorporate; the other would be timing which is the

example I gave.

I agree there is a huge amount of uncertainty about how we

reach long term CO2 targets. It is critical that we promote long

term solutions like new coal technology, sequestration, other things

we probably haven’t thought of yet. I think if there were no off-sector reductions allowed in the legislation you’ve offered, I would be

concerned. I think with the off-sector reductions, it offers a safety

valve.

The concern I would have is does it at the same time provide the

push for the new coal technologies? That is what you really need

to move forward.

On the other hand, you do have an allocation program that is

more favorable to new technologies including coal technologies. So

that is a bonus for going down that longer term path.

Senator CARPER. Someone told me the other day that if you consider the amount of coal reserves we have in this country and compare those to the amount of oil reserves they have in Saudi Arabia

or Iraq, we are the Saudi Arabia of coal and we have more coal reserves maybe than any country in the world. Can one of you confirm that for me?

Mr. HEWSON. The other two are Russia and China and I do think

we are No. 1 ahead of those. We are uniquely in our carbon fuels

gifted with coal. Saudi Arabia and Iraq are gifted with oil and gas.

Senator CARPER. And North Dakota is gifted with wind and lignite.

Mr. Chairman, it seems to me and it is kind of fortuitous that

as we hold this hearing, we are literally taking up the debate on

the energy bill almost at the same time. There are so many things

we can do in the context of energy legislation. Part of that deals
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with renewable forms of energy, whether hydro or geothermal,

solar or even biomass. The Dupont Company has come up with new

technology that enables them to take the entire cornstalk and turn

that into ethanol and to do so in a way that is so energy efficient

they believe we will no longer need a tax subsidy to be able to compete with gasoline.

Down in Brazil, they are doing a similar kind of thing with sugar

cane which is exciting and encouraging.

We talked earlier about natural gas production, being able to

complete a pipeline from Alaska to get some of that natural gas to

us and I think there is going to be a proposal to do a study to look

offshore to see if there are some places that it makes sense to

search for natural gas.

I am a former Navy guy and I believe nuclear power has an appropriate role in providing some of our energy needs. I believe legislation coming to us supports expansion of nuclear power. We

talked a bit about fuel cells. We have not talked too much about

conservation. I think one of the damning things I have heard about

the bill coming out of committee to us in the Senate on the conservation side is it just doesn’t do that much. They focus a good

deal on the production side but not very much on the conservation

side, and little if anything on more efficient cars, trucks and vans,

little if anything with respect to the air conditioners we will be

using this summer and how to use a lot less electricity from more

efficient air conditioning.

I keep coming back to the matter of what can we do to

incentivize the investment in clean coal technology, not just the

R&D, but to encourage utilities and investors to put their money

where their mouths are. We know we have the technology, we

know it works. I think part of the challenge for us is how do we

craft legislation where there is a 3-P or hopefully a 4-P bill that

incentivizes the investment in that kind of technology.

Mr. Bluestein talked a bit to that and I don’t know if you have

anything else you want to add but for me that is not the whole ball

game, but it is a big part of it.

Senator VOINOVICH. Senator Carper, I can tell you, and I am not

here to push Clear Skies, but I have it authoritatively from the

utilities in our State and other utilities that if Clear Skies passed,

they would move forward with clean coal technology, that the caps

in that and the certainty of that would cause them to move forward

with clean coal technology so we could burn our coal and also the

advantage of developing clean coal technology is that you can either sell it or give it away to other places in the world because we

know darned well that China and Russia have large supplies of

coal. We know they are going to be burning that, either clean or

burning and emitting into the environment and ultimately impact

us environmentally and directly or indirectly in terms of our economy because of competing in the global marketplace.

Senator CARPER. Mr. Bluestein, I think I understood you to say

in your testimony, talking about the effect of Clear Skies legislation

on clean coal and willingness of investors to invest in clean coal facilities, that there would be some positive effect that would come

from Clear Skies. Did you say that and could you compare the positive effect on the adoption of clean coal technology in a practical
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world from Clear Skies with the effect that might come out of legislation Senator Chafee, Senator Gregg and I have introduced?

Mr. BLUESTEIN. There is definitely a positive effect from either

bill through providing certainty and flexibility. The cap and trade

program provides a huge amount of flexibility to affected sources

to try different technologies, have flexibility in compliance. Both of

the bills, the one Senators Carper, Gregg and Chafee have introduced and Clear Skies provide flexibility and that is important for

existing and new plants.

The other way such a bill can affect future construction I think

the biggest piece is through the allocation of allowances. There is

something like $9 billion worth of allowances that are going to be

distributed under this kind of system, $9 billion per year of allowances. That can have a big effect on choices that companies make.

In the Clear Skies Act, all of those allowances go to old plants.

Some people see that as a benefit for coal. It is not really, it is a

benefit for existing plants. A lot happen to be coal plants but in

terms of coal with a ‘‘C’’ the ability to develop new technologies, the

ability to have coal as a continuing important part of our energy

mix, we have to look to the future and that is why I think a system

where allowances are periodically reallocated to all the plants including new plants provides an incentive to develop and build new

coal plants and develop new coal technologies that are part of the

mix I think we all agree we need.

So I think that is the second piece that is very important and

which is in the bill that Senators Carper, Chafee and Gregg have

introduced.

Senator CARPER. I think that this has been a good hearing. I presume this is the last panel?

Senator VOINOVICH. Yes, it is.

Senator CARPER. I would note one of our witnesses, I am not sure

who, actually mentioned we can improve our efficiency in generating electricity by introducing more energy efficient coal-fired

plants, by introducing more energy efficient nuclear plants. Someone also mentioned that we can save ourselves some natural gas

by introducing the next generation of natural gas powered electric

utilities. That is true too. Some of these plants are pretty old,

aren’t they, and rather inefficient?

Mr. BLUESTEIN. Yes, and to the extent that new gas generation

replaces less efficient gas generation, it is reducing gas consumption.

You mentioned efficiency. We can also allocate allowances to electric efficiency improvements so we can use that mechanism because

it is a zero sum game. It is electricity that you generate or you

don’t and somehow it relates to the emissions you create or don’t

create. If we are going to have a market-based system, which is

what the cap and trade program is, we ought to include all of the

market and allow that market to function. The idea is the market

is going to find the least cost way of meeting our emission goals,

so we have to include everybody.

I think the topic of efficiency has been mentioned several times

and that includes end use efficiency. There are ways we can include that in the program and reap those benefits as well.

Senator CARPER. Good point. Thank you.
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Mr. THUMB. IF I could add to the question, you are right, when

we do build combined cycle plants, they do displace steam generator plants. Basically, it takes about seven molecules in a combined

cycle plant to produce the same amount of electricity as it takes 10

molecules inside a steam generator, the so-called efficiency effect.

That efficiency effect because of the way this Nation evolved is

highly concentrated in three areas, Texas, Florida and California.

We are basically building between 1998 and about 2007, 266,000

megawatts of new capacity of which about 70 percent of these new

combined cycles, 184,000 megawatts. There is only 125,000

megawatts of existing steam generator and except for the three

units I note, we really aren’t getting that efficiency effect. This is

new gas, not that it isn’t great, but I wanted to add it tends to be

very regional specific because of the way this Nation evolved. It is

never homogeneous.

Those plants, basically those 60 percent plants beyond what we

have right now, are located in other regions and that will be incremental gas demand.

Senator CARPER. It’s been a good panel and a very good hearing.

We are grateful to each of you for being here and sharing your

thoughts and responding to our questions.

Senator VOINOVICH. Thank you very much.

We stand adjourned.

[Whereupon, at 11:55 a.m., the subcommittee was adjourned, to

reconvene at the call of the chair.]

[Additional statements submitted for the record follow:]

STATEMENT OF THE HONORABLE KYLE E. MCSLARROW, DEPUTY SECRETARY OF

ENERGY

Mr. Chairman, I am pleased to appear before you today to discuss the Administration’s National Energy Policy and to discuss why we think Clear Skies is a critical

component of the President’s strategy to confront our energy and environmental

challenges.

Though it is often overlooked, the President’s National Energy Policy directed the

Administrator of the Environmental Protection Agency to work with Congress to

propose legislation that would establish a flexible, market-based program to significantly reduce and cap emissions of sulfur dioxide, nitrogen oxide, and mercury from

electric power generators. The President’s National Energy Policy concluded that, as

our energy needs grow, additional innovations would be necessary to continue improving our environmental conditions. The success of the Clean Air Act Acid Rain

program in promoting innovation and emission reductions is well known especially

by Members of this committee—and served as the template for the Clear Skies legislation now before this Committee.

We are pleased that the Senate is now considering a comprehensive energy bill

reported out of the Senate Energy committee, and commend Chairman Domenici

and the members of his committee for acting so swiftly. And, we commend you, Mr.

Chairman, and this committee for moving aggressively to consider the Clear Skies

legislation.

Introduction and Outlook

Over the past century, we have witnessed the power of energy to drive global economic development. In the 1970’s, we learned firsthand how energy shortages and

resulting high prices can compromise economic growth and the quality of life to

which Americans have grown accustomed. Clearly, the availability of reliable, affordable energy is critical to sustained economic growth.

We have a series of long-term energy challenges that require action now. These

challenges are present along the entire energy continuum, affecting crude oil, refinery products, natural gas, electricity generation and transmission, the environment,

and economic growth.
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The Nation’s Power Industry

To understand the need for Clear Skies, it is important to understand the current

make-up of the Nation’s electric power industry. The U.S. power-generating sector

remains the envy of the world. On any given day, approximately 5,000 generating

plants can make available up to 900,000 megawatts of electricity for virtually every

home and business in the country. Fossil fuels supply about 70 percent of the Nation’s requirements for electricity generation. Coal, alone, accounts for more than 50

percent of the electricity Americans consume. Primarily because of the power sector’s use of abundant supplies of American coal and natural gas, consumers in the

United States benefit from some of the lowest cost electricity of any free market

economy.

U.S. Electricity Generation by Fuel

America’s economic progress and global competitiveness have benefited greatly

from this low cost electricity. Electricity is an essential part of America’s modern

economy. While the Nation has made dramatic progress in ‘‘decoupling’’ overall energy consumption from economic growth, increased economic activity remains closely

linked to the availability of affordable electric power and is likely to remain so well

into the future.

The Nation’s demand for electricity is projected to grow significantly over the next

22 years. Between now and 2025, the United States will likely have to add between

446,000 and 656,000 megawatts of new generating capacity to meet growing demand. This is equivalent to adding the entire power generation sectors of Germany

and Japan, combined, to the U.S. power grid. Concurrent with this dramatic and

capital intensive expansion of the Nation’s power fleet, power generators will also

be called upon to make new investments in pollution control technologies to meet

tightening environmental standards. Over the past 25 years, America’s electricity

utility industry has invested billions of dollars in advanced technologies to improve

the quality of our air. Each year, a substantial portion of normal plant operations

costs again amounting to several billions of dollars a year are associated with operating installed technologies that reduce air emissions.

The investment has returned dividends. By installing new technologies to capture

tiny particles of fly ash, the power industry has significantly improved air quality

by dramatically reducing particulate matter. The power industry has also installed

sulfur dioxide controls on more than 90,000 megawatts of capacity as part of a successful effort that has cut SO2 emissions substantially since 1970. Most of the nation’s coal-fired plants have also installed nitrogen oxide controls that have helped

make initial NOx reductions. In short, advanced technology given the time to mature and be deployed can be effective.

Technological improvements have permitted the Nation’s power sector to continue

generating relatively low cost power and, at the same time, use the energy resources

America has in most abundance. America’s use of coal, for example, has actually tripled since 1970 even as our air has become cleaner. Advanced technology also offers

a pathway toward the prospects of achieving even greater reductions in air pollutants in the future.

At this point, let me review long-term energy trends with a focus on natural gas

and coal which should help illustrate our challenges. My comments here are based

on analyses prepared by the Department of Energy’s independent analytical arm,

the Energy Information Administration, in its Annual Energy Outlook 2003 (AEO

2003). All statistics are based on EIA’s reference case scenario for the year 2025,

which assumes current laws and regulations, including the Eastern U.S ozone SIP

call, but not future regulations, such as those to implement the new Clean Air Act

ozone and particulate matter standards or the mercury MACT standard.

The reference case also assumes continued improvement in energy consuming and

producing technologies, consistent with historic trends.

Natural Gas Trends

The natural gas share of electricity generation is projected to increase from 17

percent in 2001 to 30 percent in 2025. By 2025, total natural gas consumption is

expected to increase to almost 35 trillion cubic feet, which will amount to 26 percent

of U.S. delivered energy consumption. Industrial consumption the largest natural

gas-consuming sector—is expected to increase by 3.4 trillion cubic feet over the forecast, driven primarily by economic growth. Combined consumption in the residential

and commercial sectors is projected to increase by 2.6 trillion cubic feet between

2001 and 2025, driven by increasing population and healthy economic growth, and

accompanied by gradually rising prices in real terms. Natural gas remains the overwhelming choice for home heating throughout the forecast period. Natural gas con-
203

sumption in the generation sector doubles by 2025 due to lower capital costs, higher

efficiencies, lower construction lead times, and lower emissions.

In the short term, domestic natural gas prices are expected to remain high in

2003 and are at risk for significant volatility through at least the next 12 to 18

months. EIA estimates that the current natural gas storage level is the lowest on

record for this point in the annual cycle. As long as temperatures remain at or

below normal this summer, natural gas storage levels should rise sharply over the

coming months. But if this summer is hotter than normal, natural gas prices would

jump as cooling demand would compete with the need to build storage inventories.

A large rebound in the economy, poor results from the ongoing increase in natural

gas drilling, or a continued tight oil market might also spur volatility.

On that note, drilling for natural gas expected to increase substantially, but a

fourth U.S. LNG terminal is expected to open this year at Cove Point, Maryland,

and a Kern River Pipeline extension from the Rockies to the West Coast opened earlier this month—greatly increasing the capacity to move gas from a key producing

area. In

In 2004, declining oil prices should ease natural gas prices, and strong natural

gas drilling should increase productive capacity through the end of the year.

Domestic gas production is expected to increase more slowly than consumption

over the long-term forecast, rising from 19.4 trillion cubic feet in 2001 to 26.8 trillion cubic feet in 2025. The national average wellhead price is projected to reach

$3.90 per thousand cubic feet, in 2001 dollars, by 2025.

Increased U.S. natural gas production through 2025 is projected to come primarily

from unconventional sources and from Alaska. Unconventional gas production increases by 4.1 trillion cubic feet over the forecast period—more than any other

source, largely because of expanded tight sandstone gas production in the Rocky

Mountain region. Annual production from unconventional sources is expected to account for 36 percent of production in 2025, compared to 28 percent today. An Alaska

natural gas pipeline is projected to begin flowing gas to the lower 48 States in 2021,

reaching 4.5 billion cubic feet per day in 2023, with further expansion beginning in

2025. In 2025, total Alaskan gas production is projected to be 2.6 trillion cubic feet.

Conventional onshore non-associated production is projected to increase by 1.2

trillion cubic feet over the forecast, driven by technological improvements and rising

natural gas prices. However, its share of total production declines from 34 percent

in 2001 to 29 percent by 2025. Non-associated offshore production adds 560 billion

cubic feet, with increased drilling activity in deep waters; however, its share of total

U.S. production declines from 22 percent in 2001 to 18 percent by 2025. Associated

dissolved production declines by 800 billion cubic feet, consistent with a projected

decline in crude oil production. Lower 48 associated-dissolved natural gas is projected to account for 8 percent of U.S. natural gas production in 2025, compared

with 15 percent in 2001.

A key question facing producers and policymakers today is whether natural gas

resources in the mature onshore lower 48 States have been exploited to a point at

which lower discoveries per well eliminate the possibility of increasing—or even

maintaining—current production levels at reasonable cost. Depletion has been

counterbalanced historically by improvements in technology that have allowed gas

resources to be discovered more efficiently and developed less expensively, have extended the economic life of existing fields, and have allowed natural gas to be produced from resources that previously were too costly to develop. In EIA’s projection,

technological progress for both conventional and unconventional recovery is expected

to continue to enhance exploration and reduce costs. However, there is a significant

debate within the industry itself as to whether this will occur.

The difference between U.S. natural gas production and consumption is net imports. Net imports of natural gas, primarily from Canada, are projected to increase

from 3.6 trillion cubic feet in 2001 to 7.8 trillion cubic feet in 2025. Net imports contributed 16 percent to total natural gas supply in 2001, compared to an expected

22 percent in 2025. Almost half of the increase in U.S. imports is expected to come

from liquefied natural gas (LNG). By 2025, EIA expects expansion at the four existing terminals and construction of three new LNG terminals.

Growth in pipeline imports from Canada partly depends on the completion of the

MacKenzie Delta pipeline, which is expected to be completed in 2016 and expanded

in 2023. Net imports from Canada are projected to provide 15 percent of total U.S.

supply in 2025, about the same as in 2001. Mexico is projected to go from a net

importer of U.S. natural gas to a net exporter in 2020, as an LNG facility begins

operating in Baja California, Mexico, in 2019, predominantly serving the California

market. By 2025, the United States is expected to import about 350 billion cubic

feet of natural gas from Mexico per year.
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Coal Trends

The share of electricity generated from coal is projected to decline from 52 percent

in 2001 to 47 percent in 2025 as a more competitive electricity industry invests in

less capital-intensive and more efficient natural gas generation technologies. Nonetheless, coal remains the primary fuel for electricity generation through 2025, and

EIA projects that 74 gigawatts of new coal-fired generating capacity will be constructed between 2001 and 2025.

EIA’s analysis here does not incorporate a projection of several Clean Air Act programs that could have a significant impact on the use of coal such as the mercury

MACT. Although this rule has not been proposed, based on requirements of the

Clean Air Act it is designed to require the control of mercury on a source by source

basis by the end of 2007, which could be very costly and cause an even greater decline in the share of electricity generated by coal.

EIA projects growing domestic consumption over the forecast horizon, and projects

a simultaneous reduction in real coal prices to generators by approximately 12 percent by 2025. Average annual coal consumption is projected to increase by 1.3 percent per year between 2001 and 2025. As domestic coal demand grows, U.S. coal

production is projected to increase at an average rate of 1.0 percent per year.

The decline in prices is driven by the expectation of continued improvements in

labor productivity, and the continued market expansion of western coal, which has

a lower minemouth price than eastern coals. As western production makes further

inroads into markets traditionally supplied by eastern coal, the average heat content of the coals produced and consumed will drop as well, reflecting the lower thermal content per ton of western than eastern coals.

President Bush’s National Energy Policy

We long ago ceased to fully provide for our petroleum needs domestically, and

though most of our current natural gas demand can be met with North American

production, the trend here is also toward a greater share for imported natural gas.

And coal, our most abundant energy resource, is actually projected to reduce its percentage share of electricity generation.

We are often at the mercy of events and decisions over which we have often limited and sometimes no control. When winters and summers are mild; when all refineries or pipelines are online; when supply from abroad is abundant and reliable;

when prices are reasonable, we do not feel this dependency. However, when almost

any one of these factors breaks down, markets react instantly, and we face the higher prices and volatility that have become by now an almost certain cyclical phenomenon. These trends are a concern.

President Bush recognized that to prevent these problems from becoming a permanent, recurring feature of American life, we needed a long-term plan for energy

security that would promote reliable, affordable and environmentally sound energy

for the future.

President Bush’s National Energy Policy, released in May, 2001, reflected a few,

fundamental principles. First, we need to maintain a diversity of fuels from a multiplicity of sources. Second, we should seek opportunities for increased investment,

trade, exploration and development, which are increasing every year, far beyond the

traditional markets of the last 50 years. And third, we should focus on research and

development on initiatives that seek long-term solutions to our energy challenges,

as we have done with energy efficiency, renewables, hydrogen, fusion, and nuclear

energy, as well as the recently announced zero-emission FutureGen coal project.

While these initiatives hold enormous promise for the future, we recognize the

need for immediate actions to address the nation’s growing energy demand. Clear

Skies figures prominently on this list. I’d like to mention just a few of the actions

currently underway, particularly those focused on ensuring adequate supplies of

natural gas and electricity.

To increase and diversify domestic supplies of natural gas, the Administration,

among other actions, has streamlined the process by which permits are granted for

important energy projects, such as pipelines and refineries, and accelerated the leasing of non-restricted Federal lands where environmentally appropriate.

The Administration is encouraging new gas well investment by allowing for access

to high quality resources and growth in pipeline delivery capability. We recognize

that recoverable resources tend to be more difficult to develop and produce because

the U.S. is a mature producing area. This increases ultimate supply costs, which

requires ever increasing prices to be economically viable. A number of locations,

such as portions of the Rocky Mountain area and the eastern Gulf of Mexico, are

currently unavailable to exploration and development even though they are expected

to contain substantial volumes of recoverable natural gas.
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Interstate pipelines have been expanding delivery capacity, but additional expansions are needed to satisfy expected market growth. In 2002, 54 interstate pipeline

projects were completed, adding about 12.8 billion cubic feet of capacity per day

throughout the U.S., and proposals for expansions in 2003 through 2005 have been

announced for a number of pipelines. The gas pipeline network has grown extensively over the past decade to meet the increasing demand for gas and to accommodate diversified gas sources. Regulatory lags in obtaining authorization for expansions of pipeline capacity are being addressed by initiatives at the Federal Energy

Regulatory Commission (FERC) aimed at streamlining this approval process.

The Administration also strongly supports the construction of a commercially viable Alaska natural gas pipeline as a critical part of our energy security portfolio.

The National Energy Policy also highlighted the growing need for attention to the

nation’s electricity markets and infrastructure. The Administration’s overarching

goal is to ensure that Americans have abundant, affordable, clean and secure electricity supplies, and we strongly believe that Clear Skies is a key component of

meeting this goal, as is a comprehensive energy bill that includes a sound electricity

title to modernize our Nation’s antiquated wholesale electricity laws.

The Administration believes that there really is only one viable policy choice: we

must complete the transition to effective competition in wholesale power markets.

Well-functioning markets will, we believe, lead to lower costs for consumers and

businesses. But there is more than simply the benefit of lower prices. A well-functioning market brings its own rewards. As confidence is gained that the system is

reliable and capable of coping with high-demand for electricity, there will increasingly be less need for restrictive and prescriptive regulation. And that is the point

when much-needed investment is likely to be attracted—investment in new technologies, and in improved generation and transmission facilities that produce additional energy and environmental benefits.

When the opposite is true when uncertainty reigns, when reliability is questioned,

when prices seem detached from market forces investment vanishes.

The present uncertainty in the wholesale electricity market is not simply affected

by policy choices that center on transmission assets and market designs. The uncertainty extends to the generation of electricity itself. That is why it is important to

provide greater regulatory certainty about the kinds of investment choices that the

generating industry will have to make over the next two decades.

We believe that the President’s Clear Skies proposal does just that.

S. 485, Clear Skies Act of 2003

In 2000, 39 percent of the total energy consumed in the U.S. was for power generation. Since 1975, total U.S. energy use has grown by about 1.1 percent per year,

while GDP and electricity consumption have grown by nearly 3 percent per year.

We project future electricity growth to be somewhat less, below 2 percent per year,

but it is clear that electricity is either the fuel of choice or fuel of necessity for many

applications.

Our electric power is among the lowest in cost of any free market society. Low

cost electricity is part of America’s competitive edge in international markets. Cheap

power translates to prosperity and available resources to overcome problems in

many areas unrelated to energy but essential to our quality of life. A major reason

that electricity in the U.S. is relatively inexpensive is that roughly one-half of our

generation comes from coal.

S. 485, the Clear Skies Act of 2003, is a multi-pollutant, market-based cap and

trade program that will reduce power plant emissions of sulfur dioxide (SO2), nitrogen oxides (NOx) and mercury by approximately 70 percent from today’s levels—and

do it faster, with more certainty, and at less cost to American consumers than would

current law.

Flexibility of compliance choices, maintenance of fuel diversity, and the cost savings passed on to consumers through lower electricity prices are among the benefits

of the approach taken in Clear Skies, particularly when compared with other proposals that support more stringent targets, shorter compliance periods, or command

and control regulatory approaches. The cap-and-trade system of emission reductions

used in S. 485 should translate into reduced impacts on fuel markets in particular,

coal and gas than equivalent emission reductions achieved through other approaches.

The Clear Skies Act substantially expands one of the most successful Clean Air

Act programs the Acid Rain Program and reduces the need to rely on complex and

less efficient programs. Power plants would be allowed to choose the pollution reduction strategy that best meets their needs (e.g., installing pollution control equipment, switching to lower sulfur or mercury coals, buying excess allowances from

plants that have reduced their emissions beyond required levels). And like the Acid
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Rain program, Clear Skies includes banking provisions, enabling companies to save

unused allowances for future use. The result would be significant nationwide human

health and environmental benefits; certainty for industry, States and citizens; energy security; and continuing low costs to consumers.

S. 485 establishes a coordinated timeline for control of major emissions that provides adequate time to attract investment funds and avoids premature retirement

of working capital. The patchwork of existing and soon-to-be-implemented regulations under the Clean Air Act, coupled with the delays bred by continuous litigation

over them, has created enormous uncertainty for utilities, co-ops, and municipal

generators. This uncertainty has curtailed investments in technology that would reduce emissions at existing plants and prevented numerous new facilities from coming online. Clear Skies provides industry with the time needed to attract capital

necessary to reduce emissions without jeopardizing energy security.

Energy Impacts of Clear Skies

It is difficult to quantify what the cost or energy impacts will be if multipollutant

legislation is not enacted. The EIA ‘‘baseline’’ includes all future legislation and regulations that have been specified, but does not include regulations that have not yet

been promulgated. We know that in the absence of S. 485, mercury regulations will

be promulgated by December 2004. But we do not know what those regulations will

require; that knowledge will come only after a lengthy rulemaking process. We can

anticipate that additional reductions in SO2 and NOx will be required to attain ambient air quality standards for fine particulate matter. But we do not know what

those regulations will be. We can anticipate additional regulations to reduce regional haze, but again, we do not know what those regulations will require.

What we should be concerned with is this: uncertainty, delay, and litigation are

not likely to produce greater environmental benefits; they instead are likely to lead

to more costly solutions, and they risk affecting the energy fuel mix in ways that

are unwarranted and unforeseen.

Although we have not contrasted Clear Skies to this unknown regulatory future,

we have compared it to a future predicated on current control programs. Under

Clear Skies, natural gas consumption, which is projected to increase from 23 to 35

trillion cubic feet of gas in our baseline projection to 2025, increases to 36 trillion

cubic feet per year in 2025. However, we do not project that a significant change

in natural gas supply is needed due to the implementation of Clear Skies. Wellhead

natural gas prices follow the baseline pattern, after decreasing from the unusually

high prices that occurred in 2001.

Clear Skies helps maintain coal as an important fuel source, thereby avoiding excessive pressure on natural gas prices. In our baseline projection, coal consumption

would increase about 38 percent through 2025. Under S. 485, we project approximately a 26 percent increase.

EIA projects that electricity prices will be lower throughout the projection period

than in 2001, for both the baseline scenario and under S. 485. The effect of the

emission reductions is roughly a 0.3 cent per kilowatt-hour price increase above the

baseline in 2025.

One of the concerns we have is in the ever-increasing reliance on natural gas for

generation of electricity. As I have noted previously, this is primarily a function of

efficiency and costs, but because our marginal supply of natural gas will increasingly come from imported LNG we should be concerned that we not place too much

stress on natural gas supply by forcing a level of fuel switching from coal to gas

that leads to higher volatility and higher prices. Natural gas supply as a low-cost

and reliable source of electricity is not automatic one has only to witness the winters of 2000–2001, and 2002–2003 to see the point.

In both the near and long term, the price of a commodity like natural gas is determined by the interaction of supply and demand. However, the determinants of supply and demand in the near term can be quite different than the factors that determine prices in the long term. In the near term, factors such as weather related increases in demand, storage levels, productive capacity at the wellhead, and disruptions in supply lines can be paramount because of the difficulty of quickly increasing

the number of producing wells. Long-term market conditions, however, depend more

on such factors as

• the ability of markets to respond to price increases with adequate investments

in new wells;

• continuing availability of alternative fuels for generation;

• a viable market for imported gas;

• the continued development of new technologies; and

• emissions reductions required under future regulation
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The difference in what affects natural gas prices in the near term versus long

term has important policy implications. We have to recognize that in the short run

it is hard to do much about natural gas supply. From the time natural gas prices

spike, the industry rule of thumb is that it takes 6–18 months for production to increase. And, unlike oil, there is currently no large international spot market in liquefied natural gas to moderate gas supply scarcity.

The elasticity of natural gas demand plays a significant role in price volatility.

Because many users cannot switch to alternative fuels quickly, demand tends to be

more inelastic in the short run. Inelastic demand means that small changes in demand lead to significantly higher prices than under less inelastic demand. Demand

becomes less elastic as electric generators or industrial users lose their ability to

switch to another fuel or as any user loses the ability to reduce consumption in response to higher prices.

It is, therefore, critically important that we maintain a balanced diversity of fuels

to provide low-cost and abundant electricity. And the key to this is that we not assume that all policy objectives can simply be achieved with unlimited reliance on

natural gas.

The Role of Research

One of DOE’s fundamental missions is the advancement of energy-related technology. I would be remiss if I did not emphasize again that the projections I have

presented today assume only a continuation of historic trends in technology evolution. We have the ability to change those trends through dramatic technology improvements. We intend to do exactly that.

The President has launched a suite of relevant technology initiatives:

FreedomCAR and the Hydrogen Fuel Initiative (the hydrogen/fuel cell vehicle and

infrastructure program), FutureGen (a program to develop a zero-emission coalbased power plant, coproducing low-cost hydrogen and sequestering CO2), and fusion

electric power plants. Success in these areas will dramatically change the energy,

economic, and environmental future of the Nation.

The future role of coal in our energy mix may also be highly sensitive to the success we have in our program to improve Integrated Gasification Combined Cycle

(IGCC) technology, an inherently clean way to produce power from coal. This technology has already been demonstrated at commercial scale, but additional support

is being provided by DOE to enhance its efficiency, reduce technological risk, and

drive down capital costs. In addition, as I mentioned earlier, we are also pursuing

R&D targeted specifically on one of the tougher challenges in Clear Skies mercury

control.

Conclusion

In conclusion, we believe that Clears Skies, which provides a range of benefits improved health, cleaner air, and economic efficiency—is the best approach to address

our dual energy and environmental challenges. Clear Skies avoids the more serious

economic consequences of other approaches to cleaner air and provides marketbased flexibility to the energy sector. Clear Skies, combined with our many other

efforts to develop new, reliable, and secure sources of energy, will deliver significant

environmental protection. It will help us to achieve our national goal of abundant,

affordable, and clean sources of energy by maintaining fuel diversity and by providing greater regulatory certainty.

STATEMENT OF JIM KRIMMEL, PRESIDENT, ZACLON, INC., CHAIRMAN OF THE BOARD,

OHIO MANUFACTURERS’ ASSOCIATION

Chairman Voinovich and members of the Senate Subcommittee on Clean Air, Climate Change, and Nuclear Safety, good morning and thank you for the opportunity

to testify today.

My name is Jim Krimmel and I am President of Zaclon, Incorporated.

My company, which is located in Cleveland, Ohio, is a manufacturer of both specialty and basic chemicals with wide applications and worldwide sales. Currently,

we are the largest producer of galvanizing fluxes in the world, and sell products in

19 countries. But we’re a small company, with only 35 employees and under

$12,000,000 in annual revenues. Our primary competitors are domestic, European,

and increasingly Asian.

I am also the current Chairman of the Board of Directors for the Ohio Manufacturers’ Association. The OMA, with its’ 2500 member companies is the voice of manufacturing in Ohio the strength of Ohio’s economy.
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1For 2002 LNG imports represented 1.1 percent of the total U.S. consumption.

2Data source EIA Natural Gas Monthly

3Exhibit ‘‘B’’ details the same information in tabular form.

Today, as job providers in Ohio, manufacturers employ over a million people directly and countless million others in the service, finance and other industries employed indirectly by Ohio’s manufacturing companies.

As you know, Ohio is an energy intensive state that ranks in the top five nationwide in both commercial and residential energy consumption.

To maintain a competitive advantage in today’s tough global marketplace, it is essential that Zaclon and Ohio’s other manufacturers have access to dependable, low

cost energy sources. But in recent years, energy, and more specifically natural gas,

has been anything but low cost. And fuel switching related to compliance with ever

tightening air regulations coupled with inadequate exploration and drilling for natural gas is a major factor in this unprecedented run-up and volatility in natural gas

prices. As the manufacturing economy improves and as more fuel switching occurs,

the problem will only get worse. The high price and volatility of natural gas has

threatened and continues to threaten the very existence of small and medium sized

manufacturers like Zaclon. In that respect, my company’s experiences are a good illustration. The charts that I’ve included with my testimony tell the story.

This first graph shows Zaclon’s Energy/Utility Costs by medium over the past 15

years. It demonstrates both the magnitude and volatility of expenditures that my

company has faced during that time. By itself, this chart is interesting enough in

that it shows a 63 percent increase in natural gas costs from 1999 to 2002. The runup in natural gas prices back in 2001 nearly put us out of business despite imposing

an energy surcharge on our customers.

What is more revealing, however, is this next graph which superimposes Zaclon’s

product sales on the energy cost numbers over the past 10 year period.

This combination of increasing energy costs with declining sales revenues is

unsustainable for any length of time. We are running out of other cost reduction

opportunities, and we really can’t pass the increases on to our customers without

giving up a significant share of the U.S. market to our overseas competitors.

To further emphasize the impact of escalating natural gas prices on Zaclon, the

next two pie charts show a comparison of my company’s total cost structure between

the most recent year 2002—and 1999 before the run up of natural gas costs.

As you can see energy costs have increased from 10 percent in 1999, which was

pretty typical for years before 1999, to 15 percent in 2002. And what’s causing this

problem is natural gas price. The final chart shows Zaclon’s delivered cost per MCF

of natural gas for a 15-year period.

You can see that except for predictable seasonal swings, the price of natural gas

was stable until recent years. Since that time it is high and unstable. This makes

running our business very difficult, and often unprofitable. Soaring energy costs

combined with a tough global marketplace represent a serious threat to Zaclon’s existence.

In closing, I strongly urge you to consider carefully the impact of what you do in

this committee on the competitiveness of companies like Zaclon. Any additional legislation that encourages fuel switching to natural gas without addressing the supply

side of the equation could very well put me out of business.

Thank you for the opportunity to testify here today.

I would be happy to answer any questions.

STATEMENT OF RICHARD A. METZ, UNIMARK L.L.C.

Natural Gas is the most environmentally friendly fossil fuel. On the other hand,

it is a fuel which requires special handling in order to deliver it from the supply

source to the consumer. Currently, it is moved through pipelines, which limits the

supply source to production areas that are accessible to pipelines.1 This makes the

United States primarily dependent upon supply sources in North America.

Although the supply of gas has been adequate to meet the needs of consumers

over the past 25 years, the free market price of gas today reflects the tightening

of supply/demand equation. First, the attached graph (Exhibit ‘‘A’’, Gas Production

in the United States) reflects the daily average volume of gas (Dry Gas) produced

in the United States over the past 15 years.2 As you can see over this period, summer curtailment of gas is now nonexistent.3 Since 1996 annual gas production has

been at more than 97 percent of peak capacity. No additional supply exists at this

time to take on additional demand.
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4Exhibit ‘‘C’’ demonstrates the historic value of the ‘‘Gas Futures 12 Mo. Forward Average’’

as traded on the NYMEX. 5Represent over 43 percent of total gas consumption.

6The demand for gas by these two sectors varies such that the average annual consumption

for 2002 was only 55 percent of the peak monthly usage. 7A Heating Degree Day is a day in when the average of the high & low temperature is less

than 65 F. For example, if the high and low on a day is 50 F and 20 F the average is 35 F,

resulting in a 30 Heating Degree Day, (30 = 65 F–35 F).

There have been periods when consumer demand exceeds the supplier’s ability to

meet that demand. When this occurs, the price of gas begins to increase until the

price gets to a level that an existing consumer ceases to consume gas. This process

repeats itself until the demand level is in equilibrium with supply. The industry nomenclature for this process is ‘‘Demand Destruction.’’ The loss of existing demand

hurts the industry affected, the suppliers, and ultimately the overall U.S. economy.

The attached graph4 (Exhibit ‘‘C’’) shows that since 2000 the price of gas has had

periods of dramatic increases. This is another point on the curve which demonstrates that supply/demand balance for gas is very tight.

Finally, the winter space heating requirements of the residential and commercial

sectors are major consumers of gas5 and the consumption rate is directly tied to the

winter temperatures.6 On a cold day consumption can exceed 90 BCF. At the same

time the U.S. production and Canadian imports are approximately 62 BCF per day.

In order to meet this additional demand, stored gas must be withdrawn to meet the

shortfall. Exhibit ‘‘D’’ provides a historical perspective of the withdrawal and injection into storage. The storage level for the winter season of 2002–2003, although

starting at a normal level, was drawn down beyond the level of the prior 4 years.

The first thought is: the past winter was colder than normal. It wasn’t. Exhibit ‘‘E’’

shows the cumulative Heating Degree Days7 for a normal winter and for the past

winter. The past winter, although colder than most of the recent winters, was still

4 percent warmer than normal. Therefore, the current low storage level can’t be attributed to an abnormally cold winter.

When the winter is over and storage is depleted, the entities supplying gas to the

residential and commercial customers have to refill storage (fill season) in order to

meet the winter demand again next year. As things now stand (April 25, 2003), it

will take an average storage injection rate of 12.7 BCF per day during the remainder of the fill season to get back to the storage level that existed last year at the

beginning of winter. This compares to the average fill rate for the prior 5 years of

9.2 BCF per day. This increase in storage demand of 3.5 BCF per day has to come

from somewhere. At the current time it can’t come from the supply side, so it has

to come out of existing demand and is done so, as stated earlier, by the price of gas

increasing to the point where an existing consumer can’t afford to burn gas and,

either shuts in its facility, or switches to an alternate energy source.

If the government then mandates that electric generators have to reduce their

emissions (quick fix is replacement of coal fired generators with gas fired ones) this

will add additional demand to the supply/demand equation and result in higher

prices.

The other side of the equation is that higher prices should lead to additional supply, either through additional drilling or increased imports. Although increased imports (LNG) is the hot buzz word for additional gas supplies it will be a long and

slow process for LNG to have a meaningful impact. This results in additional supplies having to come from drilling. It is a time consuming process to find and develop additional supplies. It is even harder when the government has declared many

onshore and offshore areas off limits for drilling. The producing sector will fight the

good fight, but it is much harder to prevail with one hand tied behind its back.

The bottom line is additional stress on the supply of natural gas will lead to economic displacement of industry which can’t afford to pay higher prices and still be

competitive. I am confident that the producing industry can meet the challenge of

supplying gas to the consumers, but it will have to be at higher prices. These prices

will have to be even higher if areas of this country are off limits to exploration.
210
211
212
213
214

STATEMENT OF STEVE THUMB, ENERGY VENTURES INC.

Executive Summary

The U.S. natural gas supply sector is currently being challenged to meet the nation’s demand for natural gas. This has caused natural gas prices to increase to

record levels and significant demand destruction within the non-electric sectors for

natural gas demand. The primary reason for this phenomenon is that U.S. gas production has been declining for each of the last six quarters. The cumulative effect
215

of this decline has been to reduce U.S. gas production approximately 3.5 BCFD, or

6 percent. This decline in U.S. gas production is occurring throughout the Nation,

as five of the seven major supply areas in the U.S. are in decline.

To date the greatest degree of demand destruction has occurred within the industrial sector, where the resulting high gas prices have caused a number of firms to

declare bankruptcy and other firms to idle capacity. Both of these events have had

an adverse effect on the U.S. economy. To date, total demand destruction within the

industrial sector equates to approximately 5.5 BCFD, or 26 percent of total industrial sector gas demand. Higher gas prices also have affected the residential sector,

as gas supply costs for this sector have increased approximately $17 billion from the

5 year average for the late 1990’s. This challenge for the U.S. gas supply sector will continue over the intermediate

term, as U.S. production levels are projected to continue to decline for some time,

primarily because of the limited increase in gas-directed drilling activity despite

record gas prices. One of the major reasons for the limited increase in drilling activity is the limitations the industry faces in gaining access to prospective acreage as

a result of environmental restrictions and moratoria. The potential reserves that are

off limits because of these restrictions, which are increasing rather than decreasing,

has been estimated by industry sources at between 200 and 450 TCF. Another significant reason for the limited increase in gas-directed drilling activity is the lack

of scale for prospective exploration and development activity. Even though undiscovered reserves exist, many of these reserves are contained in a series of relatively

small plays. Majors and large independents need large reserve plays in order to effectively use their staffs, impact their current production levels and effectively allocate capital. Relying on smaller independents to develop these smaller reserve plays

has reached a point of diminishing returns because of the downsizing of the U.S.

exploration and production industry.

As a result of these and other factors, the industry will be challenged to maintain,

let alone increase, production levels from traditional supply areas. Instead, the industry will have to rely on a series of emerging sources of gas supply to fill any

gap between supply and demand. However, it will be an extended period of time

before these emerging sources of supply are able to make a significant contribution

to the U.S. supply sector. As a result, any acceleration in U.S. gas demand requirements only will exacerbate the challenge for the U.S. supply sector and lengthen the

period of high gas prices and further demand destruction in other sectors.

With respect to these emerging sources of supply, which include deep reserves

below 15,000 feet, the complex subsalt play, reserves offshore Eastern Canada, frontier coalbed methane basins, new LNG terminals and reserves from the Arctic areas

of both Canada and the U.S., the challenge and extended timeframe for the industry

to develop these highly complex and very capital intensive sources of supply cannot

be emphasized enough. For example, despite a number of industry announcements

concerning possible new LNG terminals, the FERC has granted only one certificate

for a new terminal and only one other project has applied for a certificate. With respect to the potential for Arctic gas supplies the earliest date for a completion of

a pipeline to deliver these supplies is approximately 2009 and these supplies will

be from Canada’s MacKenzie Delta. Arctic gas supplies from the Prudhoe Bay will

not be available until 2013 at the earliest. To place the potential of these massive

supply projects in perspective, the initial combined capacity of these two Arctic pipelines, net of the incremental gas demand requirements for Canada’s heavy oil sands

developments, will only be 1.3 BCFD, or 475 BCF per year, greater than the decline

in U.S. production over the last six quarters.

One of the significant impacts of the proposed increases in clean air requirements

is that it will cause coal-fired generation to be reduced. A significant portion of this

decline in coal-fired generation will need to be made up by additional gas-fired generation. This higher level of gas-fired generation will increase natural gas demand

requirements within the electric sector, which will further exacerbate the challenge

to the U.S. gas supply sector. This increasing dependence of the electric sector on

gas-fried generation is most evident in the recent experience of the industry. Since

1996 gas demand within the electric sector has increased approximately 4.7 BCFD,

or 45 percent. This is one of the major reasons for the current challenge within the

U.S. gas supply sector.

Of particular concern is both the acceleration of the target dates for the proposed

changes in clean air requirements and the increases in the levels of emission reductions contained in some proposed initiatives. Accelerating the time line for these

changes in clean air requirements will represent a significant challenge for the U.S.

gas supply sector, as it is improbable that the time line for the large, complex and

expensive emerging sources of gas supply required to meet future demand increases

can be accelerated. In fact, the more probable scenario is that there will be delays
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1There also have been declines in production in Canada’s Western Canadian Sedimentary

Basin as documented in ‘‘Canada Looks to Other Sources to Offset Steep WCSB Declines,’’ Natural Gas Week, March 10, 2003, p. 16 and ‘‘Analysts Sound the Alarm on U.S., Canadian Gas

Production’’ Natural Gas Week, April 28, 2003, pp 5–6. 2See Exhibit A–1 in the Appendix for a summarization of natural gas prices. 3The term demand destruction is used often in the natural gas industry to describe the loss

of demand as a result of high gas prices. As discussed in subsequent sections of this paper it

often involves firms going out of business and plants idling capacity because these entities cannot pass through the high gas costs to their customers. 4American Chemical Council, Background Paper on Natural Gas Price Shocks and The Economy, February 28, 2003.

in the time lines for some of these emerging sources of supply, which has been the

case for offshore Eastern Canada.

Similarly, increasing the levels of emission reductions will cause an even greater

reduction in coal-fired generation and increases in both gas-fired generation and gas

demand within the electric sector. This will only heighten the challenge for the gas

supply sector. Of particular concern are the carbon dioxide limitations, since the

power industry has no viable control options and must rely totally upon switching

generation to lower carbon containing fuels, of which the most significant is natural

gas. Carbon dioxide limits, because they place an effective cap on fossil fuel generation, significantly increase the challenge for the U.S. gas supply sector.

Of the various Clean Air Act initiatives currently being considered S 366 (Clean

Power Act of 2003) and S 843 (Clean Air Planning Act of 2003), with their accelerated time tables for emission reductions and their large emission reduction requirements, particularly their CO2 emission reduction requirements, would represent the

greatest challenge for the U.S. gas supply sector. With respect to S 485 (Clear Skies

Act of 2003) it would also present a challenge for the U.S. gas supply sector. However, by eliminating the mandatory carbon dioxide limitations and providing for a

longer implementation period for the required emission reductions it presents a

challenge that may, at least, be manageable.

In summary, the U.S. gas supply sector is challenged to meet existing demand

levels. This challenge, which likely will extend over the intermediate term because

of limitations associated with traditional supply areas, has resulted in natural gas

prices reaching record levels and significant demand destruction within the nonelectric sectors for natural gas demand.

The acceleration of the proposed clean air requirement timelines and higher levels

of emission reductions will only serve to heighten and extend this challenge to the

U.S. gas supply sector, as these changes in clean air requirements will increase gas

demand in the electric sector. Furthermore, since the gas supply sector is heavily

dependent on a series of complex and capital intensive emerging sources of supply

to meet projected increases in natural gas demand, it is doubtful that the timeline

for additional gas supplies can be accelerated materially. In particular, the proposed

carbon dioxide limits may place the gas industry in a position where it is severely

challenged to meet the increases in electric sector gas demand requirements. Empirical evidence to date is that when the U.S. gas supply sector is challenged to this

degree the net result is that natural gas prices will be pushed to record levels, with

all the attendant cost increases for the other sectors, and demand destruction within

the non-electric sectors for natural gas demand.

Current Status U.S. Gas Supply

Over the last 2 years the U.S. natural gas supply sector has been challenged to

meet demand. The primary reason for this phenomenon is that U.S. production has

been declining for each of the last six quarters, as illustrated in Exhibit 1.1 This

decline in U.S. production, which equates to approximately 3.5 BCFD, or 6 percent

of total production, has caused natural gas prices to reach record levels2 and resulted in significant demand destruction3 in the non-electric sectors for natural gas

demand. The latter has impacted adversely the U.S. economy.4
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5See Exhibit A–2 and A–3 in the Appendix.

EXHIBIT 1

U.S. NATURAL GAS PRODUCTION

This decline in U.S. production is occurring throughout the United States, as five

of the seven major supply areas in the U.S. are in decline.5 The areas in decline

include the San Juan basin, the Permian basin, the Mid-Continent area, the onshore Gulf Coast area and the shelf of the Gulf of Mexico. Of these areas the most

significant decline has occurred in the shallow water region, or shelf, of the Gulf

of Mexico, which historically has been the most prolific producing area in the U.S.,

as it at one time accounted for 26 percent of U.S. production. The steady decline

in production from the shelf of the Gulf of Mexico is summarized in Exhibit 2. Furthermore, the recent development of the deepwater region of the Gulf of Mexico,

with its extensive use of modern exploration and production technology, has not

been able to offset the decline in production from the shelf, and as a result production for the entire Gulf of Mexico is declining.
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6Bankrupt fertilizer firms include Farmland (Midwest and Louisiana), Vicksburg Chemical

(MS), Agrifos (TX), Mulberry Phosphates (FL) and Agway (Syracuse, NY). Mississippi Chemical

(Yazoo City, MS) has had a 1 year credit extension and Terra Industries (Sioux City, IA) has

acknowledged limited ability to effectively hedge future gas prices. Mississippi Chemicals has

permanently shut down its Donaldsonville, LA plant and Air Products has ceased production

at its Pace, FL plant. (Source: Company announcements and trade press.) 7Currently idled aluminum plants include Alcan’s West Virginia plant, the Mead, Tacoma and

Trentwood, WA plants for bankrupt Kaiser, Alcoa’s Troutdale, OR and Rockdale, TX plants, the

bankrupt Longview, WA plant and the Goldendale plant. These eight plants may never reopen.

At present in the Pacific Northwest, which is the heart of the U.S. aluminum industry, only

two plants are operating (i.e., Glencore’s Columbia Falls in Kalispell, MT at 20 percent capacity

and Alcoa’s Ferndale plant in Bellingham, WA). (Source: Company announcements and trade

press.)

EXHIBIT 2

PRODUCTION FROM SHALLOW WATERS (SHELF) IMPACT ON DEMAND

The supply and demand imbalance resulting from this decline in U.S. production

has caused natural gas prices to rise to record levels, which has caused, in turn,

a decline in natural gas demand. This decline in demand has been most pronounced

in the industrial sector where firms have had to idle capacity or have gone out of

business because they can no longer compete at the current elevated prices for natural gas. This decline in industrial activity, which has impacted adversely the U.S.

economy, has been most pronounced in the basic chemicals and primary metals sectors, with the latter being impacted adversely by higher gas-fired electricity prices.67

With respect to the chemical industry, which accounts for over 50 percent of industrial sector demand, there has been a fundamental shift in the competitiveness

of the U.S. chemical industry versus overseas facilities because of the higher U.S.

gas prices. This has occurred because the U.S. chemical sector is heavily based upon

natural gas and natural gas liquids, while the European and Asian chemical producers are based heavily on oil (i.e. naphtha). Higher U.S. gas prices have caused

the ratio between gas and oil prices to shift from 0.6 in the 1990’s to 1.0 at present,

which has provided European and Asian chemical producers with a competitive advantage. One example of the impact of this shift in competitive position between

these regions is the recent closure of a Louisiana ethylene and plastics plant in

order to move operations to Germany, where gas prices are lower and more stable.
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8‘‘As Gas Prices Increase To New Norm, Chemical Sector Could Be Hit Hard,’’ Inside FERC’s Gas Market Report, February 28, 2003, pp 9–10; and ‘‘Chemical Analysts Grow Bearish As U.S.

Sector’s ‘Golden Era’ Closes,’’ Natural Gas Week, February 24, 2003, p. 5. 9‘‘Record U.S. natgas prices punish manufacturers’’ Reuters, February 25, 2003. 10‘‘Analysts See Bullish Gas Market Rebalanced by Pricing Factors,’’ Natural Gas Week, December 30, 2002, p. 3; and ‘‘Analysts Sound The Alarm on U.S., Canadian Gas production,’’ Natural Gas Week, April 28, 2003, pp 5–6; and ‘‘CERA Warns of Fragile Balance In Supply/Demand

Outlook for 2003,’’ Inside FERC’s Gas Market Report, February 14, 2003, p. 1. 11See Exhibit A–4 in the Appendix. 12The annual rate of decline in production from new U.S. wells accelerated to 27 percent in

2002 from 17 percent in 1990. See ‘‘EIA’s Rosy Gas Supply Projections in Doubt,’’ Natural Gas

Week, March 10, 2003, p. 9. 13‘‘Witnesses Urge Greater Access As Check for Rising Gas Prices,’’ Natural Gas Week, March

3, 2003, p. 7; and ‘‘Producers Concerns Unheeded In New Rockies Reserves Study,’’ Natural Gas

Week, January 20, 2003, p. 3–4 and ‘‘AGA Calls For Access to Closed Areas: Court Upholds Forest Land Closings,’’ Inside FERC’s Gas Market Report, December 20, 2002, p. 16.

With respect to the net impact of higher prices on industrial sector demand, the

best estimate to date is that industrial sector demand has declined approximately

5.5 BCFD, or 26 percent, over the last 2 years, as illustrated in Exhibit 3.89

Impact Of Cost

In addition to causing a reduction in demand within some sectors, the high gas

prices resulting from declining production levels have increased substantially the

costs of natural gas supply for the other sectors. For example, in the residential sector the supply component for residential gas costs has increased approximately $17

billion from the 5 year average during the late 1990’s.

EXHIBIT 3

INDUSTRIAL DEMAND

Intermediate Term Outlook For U.S. Gas Supply

This challenge for the U.S. gas supply sector likely will continue over the intermediate term, as U.S. production levels are projected by EVA and others to continue

to decline,10 as gas-directed drilling activity has been slow to respond to increases

in natural gas prices and decline rates for existing production are high.1112 One of

the major reasons for the limited increase in drilling activity during this period of

elevated gas prices is the limitations the industry faces in gaining access to prospective acreage, as a result of environmental restrictions and moratoria.13 While there

is tension between the exploration and production industry and other industry observers over the exact amount of the potential reserves that are not accessible because of the various environmental restrictions, the figure has been placed at ap-
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14‘‘Drilling Boom Deemed Unlikely Despite Natural Gas Price Surge,’’ Natural Gas Week,

March 3, 2003, p. 1. 15‘‘Special Report OGJ 200/100’’ Oil and Gas Journal, September 9, 2002, pp 70–90. 16This challenge will continue to exist even during potential periods of downward gas price

volatility, which for example might occur do to unforeseen weather events, such as very warm

winter weather. 17EPRI, Gas Supply Outlook-Gauging Wellhead Deliverability Now and in the Future

(1004588), February 2002. 18For other non-subsalt exploration plays it typically takes less than a month to process the

associated seismic data and that is accomplished on a basic computer.

proximately 200 TCF by the National Petroleum Council study and even higher by

a study conducted by Texaco (i.e., 450 TCF). Furthermore, these environmental limitations on access to prospective acreage are increasing rather than decreasing, even

though U.S. production is declining. Recent examples include (a) restrictions on

drilling under the Great Lakes even though Canada has done such for years, (b) a

nearly 75 percent reduction in the offshore acreage that was planned to be offered

in the Gulf of Mexico Sale 181 and (c) Pennsylvania’s access restriction of 56 percent

of the acreage for the Trenton-Black trend within that State.

Another major reason for the limited increase in gas-directed drilling activity is

the lack of scale for prospective exploration and development activity. Even though

undiscovered reserves exist, many of these reserves are contained in a series of relatively small plays. Majors and large independents need large reserve plays in order

to effectively use their staffs, impact their current production levels and effectively

allocate capital. It is this diminishing size and concentration of reserve targets that

led the majors away from further development of the shallow waters in the Gulf of

Mexico.14

Relying on smaller independents to develop these smaller reserve plays has

reached a point of diminishing returns because of the downsizing of the U.S. exploration and production (E&P) industry. For example, the tabulation of E&P firms in

the U.S. industry by the Oil and Gas Journal has declined from 400 in 1990 to 176

at present, with the smallest firm having assets of only $197,000.15

As a result of these and other factors, the industry will be challenged to maintain,

let alone increase, production levels from traditional supply areas.16 Instead, the industry will have to rely on a series of emerging sources of gas supply to fill any

gap between supply and demand. However, it will be an extended period of time

before these emerging sources of supply are able to make a significant contribution

to the U.S. supply sector. As a result, any acceleration in U.S. gas demand requirements only will exacerbate the challenge for the U.S. supply sector and lengthen the

period of high gas prices and further demand destruction in other sectors.

Long-Term Outlook For U.S. Gas Supply Sector

Exhibit 4 summarizes the long-term outlook for natural gas demand for several

different forecasters. While there are some differences in assumptions for each of

these forecasts, they tend to cluster around 30 TCF for 2015.

Exhibit 4

Various Gas Demand Projects For 20151

Forecast (TCF/Year)

PIRA EEA Gil EIA EVA

Total Gas ................................................................................................................. 28.8 29.3 29.4 29.5 30.5

1Source: EIA, Annual Energy Outlook 2002 and EVA.

Reaching this 30 TCF level will be a major challenge for the U.S. supply sector,

as empirical evidence to date illustrates that this level of supply cannot be attained

by further development of traditional sources of supply. Instead, the industry will

have to rely on a series of emerging sources of supply, which include the exploration

and/or development of: (1) deeper reserves (i.e., >15,000 ft), (2) the highly complex

subsalt play in the Gulf of Mexico, (3) reserves offshore Eastern Canada, (4) new

coalbed methane reserves in frontier basins, (5) new LNG terminals and (6) reserves

in the Arctic areas of both Canada and the U.S.17 The challenge and extended timeframe for the industry to develop these highly complex and very capital intensive

sources of supply cannot be emphasized enough. For example, it can take up to 9

months on a super computer to process the seismic data associated with the subsalt

play, which is still in its infancy.18 Also, drilling a single well for the deep Madden

play in Wyoming, which used to take over a year, still takes over 200 days even
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19‘‘East Coast Canada Loses Luster As Petro-Canada Abandons Well,’’ Natural Gas Week,

May 5, 2003, p. 16. 20‘‘Canadian Energy Exports to U.S. May Slow As Capacity Tightens,’’ Natural Gas Week,

April 14, 2003, p. 1. 21‘‘Report Says Southern Pipe Route The More Feasible Alternative’’ Natural Gas Week, February 3, 2003, p. 4 and ‘‘The Aboriginal Pipeline Group’’ Oil & Gas Journal, March 3, 2003, p.

8. 22Dependence upon natural gas generation is directly attributable to other power sources having only a very limited ability to offset coal generation losses. Hydro power expansion is limited

by the lack of appropriate sites and growing permitting opposition. Nuclear power is hindered

by its very high production costs and continuing waste disposal problems. Nor are other renewables able to displace large coal losses because of resource limitations and high costs. For example, areas offering Class 5–7 wind resources are very limited and distant from load centers.

Lower class wind resources are far too expensive to develop and transmit. In addition, because

Continued

with the application of significant improvements in drilling technology. Last, a

string of expensive dry holes (i.e., approximately $440MM to date) over the last 2

years in exploration for potential reserves offshore Nova Scotia has forced the industry to reevaluate development of the area and delay its time table.19

The lengthy timeframe for some of these emerging sources of supply is best illustrated by the time lines for new LNG terminals and the development of a pipeline(s)

for Arctic gas supplies. While the Nation is reopening and/or expanding each of the

existing four LNG terminals, additional LNG supplies beyond the capabilities of the

four terminals will be required to meet projected demand levels. At present, despite

a number of industry announcements concerning possible new LNG terminals, the

FERC has granted only one certificate for a new LNG terminal and only one other

project has applied for a certificate. In addition, there has been the announced cancellation of at least two proposed new LNG terminals, as the combination of stiff

resistance, primarily on environmental grounds, and the expensive nature of these

facilities have forced several potential industry participants to reconsider their involvement in such projects. Also, the U.S. industry has learned that even with new

LNG terminals, it will have to compete with the rest of the world for available supplies. This tension with the rest of the world was made very clear this last winter

when, despite record U.S. gas prices, LNG imports were limited to just 15 percent

above the levels for the winter of 2000/2001, because of high LNG demand from

Asian countries.

With respect to the possibility of Arctic gas supplies, the construction of a gas

pipeline from the Arctic region to the North American market place will be a massive project that will task severely the existing infrastructure of the region. At

present the earliest possible date for the first of the Arctic pipelines, which will be

from Canada’s MacKenzie Delta, is the end of 2008 or early 2009. Furthermore, it

appears that approximately 75 percent of the initial capacity of this pipeline will

be required to meet Canadian gas demand associated with its growing development

of heavy oil sands projects.20 Beyond this there is the possibility of the $19.4 Billion

Arctic gas pipeline from Prudhoe Bay, which is projected to be longer than the Great

Wall of China. While specifics on the timetable for this massive project are limited,

the earliest potential date for a second Arctic gas pipeline appears to be 2013. The

possibility of building both Arctic pipelines at the same time is not even being considered by the industry, because of inadequate infrastructure within the region. For

example, for the earlier MacKenzie Valley pipeline movements of pipe sections will

require one truck haul every 5 minutes along the Yukon highway system and a doubling of the capacity of the White Pass Railway. Furthermore, the tractor and trailer

units for these hauls will have to be twice the typical length of such units in order

to move the 82-foot sections of pipe.21

To further place the challenge to the U.S. supply in perspective, the initial combined capacity of both of these huge Arctic gas pipeline projects, net of the incremental demand for Canada, will be only 1.3 BCFD, or 475 BCF per year, greater

than the decline in current U.S. production over the last six quarters. Further increases in the capacity of these projects likely will not occur until several years after

the completion of the Prudhoe Bay pipeline project (i.e., approximately 2015 or

thereafter).

Impact Of Proposed Clean Air Requirements

One of the significant impacts of the proposed increases in clean air requirements

is that it will cause coal-fired generation to be reduced. A significant portion of this

decline in coal-fired generation will have to be made up by additional gas-fired generation, as other forms of generation are limited in their ability to increase significantly.22 This higher level of gas-fired generation will increase natural gas demand
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wind power units only operate at best 25 to 33 percent of the time, additional gas-fired generation is required to supplement wind power units in order to replace the lost base load coal-fired

generation.

requirements within the electric sector, which will further exacerbate the challenge

to the U.S. gas supply sector. This increasing dependence of the electric sector on

gas-fired generation is most evident in the recent experience of the industry. Since

1996 gas demand within the electric sector has increased approximately 1.7 TCF

(i.e., 4.7 BCFD), or 45 percent. This is one of the major reasons for the current challenge within the U.S. gas supply sector.

Of particular concern is both the acceleration of the target dates for the proposed

changes in clean air requirements and the increases in the levels of emission reductions contained in some proposed initiatives. Accelerating the time line for these

changes in clean air requirements will represent a significant challenge for the U.S.

gas supply sector, as it is improbable that the time line for the large, complex and

expensive emerging sources of gas supply that will be required to meet future demand increases can be accelerated. In fact, the more probable scenario is that there

will be delays in the time lines for some of these emerging sources of supply, which

has been the case for the development of the region offshore Eastern Canada.

Similarly, increasing the levels of emission reductions will cause an even greater

reduction in coal-fired generation and increases in both gas-fired generation and gas

demand within the electric sector. This will only heighten the challenge for the gas

supply sector. Of particular concern are the carbon dioxide limitations since the

power industry has no viable control options and must rely totally upon switching

generation to lower carbon containing fuels, of which the most significant is natural

gas. Carbon dioxide limits, because they place an effective cap on fossil fuel generation, significantly increase the challenge for the U.S. gas supply sector.

If the natural gas supply sector is not capable of meeting the challenge of increased gas demand within the electric sector, as a result either of an accelerated

time table for new clean air requirements or the increased emission reduction levels

proposed in some initiatives, then the alternative is for an extended period of high

gas prices and demand destruction within the other sectors for natural gas demand.

Both these latter items will have an adverse impact on the U.S. economy. From one

perspective this alternative is a mirror image of what is currently occurring within

the U.S. gas industry.

Current Clean Air Act Initiatives

The three Senate proposals have significantly different impacts on the natural gas

industry. S 366 (Clean Power Act of 2003) poses by far the largest natural gas supply challenge because (1) its much tighter carbon dioxide and SO2 limitations create

the greatest demand shifts toward natural gas; (2) its much shorter compliance period gives the gas supply industry the least time to expand its supply base; (3) its

much tighter mercury limit is heavily dependent upon mercury control technology

performance that has not been commercially demonstrated yet and may force the

shutdown of a large portion of the existing coal power plant fleet; and (4) its new

source standards forces the greatest amount of older coal based capacity to be retired.

In comparison to S 366, S 834 (Clean Air Planning Act of 2003) will reduce the

challenge to the natural gas supply sector by phasing in slightly higher limitations

over a longer period (i.e., four additional years). Its longer scheduled compliance period allows the natural gas industry valuable time to expand its supply base, while

reducing natural gas demand pressure by permitting greater coal generation with

its alternative emission limitations. Also, mercury technology risk is greatly reduced, as limitations are more in line with current DOE research targets.

Finally, S 485 (Clear Skies Act of 2003) also presents a challenge for the U.S. gas

supply sector. However, by eliminating mandatory carbon dioxide limitations and

providing for longer periods for implementing the required emission reductions, it

presents a challenge that may, at least, be manageable.

Conclusions

Currently the U.S. gas supply sector is challenged to meet existing demand levels.

This challenge, which likely will extend over the intermediate term because of limitations associated with traditional supply areas, has resulted in natural gas prices

reaching record levels and significant demand destruction within the non-electric

sectors for natural gas demand.

The acceleration of the proposed clean air requirement time lines and higher levels of emission reductions will only serve to heighten and extend this challenge to

the U.S. gas supply sector, as these changes in clean air requirements will increase
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gas demand in the electric sector. Furthermore, since the gas supply sector is heavily dependent on a series of complex and capital intensive emerging sources of supply to meet projected increases in natural gas demand, it is doubtful that the

timeline for additional gas supplies can be accelerated materially. In particular, the

proposed carbon dioxide limits may place the gas industry in a position where it is

severely challenged to meet the increases in electric sector gas demand requirements. Empirical evidence to date is that when the U.S. gas supply sector is challenged to this degree that the net result is that natural gas prices will be pushed

to record levels, with all the attendant cost increases for the other sectors, and demand destruction within non-electric sector for natural gas demand.

APPENDIX

EXHIBIT A–1

HENRY HUB NATURAL GAS PRICE WEEKLY DATA
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EXHIBIT A–2

PRODUCTION FROM SELECTED REGIONS I

EXHIBIT A–3

PRODUCTION FROM SELECTED REGIONS II
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EXHIBIT A–4

RIG COUNT FOR GAS WELLS

RIG COUNT FOR THE GULF OF MEXICO

STATEMENT OF THE AMERICAN CHEMISTRY COUNCIL

The American Chemistry Council welcomes this opportunity to comment on the

Clear Skies Act as it relates to the all-important issue of natural gas supply and

demand. Our country’s standard of living and the economic health of our citizens

and our industries that provide the wealth of our jobs are tied intimately with the

energy supply including a competitively priced natural gas component.
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It is impossible to discuss the benefits of Clear Skies legislation without first asking Congress how it plans to address the larger issue of restoring balance to the

natural gas markets.

Over the past decade, environmental legislation and policies, like the Clean Air

Act, have had the effect of triggering a dramatic run-up in demand for natural gas.

Other environmental policies have put the nation’s most promising natural gas reserves off limits. As a result, all consumers are hurt by the high prices that result

from the increased demand and shrinking natural gas supply.

American manufacturers are being priced out of the marketplace. Plants are closing. Jobs are moving overseas. Over 35,000 well paying jobs in the chemical industry are at risk due to the latest run-up of natural gas prices and sustained natural

gas prices of over $6.00/MMBtu will threaten over 200,000 jobs economy wide. Natural gas pricing forecasts call for more of the same.

At the end of the day, the real environmental benefits that could be achieved by

Clear Skies legislation will mean little to American manufacturers, if current energy

policies continue, and more manufacturers and jobs are driven off shore because

America now has the world’s highest energy prices.

The Natural Gas Crisis

Last month an energy-consulting firm, Energy and Environmental Analysis,

issued a report saying that, ‘‘US natural gas prices will average $6.00/MMBtu at

Henry Hub through the current storage injection season.’’

Prices next winter will increase further, averaging $6.40 from November through

March and peaking as high as $6.60 between December and February, the firm

said. ‘‘Declining gas productive capacity due to the anemic drilling activity in 2002

has resulted in extremely tight market conditions,’’ EEA said in its monthly report.

Those US prices are more than double the price of natural gas in Europe, more

than triple the price in parts of Asia, and nearly ten times the price of natural gas

in the Middle East, North Africa, Russia, and Venezuela.

Natural gas is a regional commodity, but industries that depend on natural gas

compete in a global marketplace. The chemical industry is an example. Chemical

makers use natural gas to power their plants and as a raw material that is converted into plastics, fibers and other materials that are bought and sold around the

world. In recent years, when the price of natural gas was at its historic average,

the chemical industry posted a $20 billion trade surplus. Today, the US is net importer of chemicals. Today, the US is the world’s high cost producer of chemicals

because it pays the highest prices for natural gas. With its competitive advantage

gone, US chemical production capacity is being shut down and thousands of goodpaying jobs are moving overseas.

What’s happening to natural gas is simple—the oft proven laws of supply and demand at work. Demand for natural gas is booming and supply is declining. The gap

is growing rapidly and, as a result, the price of natural gas has tripled since 1999.

Compounding the problem—the inventory of natural gas is now at historic lows.

These inventories are unlikely to be replenished over the summer to a level sufficient to drive down prices in the face of next winter’s heating demand.

What America faces is not a seasonal disturbance, but a fundamental structural

imbalance in supply and demand for natural gas. America has developed a tremendous demand for natural gas. It is clean. It is efficient. It is critical to making important products Americans use every day. And until recently, it was abundant and

competitively priced.

Consumers demand it for heating their homes. Half of new homes are now heated

by gas. Environmentalists demand it because it is clean burning. Industries, including the chemical industry, demand it because it is an excellent raw material for

making thousands of products that we each use, every day.

More recently the electric utility sector of the US economy has turned to natural

gas. Because of the low capital costs, shorter construction lead times, and environmental policies, natural gas used to generate electricity has increased by 35 percent

in the past 5 years. Natural gas consumption for electricity generation is projected

to increase from 5.3 trillion cubic feet in 2001 to 10.6 trillion cubic feet in 2025.

America’s economy is becoming one that is increasingly reliant on natural gas.

Natural gas prices and subsequent impacts leave us with questions about how

much Clear Skies will help our situation. While Clear Skies could slow the drive

to natural gas for power generation, and could even promote clean coal technologies

for future generating capacity, additional action is needed. Environmental policies

like Clear Skies will have little bearing on businesses like ours if our operations

continue to be driven off-shore by runaway energy prices.
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Congress Needs to Act

Unfortunately, the nation’s current natural gas supply is running low. Production

capacity is lower today than it was 30 years ago when Americans were consuming

far less natural gas.

The paradox is that America has adequate domestic natural gas reserves to meet

current and future needs. Unfortunately, Congress won’t allow access to those natural gas reserves. The most promising—and desperately needed—reserves are cur- rently off-limits to development. Many of these reserves are in partially restricted

areas like the northern Rocky Mountains, Alaska, or in fully restricted areas such

as the eastern Gulf of Mexico and off the East and West Coasts.

In the final analysis, the natural gas crisis is a domestic political and public policy

problem. Environmental policies are driving new demand for gas to generate electricity and heat homes. Other environmentally driven policies keep critically needed

supplies off limits. As a Nation, we can’t have it both ways. We can’t demand more

natural gas and continue to cutoff the natural gas supply.

Natural Gas Implications for the Clear Skies Act

This economic and energy context shapes how we look at environmental policies

like Clear Skies. National air quality policies have sharply accelerated the switch

from coal to natural gas by electricity generators. The Clear Skies proposal, in its

current form, has the potential to slow the stampede from coal to gas and to partially help secure a period of more stable, diverse and sustainable supply of competitively priced energy.

Clear Skies does not go far enough, however, to promote the development and use

of clean coal technologies for future generating capacity. Clear Skies largely supports the continued use of existing generating capacity with add-on technology controls, but does little to encourage the adoption of control technologies that will actually grow the use of coal in America and mitigate the demands on natural gas.

When compared to other multipollutant legislation that has been introduced,

Clear Skies would best promote continued fuel diversity. Clear Skies attempts to

balance the demand for continued Clean Air progress with maintaining energy diversity. The debate surrounding the introduction of Clear Skies highlights this delicate and tenuous balancing act—even minor changes to the bill could drive utilities

to switch to natural gas.

Clear Skies does not put mandatory controls on CO2 emissions. If Congress does

enact mandatory CO2 controls, the days of coal-fired power generation are numbered. Coal, the one domestically abundant energy source that keeps energy prices

in reasonable balance will no longer be used. Natural gas prices will skyrocket with

even greater demand and subsequent shortages of supply. The three-pollutant approach, described in Clear Skies with implementation carried out over a reasonable

timeframe will enable utilities to make use of the latest clean coal technology and

move forward with development of additional coal technologies.

The right timelines also could enable power generators to maintain their diverse

fuel base, and assure market entry of advanced fossil technologies, including natural

gas and coal technologies. The same holds true for timelines and stringency chosen

to control mercury emissions. Too tight a timeline or too stringent mercury reduction will force utilities to fuel-switch.

Clear Skies should provide an exemption for all energy efficient and low-emitting

combined heat and power (CHP) generators. Many of our member companies rely

heavily on CHP systems to provide the steam and electricity for internal manufacturing processes. These systems are universally recognized as being ultra-efficient

when compared to traditional fossil fueled utility power generators because they

capture the heat from the electricity generation process for use in the host chemical

plant. Today’s systems can reach or exceed efficiencies as high as 80 percent, nearly

twice that of the best combined-cycle gas fired utility generator. Obviously getting

twice the energy outputs from the same energy inputs is beneficial. Congress should

be encouraging greater CHP usage by commercial, industrial and residential interests.

The American Chemistry Council has not yet finalized our position on Clear Skies

legislation as environmental policy. But Clear Skies also has implications on national energy policy, and in that regard, our position is clear: Clear Skies can slow

the stampede in power generation from coal to natural gas and Clear Skies can help

America maintain a more diverse fuel base. But Clear Skies cannot, by itself, restore balance to natural gas markets and it will not stop new generating capacity

from being almost exclusively natural gas fired and increasing the price of natural

gas. Last, Clear Skies alone cannot make American manufacturing more competitive

and help our economy regain and maintain its strength in global markets by lowering energy prices.
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Congress must open up the domestic natural gas supply and restore balance to

our nation’s fuel diversity. A strong long-term economy that includes an energy policy that improves the economic well being of all citizens must be coupled with the

actions that lead to improved health and environment.

STATEMENT OF JOEL BLUESTEIN, PRESIDENT, ENERGY AND ENVIRONMENTAL

ANALYSIS, INC.

Summary of Testimony

Natural gas prices are likely to be higher in the future than in the last 15 years

and power generation is the fastest growing component of natural gas demand. New

multipollutant regulations are not a primary driver for the increase in gas prices,

however. In addition, higher gas prices are likely to reduce the potential for widespread switching from gas to goal as a result of increased regulation. Finally, a

gradually implemented multipollutant program that rewards the development and

implementation of new technology could promote a more balanced mix of power generation assets and help avoid over-reliance on gas.

Introduction

Thank you Mr. Chairman and members of the Subcommittee for the opportunity

to testify today. My name is Joel Bluestein and I am the President of Energy and

Environmental Analysis, Inc. EEA is located in Arlington, Virginia and has been

providing energy and environmental consulting services since 1974. Among our

major areas of expertise are:

• Analyzing and forecasting the supply, demand and price of natural gas

• Analyzing the impacts of regulatory policy on energy markets

• Analyzing new energy technologies in the context of environmental regulations.

We have done this work for natural gas producers, pipelines, local distribution

companies, power generators, technology developers, the U.S. Department of Energy, the U.S. Environmental Protection Agency and other public, private and institutional clients. I have been at EEA for 14 years and have over 20 years of experience in the energy and environmental field.

Today I’d like to briefly share with you our current outlook on supply and price

of natural gas in North America and some views on the relationship between that

outlook and multipollutant legislation.

Gas Price Forecast

EEA quarterly prepares a 20 year forecast of North American natural gas supply,

demand and price that we call our Natural Gas Compass. Figure 1 summarizes our

current view of the price for natural gas over that period. It shows that we expect

gas prices at the Henry Hub to average about $5.70/MMBtu (in constant 2002 dollars) for the next 2 years and decline to a level around $4.50/MMBtu for the remainder of the period except for brief periods later in the forecast.

This is a significant increase from gas prices over the last 15 years, which have

mostly stayed below $2.50/MMBtu. The roots of this change have been quite visible

in the last few years and reflect the end of the ‘‘gas bubble’’ of the 1990’s or more

precisely the fact that the balance of supply and demand for natural gas has been

growing tighter in recent years. A tighter balance between supply and demand results in higher prices and increased volatility. This does not mean that we are ‘‘running out’’ of natural gas, it does mean that gas producers need to look further afield

and spend more money to meet the demand for gas, and that is reflected in the

price.
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Our forecast includes new development of natural gas in several U.S. areas including Alaska, the deep Gulf of Mexico and the Rockies as well as imports from

the Mackenzie Delta in Western Canada and the Maritimes area off of Canada’s east coast. We also project increased imports of liquefied natural gas (LNG) through

the four existing LNG terminals and the addition of several new LNG terminals in

the later part of the forecast. Finally, we project that adequate pipeline capacity

must be constructed to bring the gas to places where it is needed.

This scenario reflects what we see as a realistic though challenging period of

growth for the natural gas industry. It requires very large investments of capital,

though not more than has been invested in the past. It also requires a variety of

positive policy decisions such as support for an Alaskan gas pipeline, development

of LNG terminals, construction of other new pipelines, etc. If any of these does not

occur, the price forecast is higher. One might say that there is more upside potential

than downside on gas prices.

This price forecast is driven by the consumption of natural gas growing from 22.3

trillion cubic feet (Tcf) in 2002 to 28.2 Tcf in 2015 and 30.4 Tcf in 2020. The largest

portion of this growth is in the power generation sector, growing from 4.3 Tcf in

2002 to 8.4 Tcf in 2015 and 9.5 Tcf in 2020. While there is some variation, these

consumption projections are not significantly different from those developed by other

forecasters, including the U.S. Energy Information Administration.

So I agree with the basics of much of what has been said on this topic:

• The gas supply/demand balance has gotten tighter and will remain tight.

• Gas prices will be higher than in recent history, perhaps significantly higher.

• Power generation will be the major growth sector for gas demand.

Relationship to Multipollutant Regulation

The question of how we can best and most appropriately ensure an adequate gas

supply is a complex and important one that is already being addressed in other forums. I think the question for today is: ‘‘What does this gas price outlook say about

environmental regulation of the power generation sector?′′

The EEA forecast does not include any significant switching from coal to gas in

the power generation sector. We do include the large amount of new gas-fired generation that has been built in recent years, about 150 GW from 1998 through 2002,

and continued construction of new gas capacity in the near future. We also project

new coal capacity coming on line, mostly after 2010.

It must be pointed out that, in certain areas, this new gas capacity actually reduces gas consumption by replacing older, less efficient gas generation. We have

seen old gas plants retired in Texas because they cannot compete with the new,

more efficient gas plants. It’s been estimated that replacing all of the old gas plants

in Texas with new, state-of-the-art gas combined cycle plants could reduce gas con-
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sumption for power generation by over 200 Bcf per year. The use of even more efficient combined heat and power (CHP) can make this reduction even greater. The

same is true in other parts of the Southwest, as well as parts of the West, South

and Northeast. In some States where markets have not opened up yet, this potential

is currently being lost because incumbent utilities can choose to dispatch their old

less efficient plants rather than the new plants.

There seems to be a lot of concern that, either on its own or due to various environmental restrictions, the demand for gas for power generation will inexorably

grow until it threatens our economy. I think this concern is overstated and unfounded, certainly as regards the power generation sector. Although we see continued growth in new gas-fired generation, we do not expect massive switching from

coal to gas under any 3-P regulatory scenario currently being discussed.

At the gas prices we are forecasting, switching to gas will not be the most economic choice except for the least economic, highest cost-of-control coal plants. The

capital cost of a new combined cycle plant is much less than a new coal plant, but

still much more than the cost of even a complicated control retrofit at most coal

plants. And then, the cost of fuel for even an efficient new combined cycle gas plant

at $4.50/MMBtu is over $30/MWh. This is almost three times the fuel cost for even

an inefficient coal plant burning coal at $1/MMBtu or less. There is a lot of money

to be made on the coal side of that competition. This is reflected in the U.S.

EPA’s extensive modeling of regulatory scenarios in which they are hard-pressed

to show any significant switching to gas even with gas prices two or three times

lower than the prices we are forecasting.

The higher gas prices go, the better the economics of coal look. We might have

greater concern over switching if there were no way to burn coal efficiently and

cleanly. But this is not the case. There are many coal plants today that efficiently

and economically limit their SO2 and NOx emissions and are highly competitive in

the market. New coal plants being built are even cleaner. New coal technologies

being developed, such as integrated gasification combined cycle plants, are cleaner

and more efficient yet.

New technology is vital to addressing control additional pollutants such as mercury or even CO2. The concern then becomes whether the appropriate technologies

will be available to provide adequate reductions. In the history of pollution control

programs, industry has always found ways to control pollution more effectively and

less expensively than originally thought possible. But that may be little comfort to

plant owners who face a new set of pollution control challenges.

Multipollutant programs like the Clear Skies Act and those proposed by Senator

Jeffords and Senators Carper, Chafee and Gregg, despite differences in detail which

I don’t propose to address, all will likely help the development of new, clean coal

generation by providing increased regulatory certainty and flexibility to find effective compliance solutions. Emission cap and trade programs provide a variety of

tools to address the problem, including: the timing and stringency of the cap, cost

mitigation measures and availability of off-sector trading.

One shortcoming of the Clear Skies Act in supporting new technology is that the

‘‘grandfathering’’ approach to allowance allocation disadvantages new plants in general and new coal plants in particular. The failure to allocate allowances to new coal

plants creates a disincentive for companies to develop these plants and drives the

power sector more toward gas. An allocation approach that includes new plants and

rewards efficiency is one way to help ensure that we can continue to rely on our

substantial coal resources.

I agree with those who endorse phased implementation of emission caps. However, I would add that starting the programs earlier and phasing them in more

gradually is critical to ensuring the availability of appropriate technology. Development of new technology requires a driver, which in this case is regulation. Then

technology development needs money and time for research, development and commercialization. Command and control programs and cap and trade programs with

large reduction steps don’t provide enough time for technology development. However, delaying the imposition of the regulation doesn’t provide a sufficient driver for

development. A series of gradual steps can jump-start technology development and

keep it moving.

This can be illustrated for the topic that probably creates the greatest concern for

over-reliance on natural gas—CO2 reduction. I think it’s clear that switching to gas

alone is not an adequate approach to CO2 mitigation. CO2 reduction will require a

mix of gas, renewable, and advanced coal technologies such as integrated gasification combined cycle with sequestration or coal-based hydrogen production, combined heat and power and other efficiency measures. Overly aggressive near-term

reduction requirements will not help us promote the development of new technologies. On the other hand, neither will continued delay of regulation. The point
231

was made at the last hearing on this topic that delay in addressing CO2 regulation

is one more reason that companies are reluctant to construct new coal capacity

today. Finally, the long-term reduction goals required to address climate change are

much greater than the levels currently being discussed even in 4-P legislation and

must be recognized early to provide the right direction.

Figure 2 shows a cap and trade approach that applies gradual CO2 reductions to

jump-start technology development and promote long-term solutions while avoiding

near-term economic distruption, including excessive switching to gas. In fact, in this

approach, the emission cap increases for the first several yars, then levels off and

begins a very gradual decline. It is designed to reach an 80 percent CO2 reduction

by 2060, which is calibrated to meeting a 450 part per million (pp) atmospheric CO2

level. An economic ′′circuit breaker′′ could be used during the declining portion of

the program to adjust the rate of decline and avoid economic disruptions.

This approach would send an immediate signal that new technology is required

and provide financial support for new technology through an immediate, active market in CO2 allowances, even though reductions are not immediately required. It

would provide immediate financial return for ‘‘no regrets’’, voluntary actions while

reducing the transaction cost and verification concerns. The schedule would also

avoid any immediate devaluation of existing assets, since major reductions don’t

start until 2015. At the same time it makes a commitment to meet the long-term

goals. More information on this approach is included as Attachment A. A similar,

less gradual approach could be used to promote new technology for mercury control.

Conclusion

In conclusion, we do see higher gas prices in the future, regardless of what regulations are imposed on the power generation sector. This increase and its implications

need to be addressed separately from their implications on multipollutant regulation. However, higher gas prices will increase the value of new, clean, efficient coal

technologies. We need to continue the use of coal as a major component of our power

generating mix. However, the future of coal-based generation should not be the continued use of 50 year old plants but rather the construction of new, more advanced

coal technologies. That, in fact, is probably the long-term path to wider use of coal

in our economy through the development of coal-based liquid fuels or hydrogen.

Multipollutant legislation can encourage the development of those technologies by

providing equitable allowance allocations for new plants and by setting gradually

declining emission caps from an early starting point.
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Thank you again for this opportunity to speak and I’ll be happy to respond to any

questions at the appropriate time.
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CLEAR SKIES ACT OF 2003

THURSDAY, JUNE 5, 2003

U.S. SENATE,

COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS,

SUBCOMMITTEE ON CLEAN AIR, CLIMATE CHANGE AND

NUCLEAR SAFETY,

Washington, DC.

The subcommittee met, pursuant to notice, at 9:35 a.m. in room

406, Senate Dirksen Building, Hon. George V. Voinovich [chairman

of the subcommittee] presiding.

REVIEW OF EMISSIONS CONTROL TECHNOLOGIES AND

UTILITY-SECTOR INVESTMENT ISSUES

Present: Senators Voinovich, Carper, Thomas, Cornyn, and

Inhofe [ex officio].

OPENING STATEMENT OF HON. GEORGE V. VOINOVICH,

U.S. SENATOR FROM THE STATE OF OHIO

Senator VOINOVICH. Good morning. The hearing will please come

to order.

This is the third hearing we’ve had on the Clear Skies Act, S.

485 and continues a discussion that we have had in this committee

for several years on the complex issues on how to clear our air by

reducing emissions without doing irreparable harm to our economy

and this country’s competitive position in the global marketplace.

Today’s hearing will focus on the issues surrounding current and

projected emissions control technologies and their impact on utility

sector investments. Several times throughout the course of these

hearings I have stated that we need to enact a comprehensive energy policy that harmonizes the needs of our economy and our environment. We cannot forget that one of the major reasons that we

have been successful economically and competitively in the world

marketplace is our ability to purchase reliable, affordable energy

supplies.

We must also keep in mind that we must do better in protecting

the quality of our air. Despite the fact that the Clean Air Act has

been extremely successful in reducing emissions of pollution, emissions of all criteria pollutant have been reduced by 29 percent since

the Act was passed, despite that fact that both electricity and energy use have both increased significantly over the same period of

time, the fact is, there is still significant room for improvement,

and that’s why this legislation has been introduced.

As we look at the issues surrounding emission control technologies and the financial stability of our utility sector, it is very
332

clear that the nexus between the environment and the economy is

rather than an academic or political exercise, a very real issue for

those who will be affected by the decisions we make on this committee and in the Senate.

The Clear Skies Act establishes legislative emission caps for SO2, NOx, and mercury that will require utilities to reduce their emissions of these pollutants by approximately 70 percent by 2018. In

order to meet these reduction requirements, utilities will need to

rely on different technologies to capture each of the pollutants. The

primary technology used by utilities to reduce SO2 is the flue gas

desulfurization, FGT unit, which we like to call, easier, scrubbers,

which can achieve about a 95 percent reduction in SO2 emissions.

Utilities that need to reduce NOx emissions generally install selective catalytic reduction, SR units, which can remove about 90

percent of the NOx in our power plants. In order to reduce emissions of mercury, utilities must rely on the combination of scrubbers, SCRs and other emission reduction technologies that are currently available until new mercury specific technologies are

brought on line. The level of mercury removal from this method depends on a combination of control technologies used and the rank

of the type of coal, bituminous, subbituminous or lignite, and composition or chlorine level of the coal.

Investor owned utilities, co-ops and municipal generators, in conjunction with the Administration and others in the public sector,

are currently working on the development of several new mercury

specific control technologies, including activated carbon injection,

clean coal technologies and integrated coal gasification combined

cycle technologies. However, demonstration projects using these

technologies are in their infancy and results have varied greatly.

The technologies that utilities, co-ops and municipal generators

have to install in order to meet the Clean Air requirements constitute major capital investment for these entities. I can recall

when I first became Governor of Ohio that we put in place a plan

that helped AEP to add scrubbers to their Gavin plant in order to

reduce SO2 emissions. Those scrubbers at that time cost over $675

million, a decade ago. I also understand that AEP has recently installed SCRs at Gavin in order to reduce NOx emissions at an additional cost of over $250 million.

Although the capital expenses that generators have had to install

to date are high, the projected expenses for installing new equipment to meet new EPA regulations will be even greater. I understand that over 100,000 megawatts of coal power plant capacity

will have to be retrofitted with SCRs by 2005 in order to meet the

requirements of the NOx SIP call, which they’re all going to make

or try to make.

Additional equipment will be required to meet EPA’s new standards for ozone and particulate matter which will go into effect in

2004–2005. Further, EPA is set to propose a new rule on the mercury MACT next year, that will require significant reductions in

mercury emissions by 2008, despite the fact that we don’t have any

mercury-specific reduction technologies available to install.

It is understandable why many people feel the environmental

policies that have been developed over the last decade have focused

more on eliminating coal-based generation than eliminating emis-
333

sions. This is despite the fact that over 50 percent of our electricity

generation is coal based and that we have over 250 years worth of

coal available domestically. These tremendous capital expenses for

installation of emissions reduction technologies have direct impact

on generators’ ability to provide reliable, affordable electricity to

residential, industrial and manufacturing customers. Utilities, coops, municipal generators that rely on coal for a large percentage

of their generation are facing the choice of either investing hundreds of millions of dollars on emission control technologies or fuel

switching to natural gas in order to meet air quality standards.

Further, the California electricity crisis, the recent energy trading scandals, the significant increases in natural gas prices, have

left utilities financially strapped and forced several major energy

companies to declare bankruptcy. The end result will be inevitably

higher energy prices and a drag in our economy. All sides in the

debate on multi-pollutant legislation agree that the current approach to regulation utilized by EPA is plagued with burdensome,

overlapping regulations that are subject to costly and time consuming litigation and have become unnecessarily costly.

In the first hearing on this topic, I stated that there are now

more than a dozen separate regulations on the books for sulfur dioxide and nitrogen oxide, with additional regulations around the

corner. We also discussed the fact that litigation over several of

these regulations has already delayed their implementation, forestalling the air quality benefits that they were designed to achieve.

The patchwork of existing and soon to be implemented regulations,

coupled with the delays bred by continuous litigation, has created

enormous uncertainty for utilities, co-ops and municipal generators, and has stymied efforts to improve the environment. This uncertainty has curtailed investments in technologies that would reduce emissions at existing plants, prevented numerous new facilities from coming on line and caused several utilities to consider

phasing out coal based generation altogether by fuel switching.

With the implementation of the Clean Air Act provisions, other

Federal environmental regulations and State clean air laws, they

combine to create uncertainty for electricity generators. They have

a tremendous impact on the ability of private sector utilities to

raise capital and make strategic long term investment decisions,

such as decisions on the purchase and installation of emission control technologies.

It’s absolutely imperative that we act to pass legislation that will

bring sanity to our environmental policy and prevent situations

like this from taking place. Clear Skies will eliminate many of the

problems that have arisen from EPA’s implementation of the Clean

Air Act. It will result in significant emission reductions and protect

our air quality and public health. It will provide generators with

a realistic and certain time table to meet emission standards. And

it will ensure that they can continue to provide affordable, reliable

electricity to residential, industrial and manufacturing customers

and move forward with the emissions reductions.

As I mentioned at the beginning of my remarks, this is the third

hearing on Clear Skies. I intend to mark up Clear Skies at the next

subcommittee level as soon as possible. And I want to restate my
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firm commitment to push hard to have the full committee report

a bill to the floor and to have the Senate pass it this Congress.

I want to thank our first witness this morning, Chairman

Kroszner, for coming to present the Administration’s take on these

vital issues to the subcommittee. I also look forward to the testimony of our other witnesses. I’d like to make it very, very clear

that we are going to stick, I’m going to be very fastidious about the

5 minute rule, because we have a lot of witnesses today, we want

to move along and I may, if we get to the third panel, even require

that it be less than 5 minutes. But we’ll see how things move along

this morning.

I would now like to call on the ranking member of this committee, Senator Carper.

OPENING STATEMENT OF HON. THOMAS R. CARPER,

U.S. SENATOR FROM THE STATE OF DELAWARE

Senator CARPER. Thanks, Mr. Chairman. Good morning to our

chairman of the full committee, Senator Inhofe, good morning. And

to our first witness and other who will follow, glad you are here.

It looks like it’s standing room only here in our hearing room.

That’s a great thing.

Mr. Chairman, I want to start off by thanking you and your staff

for working with us as we have gone through the gyrations of the

last week or so trying to figure out how many witnesses we were

going to have. I’m most grateful for the way that you’ve approached

this. I think we’ve got a great lineup and we’re looking forward to

learn a lot from them and from one another as we prepare to mark

up.

I especially want to welcome a couple of folks from Delaware who

are here. One of our witnesses is from W.L. Gore, and they’re going

to be sharing with us some of the technology, exciting technology

that they’ve developed in their testing and implementing around

the country with respect to controlling emissions of mercury. Chris

Koons, who works with W.L. Gore, was good enough to set up a

briefing earlier this year and maybe late last year. One of the people who showed us their new technology is Rick Bucher, who’s

going to be sharing that with us again today. That technology apparently removes as much as 90 percent of mercury emissions from

coal-fired plants. That got my attention and I think we’ll be interested in hearing what they have to say.

I’m told that Chris Koons going to play the role of Vanna White

in working with the visual aids. That will be an interesting role for

her. Thank you both for coming.

And it’s these kinds of technologies that I think move us and

help move our country and the Congress toward a cleaner environment, which we all want to support.

I’m also looking forward to the third panel, when we’ll have the

opportunity to hear maybe for the first time before a Senate committee an aspect of this debate that we’ve not previously considered, and that is the view of this issue, particularly the issue of

global warming, for investors, investors who invest in the utility industry.

One week ago today in the New York Times there was an article

in the business section that I’d like to quote from briefly, and then
335

Mr. Chairman, I’m going to ask consent that the full article be entered into the record. It was written by a woman whose name is

Catherine Seely, I hope I’ve got that right, if she’s listening or

watching. But she said this, she said, ‘‘Almost a quarter of the

shareholders of the Southern Company, one of the Nation’s largest

utilities, voted at an annual meeting today to require the company

to analyze and report on the potential financial risks associated

with its emissions of the pollutants that cause global warming.’’ The article goes on to say that last year similar resolutions concerning global warming garnered an average support of 18 percent,

while this year the average has grown to more than 25 percent.

More and more companies are beginning to face such questions

about their environmental record for investors while here in Congress we continue to discuss new legislative strategies to clean up

our air. On Wall Street, there is a growing call for companies to

recognize that emissions, including CO2 and those that lead to

global warming, should be addressed. An increasing number of

shareholders who vote with their dollars are beginning to invest

their capital based on how companies are addressing these issues.

And those shareholders and the companies are looking to us for a

signal on what will come.

While today’s hearing focuses on the Clear Skies Act, I want to

remind the committee that along with Senators Chafee and Gregg,

I’ve introduced a Clean Air Planning Act, which represents what

we think is a sensible solution to this problem. The bill would provide a market based and flexible approach to regulating CO2, NOx,

mercury and SO2 emissions, while continuing to provide affordable

and reliable electricity.

And I’d be remiss if I didn’t take just a moment, Mr. Chairman,

to say something about our good friend Christy Whitman, I always

address her as Governor Whitman when she comes before this

panel, who since her last hearing announced her plans to step

down as the Director of EPA. I will miss her personally, and I certainly wish her and her family the very best in all that lies ahead,

and I wish President Bush, another old Governor, some good luck

in nominating a replacement who is as capable and as cooperative

as Governor Whitman has been on many issues that we’ve dealt

with her together. She’s been a strong advocate for moving a multipollutant bill through this committee and through the Senate, and

I hope we can meet that challenge even after she’s gone.

I also hope that before she leaves, she’ll be able to respond to the

requests that Senators Chafee and Gregg and I made to her this

past April, when we asked for an analysis of the Clean Air Planning Act. And to date, we’ve not received it. Having that information we think is critical to our ability and this committee’s to evaluate alternative options and to develop effective legislation.

Mr. Chairman, let me conclude with this. Something I said at

our first hearing on this topic, I just want to repeat it, I said it I

think when Governor Whitman was before us, and here it is. We

should agree on at least a set of principles to guide us as we move

forward, and I again offer the following four principles.

No. 1, and four is better than three, a comprehensive four mission strategy that includes carbon reductions will provide regulatory certainty and offer the greatest environmental and economic
336

benefits. No. 2, markets work. Cap-and-trade-based emissions

standards provide the maximum incentive to achieve cleaner

power.

No. 3, stairs are better than cliffs. Prompt but gradual reductions

through multi-phase or declining caps are more desirable than single phase cuts. And last but not least, No. 4, eliminate redundancy

only when emission reductions are secured. Existing regulatory

programs such as new source review will need some modernization

in light of tight emission caps.

Well, that’s it. I look forward to the hearing. It’s going to be a

good one, and Mr. Chairman and all our witnesses, thank you all

for making it possible.

Senator VOINOVICH. Thanks very much, Senator Carper.

I’d like to call on the chairman of our committee, Jim Inhofe.

OPENING STATEMENT OF HON. JAMES M. INHOFE,

U.S. SENATOR FROM THE STATE OF OKLAHOMA

Senator INHOFE. Thank you, Mr. Chairman. I would also say favorable things about Governor Whitman, particularly since she recanted the very statement that you read at a later date. It takes

a very large person to do something like that.

I want to thank Dr. Kroszner for testifying on this current state

of the knowledge regarding emissions control technology. As you

know, this topic is of great significance to not just the four of us

at this table, but our committee. While I would have preferred that

this data had come to us earlier, I appreciate the Administration

is here today to ensure that this subcommittee has the most up to

date information as it considers the legislation.

I want to reiterate something the chairman said that I’m committed to the Clear Skies goal of reducing the SOx and NOx and

mercury emissions by 70 percent, which is the most aggressive

Presidential initiative in the United States history to reduce power

plant emissions. That’s worth repeating, because you don’t hear

this very often out in the media. This is the most aggressive Presidential initiative in the history of reducing power plant emissions.

But I am concerned that the phase one mercury interim cap is

too stringent and creates too much uncertainty. U.S. utilities contribute only 1 percent of the mercury emitted globally and new scientific findings have called into question the health effects associated with mercury emissions. While I intend to address the question of the current state of science regarding mercury at a future

full committee hearing, the focus of this hearing is on the control

equipment.

The decisions we make should be based on the best available

facts about how well the technologies work because regulation of

mercury is very, very costly. These costs are passed on to consumers as higher electric prices. And high prices are like a regressive tax on the poor in our Nation. That’s something that everybody has to have. And it’s one that hits the poor harder than it

does the wealthy.

I’m aware that the Administration has expended much effort to

incorporate into its models the most accurate assessments of what

the various technologies accomplish in terms of reducing SOx and

NOx and mercury. While reducing emissions levels can be ex-
337

tremely expensive, much is understood about the capture of SOx

and NOx in particulate matter. There is little uncertainty regarding the costs and emissions capture rates in SOx in the latest technologies such as scrubbers and bag housing.

Mercury stands in sharp contrast. While there are technologies

under development, and we’ll hear of some of them toady, as Senator Carper pointed out, there is no commercially proven and available technology to remove mercury from coal-fire emissions. My

main interest in this hearing is the estimated mercury phase one

co-benefits level. I feel compelled to note my longstanding frustration at the ever-evolving definition of co-benefits as this process has

progressed. So I want to make clear at this hearing how I define

it.

Mercury co-benefits are the levels of mercury expected to be

achieved as a result of meeting SOx and NOx phase one emissions

limitations. Dr. Kroszner, when it becomes question and answer

time, I’ll be asking for your definition to see if you’re in agreement

with that.

Clearly, the state of knowledge regarding mercury capture is rapidly evolving. It is still in its infancy. Much uncertainty remains

about the levels of capture that are achieved using proven technologies. Dr. Kroszner, you written statement reflects both these

statements. While Clear Skies has a hard cap of 26 tons, your models predict that the co-benefits will result in emission levels in the

range of 34 to 46 tons. This range also demonstrates the level of

uncertainty that exists even now about the levels of control and

what the various technologies will achieve.

My primary interest is to better understand the major assumptions your models make about various combinations of equipment.

Specifically, how have the models evolved from the 2002 to 2003 for

both EPA and EIA and also what equipment combinations drive

the differences between the co-benefit results projections.

I would like to compliment the Administration for the level of attention given to continually upgrade its estimates by working with

researchers and industry to improve the assumptions it uses in the

models. This new information is profound in its implications. I am

also encouraged the Administration is continuing in its efforts to

reconcile the differences between the EPA and the EIA models so

that Congress has the latest information as to the science, as the

science matures.

So Mr. Chairman and Mr. Ranking Member, I’m delighted to

have all three panels. And I do agree with your restriction on time.

Otherwise, it’s going to last the whole day.

Senator VOINOVICH. Thank you, Mr. Chairman.

Senator THOMAS.

OPENING STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR

FROM THE STATE OF WYOMING

Senator THOMAS. Thank you, Mr. Chairman. I agree with your

restriction on time also, so I’ll be very brief.

I agree with what the chairman has just said, but I certainly

welcome this hearing. We all agree we want clean air and we want

to move in that direction, of course. So we need to talk about it.
338

Since the enactment of the Clean Air Act, there have been significant reductions in NOx and SO2 and technologies exist for both

of these emissions. My concern is the lack of commercially demonstrated technology for mercury, particularly for western coal, and

general belief that mercury can be captured by adding scrubbers in

the routine way of doing it. This may work for eastern bituminous

coal, it does not work in the west.

So I agree very much with what the chairman has said, and I

look forward to it, and I appreciate your being here and hope we

can come up with a reasonable approach to continue to get clean

air. Thank you.

Senator VOINOVICH. Thank you, Senator Thomas.

Dr. Kroszner, you can proceed with your testimony. We’re very

happy that you’re here today.

STATEMENT OF RANDALL S. KROSZNER, MEMBER, COUNCIL

OF ECONOMIC ADVISERS

Dr. KROSZNER. Thank you very much, Mr. Chairman, ranking

member and members of the committee. I’m delighted to be able

to address you today on this extremely important issue of the Clear

Skies Act of 2003.

I will just give you a few highlights of the testimony to try to

keep in the 5 minute limit, and if I may just submit for the record

the formal written testimony that I have.

Senator VOINOVICH. Without objection. And Senator Carper,

without objection, we’ll include that which you referenced in are

opening statement earlier.

Senator CARPER. Thanks, Mr. Chairman.

Dr. KROSZNER. Thank you very much.

Strict enforcement of environmental rules can be dated back as

early as 1306, when a man was allegedly executed for burning coal

in London. In the United States, concern for air quality dates back

to the mid–19th century, when many municipalities began to issue

smoke ordinances. Responsibility for regulating air polluters rested

almost exclusively with States and localities until the 1970’s.

During these years, the Federal Government began to take a

more active role in environmental regulation with the passage of

the National Environmental Policy Act, Clean Air Act, and further

amendments later in the 1970’s. One common thread over time has

been that the U.S. air quality regulatory policy, and indeed, environmental regulation in general, has typically relied on command

and control regulation. This type of regulation mandates technologies or processes, does not take advantage of the power of markets, and is therefore by its very nature more expensive and less

efficient than is necessary.

In contrast, the President has crafted an initiative that will clean

our air using a proven market based method. Announced in February of 2002, the Clear Skies Act would be the most significant

and aggressive step America has ever taken to cut power plant

emissions of three harmful pollutants: sulfur dioxide, nitrous oxide

and mercury. The proposal, which builds upon the highly successful

1990 acid rain trading program, will cut emissions by approximately 70 percent over the next 16 years.
339

Clear Skies employs a dynamic approach to regulation that mandates specific emission-reduction emission caps, while providing

managers with flexibility to reduce emissions in the most efficient

and least costly manner possible. Through a market-based cap-andtrade program, Federal emission limits, or caps, are set and emissions permits are distributed to electricity generators. Managers

then have the advantage to determine the most efficient means of

action; whether it is sale or purchase of unused allowances, or

banking of credits for later use, Clear Skies provides regulatory

certainty and lays out the timeframes necessary for managers to

design a cost-effective strategy tailored to both current budget and

future plans.

With this structure, we uphold the principal feature of the President’s initiative, improving air quality more cost-effectively, so

Americans can continue to rely on clean and affordable electricity.

Clear Skies will achieve faster reductions than in the current Clean

Air Act by creating incentives for over-compliance and innovation— the means to reduce pollution by more than or earlier than required—and then those who do so, can generate and sell extra

credits.

The Clear Skies Act will improve health, visibility and a diverse

range of ecosystems by reducing the emissions of NOx, SOx and

mercury. In short, Clear Skies will result in dramatic progress toward solving our Nation’s persistent air quality problems.

As you are well aware, the crucial element of any regulatory policy is not only recognition of the benefits received from emissions

reductions, but also the resource costs associated with the policy.

Those costs, it must be emphasized, are ultimately borne by the

citizens, whether by stockholders or companies making the reductions, or by consumers of electricity, or both. Therefore, the Administration takes the economic modeling of Clear Skies quite seriously. In this respect, over the past year we have gained better understanding of the costs to abate NOx and SOx and the co-benefits

associated with reduction of mercury.

Understanding the removal costs associated with mercury is still

in a bit of an early stage, exactly as the Senators had been describing. The goal of Clear Skies is to reduce mercury emissions by 70

percent by 2018, with an interim cap of approximately a 50 percent

reduction by 2010. Mercury emissions will be reduced from current

levels of approximately 48 tons to 15 tons in 2018, with an interim

cap of 26 tons in 2010.

Clear Skies is designed to meet the goal of reducing the mercury

with a trading program that is more cost-effective than the program currently required by the Clean Air Act. The interrelationship of the cap levels for NOx, SOx and mercury is also a very important feature of the Clear Skies program to provide much more

flexibility, greater regulatory certainty and help in planning cycles

with the co-benefit of mercury reductions from the NOx and SOx

emissions controls.

So in looking at the total resource costs, and looking at the cost

of mercury removal, I want to talk more during the question period

about some of the new data that has been gathered throughout the

EPA’s information collection request and various pilot programs.

What we’ve been finding is that even though there are uncertain-
340

ties, I just want to highlight a couple of the empirical estimates of

interest. The first phase of the mercury-reduction cap is designed

to take advantage of the interrelationship of NOx, SOx and mercury emissions and do this through SCRs, scrubbers, NOx and SOx

controls determining co-benefits.

Our updated analysis suggests that the NOx and SOx limits in

Clear Skies would lead to estimates of annual mercury emissions

in 2010 of controls between 34 and 46 tons. What I can do is provide you with more details during the question period. But just to

sum up, the President’s Clear Skies legislation calls for a 76 percent reduction in power emissions during the next decade and a

half. The legislation will meet the required health based standards

laid out in the Clear Air Act. It will achieve those results sooner

than required at a much lower cost to consumers.

We look forward to working with the committee and Congress to

create a market based system that will provide early reductions

and affordable energy prices for consumers. Thank you, Mr. Chairman and I look forward to answering your questions.

Senator VOINOVICH. Thank you, Dr. Kroszner.

I’ll start the questioning off. You stated that Clear Skies will

achieve faster reductions than the current Clean Air Act. Can you

explain in greater detail how these provisions will work and how

quickly you believe emissions will be reduced?

Dr. KROSZNER. What we’ve done is we have a market-based system that gives incentives for early reduction. Unlike the uncertainty associated with the so-called MACT that will be coming

down the line, we have a very clear structure of how there will be

reductions that need to be occurring by 2010 and then by 2018. A

clear system of SOx that will give incentives for people to start innovating today and reducing today rather than spending a lot of

time litigating hoping that there can be changes in the MACT.

So I think the market based structure that we have gives the incentives for earlier reductions than we otherwise would get through

the current structures.

Senator VOINOVICH. In other words, because of the certainty of

the provisions of Clear Skies, it will lay out a pattern for the future

which will make it much easier for people to move forward because

they’ll know what’s expected of them rather than what we currently have on the books.

Dr. KROSZNER. Precisely. There’s a great deal of uncertainty associated with the mercury MACT, and there’s likely to be a lot of

litigation associated with that, which of course engenders a great

deal of uncertainty. Something like Clear Skies, which very clearly

sets out with legislative mandates a very clear time table, provides

much more certainty for firms to do this, as well as the cap-andtrade program that also gives the incentive for early innovations

and early reductions.

Senator VOINOVICH. Several of the witnesses we’re going to hear

today will argue that we need to put a cap on carbon dioxide emissions in order to improve the financial health of investors. However, the political reality we face in Congress is the regulation of

carbon will not become law for at least some time. That’s the lay

of the land here.

Would you like to comment on that?
341

Dr. KROSZNER. I think it’s extremely important to go ahead with

the Clear Skies legislation. The President is very much committed

to improving the health of American citizens through exactly this

kind of means, and improving visibility at our national parks and

throughout the country. And moving quickly and moving today on

this legislation is something that is very important. We should not

delay for other reasons, we should go on this. We get much earlier

health benefits by moving promptly on exactly this.

Senator VOINOVICH. There are many of us that realize that there

is very much concern about carbon.

Dr. KROSZNER. Yes.

Senator VOINOVICH. We’ve been working very conscientiously to

try and find some kind of a compromise that does not cap carbon

but would encourage technology and also the sequestration of carbon, which is a major problem that we have, the lack of it is a

major problem today. Has the Administration given any consideration to some compromise in this area?

Dr. KROSZNER. I think the Administration’s proposal so far with

the registry system, with the reduction system that we have in

place, the commitment to reduce intensity by 18 percent over time,

goes precisely in that direction of trying to deal with these issues

in a way that is as market based as possible. But of course, we look

forward to working with Congress as we develop and get more information about the costs and benefits of carbon and of carbon reduction. The issues are still really in a very, very early stage. So

I think we need to gather more data.

But obviously as we gather more data, and do more analysis, we

very much look forward to working with you to see what should be

done. But I believe that the proposals and the program that we

have today, with the 18 percent reduction in intensity over time,

is an excellent way to deal with the problems, at least on the

science that we have today.

Senator VOINOVICH. Thank you.

Senator CARPER.

Senator CARPER. Thanks, Mr. Chairman, and Dr. Kroszner,

thank you for being with us today and for your testimony.

I found your written testimony informative and are verbal testimony as well. However, I think it’s remarkable in that your testimony does not ever mention the issue of carbon dioxide or greenhouse gases or climate change or global warming. And I’m just

wondering, has the Council of Economic Advisers conducted an

analysis of the impact for the Clear Skies Act on, or really any

other multi-pollutant bill, and what impact those legislation, those

pieces of legislation will have on CO2 emissions from the power sector? Do you think this is an issue that we should consider?

Dr. KROSZNER. We have not undertaken any specific analysis of

that issue. We’ve been looking primarily at the three main pollutants of NOx, SOx and mercury. So we’ve been looking at the interaction among those primarily.

That is not to say that carbon isn’t a very important issue. As

I’d mentioned, the President has his plan for the 18 percent reduction in intensity of carbon emissions.
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Senator CARPER. Eighteen percent reduction, could you put that

in context? Is it 18 percent reduction below what it is right now

to what it would otherwise be at some date in the future?

Dr. KROSZNER. It’s 18 percent reduction in the intensity. So that

is the amount of emissions relative to GDP. So it’s a ratio.

Senator CARPER. Below the intensity this year? Five years from

now, 10 years from now? Is it an 18 percent reduction below current levels?

Dr. KROSZNER. It is an 18 percent reduction over time from current levels. That is my understanding of the program.

Senator CARPER. We’ll come back and verify that. In fact, let me

just ask you to verify that for the record.

Dr. KROSZNER. Certainly.

Senator CARPER. My understanding is it’s an 18 percent reduction, not below current levels, but below what they would otherwise

be at some date in the future. And maybe we can verify that.

Dr. KROSZNER. Certainly we’ll do that for you, Senator.

Senator CARPER. In your testimony, why don’t you address CO2?

I think it’s just peculiar, it’s an issue that is deemed to be important by a lot of people, and you never mention it.

Dr. KROSZNER. It certainly is an important issue. I don’t mean

to not mention it, or by not mentioning it say that it is not an important issue that we continue to look into and continue to spend

an enormous amount of resources studying, much more than any

other country. But I did not realize that this testimony was to be

focusing in that. I thought it was to be focusing on the Clear Skies

Act itself. That’s why I tried to limit myself to focus on the three

main pollutants in Clear Skies.

Senator CARPER. You stated very directly in your testimony that

Clear Skies is designed to meet the Clean Air goal of reducing mercury with a trading program that I believe you say is more costeffective than the program currently required bay the Clean Air

Act. Here’s my question. What is the cost that you’re using of the

current Act’s requirement for comparison purposes? And second,

what is the cost of the Clear Skies mercury program?

Dr. KROSZNER. The cost of the Clear Skies mercury program, let

me talk just a little bit generally about how we get to those costs.

What we’re doing is looking at the NOx and SOx reductions from

scrubbers, SCRs, et cetera, using various forms of technology. And

we do get some co-benefits with a reduction in the level of mercury

that gets into the sky, simply by taking out the NOx and the SOx.

And that then gives us estimates of how much would be taken out

just by the mere fact of controlling NOx and SOx based on 2010

and 2018 goals that we have in mind.

Then what we do is say, let’s try to see what will the costs be

of moving beyond the co-benefits if we need to move beyond the cobenefits. And currently both the EPA and EIA estimates are that

the costs to meet the interim goal, 2010, would be on the order of

$650 million to $700 million per year. Both modeling techniques

suggest that that’s approximately what the cost would be to

achieve our interim goal of 26 tons.

Senator CARPER. I got lost there in the weeds. I asked two questions. Just come back and answer them as directly as you can.

First, what is the cost that you’re using of the current Act’s re-
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quirements for comparison purposes? Because what you’re asserting in your testimony is that the trading program within the Clear

Skies initiative is more cost-effective than the current Act. What is

the cost you’re using for the basis of your comparison? I think you

may have just given me the cost of the Clear Skies mercury program. But let me just have both of those again, please.

Dr. KROSZNER. Sure. The mercury MACT program, the implementation of it, is highly uncertain. So we don’t have a specific

number for the MACT implementation, though we very, very

strongly believe, and I think it’s from past experience with other

attempts to use something like MACT, is that relative to a SOx

system, it’s going to be much more costly to do plant by plant types

of controls, use the MACT structure, which looks not at cost reduction, but looks at just particular technology use.

So by taking that approach rather than an approach that allows

for SOx, allows for companies to try to choose the most cost efficient means of reducing things, we know that that will be more expensive relative to an alternative. But I don’t have a specific number to give you that.

Senator CARPER. If I could just ask you to attempt to respond in

writing for the record on the two questions. If you could do that,

that would be much appreciated.

Dr. KROSZNER. Sure.

Senator CARPER. Thank you. I see my time’s expired. Thanks,

Mr. Chairman.

Senator VOINOVICH. Chairman?

Senator INHOFE. Thank you, Mr. Chairman. Let me read a couple

excerpts from a letter, since Senator Carper has made some requests of the Administration insofar as CO2 is concerned. This is

a letter which I will want to insert in the record at this time, but

will read just a couple sentences. This is from Christine Todd Whitman to both Senator Voinovich and myself.

‘‘I noted with particular interest the comments by several witnesses that we not hold hostage Clear Skies certain and aggressive

reductions of sulfur dioxide, nitrogen oxide and mercury emissions

to a debate on whether carbon dioxide should be regulated. The Administration shares these views. As the President stated in his

March 13th, 2001 letter to several of your colleagues, ‘I do not believe that the Government should impose on power plants mandatory emissions reductions for carbon dioxide, which is not a pollutant under the Clear Air Act.’ ’’

[The referenced letter follows:]
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Senator INHOFE. A lot of us have looked at this over a period of

time and tried to sort out the emotions from the science in terms

of greenhouse gases, CO2, global warming, and go back and looking

at it historically when we can recall during that 500 year period

ending in 1300 which was considered to be the medieval warming

period, going into the little ice age, then going back into a warming

period. The interesting thing being that that second warming period ended in 1940. So we went into a cooling phase. And what

happened in 1940? It was the expanded use of automobiles, CO2

emissions and all that. Totally contradicts the assumptions that

many people have, their belief certainty of this whole global warming concept.
346

So my request is, and I’m asking this on the record in this meeting, that if you do go back and do, as Senator Carper is asking you

to do, evaluate and look at CO2, that you take into consideration

the fairly new Harvard study of the 1,000 climate change period.

It involved 240 scholars and came up and pretty much opened this

up and gave new concepts to this whole discussion.

All I want, and I said this on the first day I became chairman

of this committee, is that we’re going to look at sound science.

We’re going to adhere to that. So I’m going to ask you to take that

into consideration in anything that you’re doing.

Now, I mentioned to you in my opening statement that my definition on the, by the term co-benefits in the context of the mercury

provisions, I’d like to have you give us your definition or the Administration’s definition.

Dr. KROSZNER. I think we’re very much consistent with the definition that you had given. The co-benefits are the benefits of mercury reduction that come along with trying to reduce the emissions

of NOx and SOx. So those are the ones that by trying to meet particular caps on NOx and SOx, you also get in terms of mercury reduction.

Senator INHOFE. That’s excellent. I agree with that.

What are the main drivers that are responsible for the co-benefits level of 34 tons for EPA and 46 for EIA?

Dr. KROSZNER. They have slightly different modeling approaches.

Let me highlight a few of the differences. We’ve been spending the

last 6 months really trying to dig deep into these models and I really want to very much commend EPA and EIA for working so closely together. We’ve really been running them ragged and I really

want to praise them for the great progress that they have made in

helping us.

Senator INHOFE. And as you do this, if you’d use as layman

terms as possible.

Dr. KROSZNER. I will try to, since I’m very much a layman also

in many of these areas. One has to do with the amount of mercury

removal, getting at this notion of how much mercury comes out

when you apply these different types of technologies. And there

seems to be a fair amount of agreement on the two sides for bituminous coal. There seems to be enough data and similarity of modeling techniques that we’ll get roughly 90 percent reduction from

the technologies that we have some information on.

For other types of coal, we don’t have quite as much data and

there’s a little bit more difference between the two sides on that.

So that’s one of the areas I wanted to highlight, is differences in

the two approaches. They make somewhat different assumptions

about natural gas prices. They make somewhat different assumptions about growth in the demand for electricity over the next 20

years. And also a little bit of differences in the way that they think

about the coal models. That is the choice of different types of coal

to be used. And I think there are some differences in the way they

think about how flexible contracts are and such.

So I’d highlight those as probably the three or four major areas

of differences between the two that have led to what I would think

of as sort of a sensitivity analysis that now gives us a range of 34

to 46.
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Senator INHOFE. And it’s my understanding that those entities

are meeting and talking about these differences and the outcomes,

the results that they’re coming up with?

Dr. KROSZNER. Yes. We’ve had a lot of convergence, and have a

much, much better understanding for the differences in the two

models; and EPA and EIA continue to work together. And again,

I have to praise them for the gauntlet we’ve kind of put them

through. I don’t think they’ve ever been asked to work so closely

together before. And I think both sides have benefited quite a bit.

This is really how science improves.

Senator INHOFE. Thank you very much, Dr. Kroszner.

Senator VOINOVICH. Senator Thomas?

Senator THOMAS. Thank you. I guess I need to pursue that a little further. What is the latest estimate that you have then of the

co-benefits for mercury?

Dr. KROSZNER. Roughly, from the EPA models, we have on the

order, I’m sorry, for co-benefits——

Senator THOMAS. Reduction in phase one.

Dr. KROSZNER. The estimates coming out of the models are that

by meeting the SOx and NOx caps by 2010, we would have between 46 and 34 tons of mercury still being put into the air. That’s

where we are in terms of the two modeling approaches.

Senator THOMAS. Your original one was what level?

Dr. KROSZNER. The original focus, or the original one using less

data that we have was one based on EPA in the upper 20’s.

Senator THOMAS. Twenty-six, I believe, wasn’t it?

Dr. KROSZNER. Yes, the cap is set there. I certainly want to emphasize, and this is not a model to minimize what EPA and EIA

have done, there’s always some uncertainty. These are really estimates that come out of the models. That’s true whether it’s trying

to estimate co-benefits in mercury or trying to estimate what economic growth will be in 2010, which is another exercise that I do

at the Council of Economic Advisers.

So that’s why I say, these numbers are estimates, so upper 20’s

is roughly where we were, and now we’re in the range of sort of

upper 30’s, I would say, upper 30’s to low 40’s, as the reasonable

range for where we are.

Senator THOMAS. So that in terms of what the expectation will

be, then, in the regulation, will be where?

Dr. KROSZNER. The President’s proposal has a 26 ton cap in

2010. What we wanted to do, the request from the committee was

to try to provide updated information, and we’ve gathered new information from last year, and we’re eager to share that with you.

So we wanted to present that to you. But the President’s proposal

is a cap of 26 tons in 2010.

Senator THOMAS. I guess I don’t understand that. If your information and data shows one thing, and your President’s program

shows another, how do you reconcile those two things?

Dr. KROSZNER. Obviously we have put forward a program based

on the best science that we had available at the time, as the proposal was put forward in February of 2002. And we wanted to provide you with updates on where the science is.

Senator THOMAS. So you’ll be supporting an update based on the

newest data?
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Dr. KROSZNER. We support the President’s proposal. We think it’s

a very good proposal, of course.

Senator THOMAS. I don’t understand that. Tell me what you’re

talking about.

Dr. KROSZNER. But we wanted to provide you with the new information. Obviously—— Senator THOMAS. You want us to change it, then, is that it?

Dr. KROSZNER. Occasionally Congress does change things that

the President puts forward. I know that that does happen.

Senator THOMAS. That does happen, yes.

Dr. KROSZNER. As shocking as it has been to me in my 2 years

in Washington. So of course, we understand that that could be a

possibility. But the President’s proposal certainly is with the 26 ton

cap in 2010, but obviously we wanted to provide you with the updated information.

Senator THOMAS. Thank you.

Senator VOINOVICH. Dr. Kroszner, when the mercury number

came to our attention, that the Administration suggested in the

Clear Skies proposal, many of us were skeptical of that number.

What you’re saying here today is that after working between EPA

and with the Department of Energy that that number of 26 does

not reflect the most recent information that you’ve been able to derive in terms of co-benefits, and that is that rather than the 26 ton

number that the number should be somewhere between 34 and 46?

Dr. KROSZNER. If you are choosing the number based on the estimates of the co-benefits. First, of course, as I had said in response

to Senator Thomas, there is uncertainty around these estimates. So

I don’t want to say that these are necessarily the true numbers

that we know with certainty. We don’t know them with certainty.

But also, there could be other factors.

Senator VOINOVICH. Is 34 better than 26, based on your information or not?

Dr. KROSZNER. We have more data, so we have more data than

we had from before, and I think we’ve improved our modeling techniques over time. But there may well be more considerations that

come in to making these calls. Because the science brings us so far,

but there’s certainly some uncertainty that is still left over. There

still may be room for policy judgments that come in.

So I think that it is important to take co-benefits in as one very

important factor. But it is, I think, one very important factor in

that it is a policy judgment as to whether one wishes to take more

factors into account or not. And that’s why we wanted to make sure

to provide you with the information on co-benefits. But of course,

other factors can come in to make the decision on where it’s appropriate to put a particular cap.

Senator VOINOVICH. Have you done any investigation into in the

event that you had the 26 number in this, whether that would

cause utilities to fuel switch to natural gas?

Dr. KROSZNER. We’ve looked into that. Fortunately, the flexibility

of the Clear Skies policy allows people not to have to fuel switch.

Projections from both models suggests that there would be relatively little fuel switching between coal and natural gas over time.

It’s precisely because of the flexibility that Clear Skies allows. So

this is not something that should be seen as putting to death one
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type of fuel. It’s something that I think is very valuable in maintaining fuel diversity, which is an important part of our fuel security program.

Senator VOINOVICH. You haven’t really looked at that number,

then?

Dr. KROSZNER. We have modeled, the models predict whether

there will be a lot or a little fuel switching. And there will be relatively little fuel switching under both models.

Senator VOINOVICH. You’re saying that the 26 number would not

cause fuel switching?

Dr. KROSZNER. There would be a small amount of fuel switching

but not very much. What people will do is, given the model’s assumption about electricity demand, about the prices of natural gas,

is that people may choose to pay more for the permits, the permit

prices would go up. But that might be a more effective means of

trying to generate electricity than switching to gas. So, that flexibility allows—— Senator VOINOVICH. So what you’re saying is that part of the decisionmaking has to do with the price of natural gas?

Dr. KROSZNER. The price of natural gas and the price of the permits. So the models both predict what those will be over time. Look

at the choices that the managers would make between choosing to

continue to use coal and choosing to switch to natural gas. The

model suggests that there would be relatively little switch between

coal and natural gas.

Senator VOINOVICH. Senator Carper?

Senator CARPER. Thanks, Mr. Chairman.

Several of us on this panel, there aren’t a whole lot of us here,

but several of us here on this panel are very much interested in

working on an issue that we’re not discussing today, but it’s an

issue that will be before the Senate, and I hope fairly soon, and the

issue is asbestos. There are, as you know, in this country a lot of

people who have been exposed to asbestos over the years. Many of

them have become sick and have died. They’re not getting the kind

of financial help that they need. In the meanwhile, a fair amount

of money is being siphoned off to help people who are not sick and

will never be sick from asbestos exposure.

And we’re working, Senator Voinovich and I and others are

working with Senator Hatch. I think Senator Thomas has an interest in this issue as well. We’re trying to come up with an approach

to create a trust fund where companies, manufacturing companies

and others, insurance companies, would contribute money into a

trust fund from which would be paid claims to folks who meet certain medical criteria from their exposure to asbestos over the years.

One of the reasons why companies are interested and insurance

companies are interested in contributing to a fund, creating a trust

fund, and contributing a lot of money to it, and Senator Hatch was

talking yesterday about, I think about a $108 billion trust fund

that would be created for this purpose. One of the reasons why

companies are interested in doing this is because it provides some

certainty for them in an uncertain world. One of the lessons that

I learned, and I’m sure Governor Voinovich learned this long before

I did, being one of the Governors of our States, in promoting economic development and job creation, companies like certainty. And
350

to the extent that we can provide that, we ought to. We try to provide a nurturing environment for job creation and business development in my State, as Governor Voinovich did in Ohio.

Which leads me to this question, there are a number of utilities,

one of whom will testify later today, who will talk about the value

of certainty in their industry, the idea of knowing what they’re up

against in terms of caps on sulfur dioxide, nitrogen dioxide, mercury and SO2. In your verbal testimony, I don’t recall hearing anything about the economic value of certainty. It may be there in

your written materials and I missed it.

But companies have raised with me and I suspect others on the

panel the need for certainty. And I’d just like to hear from you how

you would include that in an economic model. How would that be

valued?

Dr. KROSZNER. Certainly it’s something that economists often

talk about as a risk premium when there is greater uncertainty,

greater risk associated with taking one path versus taking another.

And so of course there has to be some compensation for the greater

risk or greater uncertainty. Typically for, let’s say, a riskier firm,

if they were to issue bonds, they would have higher interest rates

associated with them. If there’s greater uncertainty for the firm

itself, there is more difficulty in their planning processes, it’s more

difficult for them to think about what they need to do going forward.

So it makes their planning cycle more difficult, it can make their

planning cycles more difficult for firms to figure out where they

need to be investing in different areas. So it can raise the cost of

capital in general if there is greater uncertainty, and it can also

just make it more difficult for firms to move forward to invest, because they’re just not sure where they should be going.

Senator CARPER. Thank you for that response. How would you

include that in an economic model, in the work that you do?

Dr. KROSZNER. What it would be is in terms of an economic

model going forward, let’s say, with the challenges that the economy may be facing now, we may be seeing less investment than we

otherwise would be, because of uncertainties about the economic future. So one way in which we take it into account is that it would

reduce overall investment in the economy if there are broad uncertainties. If there’s much more certainty about the direction of the

economy, let’s say it’s a good direction for the economy, then of

course, managers will be able to make plans more easily, they’re

more likely to go forward and increase capital spending plans. So

that would be one way in which I would take uncertainty into account in an economic model.

Senator CARPER. If you want to give it some further thought

later and want to respond further in writing, that would be welcome. Thank you.

I think I have time for one more. What price signal does the

President’s voluntary emissions intensity approach, and that’s

where we’re talking about the 18 percent, and that’s 18 percent

below a baseline. There’s an increase in the emissions. And when

you’re talking about 18 percent reduction, it is an 18 percent reduction below the baseline, or projected increase. But what price signal
351

does the President’s voluntary emissions intensity approach send to

the markets and to industry about reducing greenhouse gases?

Dr. KROSZNER. What it does is it, I believe, provides some, the

combination of Clear Skies and our carbon plan does provide some

certainty for going forward and provides an incentive for the companies to reduce their emissions. We don’t have a specific price signal that is out there now, but implicitly there will be one that will

be developing, the choices people make to try to reduce to meet this

18 percent intensity reduction. But there’s not a specific number

that is out there now. But there is an incentive that is there.

Senator CARPER. Thanks very much.

Senator VOINOVICH. Mr. Chairman.

Senator INHOFE. I have only one question. You say that there

will be no fuel switching. Is this true for both the EPA and the EIA

models, or just the EPA?

Dr. KROSZNER. I believe it’s for both models that they would have

relatively little fuel switching associated with the President’s proposal.

Senator INHOFE. Thank you. No further questions.

Senator VOINOVICH. Senator Cornyn, do you have any questions?

Senator CORNYN. Not of this witness. Thank you.

Senator VOINOVICH. Thank you.

Dr. Kroszner, we’ll be submitting some other questions to you in

writing and we’d like you to get back. Senator Carper is concerned

about some of the responses that you have given. All I can say to

you is, and to the other people who are coming here, when I talk

with utility executives, and I have been authorized by one of them

to say publicly, American Electric Power, which is a very large producer of electricity, that they will never build another coal-fired facility, and they will switch to natural gas unless this situation is

clarified for them. They are very supportive of the President’s Clear

Skies proposal.

Thank you very much. We’ll have our next panel.

Dr. KROSZNER. Thank you very much.

Senator VOINOVICH. While the panel is coming forward, I’m going

to introduce them and give you a little background on them. Our

first witness is Dr. Larry Monroe. He’s the Program Manager of

Pollution Control Research and he’s speaking on behalf of the

Southern Company and the Edison Electric Institute, EEI. Our

next witness will be Dr. Steven Benson, Energy & Environment

Research Center, the University of North Dakota. And our third

witness is Dr. Richard Bucher, who is here from W.L. Gore and Associates, and was referenced by Senator Carper in his opening

statement.

We want to thank you all for coming today and again like to remind you, I hope that somebody tipped you off that it’s 5 minutes,

and hopefully if there are some things that you didn’t get out in

your statement you can bring them forward in the question and answer period.

Dr. Monroe, we’ll start with you.
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STATEMENT OF LARRY S. MONROE, PROGRAM MANAGER,

POLLUTION CONTROL RESEARCH, SOUTHERN COMPANY

Mr. MONROE. Thank you, Mr. Chairman, Senator Carper, Senator Cornyn. My name is Larry Monroe, and I work for the Southern Company. The Southern Company is a regional energy company serving some 4 million customers in the southeastern United

States. I’m a chemical engineer and I work on finding effective

emissions control technologies. I’m also speaking today on behalf of

the Edison Electric Institute.

The state of power plant mercury control technologies is still in

its infancies. There are no commercial technologies available. By

that, I mean there are no vendors that are offering a process to the

industry that includes a guarantee of performance. There are two

near-commercial technologies available, the first is coke control by

flue gas desulfurization systems, also called scrubbers, installed to

control sulfur dioxide, called SO2, and perhaps aided by nitrogen

oxide, NOx controls. And the second of these technologies is activated carbon injection.

Mercury can exist in three forms at the exit of a power plant: the

elemental vapor, the ionic form or attached to fly ash as particulate

mercury. The form of the mercury in the flue gas determines how

easily it can be removed.

Now to the first of the near-commercial processes, coke control

by SO2 removal, and possibly NOx removal processes. The most

common sulfur dioxide control process is the wet scrubber, where

powdered limestone and water are mixed with flue gas to remove

SO2. The ionic form of mercury is soluble and is also removed with

relatively high efficiency in these scrubbers. Therefore, the amount

of mercury control in the scrubber depends on how much ionic mercury is present, which is highly dependent on how much chlorine

is in the coal.

The coals in the eastern U.S., mostly bituminous coals, contain

significant amounts of chlorine and therefore produce maybe 60

percent ionic mercury. And the scrubbers in the limited testing

done to date can remove as much as 90 percent of that, for a total

mercury removal of 55 percent.

However, the coals found in the western U.S., mostly subbituminous and lignite coals, are naturally low in chlorine and produce

only about 25 percent ionic mercury, which means that a scrubber

would only remove about 22 percent of that mercury.

Claims have been made based on German research and now tested in the U.S. that selective catalytic reduction systems installed

to reduce NOx converts some of the remaining elemental mercury

into the ionic form, the form that can be captured in scrubbers.

Testing conducted thus far appears to show that these NOx reduction systems do appear to help with the mercury chemistry but

only for eastern bituminous coals and not at all for subbituminous

and lignite coals. Studies at a very limited number of power plants

suggest that this combination of NOx and SO2 controls for plants

burning eastern bituminous coals may increase the 55 percent mercury scrubber capture to around 80 to 90 percent, when a selective

catalytic reduction system for NOx control is added.

However, the low chlorine content of the western subbituminous

and lignite coals apparently prevents the selective catalytic reduc-
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tion system from oxidizing the mercury, so the combination of NOx

and SO2 controls remains at the 22 percent mercury, due to the

scrubber alone. Let me emphasize that these estimates in mercury

reductions are based on tests at only 10 plants, less than 1 percent

of the 1,140 plants in the country. Therefore, we have no way of

knowing how many plants will be able achieve these States performance numbers.

The second near-commercial technology for mercury control in

power plants is activated carbon injection. The very first full scale

test of any mercury control process in the Nation was a test of activated carbon injection performed at a Southern Company plant,

Alabama Power’s Plant Gaston. I would be happy to give more details about activated carbon injection in the question and answers.

Finally, recent modeling by EPRI suggests that U.S. utility emissions of mercury are only a small contribution to deposition of mercury in the continental United States. Significant reductions of utility emissions will only reduce deposition in the U.S. by about 1.5

percent and will only decrease exposure of the most sensitive population, that is women of child bearing age, by one half of 1 percent

in the year 2020 as compared to 1999.

In summary, there are no commercial technologies that I can buy

to control mercury emissions from power plants. The two most

promising, coke control with scrubbers, and maybe selective catalytic reduction, and activated carbon injection, are under investigation but still need further testing under various coal types, geographic locations and operating conditions. Both seem to work better for eastern bituminous coals, leaving us with no good technology choices for western subbituminous and lignite coals.

Southern Company and EEI understand that some mercury reductions will occur as SO2 and NOx control systems are installed.

But we can only guess at the exact amount. More testing and research is needed. Any regulatory program for mercury reduction

must consider the state of the technology, the costs and the energy

impacts of meeting the requirements. Failure to follow the right

path will lead to significantly increased costs, further switching

from coal to natural gas for power generation, and possible disruption of the Nation’s energy supply.

I would be glad to answer any questions you might have.

Senator VOINOVICH. Thank you, Dr. Monroe.

Dr. Benson?

STATEMENT OF STEVEN A. BENSON, SENIOR RESEARCH MANAGER, ENERGY AND ENVIRONMENTAL CENTER, UNIVERSITY

OF NORTH DAKOTA

Dr. BENSON. Thank you, Mr. Chairman, members of the subcommittee, for the opportunity to testify and share information on

mercury control technologies and challenges for western lignite and

subbituminous coals. My name is Steve Benson and I’m a Senior

Research Manager at the Energy and Environmental Research

Center at the University of North Dakota, where we have conducted research on mercury measurement and mercury control

technologies for approximately the last 20 years.

The first thing I’d like to do is cover two main points. The first

is that the west produces over 50 percent of the coal in our country.
354

And aggressive regulation could put western utilities and their customers at a serious economic disadvantage. The second point is

that the configuration of western plants suggests that there is not

a one fit for all solution to mercury control technologies in the

west.

As Dr. Monroe mentioned, the form of mercury emitted from

power plants is dependent upon the composition of coal. Western

coals contain low amounts of chlorine and produce mostly elemental mercury in the flue gas. Western coals also contain high

levels of calcium and sodium oxide that tie up the available mercury, further increasing the elemental form of mercury.

As compared to eastern bituminous coals that have higher levels

of chlorine, the levels of the oxidized mercury in the flue gas dominates the form of mercury. The problem with elemental mercury is

that it is not very reactive, and cannot be captured with most existing flue gas pollution control equipment. This represents a significant emission reduction challenge for western coals since a cost-effective commercial system for effective capture of elementary mercury is not yet available.

The most common western plant control configurations include

electrostatic precipitators and fabric filters for particulate control

and wet and dry scrubbers for sulfur control. Selective catalytic reduction for NOx control are not very common.

Currently research is underway on technologies for reducing

mercury emissions from low-rank coal or western coal-fired power

plants. These include activated carbon injection, upstream of existing electrostatic precipitators and fabric filters, oxidation of elemental mercury by chemical addition or catalyst for capture by wet

scrubbers and dry scrubbers, and also some emerging novel approaches, such as mercury absorption by noble metals and other

means.

The results to date have been varied. Existing research suggests

that mercury removal by particulate and sulfur control is two to

three times lower for western low ranked coals than for eastern bituminous coals. Fabric filters were the only particulate control device that appears to remove appreciable amounts of elemental mercury. But this has only been accomplished where the chlorine levels

are sufficiently high, which is not typical of low-rank coals.

The technical challenges that need to be addressed include decreasing the quantity of carbon necessary to control mercury emissions, decrease in the impact of chemical additives on boiler corrosion, understanding ash blinding of catalytic oxidation systems,

and the understanding of the impacts of coal variability. Western

coal variability and composition, especially for lignites, has humbled many researchers and technology developers, including myself,

in the past.

Most of the current research and development efforts have been

conducted on a pilot scale. Long term field tests are needed to confirm the technical and cost-effectiveness of the most promising

technologies and approaches. In addition, for any technology to be

effective, we need continuous, reliable mercury monitors to measure both oxidized and total mercury species in the flue gases.

An additional issue is that fly ash produced by many western

coal-fired power plants is a valuable by-product producing a rev-
355

enue stream. The use of activated carbon reduces the usefulness of

this product and may require returning the fly ash and carbon materials back to landfills. Thus, in addition to the cost of activated

carbon disposal costs would be incurred.

As I previously noted, cost-effective commercial mercury control

technologies are not available for western lignite and subbituminous coals where the mercury is in the elemental form. Although

an aggressive research and development program is being pursued,

it is doubtful a cost and technically effective control technology will

be available by 2007, an EPA regulatory target.

In summary, aggressive control targets could seriously disadvantage western utilities and their customers who rely on affordable

power. Currently there is no commercially available technologies

that can be applied to control mercury emissions from western coalfired power plants. Significant additional research is required to

prepare the western utility sector for implementation of mercury

control standards.

Thank you. I would be glad to answer any questions.

Senator VOINOVICH. Thank you.

Dr. BUCHER.

STATEMENT OF RICHARD BUCHER, W.L. GORE AND

ASSOCIATES, INC.

Mr. BUCHER. Good morning, Chairman Voinovich, Ranking Member Carper and members of the subcommittee. My name is Richard

Bucher and I’m here to speak on behalf of W.L. Gore and Associates about some exciting technical advances that may offer a solution to the vitally important challenge of reducing mercury emissions.

Gore is a leading company in the field of advanced materials that

provide creative solutions to longstanding problems. We believe

that a new mercury capture system we have developed and that

has been recently tested at the EPA may well offer dramatic improvements in the effectiveness, efficiency and cost of mercury capture from flue gas. We are excited by this development as an improvement of this kind in mercury control could greatly contribute

both to the long term sustainability of power generation from coal

and to the health of all Americans.

My employer, W.L. Gore and Associates, best known as the

maker of Gore-Tex fabric, has built a reputation since the 1970’s

as a leading supplier of high performance filtration devices to our

Nation’s industrial applications. Beginning in the 1990’s, Gore scientists and engineers have discovered and developed a series of

radical improvements to our filters through embedding additional

materials and properties into the structure of the filters that

makes them work.

These advances have led to new applications for capturing over

99.99 percent of fine particulate to catalytically destroying over 99

percent of carcinogenic dioxins and most recently, for capturing

over 90 percent of mercury in flue gas streams. The result is a

cleaner, safer, healthier environment and more sustainable industry.

Our invention in the area of mercury capture has moved well beyond the lab bench and shows dramatic promise for the future. The
356

key to our technology lies in an increased capacity to capture and

hold mercury, which allows the mercury collection function as illustrated in this figure to be moved from a consumable, as with activated carbon on the left, to a system component. That’s with the

Gore technology shown on the right.

The Gore system, which employs the same filter bags as the activated carbon system as shown here, employs the same filter bags

for particulate control as a filter insert on the inside of the filter

which contains the mercury control functionality. This system

means that end users don’t need any additional system infrastructure such as activated carbon silos or injection equipment or space.

The fly ash is free of contamination, allowing plants to continue to

sell as opposed to landfill this valuable by-product of the coal-fired

industry.

And finally, the system is completely passive in nature. Once installed, it is always operating, continuously protecting the air we

breath. It does not require additional operators, maintenance or

monitoring.

Initial bench scale studies of our technology conducted at the

EPA research facility in North Carolina demonstrate an unprecedented level of mercury capture, efficiency and capacity as illustrated in this figure. On the Y axis we have mercury capacity of

absorbent, on the X axis we have various technologies. The red

bars represent the absorbent capacities of activated carbons as reported in the literature, and the blue bars represent the advances

made with the Gore technology. Some of these cases are up to two

orders of magnitude or 100 times more efficient at capturing mercury.

Following this success, our most significant testing to date was

conducted at the EPA on their pilot scale coal combustion unit. The

7 week trial with 24 hour operation was designed to test the long

term viability of the technology under a variety of conditions. As

shown here in this figure, mercury concentration of the flue gas is

on the Y axis, various conditions on the X axis. The red bar is

showing the amount of mercury coming into our filters. The blue

bar is showing the amount of mercury leaving our filters. And

again for a variety of conditions, both with western subbituminous

coals and western lignite coals.

These results, assuming further successful field verification, will

allow coal burning facilities to easily comply with the most stringent regulations set forth in the Clear Skies Act of 2003 and the

Clean Air Planning Act of 2003. Our mercury technology is being

designed to provide the benefits stated above, while potentially

costing considerably less than carbon injection.

For example, activated carbon injection for a 110 megawatt facility, projected the EPA to cost $700,000 per year. When the lost revenue of unsalable fly ash is included, those numbers inflate to a

range from $1.1 million to $1.5 million per year. Current estimates

our technology could be 38 to 83 percent lower than those estimates, making our approach much easier to implement and more

cost-effective.

Although we have not begun marketing this technology, our

interactions with prospective customers have been nothing short of

extremely encouraging. Owners and operators have expressed en-
357

thusiastic support of the concept, citing the ease of implementation,

minimal impact on system performance, and most of all, the preservation of fly ash value, which is so critical to their bottom line.

I appreciate the opportunity to testify before you today regarding

the important issue of mercury emissions control. W.L. Gore and

Associates remains committed to developing innovative, economically feasible technology to address our Nation’s air quality challenges. We look forward to continuing to work with the committee,

the EPA and the coal-fired power industry to make this technology

a commercial reality. Thank you again for allowing me to testify,

and I’d be pleased to answer any questions you may have.

Senator VOINOVICH. I thank all of you for your testimony this

morning.

The big question that we’re laboring with is the issue of the tonnage that we have in the mercury requirement and the Clear Skies

legislation. And as I mentioned earlier, there were many of us that

were skeptical about those numbers, and feel that the more recent

numbers coming from the EPA and from the Department of Energy

are more reflective of reality. That’s No. 1.

No. 2, there’s obviously a difference of the three of you in terms

of the state of technology. Mr. Bucher, you have testified that

you’ve got some new technology here and that it’s a lot more reasonable than the activated carbon. What is the difference in terms

of the capital investment in regard to this, to the other technologies

that are available? In other words, to install, we talked about the

cost of operation, but what about the initial capital improvement?

I’d be interested in that. And in addition to that, also the issue of

how much testing has gone into this to the extent that the two

other gentleman at the table here are a little skeptical about

whether or not there is technology out there to deal with the particular coal that they’ve mentioned here at the table.

Mr. BUCHER. Certainly. The two approaches that I’ve outlined

both include, most facilities today do not have a baghouse. The

EPA has assumed that most facilities would adopt a baghouse,

whether they’re using activated carbon injection, that they pose as

being the most cost-effective solution. Their numbers, which I

based those annual yearly expenses, include capital expenditures,

amortized over a period of years. So it’s the total ownership costs

of both technologies, to answer your first question.

To answer your second question, all the testing that we’ve done

to date up until about 1 month ago has been confidential in nature.

We have not shared it widely with the industry, which would explain why most people you would ask about mercury control from

coal would not be familiar with our technology. We have done a 7-

week long test at the EPA, like I mentioned, which is a short test

but in the field of mercury control a relatively long test.

And it, granted, is on a small, pilot scale facility roughly the size

of this room. We realize that more extensive testing is going to be

required in the field, real facilities. And we have some plans in

place to have that testing start beginning in the late summer to

fall time period.

Senator VOINOVICH. I think the real question is that if you were

a utility and got a new technology, the real issue would be how
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good is the testing and for how long and how much does it cost and

what do your bankers think of it.

[Laughter.]

Senator VOINOVICH. Dr. Benson or Dr. Monroe, would you like to

comment?

Dr. BENSON. I think the key thing that we look at when we consider a technology that’s out there and commercially available is

that it has been demonstrated in the field for sufficient amounts

of time. I guess that is the key. And pilot scale systems have their

limitations. They don’t always represent the variability of the fuels

that you may see and they also may not represent the flue gas

compositions that you’re concerned with.

Senator VOINOVICH. Dr. Monroe?

Mr. MONROE. Specifically on this technology, I would just mention that only about 14 percent of the Nation’s power plants have

this baghouse technology installed at present. So that would require additional capital investments.

From my point of view, from a utility, I’d rather capture the mercury in a co-benefits, in a scrubber sort of system, whether an SCR

is available or not. If I install a scrubber on a 500 megawatt plant,

sort of a medium size plant, that’s $75 million to $100 million investment for that. If I have to add a selective catalytic reduction

system for NOx, that’s an additional $50 million to $60 million.

And to add the baghouse on top of that would be yet another increment of capital of $20 million to $30 million.

So I’d rather avoid that capital expense if I can perfect another

technology. Once I have a baghouse, then to me it’s a commodity

question, does this technology work better, cheaper, faster that activated carbon.

More generally, I’d just like to point out——

Senator VOINOVICH. Let me see if I understand this. What you’re

basically saying is that you would get the scrubber and you’d get

the SCR and try to get the best that you could from co-benefits and

probably not invest in a baghouse, does that have to do with the

activated carbon thing, the baghouse?

Mr. MONROE. Yes.

Senator VOINOVICH. OK. And that’s what you try to do. And if

that wasn’t good enough, then you’d have to probably go to the activated carbon and the baghouse, and then at that stage of the game,

you’d probably want to be looking at what Mr. Bucher is talking

about?

Mr. MONROE. That’s correct. Particularly in the current regulatory business as usual, in a MACT case, I may have to control

mercury on every power plant. So I may install more baghouses

under a MACT scenario than I would under Clear Skies.

I want to return to the testing, just to state that the electric utility industry is somewhat unique. We have to make the power as

soon as someone needs it. We don’t have any way to store it, aside

from a few sort of off-peak storage systems there. So we require our

equipment to run 100 percent of the time. Most industries, if you’re

talking about a refinery or chemical plant, typically design their

equipment for 90 percent availability, so that it runs 90 percent of

the time. It’s not as crucial if they have to shut down their process
359

to fix something as it is in the electric utility business, particularly

in Atlanta, Georgia, in the middle of an August afternoon.

So we require much more testing. We require more robust designs and long term testing before we can accept that equipment,

just due to that unique nature of our business.

Senator VOINOVICH. Senator Carper?

Senator CARPER. Gentlemen, thank you all very, very much for

illuminating testimony and I think in some respects very encouraging testimony.

Before I ask some questions of our witnesses on this panel, Mr.

Chairman, I’d like to submit for the record a report from the

Northeastern States for Coordinated Air Use Management. It’s entitled Environmental Regulations and Technology: Controlling Mercury Emissions from Coal-Fired Boilers. It was published in September of 2000. The report examines the feasibility and the appropriateness of mercury control issues.

It concludes by stating that past experience suggests that further

delay in the regulation of mercury emissions from power plants

cannot be justified on the basis of concern about technology availability. On the country, delay is likely to stall efforts to advance

promising control technologies. Mr. Chairman, I would ask that a

copy of this report be included in the record, please.

Senator VOINOVICH. Without objection.

Senator CARPER. Dr. Bucher, let me ask sort of a follow-up question here from your testimony. What will happen to the promising

technology that you’ve described and that we’ve seen demonstrated

visually here, what will happen to this kind of promising technology if we simply pick a mercury cap that can be achieved due

to co-benefits of controlling sulfur dioxide and nitrogen oxide?

Mr. BUCHER. Senator, I go frequently in front of our leadership

at Gore in order to state the case for the business potential. And

obviously they have many options on where to invest their funds

for research and development. If we were not able to paint a clear

case of potential market that it’s going to be available and that

we’d be able to sell our product into, it would be very difficult for

them, justify it for me to ask for increased funding and additional

research and development.

Senator CARPER. Dr. Monroe commented a bit on the feasibility

and cost-effectiveness of implementing the kind of controls you

were talking about. He mentioned the price of baghouses and all.

Would you just think of it and just sort of respond to any thoughts

that come to mind in response to what he’s talked about. In the

end, they’ve got to be able to produce electricity in ways that are

cost-effective. We understand that. Would you just care to respond

to anything he said?

Mr. BUCHER. Certainly. And clearly I see Dr. Monroe’s point,

that if you have a wet SGD scrubber system you can add an SCR

for NOx and you can get those benefits that you need for mercury.

That may be an attractive way to go. However, the EPA’s reports

are indicating that that is not always going to be the preferred

technology. You’re not always going to be able to achieve those

mercury caps with those technologies. Their analysis has shoed

that for most of these western coals that we’re talking about, the

subbituminous and the lignite, those systems, the most economi-
360

cally attractive solution is a baghouse with activated carbon injection. That’s why we use that as the basis for our report to show

how we could save those customers money over that solution.

Senator CARPER. When I visited with you and Chris Koons and

others of your associates at W.L. Gore back in, I think it was January, you described another project. I think you referred to it as an

advanced hybrid, as I recall. I believe it required, it removed almost 100 percent of, I think it was small particles, maybe 99.9 percent from coal exhaust. How is that different from the mercury

technology that you’ve described here today, and what is the status

of that advanced hybrid technology in the marketplace?

Mr. BUCHER. You’re speaking of the advanced hybrid technology

actually that the EERC, which Dr. Benson is from, was the inventors. Gore is the party that is commercializing the technology.

Senator CARPER. Dr. Benson, you were present at the creation?

Dr. BENSON. One of my colleagues actually did the development.

Mr. BUCHER. That technology, as you mentioned, is focused on

controlling the fine particulate. It’s really a more, it’s attempting

to be a more cost-effective solution than a traditional baghouse, as

I picture it up there. An interesting story about when we first

brought that facility up and running in Big Stone, South Dakota

is, many of the operators, when they reported to work those first

several mornings after the system went on line, they came into the

control room and said, what’s wrong? Why aren’t we operating?

Because they had come to work and every day for 20 years, they

come to work and they’d see smoke coming out of the smokestack.

This time they showed up to work, there was no smoke, so they

said, the plant’s not operating. The controllers said, well, we’re at

full load. Just an indication of the ability of these advanced technologies to control emissions far beyond what it has been in the

past.

And they’re continuing to operate, right now actually that facility

is down for a week of maintenance and they will be coming on line

about a week from now.

Mr. MONROE. If I might comment.

Senator CARPER. Dr. Monroe, please.

Mr. MONROE. We are currently testing at one of my plants a

competition to that device, using similar principles that was invented by the Environmental Protection Agency out of their North

Carolina laboratories jointly with Southern Research Institute, a

not-for-profit in Birmingham. So it’s very intriguing technology to

us, also.

Mr. BUCHER. And if I can add one more thing onto that, our mercury control technology is being designed to work with the traditional pulse chip baghouse, our advanced hybrid baghouse, or the

co-pack baghouse that Dr. Monroe’s referring to.

Senator CARPER. Mr. Chairman, I’m going to have to learn more

about baghouses. Thank you all. I hope we’ll have a second round

here.

Senator VOINOVICH. Senator Cronyn?

Senator CORNYN. Thank you, Mr. Chairman, and I want to commend you for calling this hearing today on this very important subject, and thank all the witnesses for being here and sharing your

expertise.
361

I know the Administration has put a lot of work into the Clear

Skies initiative, and I’m grateful for their efforts. I think the

framework proposed has potential, but I’m concerned about unintended consequences and maybe getting out ahead of the science

before Congress seeks to impose some requirement that ends up

being impossible to meet or certainly not possible within the economies involved.

But I’m hopeful that technology will ultimately provide some answers. But I guess my concerns, gentlemen, largely focus on two

areas. One is the importance of maintaining fuel diversity. And second, on mercury removal. And I want to ask you in a minute about

the technology, more about the technology that you talked about in

terms of meeting the regulatory burden that would be imposed by

the bill.

But in my State of Texas, as no doubt you know, coal, specifically

lignite coal, must remain a viable energy source for Texas utilities.

Forty percent of electricity in Texas is powered by coal. And I’m not

convinced that there’s enough natural gas there to counter-balance

a drop in coal usage, particularly given the limitations that we’ve

imposed on access to probable reserves of natural gas.

So we find, what I don’t want us to do is find ourselves in a

catch–22 where we get out ahead of technology, and I’m not in any

way demeaning the promise, indeed, I’m hopeful, Dr. Bucher, that

you and others are able to finally perfect the technology that will

accomplish the goals that you seek. But I don’t want to be in a position of imposing a requirement by law that results in reduction

in fuel diversity and a dependence on ever-shrinking forms of energy and in the process, making electricity so expensive to consumers that it creates additional problems.

I’ve been repeatedly told by Administration officials that they

think the technology will be available in the future to accomplish

mercury removal. But I’m struck by the speculative nature, really,

that tell us where we are at this point. And I know Dr. Bucher,

your company, which I read is credited with producing Gore-Tex

and other remarkable inventions, that you have maintained this

technology as confidential given the proprietary reasons which I

certainly respect, and you’re not marketing this technology.

But I just would be interested, perhaps, to hear from each of you

of the consequences of Congress imposing a standard today that

there is not currently technology available to meet. Dr. Monroe,

maybe you can respond to that first, please.

Mr. MONROE. We’re sort of acutely aware of that problem, with

the given regulatory program, with the MACT for mercury that

we’re struggling now, how do we continue to make coal-based

power without these technologies available. I share your worry

about fuel diversity. The southeast that my company serves is more

heavily dependent than Texas on coal. We also burn, probably a

third of the coal that we burn comes from the Powder River Basin

in Montana and Wyoming, so that issue is very important to us

also.

We see the speculative nature of we hope the technology is ready

in time. We hear it again and again, the NESCAUM report that

Senator Carper refereed to is sort of an article that reads that if

you make a regulation, then the technology will suddenly appear.
362

Now, I’m a good engineer. My job is to make things cheaper every

day, for my company. And so I work as hard as I can, and the regulations make me work to do that. But we could look at other examples of sort of technology approaches that didn’t work. Fusion is

one. The nuclear-solar sort of power that was always 10 years away

and had been that way for 40 years running, the new kind of nuclear power plant.

Another example would be California’s zero-emission vehicles,

where they’ve just continued to redefine what those are and have

never really reached the levels that were mandated by a State regulation there.

To get directly to your point, it really does scare us in the power

industry to think we’re racing toward some regulations or some legislative solution where we don’t have the technologies, so that we’re

struck with a grim choice of not providing power to our customers

or in violation of the law.

Senator CORNYN. I take it that you’re not an eleemosynary institution that’s involved in providing charitable services in the form

of electric power. I guess there are economic you have to contend

with in all of this.

Mr. MONROE. That’s correct. And you know, being a regulated

utility, I have State governments looking over my shoulder second

guessing every move I make, also.

Senator CORNYN. Dr. Benson, would you care to comment on the

challenges that are presented when Government mandates a standard for which technology is not currently available to achieve that

standard?

Dr. BENSON. From the perspective of somebody that does the research and testing of the technologies, I think there’s many technologies out there that show promise, like W.L. Gore technology.

Senator CORNYN. Don’t get me wrong, I hope you’re successful,

ultimately. I’m talking about passing a law this sessions. So that’s

my concern.

Dr. BENSON. I think there are many technologies. It takes time,

and there are many technologies in the laboratory right now and

in the pilot scale that show some promise. There are a lot of issues

that must be overcome with those technologies to move them into

the demonstration stage. Once the technology shows the ability to

have good performance during demonstration, the information can

be used to develop performance guarantees. In addition, we need

to understand impacts of the fuel variability issues on the performance of these technologies.

Senator CORNYN. Dr. Bucher, let me change the questioning just

briefly a little bit and make sure I understood what you said correctly. Did you say that basically it’s difficult for your company to

get financing for a technology for which there isn’t a currently

mandated requirement?

Mr. BUCHER. I think I may have misled you there a little bit.

Senator CORNYN. I just want to give you a chance, I want to be

fair to you and let you explain what you meant, if I misunderstood.

Mr. BUCHER. Certainly. I appreciate that.

Not difficult for us to obtain financing, difficult for our leadership, who’s looking at a portfolio of places to invest their research

and development money. They’re going to put that in the area
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where they feel they’re going to have the largest chance for return.

I’m a firm believer in our capitalistic system. And if the opportunity is there, it’s so much easier for me to go in front of them

and say, this is a great opportunity for not only us as a company,

but for us to meet some of the needs of the Nation. So without that

carrot, so to speak, it becomes difficult for them to embrace these

kinds of programs.

Senator CORNYN. Thank you for clarifying that.

Mr. Chairman, my only concern would be imposing a standard

and then just hoping and praying that there will ultimately be a

technology available. That’s my primary concern. Thank you.

Senator VOINOVICH. I share your concern.

Dr. Monroe, I’m sure you’re aware, my State of Ohio relies a

great deal on burning of coal, both from our part of the country and

from some other parts. I’m really concerned about the whole issue

of fuel switching. That’s something that’s very paramount in my

thinking as the former Governor of the State of Ohio, and I’m concerned about the environment for our manufacturers.

Last year I had some real problems with Senator Jeffords’ legislation on the four Ps, and my concern was that if it went into effect

that it would force our utilities to switch to natural gas. Natural

gas already today is really under stress, and the cost is escalating,

in fact I think it’s one of the reasons some of our businesses are

in trouble today, because of the high cost of natural gas. And if we

add to that problem fuel switching, I can see a lot of our industries

either closing down or going some place else. That’s not the United

States, somewhere else in the world.

With the revelations expressed by the Administration on co-benefits and your extensive knowledge of the industry and technology

available in regard to mercury emissions, what do you think would

happen to the utility sector, and you’re talking also for EEI, if the

Clear Skies Act was passed as it’s introduced?

Mr. MONROE. First, talking for Southern Company, we support

the approach of Clear Skies. We would like to be working with the

Administration and working with Congress on some of those details

about the timing and the levels. EEI has a slightly different position than Southern Company on that.

Assuming it was passed as written, focusing specifically on mercury issues there, the SO2 and the NOx issues are, as Chairman

Inhofe mentioned earlier, there’s not much uncertainty about NOx

controls and SO2 controls. We know what they cost. We know how

they perform, although my company’s been surprised as well as

AEP, with the installation of selective catalytic reduction systems,

with unintended consequences of those. So it’s still not risk free for

NOx.

Senator VOINOVICH. You’re talking the SCRs?

Mr. MONROE. Yes.

Senator VOINOVICH. Yes. I’m well aware of that with the plume

that they had. They actually had to buy out a town in order to

eliminate a problem from that plume.

Mr. MONROE. Our problem has been slightly different. We have

stopped up the catalyst. It has small holes about a quarter inch in

diameter, several million in the gas flow pad, and we stopped every
364

one of those up and had to shut the plant down for that. So there

are still risks there.

For mercury, as given the cap that’s in place now, it would certainly cost more than I think most people think at the moment, because it would require an alternative to just the SCR for NOx and

the SO2 scrubbers to do the additional mercury control. So that

then we would be very interested in W.L. Gore’s technology. We

would probably be looking at building baghouses for, not for particulate control, which we do a good job at, but only to add something,

whether it’s that technology, activated carbon or something that’s

invented in the meantime, some absorbent to just capture the mercury.

So that instead of getting sort of the benefits of the other investments that would require additional investments. It would make

our coal plants more expensive to operate. We would probably shut

down some of our marginal coal plants on that basis, and it would

be yet another push for us to burn more natural gas.

Senator VOINOVICH. Dr. Benson, do you want to comment on

that?

Dr. BENSON. I agree with Dr. Monroe.

Senator VOINOVICH. Well, in other words, what you’re saying is,

one of the things we’re looking at is that we’ve got the 26 tons and

we’re talking about increasing that to 34 or between 34 and 46.

How much of a difference would that make in terms of your situation?

Mr. MONROE. The cost to the industry would probably measure

in the several billion dollars a year for that additional increment,

because of the additional baghouses and activated carbon.

Senator VOINOVICH. So what you’re saying is that 26 probably,

that would mandate the baghouses and the activated carbon and

that approach? And let’s say, 34, that would not require that?

Mr. MONROE. I’d have to say that we do not know what that

number would be. The problem we have is we’ve tested very few

power plants. I can’t tell you what that tonnage would be. It’s certainly more, the co-benefits will leave us with emissions of certainly more than 26 tons. I think the range expressed by the Administration, 34 to 46, is probably in the ball park somewhere

there.

Having worked with EPA on assumptions in their modeling, and

they’re proposing the 34 ton model, my opinion is, and again with

my bias being a utility engineer, I think the technology is not quite

as aggressive, it won’t work quite as well as EPA. So I would tend

to look at the higher end of that range.

Senator VOINOVICH. Well, the next issue is that if you had it at

34 rather than 26, how much influence would that have on the decisionmaking of people like Mr. Bucher and his company?

Mr. MONROE. It would simply be the extent of the market penetration of these other technologies that will add to the co-benefits.

Certainly from an electricity price, if we have to do any more to

get to the 34 tons, then the 26 would cost even that much more.

It puts more pressure on the western coal users, whether they’re

in the west or actually buy the coal from the west, just because of

the technologies that are available there.
365

The one thing that the Clear Skies approach does with the SOx

is allow utilities like mine to take some risks on technologies. If I

try a risky technology for mercury on a trading program, theoretically I can buy my way out of a failure by going to the market and

buying those allowances, as compared to sort of a strict command

and control MACT scenario, where I’d have to meet it at every

plant. So that that scenario is much more costly, because I can’t

afford to take any risks on the technology, so I buy the most robust

and therefore the most expensive.

Senator VOINOVICH. So the SOx is essential for you to have the

flexibility to move on this area?

Mr. MONROE. Yes.

Senator VOINOVICH. Well, I think that we’re not going to get that

done today, we want to hear from the other witnesses, but I’d like

to really get a sense of, if you went from 26 to 34, what it would

have in terms of moving forward on new technology. Also then, you

needed to look at the environmental benefits that you would get

from the difference. That’s something we haven’t talked a lot about

today. But maybe it’s a subject of a hearing in terms of mercury

and what it’s contributing. I read half of it’s natural and then half

of it’s caused by us, and a lot of it’s caused by utilities. And do we,

is there free mercury in the air.

In know one of the things in my State, because in our lakes we

discourage people from eating our fish, particularly pregnant

women, more than once a month or something because of the fact

there’s concern it might influence their baby. And so I need just a

whole lot more information in that area. Because that’s what we’re

trying to look at, is we’re trying to improve again, getting back to

harmonizing. We want to provide readily available low cost energy

so that we can have a good economy and be competitive in the global marketplace. At the same time, we have to balance that in terms

of our environment, public health and what we know in that arena.

That’s the real challenge that we have here sitting at this table.

Mr. MONROE. If I can make a few comments. I’m not a human

health expert, I’m an engineer. But I follow that debate in the mercury issue. And I would encourage you to hear some more about

the science of that. There’s controversy about what low levels of

mercury, and incidentally the only route of interest is actually

through the consumption of fish for humans. That is the only thing

we worry about for mercury exposure.

And there’s two competing studies on health effects that sort of

come to different conclusions. A follow-up to one of them was just

published in the Lancet which cast some doubt on whether the referenced dose that EPA has set forward is, it suggested it may be

much more conservative than necessary.

So I would encourage you and be happy to help supply suggestions for witnesses.

Senator VOINOVICH. I hope it’s better than what we’re getting on

the issue of greenhouse gases and global warming. We’ve had several hearings on that, and if you listen to one side, it’s one way,

and you listen to the other side, it’s another way. I’ve always found

usually somewhere in between is where it really is.

Senator CARPER. We’re not yet in full agreement on the need to

address greenhouse gases and global warming. But at least, Mr.
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Chairman, and I suspect Senator Cornyn as well are in agreement

that SOx needs to be in whatever bill we enact. That’s a good

thing.

Dr. Monroe, I think you said earlier, I’ve just been thinking

about this during the course of this conversation, that, are you a

chemical engineer?

Mr. MONROE. I am.

Senator CARPER. And a utility engineer as well. Thinking about

all the work that lies ahead for your industry, I just think, you’ve

got pretty good job protection.

[Laughter.]

Senator CARPER. That’s got to be a comforting thing.

Mr. MONROE. It’s the best time to be in this job and at the same

time the worst time to be in this job.

Senator CARPER. Our sons are 13 and 14, and we’re talking

about what they’re going to be when they grow up. I’m going to

walk away from this conversation thinking more about maybe

chemical engineering as a promising field.

Earlier in your testimony, you referred to the NESCAUM report

that I asked to be made part of the record. There was a question

of whether or not, if we set a standard, a regulatory standards,

somehow that incents industry to come up with ways to meet that

standard. You used, I think, fusion as an example and said that it’s

always been 10 years away for the last 40 years. I would just, and

I know I’ve heard that a lot myself, but fusion was never a regulatory requirement, which is an interesting point, never a regulatory requirement.

I would make another one of those unanimous consent requests

while the chairman is not listening to me, and——

[Laughter.]

Senator CARPER. While he’s talking to his close colleague and associate over there, Mr. Chairman, I’m sorry to interrupt, but I am

going to ask, Senator Lieberman is not here today, he’s not going

to be able to join us. He’s given me a statement he’d like submitted

for the record. If we could do that, I’d appreciate it, and he would

too. So I’d ask unanimous consent.

Senator VOINOVICH. Without objection.

Senator CARPER. Thank you, sir.

[The prepared statement of Senator Lieberman follows:]

STATEMENT OF HON. JOSEPH I. LIEBERMAN, U.S. SENATOR FROM THE STATE OF

CONNECTICUT

Thank you, Mr. Chairman. I appreciate your convening today’s panel on investor

risk and climate change. While over the past few years we have already heard from

many witnesses about the range of promising technologies to control pollutants from

power plants, we have not yet heard about these issues from the perspective of investors. I am particularly pleased that Denise Nappier, the esteemed treasurer of

my State of Connecticut, was invited to speak on this matter. I trust she will give

an eloquent and persuasive presentation. As you well know, Mr. Chairman, I have

long been concerned about the growing threat of global climate change and our nation’s resistance to taking credible action to counter it. The science is now overwhelming and indisputable: carbon dioxide emissions are heating up the planet, and

the longer we do nothing, the worse it will get. That is why I have introduced the

Climate Stewardship Act with Senator McCain-the only legislative proposal on the

table that would actually stem the increase of our nation’s greenhouse gas emissions-and, with Senator Jeffords, have introduced the Clean Power Act, which would

cut the emission of major pollutants from the nation’s power plants.
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But the Bush Administration’s do-nothing policy on climate change is much more

than a mammoth environmental problem. It also creates two other kinds of problems.

First, a foreign policy problem. Just this Tuesday, a troubling poll from the Pew

Center for the People and the Press confirmed once again that our great nation’s

stature in the world is shrinking. Some attribute our loss of stature solely to the

war in Iraq, but that’s just not the case. Removing Saddam Hussein was the right

thing to do, and much of the world will come to respect us for acting on principle.

No, the core problem is that the world sees an American administration that on a

broad range of issues is happy to lecture but not willing to listen. As Tony Blair

has said, America must not only speak to the world. To truly lead, we must hear

the concerns of our friends and allies, including the outpouring of concern about climate change and the consequences of America, the world’s largest emitter of carbon

dioxide, doing nothing to stem it. The fact is, America produces about a quarter of

the world’s greenhouse gases, but under the Bush Administration’s neglectful watch

has shown an unwillingness to produce any of the world’s climate change solutions.

Second, the Bush Administration’s neglectful approach to climate change creates

a big economic problem. The ongoing regulatory uncertainty produced by the Bush

Administration’s refusal to act leaves businesses waiting, wondering, and spinning

their wheels rather than making the long-term investments today that they would

make if they were confident of how government would approach this problem. When

it comes to climate change laws, businesses deserve more than instructions to place

their fingers in the wind. They deserve an answer from us in Washington so that

they can get down to the business of serving their customers, producing profits, and

creating jobs.

Institutional investors see the problem quite clearly. Treasurer Nappier, for instance, is the steward of some $17 billion in pensions that are the nest egg of Connecticut’s working families. Unfortunately, as we will hear from her, her ability to

invest that money wisely has been impaired by the now chronic uncertainty surrounding what companies’ obligations will be to abate climate change.

Mr. Chairman, my staff has talked with many investment analysts on Wall Street

who tell the same story. There is a general understanding that constraints on greenhouse gases are an inevitable fact of the future. Analysts understand the size and

the scope of the global warming problem and understand that America cannot keep

its head in the sand forever. They understand that the climate is changing and executives are willing to invest in solutions-but they will put off those investments if

they think the regulatory climate will keep changing each step of the way.

The Coalition for Environmentally Responsible Economies (CERES), a coalition of

environmental, investor and advocacy groups, has long warned us of the strong link

between climate change and investment risk. In its April 2002 report, Value at Risk:

Climate Change and the Future of Governance, CERES warned that ‘‘there is

mounting evidence that failure to respond to the risks posed by climate change

could result in multi-billion dollar losses for U.S. businesses and investment portfolios.’’ The report found a pressing need for corporate leaders and institutional investors to tackle climate change more aggressively, noting that ‘‘it is increasingly

evident that the costs of inaction are likely to far outweigh the costs of action.’’ The

report went further to state that ‘‘climate change represents a potential multibillion

dollar risk to a wide variety of businesses and industries. It should, therefore, command the same level of attention and urgency as any other business risk of this

magnitude.’’ Mr. Chairman, I ask unanimous consent for this report to be entered

into the record.

The World Resources Institute also released a recent evaluation of the effects of

climate change on shareholder value, in this case the value of oil companies. WRI

found that different oil companies were positioned very differently on this issue, depending on how each company had hedged its risks in anticipation of policies to address global warming. For the companies that had acted wisely, WRI saw little impact; for those that had not done so, WRI saw a loss of more than 6 percent in

shareholder value. Mr. Chairman, I ask unanimous consent for this report to be entered into the record as well.

Finally and most recently, CERES conducted a yearlong dialog among experts in

the electric power sector, investors, and environmentalists on the issue of climate

change. The resulting report, The Electric Power Sector, Investors, and Climate

Change, due to be released today, concludes that the inevitable rise of carbon-regulating legislation, along with the direct financial consequences of climate change,

justifies corporate and investor action. This problem, CERES has found, crosses industry and sector lines, and presents serious risks for all corporate shareholders

alike.
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Climate change is real and must be addressed. The heat is on the Administration

to do something, do something decisive, do something credible, and do something

soon. What John McCain and I have proposed is a moderate, measured, and marketbased response to get us on the right track without creating a shock to our economy.

It would help, not hurt, businesses crying out for a hint of what is to come. It would

improve America’s stature in the world. And most of all, it would protect America

from the growing environmental threat posed by global warming.

Senator CARPER. I wondered if I could start off with Dr. Benson

on this. A couple of times in the testimony today I’ve heard the

term fly ash used. It sounds like it’s a product for which there can

be some value, or not. We have a large coal-fired utility, electric

utility in the southeastern part of Delaware. And if anybody in the

audience has ever been to Bethany Beach or Rehoboth Beach or

Dewey Beach or Fenwick Island, or any of those great Delaware

beaches, you’ve been not too far away from the Indian River power

plant, which uses a lot of coal and create electricity for the DelMarVa peninsula.

They create fly ash as a by-product of their operation. And the

fly ash has elements in it, mercury among others, but it doesn’t

have a commercial value and it has to be landfilled, which is not

inexpensive. And instead of having the ability to sell fly ash and

make some money off of it, they have to figure out what they’re

going to do with it, and it costs money to landfill it. God only

knows what kind of potential hazards that will pose for us later in

this century.

Dr. Benson, any comments that you’d like to share with us no

the cost-effectiveness of, or the economic value of dealing with fly

ash and the stuff that goes into it, the mercury and what are the

benefits for some of the new technology that we’re talking about

here with respect to resale of taking a waste product and turning

it into something that has market value?

Dr. BENSON. The ability to utilize fly ash in various products,

such as cement, use it for cement replacement, use it in other types

of building materials, is dependent on the fuel composition, which

dictates the fly ash composition. For western coals, there’s a lot of

calcium in the fly ash, so it’s a great cement replacement material.

By adding, for example, carbon based materials, it decreases the

ability to utilize the ash, because the carbon interferes with the

ability of the concrete formation process. So that’s one of the issues.

So you want to look for alternative sorbent technologies, if there’s

another mercury sorbent, such as calcium silicate or something else

that can be used, that does not interfere with the cement making

process. Also the W.L. Gore technology, which does not use a sorbent or a carbon material, does not interfere with the process of

utilizing the material.

The mercury that’s absorbed into the fly ash based on our testing

is fairly stable. We’ve heated the material up over 200 degrees to

300 degrees Centigrade and the mercury stays in the fly ash. So

it seems to be stable once it gets there, with most technologies that

we’ve been studying.

Senator CARPER. Dr. Bucher, I think you made some mention of

fly ash in your testimony. Would you just go back and expand on

that a little bit, at W.L. Gore, when you’re thinking about how to

make a product or a process that will have a return on your invest-
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ment, how does this issue of turning fly ash into a marketable commodity figure in?

Mr. BUCHER. It figures in very strongly. As Dr. Benson indicates,

some facilities today sell their fly ash, and as you indicate, some

facilities do not. When we go and visit and talk to some of the

plants that are currently selling their fly ash, when they think

about one, not being able to get the revenue from selling it, and

then two, paying someone to put it in the ground in a landfill, it’s

a very considerable delta that just drives them to find any solution

that they can other than having to contaminate their fly ash.

So it’s things like that that provide avenues for creative technologies to come in and solve those problems in a way that provides extra benefits to those customers, giving them further reason

to employ, and as Dr. Monroe says, take some chances on some

new technologies, because it will provide them that value in the

end.

Senator CARPER. Thank you.

Senator VOINOVICH. Senator Cornyn?

Senator CORNYN. I don’t have any further questions, Mr. Chairman.

Senator VOINOVICH. I want to thank you very much. This has

been very, very fascinating, and it’s certainly been helpful to me

and created some more questions that I need to get answered.

Thank you very much.

Our next panel, and I’ll introduce them as they’re coming forward because of our time limitations, and I apologize to them for

their long wait. First is the Honorable Denise Nappier, Treasurer

of the State of Connecticut. Dr. Margot Thorning, who’s the Chief

Economist for the American Council for Capital Formation. Mr.

Wes Taylor, President of Production of TXU Energy. Mr. Jim

McGinnis, Managing Director of Morgan Stanley. Mr. Douglas

Cogan, Deputy Director, Social Issues Service, Investor Responsibility Research Center. And Mr. Mark Brownstein, Director of Enterprise Strategy, PSEG Service Corporation.

The chairman suggested that we try to—well, make sure that

your testimony is within the 5 minutes. We would like to have

some questions asked today and we’re probably going to have to

wrap up this hearing by 12:30 at the latest. Again, we appreciate

your presence here.

We’re going to start out with Denise Nappier, who is the Treasurer of the State of Connecticut. We’re very happy to have you with

us today.

STATEMENT OF THE HONORABLE DENISE NAPPIER,

TREASURER, STATE OF CONNECTICUT

Ms. NAPPER. Good morning, Senator. I appear before you as an

institutional investor and the principal fiduciary of a $17 billion

pension fund representing 160,000 beneficiaries and plan participants. As Treasurer, I’m elected by the people of my State who like

millions of Americans, seek to ensure their families’ economic future through investments in the capital markets.

I appreciate the opportunity to testify about the relationship between climate change, corporate governance and the well-being of

institutional and individual investors.
370

I know that you have testimony from others more expert than I

on the science of climate change, so I won’t go there. But I will

share with you the perspective of an institutional investor who has

the responsibility, the fiduciary responsibility, to consider the long

term value of our pension funds.

We have all learned about a number of very painful but very valuable lessons following Enron and the corporate scandals that followed. We must not allow ourselves to lose sight of those lessons.

We’ve learned about the disastrous impact on our investment savings, on our jobs and on the economy.

That is when transparency, accountability and an honest assessment of risk is not viewed by companies as priorities. As institutional and individual investors, we need accurate and complete disclosure information that could affect the current and future health

of the companies we invest. And that goes beyond accounting to include among other things climate change as a risk factor.

Now, the consequences of those companies that do not act responsibly today and take steps to assess and mitigate the risks associated with climate change can be quite devastating. For example, companies could face the prospects of losing their competitive

edge, incurring litigation costs or being saddled with unforeseen

capital expenses just to name a few. And all these factors, all of

these factors and others, can erode shareholder value and place today’s seemingly solid investment in jeopardy.

Now, climate change may well be about our planet’s future. But

it is also about the financial risks to corporations and the impact

on the retirement savings of millions of Americans. As a result, we

have every right, as shareholders, to know what is being done

about it and how America’s corporations will protect their bottom

line and thereby the value of our investments.

I believe that this issue is quickly becoming the leading edge of

the next wave of corporate governance issues, and that the marketplace must begin to closely scrutinize companies to determine

whether they have honestly, directly and thoroughly evaluated climate change as a risk factor and developed a proper response to

it. In finance, where there is risk there can also be reward. A report by the Rose Foundation last year, the Environmental Fiduciary, reviewed the findings of a number of studies on this issue

and concluded that in many cases, improving environmental performance provides a measurable boost to profitability and shareholder value, especially over the long term.

So we have a real opportunity here to not only protect our shareholder value, but also to achieve added value. Now, while you in

Congress are debating the merits of a legislative response to climate change, such as whether or not to enact mandatory caps on

carbon emissions, other nations are preparing to implement the

provisions of the Kyoto Protocol, which include mandatory provisions.

Many of these companies in which we invest, particularly companies such as GE, Exxon-Mobil and Chrysler, operate in a global

economy. For them, carbon regulation is not a future possibility, it

is an imminent reality. And many State governments are also considering and enacting legislation addressing climate change.
371

Now, beyond the regulatory environment, shareholders are now

advancing this issue. This year, resolutions on climate change were

introduced at 23 U.S. companies and the Connecticut pension fund

filed two of these and co-filed on a third.

Shareholders are asking companies to report on their greenhouse

gas emissions, or to set a goal to reduce emissions or to report on

the potential future financial risks to the company from their past,

present and future emissions and to issue a plan to mitigate that

risk. Some of these resolutions were withdrawn after productive

discussions between shareholders and management. However, you

should know that most of the resolutions were opposed by management and the directors. That opposition may prove to be shortsighted. That is penny wise and pound foolish.

At an annual shareholder meeting of American Electric Power,

and I realize that my time—I need to wrap up.

Senator Inhofe [assuming the chair]. I’m sorry. We’ll have to go

on to Dr. Thorning. Dr. Thorning?

STATEMENT OF MARGO THORNING, SENIOR VICE PRESIDENT

AND CHIEF ECONOMIST, AMERICAN COUNCIL FOR CAPITAL

FORMATION

Ms. THORNING. Thank you, Mr. Chairman. I appreciate the opportunity to appear before this committee to comment on the impact of the Clear Skies Act and the proposals to cap carbon on the

financial health of the utility sector.

First, the Clear Skies amendment is, while a challenge for the

utility industry and in the judgment of many, not likely to significantly imperil the financial health and well-being of the utility industry. Carbon caps on the other hand are a different story. Some

proponents of carbon caps suggest that this will give certainty to

the investing community.

I think that the argument is flawed for three reasons. First, the

goalposts are not likely to stay the same. The Kyoto Protocol targets, which were just discussed and which are similar to the targets in Senator Jeffords’ bill, are not likely to hold. The European

Union is already moving beyond the Kyoto target. Proponents of

climate change measures there are suggesting targets of perhaps

60 to 70 percent reductions in CO2 by the year 2050 will be required. And that’s what they’ll be discussing at the COP 9 meetings in Italy this fall.

So the goalposts are likely to shift, thereby increasing investor

uncertainty and making it difficult for utilities to plan capital

structures. If we go down this path of carbon caps, there will be

increasing pressure from the European Union to try to keep up

with them in terms of the targets that they are suggesting should

be adopted.

Second, U.S. firms, if they accept these carbon caps, will be held

to them. We have a different regulatory structure in the United

States compared to the European Union. In Europe, there is much

more flexibility between regulators and the regulated. Utility companies that fail to meet their emission targets, and by the way, Europe is not on target to meet its Kyoto targets, are likely to have

much more flexibility and not face the draconian penalties that
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U.S. firms would face if they failed to meet their targets. It’s another source of uncertainty.

Third, as energy prices rise, if we put in place carbon taxes, the

demand for electricity, the product is likely to fall as energy intensive sectors move abroad at an even quicker rate than they really

are and consumer demand and industry demand falls. That’s another source of uncertainty for the utility community, the demand

for their product.

A better approach, I think, is based on the one the Bush Administration is advocating, which is an 18 percent reduction in greenhouse gas emissions per dollar of GDP over the next decade, compared to the 14 percent baseline forecast. One way to help achieve

that goal is to take a hard look at U.S. Federal tax policy. A study

that the American Council for Capital Formation Center for Policy

Research commissioned recently showed that out of 14 countries,

the U.S. has the slowest capital cost recovery for investments in

energy assets. I ask you to note Table 1 in my testimony which I’d

like included in the record. Table 1 shows that, for example, for

transmission investments and transmission assets, U.S. investor

only gets 29 cents on the dollar back after 5 years, whereas in

Brazil they get 50 cents back on the dollar. In China, they get

$1.04 back on the dollar. They are subsidizing those types of investments.

Similar story for combined heat and power and for investment in

other energy assets. So as the Treasury study in the year 2000 suggested, because of the increasingly competitive nature of the utility

industry, we need to take a hard look at the class lives and depreciation schedules that are provided for investments in those assets

and speed them up, with a goal of making it easier for companies

to make the kind of expenditures that will let them reduce CO2.

Finally, I think we need to recognize that climate change and addressing the potential threat of climate change is a global problem.

Imposing carbon caps on one industry and one country or even in

the industrialized world will make virtually no difference in global

concentrations of CO2 in the next hundred years. Because the

growth in emissions, for example, 84 percent of the growth in CO2

over the 1990–2010 period is coming form China and Indian. So instead, we need a global solution that helps transfer existing technologies for clean coal and other energy sources to the developing

world, so that they can try to meet the aspirations of their population for faster economic growth, as well as emitting less CO2 and

other emissions.

Senator INHOFE. We’ll have to cut it off at that point.

Senator VOINOVICH. Senator Inhofe? During question and answer

time, you’ll both have an opportunity.

Mr. TAYLOR.

STATEMENT OF WES TAYLOR, PRESIDENT OF PRODUCTION,

TXU ENERGY NORTH AMERICA

Mr. TAYLOR. Chairman Inhofe, Senator Carper, Senator Cornyn,

my name is Wes Taylor and I’m President of Production at TXU

Energy North America.

I appreciate the opportunity to appear at this hearing and provide TXU’s perspective on Senate Bill 485, focusing on the capital
373

investment ramifications of emission reductions. As one of the Nation’s largest energy providers, TXU made environmental stewardship a corporate priority long ago. Since 1990, TXU has added more

than 2,600 megawatts of generation with zero air emissions. Our

commitment to renewable energy has increased to the point where

we are one of the largest purchasers of wind energy in the Nation.

TXU has been among the Nation’s leaders in the voluntary reduction of greenhouse gas emissions, eliminating, avoiding or sequestering CO2 emissions by more than 193 million tons since

1991. TXU has decreased its rate of SO2 emissions by 38 percent,

decreased its rate of NOx emissions by 70 percent and our SO2 and

NOx emission rates remain below the national average.

Despite these significant accomplishments, more remains to be

done. TXU supports President Bush’s efforts to reduce SO2, NOx

and mercury emissions through a three pollutant framework such

as that used in Senate Bill 485.

I want to emphasize that this legislation must not cause the

shutdown of power plants, which are vital to our Nation’s electricity infrastructure, and also must not cause fuel switching that

could impair fuel diversity and adversely impact our Nation’s economy. TXU has a credible basis for issuing this caution. Our company has been an industry leader in the reduction of SO2 and NOx

emissions. We are very familiar with available control technologies

and have a good understanding of both the cost and the effectiveness of these controls.

Unfortunately, S. 485’s provisions regarding mercury emissions

go well beyond co-benefits in phase one and the control technology

to achieve these reductions is unproven and undeveloped. Therefore, no one has the ability at this time to fully evaluate the costs

associated with controls necessary to achieve the mercury emission

limitations contained in the bill, and this significant financial uncertainty may have the unintended consequence of causing plant

closures or fuel switching rather than investing in SO2 and NOx

control technology.

The adverse economic impacts of such actions may be totally disproportional to the harm sought to be addressed by S. 485. The

EPA itself states that less than 1 percent of global mercury emissions are produced by U.S. power plants. So I urge the committee

to proceed with caution and understand all the facts concerning the

economic and other impacts created by the public policy contained

in this legislation.

I have submitted a prepared statement with additional details.

I am also submitting for your use the 2002 environmental review

of TXU, which contains details on our SO2 and NOx emission reduction programs and documentation of our exemplary environmental record.

I respectfully request that my prepared statement and this report be included in the record of this hearing. In closing, I again

want to thank you for the opportunity to be here and I’ll be pleased

to respond to questions.

Senator INHOFE. Thank you, Mr. Taylor. And for all of you, your

complete statement will be made a part of the record.

Mr. MCGINNIS.
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STATEMENT OF JIM MC GINNIS, MANAGING DIRECTOR,

MORGAN STANLEY

Mr. MCGINNIS. Mr. Chairman, thank you. Senators, good morning. My name is Jim McGinnis, I’m a managing director of Morgan

Stanley, the investment banking division, with responsibilities in

providing advice on capital raising, restructuring and mergers and

acquisitions involving companies in the energy sector.

Senator Carper, you might be interested to know my wife and I

make our home in Greenville, Delaware, although my office is in

New York.

Senator CARPER. I know that.

Mr. MCGINNIS. I focus my work on power and energy providers,

utilities and on regulated competitors alike through a 14 year period characterized by nearly continuous and episodically chaotic

structural change in this sector. The utility and power generation

energy is a large user of investor capital at some $800 billion of institutional and individual investment dollars deployed in the Nation’s power and gas utility and generation sectors.

Yet despite that large number, investor sensitivities to smaller

incremental cash-flows requirements for debt repayments or new

capital spending can sharply affect any individual company’s access

to capital. And an event related swell of concern in the market can

and has in the past 12 months effectively cutoff access to capital

for even large companies for significant periods of time.

I believe that this investor sensitivity drives a basic need for

clarity in multi-emissions legislation. Capital providers to the industry can be expected to react poorly to financially significant expenditures required of utilities and unrelated generators in the

context of potentially shifting requirements, on proven technologies

and uneven regulatory treatment. This need for clarity has heightened importance now, at a time when industry participants have

been roiled by unprecedented financial disruptions and failures,

and by persistent uncertainties elsewhere in the public policy

arena. Investors and company leaders are currently wrestling with

an unprecedented variety of fundamental uncertainties, State by

State changes and policies related to industry restructuring, purchase power contract disputes, as in California, accounting standard revisions related to energy purchasing, hedging and trading activities, uncertainty over aspects of currently pending legislation

such as PUHCA reform, FERC transmission policy, transmission

siting rules and transmission tax policy on transfers and ownership, and certain aspects of bankruptcy code reform, just to name

a few.

One important attribute of legislation to reduce power generator

emissions which supports the objective of clarity is the abundance

of market signals from freely traded emissions allowances. Allowance trading improves the ability of affected companies to make

clear choices as to the most cost-effective of various strategies they

can employ in meeting emissions reduction strategies targets, and

promotes capital efficiencies when capital is scarce.

Now a few comments on financial stress in the industry. The

electric sector is in the midst, though perhaps the trailing end, of

the worst ever period for credit rating deterioration. Since January

1, 2002, we have seen 232 separate rating downgrades, some of
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multiple rating categories at one time versus 18 rating downgrades. These downgrades are a symptom of massive investor

losses on bonds and bank loans to companies in the sector and the

merchant power generation marketing in particular.

Also during the 2 years ending March 31, 2003, equity losses for

investors have been staggering as well. I won’t repeat some of the

numbers that have been included in my written statement.

There are related impacts on utilities from the recent merchant

power sector value destruction episode. In recent years, statewide

restructuring in California, New York, Illinois, Texas, Pennsylvania, Delaware and Washington, DC. has resulted in large legacy

generation portfolios of certain incumbent utilities to be transferred

in those locations to unregulated power merchants, many of which

have experienced a sharp decline in financial strength, and are

counter-parties to the host utilities in meeting their demand needs

for legacy customers.

Thus in evaluating legislation to reduce power generator emissions, which envisions one of the Nation’s most ambitious private

investment programs ever conceived, I would submit that the committee members examine several important market dynamics, multiple critical uncertainties in upcoming energy policy decisions, uncertainties related to fuel costs and availability and generally the

weakened financial capacity of the industry’s generation participants.

Thank you.

Senator Voinovich [resuming the chair]. Thank you very much.

Mr. COGAN.

STATEMENT OF DOUGLAS G. COGAN, DEPUTY DIRECTOR OF

SOCIAL ISSUES, INVESTOR RESPONSIBILITY RESEARCH

CENTER

Mr. COGAN. Thank you, Mr. Chairman and members of the subcommittee. My name is Douglas Cogan. I am the Deputy Director

of Social Issues for the Investor Responsibility Research Center.

I’m honored to have this opportunity to share with you an investor

perspective of clean air legislation, especially as it concerns climate

change.

Our Nation’s electric utilities account for 40 percent of America’s

and 10 percent of the world’s man-made CO2 emissions. Addressing

climate change necessarily involves this industry. Companies and

investors that ignore this fact do so at their own peril. Investors

loath uncertainty, as you know. Certainty will not be achieved until

carbon dioxide is recognized as an emissions source that will be

managed and controlled.

Electricity providers are poised to invest tens of billions of dollars

to reduce power plant emissions of NOx, SOx and mercury. The

concern of many investors is that the value of these investments

may be compromised if they fail to address CO2 emissions as well.

A more prudent and certain approach would be to consider these

four emission sources together as part of an integrated strategy.

Consider what Jim Rogers, chairman and CEO of Cinergy, one

of the Nation’s largest coal burning utilities, told this committee 2

years ago. He said, ‘‘Who will make a decision to invest a billion

dollars in a new coal plant if you can only guess about future regu-
376

lation? A new power plant today that fails to address CO2 will be

as dated in 5 years as current law is today.’’ Investors have raised

this issue with electric utilities over the last 10 years through the

filing of shareholder resolutions. With mounting support from large

pension systems and endowments, shareholder support for corporate disclosure on climate change has increased dramatically.

At three of the Nations’ largest electric utilities, AEP, TXU and

Southern, the support level has reached almost 25 percent for the

resolutions voted on in the last annual meeting season. Today you

are hearing testimony about processes electric utilities use to analyze capital investment decisions relating to emissions control.

Such analyses involving scenarios and decision trees are part of

good governance practices with respect to climate change.

Yet when it comes to investor disclosure, these analyses are not

yielding much useful information. Statements appearing in form

10(k) filings of electric utilities typically say that management is

unable to predict the impact of the Bush Administration proposal

or related climate change legislation, and that possible material

impacts cannot be determined at this time. Such statements offer

neither comfort nor guidance to investors. But they are typical in

terms of the statements that we see in securities filings. That is

one reason why shareholder resolutions seeking more information

from management on climate change are setting record proxy

votes.

Companies working with investors can take several steps to improve governance practices on climate change. IRRC in a soon to

be released report commissioned by the CERES coalition of investor and environmental groups identifies 14 specific governance actions. I will highlight three vitally important ones here.

First, companies should provide regular assessments of the climate change issue to shareholders, based on systematic board reviews of company financial risks and opportunities. Second, companies need to set CO2 emissions baselines and provide annual emissions data to investors, so they can gauge prevailing emissions

trends. Most important, utilities should be making forward-looking

disclosures of their CO2 emissions. Investors cannot begin to make

meaningful evaluations of the impacts of clean air legislation called

here as the most aggressive clean air initiative in our history, until

they have access to this forward looking information.

Congress can facilitate this process by requiring utilities and

other major carbon emitters to report not only past emissions data

but also future projections in their securities filings. To be fully

transparent in this disclosure, aggregate emissions data, as well as

emissions intensity ratios, should be provided.

The most helpful thing Congress can do, however, is to establish

once and for all that carbon dioxide is an emission source that will

be managed and controlled. Many investors see this coming. Regardless of the targets and time tables, this act alone will provide

essential guidance for investors and company directors who now

have climate change on their corporate governance agenda.

Thank you for this opportunity to testify.

Senator VOINOVICH. Thank you.

Mr. BROWNSTEIN.
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STATEMENT OF MARK S. BROWNSTEIN, DIRECTOR,

ENTERPRISE STRATEGY

Mr. BROWNSTEIN. Mr. Chairman and members of the committee,

good morning. I’m honored to be here this morning to represent

Public Service Enterprise Group and the Clean Energy Group. PSEG is a diversified energy company with over $25 billion in assets and over $8 billion in annual revenues. Among the assets we

own are 13,000 megawatts of electric generating capacity operating

or under construction in New Jersey, New York, Connecticut,

Pennsylvania, Ohio and Indiana. Clean Energy Group is a coalition

of companies with more than 100,000 megawatts of generation capacity nationwide including coal, oil, gas, nuclear and renewable.

The members of CEG, ConEdison, Entergy, Excelon, KeySpan,

Northeast Utilities, PG&E National Energy Group, Sempra Energy

and ourselves, are committed to promoting progressive environmental policies that are economically sound and sustainable.

PSEG, which celebrates its 100th anniversary this week, has

long believed that environmental performance is one indicator of

overall business performance. That being said, our eye is never off

the bottom line. In our view, environment and economics are inseparable and as with many things in life, the secret to success is

finding the right balance.

If you remember only one thing from what I say here today,

please remember that one word, balance. For PSEG and CEG, the

single greatest value to be derived from Federal multi-pollutant

legislation, aside from the public health and environmental benefits

themselves, is certainty. And the best way we know to achieve certainty is through a public policy outcome that strikes the right balance between environment and energy policy objectives.

I’m aware that this is the third hearing that you’ve held on the

many questions surrounding multi-pollutant legislation, and I’m

also aware that various stakeholders have come before you to argue

that the current proposals on the table either go too far or don’t

go far enough. From day one, our goal in this debate has been to

seek and encourage consensus. For we believe that it is only

through consensus that we can achieve the kind of regulatory stability essential to the health of our industry.

You’ve heard from others here today about the importance of certainty, and I echo that concern. This is a very capital intensive industry, where large investments are made in assets that last 30

years or more. Making large bets on the future is an inherently

risky proposition, and no amount of legislative activity on your part

can offer us 100 percent certainty.

But to the extent that the trajectory of future environmental requirements looms large in the planning of any major player in our

industry, you can make a significant difference by crafting legislation that clearly articulates expectations over the next 15 years, at

least. The past two and a half years have been a tumultuous one

for our industry. And we don’t need any more excitement.

But where some people might argue that now is the wrong time

to set new environmental requirements, we would argue that to

take this do nothing approach would be to kill us with kindness.

Whether you believe that the current oversupply of generation and

capital crunch will last two or 5 years, the fact of the matter is that
378

current market conditions in our industry are part of a cycle. At

some point, hopefully soon, companies like ours will begin to make

new investments in our Nation’s energy infrastructure. And when

we do, it is critical that we have clear understanding of the environmental requirements we will have to meet. Otherwise, I feel we

will be making suboptimal investments.

Nowhere is this more true than on the issue of carbon dioxide

regulation. First off, let me state for the record as we’ve said many

times in the past, PSEG believes that President Bush was right to

reject the Kyoto Protocol. The reductions contemplated under that

agreement demanded too much, too fast for our industry and our

economy to handle.

At the same time, we think the issue of climate change is real,

and we believe a domestic regulatory response is both necessary

and inevitable. Given that our industry is singularly responsible for

over a third of the Nation’s greenhouse gas emissions and 10 percent of the global greenhouse gas emissions, we cannot and should

not dodge this issue. With this perspective n mind, we believe that

we are better off as a company and as an industry if we develop

and implement a moderate response now, rather than wait 10

years, only to find that the political problem is now worse or that

the environmental problem requires a more drastic response.

In the investment decisions that we have made in the interim,

we’re dead wrong. This is one of the reasons why we think the bill

introduced by Senators Carper, Chafee and Gregg makes such an

important contribution to this debate. We’re encouraged by the

leadership that the Bush Administration has shown on the issue of

multi-pollutant legislation and we deeply appreciate the leadership

that Senator Inhofe and you, Senator Voinovich, have shown in

tackling this very difficult issue.

We encourage you in your efforts to find that balance that I

talked about earlier, and I thank you for this opportunity to testify.

Senator VOINOVICH. Thank you, Mr. Brownstein.

Again, I want to thank all the witnesses for being here today. Dr.

Thorning, we’ve heard several of the witnesses talk about the need

to place a cap on CO2 emissions to help the industry. However, if

a cap is placed on CO2 emissions, utilities, from what I understand,

will be forced to fuel switch away from low cost, abundant and reliable coal to natural gas. As I’m sure you know, natural gas prices

will only continue to increase as pressure becomes increasingly

greater already in a tight market.

How have the increased natural gas prices over the past few

years affected companies in other sectors, such as the chemical and

agriculture industry’s ability to invest in the market in general,

and has it affected utilities that rely primarily on natural gas for

their generation?

Ms. THORNING. That’s an excellent question, Mr. Chairman, and

I think most of the people in this room know that with respect to

the higher natural gas prices, our chemical industry has been adversely affected, fertilizers, and others that are dependent on gas

have been very hard hit and face reduced competitiveness, not only

at home but globally. So industry has been very hard hit in terms

of trying to maintain competitiveness.
379

The issue of placing carbon caps, which presumably would encourage fuel switching, is one that I think a lot of research shows

would significantly increase natural gas prices and make it even

more difficult for the U.S. economy to recover from its current slow

growth.

Senator VOINOVICH. It is a major problem.

Ms. THORNING. It is a major problem.

Senator VOINOVICH. Is it affecting the stock prices of any of the

companies that are highly reliant, for example, the chemical industry?

Ms. THORNING. Certainly it is. Stock prices have taken a very

hard hit in the energy intensive sector. The surge in gas prices is

certainly part of it.

Senator VOINOVICH. Thank you. Mr. Brownstein, the political reality we face in Congress is that the regulation of carbon will not

become law. We went through that last year. It’s not going to happen. And the whole issue is, in light of that fact, what is the wisest

action for the Senate to take, pass a bill that provides certainty

now for SO2, NOx and mercury and get on with it, or should we

just wait until the time comes when we deal with CO2?

Mr. BROWNSTEIN. Well, certainly, Senator, I’m in no position,

have no expertise to comment on political dynamics in this body or

in Washington. I can only bring to you the perspective of my company and my shareholders, which is in a perfect world, I suppose,

having some form of carbon price signal today would be much better for us than waiting.

I suppose the question of how our company would view legislation coming out of this committee or the Senate, and how we would

feel about that, would depend a lot upon the details in it. But I’m

hopeful that perhaps we can work with you and some others to

help change some minds about the value of doing something on a

moderate basis for carbon in the interim.

Senator VOINOVICH. Would a moderate basis not include a cap?

Mr. BROWNSTEIN. My view is that you need some type of price

signal out there. We’re very supportive, Mr. Chairman, of efforts to

provide Government support for the development of IGC technology, geological sequestration of carbon. Coal is a very important

of our generation mix and we want to make sure that it continues

to be an important part of our generation mix. But at the end of

the day, our concern is that as promising as those technologies are,

without some sort of price signal that values the carbon benefit

that they bring to the table, we’re concerned that they will never

be economic in the current marketplace.

Senator VOINOVICH. How much of your group’s generating capacity is attributable to coal?

Mr. BROWNSTEIN. Generating capacity, sir, is about 21 percent or

so, about 26 percent of the megawatt hours we generated last year

came from coal.

Senator VOINOVICH. So it’s about a quarter of all your group is

coal generated?

Mr. BROWNSTEIN. That’s right.

Senator VOINOVICH. I have, Mr. Taylor, I’m out of time. With the

implementation of the Clean Air provisions, other Federal regulations and State clean air laws combined to create uncertainty for
380

electricity generators, they do have an impact on the ability of private sector utilities to raise capital and make strategic long term

capital investments such as decisions on the purchase and installation of emission control technologies.

A prime example of this is the recent filing by PG&E National

Energy Group which requested permission to shut down a 745

megawatt coal-fired plant in Massachusetts because it cannot meet

the deadline to instal $125 million worth of SCRs and scrubbers.

The New England independent system operator is likely to rule

that the plant must stay on line in order to prevent blackouts, forcing either the State of Massachusetts to loan the money to the utility or the ISO to pay for the installation of the SCRs and scrubbers. In either case, the cost will likely be passed on directly to

ratepayers. I’d like to add this article that recently appeared in the

record. And I’d like to ask, is it reasonable to assume that we

would see similar scenarios if Senator Jeffords’ four P bill would

have been enacted last year?

Mr. TAYLOR. Chairman Voinovich, I think that the addition of a

fourth P to the legislation would exacerbate this problem and

would cause the problem that this company had with their Salem

Harbor plant to recur many more times around the Nation. Some

of my fellow panelists this morning have talked about the certainty

that would come by adding the fourth P to the bill. In my opinion,

the only certainty that we would have from that would be the certainty that we would use less coal, use more natural gas and result

in higher prices for both electricity and natural gas. I believe that

it would harm our Nation’s economy.

Senator VOINOVICH. Thank you.

Senator CARPER.

Senator CARPER. Again, this is another excellent panel, and we’re

grateful to each of you for making time in your lives to be here

with us today and to share your input. Mr. Taylor, I’d just say, I’m

the only native born West Virginia Senator in the U.S. Senate. I’m

hoping to go to the Carper family reunion the first Saturday in August. I assure you, I don’t want to go to that reunion having anybody there think that I’m not interested in the economic well-being

of my native State and the coal industry within that State, from

which I was born.

And you make an assertion that if we do take, given some balanced steps, reasonable, I think modest steps with respect to CO2,

and we include a cap and tarde system, the opportunity for sequestration really to use a lot of innovation, that we’re going to see a

wholesale shift from coal to natural gas. There’s actually been some

pretty good empirical analysis that says that’s not really the case,

at least when you take a reasonably balanced approach. And

maybe we can have a conversation about that later.

But the last thing I want to do is push people out of coal and

exclusively into natural gas. We’re aware of the consequences of

that for a company like Dupont, which is headquartered in my

State. We’re aware, we have a lot of agriculture in my State, and

we’re aware that as the costs of natural gas go up, it has an adverse impact on agriculture, too.

So for us, part of the challenge is to find ways to, as we look to

control the emissions of CO2, to do so in a way that doesn’t lead
381

to this wholesale shifting away from coal and makes less economically viable some of our major industries, including chemicals and

agriculture.

I was riding down on the train this morning, Mr. Chairman, and

sometimes I read the paper. Today I was taking a look at the

morning paper and I came across a small article in our paper from

Delaware about a lawsuit that I think several States had filed

against EPA to force recognition of CO2. I think there were three

States that were listed. And I believe Connecticut may have been

one of the States.

I know you’re not the Attorney, you’re the Sate Treasurer. A

more important job, I used to be State Treasurer of Delaware. Almost as important as the Auditor. What were you, the Auditor of,

I know you were the major, were you the auditor?

Senator VOINOVICH. Of Cuyahoga County.

Senator CARPER. Another important job. But are you aware of

the lawsuit that’s been brought? I think it involved Connecticut,

maybe a couple of other States.

Ms. NAPPIER. I am aware of the lawsuit, and it essentially says

that the Federal Government should step up to the plate and identify CO2 as a pollutant that ought to be regulated, that we should

have uniformity as it relates to the need to lower emissions. And

put it under the, I believe it’s the P3 legislation, to make it P4.

Senator CARPER. Thank you. You were cutoff, you ran out of time

and didn’t have a chance to finish up your testimony. And I’m not

going to go back and ask you to read it, but anything that you

wanted to convey to us or just reemphasize?

Ms. NAPPIER. Yes, that shareholder votes in favor of climate

change resolution has doubled over the last 2 years. I think that

evidences the growing interest to properly address climate change,

going out into the future.

The other thing is that CERES, which is a coalition of environmental groups and institutional investors, has had a year-long dialog on this whole topic. An important study is being released today

as we speak here. I would hope that your committee would sort of

avail themselves of that report, some important information coming

out.

Last, that we do have a, I am calling for an institutional investor

summit this fall that will take a very close look at climate change,

what needs to happen to better quantify and assess the risks associated with climate change, along with the need to mitigate that

risk. But a group of us will be coming together to do just that. And

I believe that if we look at climate change as merely an environmental issue, we are missing the point. It is an investor security

issue of the highest magnitude.

Senator CARPER. Thanks very much. Mr. Chairman, I hope we

have another round, but thanks very much.

Senator VOINOVICH. Senator Cornyn?

Senator CORNYN. Senator Carper, unfortunately I had the misfortune to be Attorney General for 4 years in my State.

Senator CARPER. There are worse misfortunes.

Senator CORNYN. A whole State can’t be held accountable for the

actions of a single Attorney General.

[Laughter.]
382

Senator CORNYN. Mr. Taylor, I’m going to pick on you a little bit,

because we come from the same place and your company is the

largest electric generator in Texas. I’d like for you to clarify a few

things for the record for me and for the subcommittee. Your company has a generation mix that includes coal, natural gas, nuclear

and renewable. During our subcommittee hearings on the Clear

Skies proposal, we’ve heard varying claims regarding the level of

emissions controls that are currently in place at coal-fired plants.

Would you give the subcommittee a sense of the emissions controls

that TXU operates at its coal-fired plants and when those emissions controls were installed?

Mr. TAYLOR. Senator Cornyn, at TXU we have nine generating

units that use lignite and coal. Five of those generating units had

scrubbers installed at the time they were built. This was in the late

1970’s, roughly 25 years or so ago.

Since that time, we have spent a great deal of money in upgrading those pollution controls and adding additional pollution controls. About five or 6 years ago, if memory serves correct, we added

some, a device called a compact hybrid particulate collection system. It was very much like one of the systems that the gentleman

on the second panel from the Gore company described as an advanced technology that removes very fine particulates. We spent

$121 million installing that system.

We have spent $100 million, roughly, upgrading the scrubbers on

our plant since 1995. We have spent $230 million on NOx controls

at all of our power plants since 1997. So the total just since the

early 1990’s is in excess of $450 million.

Senator CORNYN. Well, obviously TXU has committed significant

resources to control various emissions. Can you explain to us why

the circumstances surrounding the proposed control of mercury

emissions are different?

Mr. TAYLOR. Senator Cornyn, first of all, TXU very much supports the concept of the multi-pollutant legislation, and we certainly commend President Bush and the Administration on the introduction of it. We have a great deal of certainty with regard to

how much it costs to control SO2 and how effective those controls

are. The same thing is true for NOx. We have no technology available for mercury control, other than what we get through co-benefits. We would be faced, under this bill as currently filed, with

spending some $400 million to install additional scrubbers on our

unscrubbed power plants, which we, by the way, are ready and

willing to do. We would probably spend another $100 million or so

on additional NOx controls, which we are ready and willing to do.

But if we have to do that and also are facing a mercury control

limit which we cannot meet, then our option would probably be

that we would not install the SO2 controls, not install the NOx controls, but simply shut down or fuel switch those units when 2010

gets here. I cannot overstate the difficulty that we would have in

committing capital for further SO2 and NOx reductions if we knew

we could not comply with mercury reductions with any existing

available technology.

Senator CORNYN. If TXU and utilities generally decide to just

give up on coal and go natural gas, what are the financial prospects, what are the ramifications of that?
383

Mr. TAYLOR. We believe, first of all, that it would drive up our

cost structure very considerably. The lignite and coal that we burn

at our company is just over $1 per million BTU, I think $1.20 or

so on average this year, if memory serves correct, whereas natural

gas prices are currently $6. We’re one of the largest generators in

the United States, and it would add several billions a year to our

cost structure. That would make the prices that our customers pay

for electricity higher. We believe it would also drive up the cost of

natural gas, and that would have severe adverse impacts on consumers, as well as for industry and particularly those industries

that use natural gas as a feedstock, like the petrochemical industry

and the plastics industry, for example.

Senator CORNYN. Thank you very much. I’ll yield back my time.

Senator VOINOVICH. Mr. McGinnis, you’ve, and I apologize, I

wasn’t here to fully get your testimony, but the real issue here is,

we have a kind of a patchwork, do source review, NOx SIP call, 126

petitions and so on and so forth. And we’re trying with this Clear

Skies legislation to come up with some sensible plan that will reduce emissions and improve public health and at the same time

leave this country in a competitive position in terms of the global

marketplace.

Sitting from your perspective, would the passage of this legislation make it more attractive for you to finance some of the things

that Mr. Taylor talked about as contrasted from the current situation where we have all these other things that are in place?

Mr. MCGINNIS. Senator Voinovich, you address the question of

whether it is easier to finance. There are going to be a number of

issues, a number of inputs to market pricing of bonds and stocks.

But I will say that a gist of the part of my remarks focused on the

need for clarity. And investors seek clarity in an industry which

has an environment of uncertainties, fundamental uncertainties related to regulatory policy and other matters.

So with respect to a Clear Skies bill, it does bring clarity on

these three emissions. I’d also say that with respect to the adoption

of additional restrictions on emissions that would use technologies

that may be beginning to be introduced or being developed in R&D

labs but are not yet proven with unknowable costs yet, doesn’t help

on the clarity point. It decreases clarity, decreases certainty with

respect to how investors think about the future profits of those

companies.

Therefore, more certainty is better here. I think more clarity

would help investors get comfortable at a time of uncertainty otherwise, to put additional dollars into the companies that are going to

need significant capital raised to embark on this emissions reduction program.

Senator VOINOVICH. There seems to be some strong opinion of

some of the witnesses here that we have to add carbon to make it

the fourth P. The issue is, if we did that, would that make it better

for you or worse for you or wouldn’t it matter?

Mr. MCGINNIS. Speaking from the perspective of investors and

access to capital, the flow of funds, what would improve the flow

of funds, what would make financing these more efficient. Adding

a fourth P without the technology in place to getting to the emissions standards apply to the fourth P or clear costs associated with
384

the equipment required to meet those standards, potentially even

technology to quantify the amount of the emissions creates more

uncertainty than not having that fourth P in the bill.

So there would be a lack of clarity on what amounts the companies would have to spend over what period of time, because we

don’t have the technology in place to deploy.

Senator VOINOVICH. Do you have some of the same concerns over

the issue, you’ve heard the testimony on mercury, the same concerns about that? We’re struggling here with a number, and as I

mentioned before, when we inserted the number into the legislation, there was a lot of people that said it was unrealistic because

it was too low to take advantage of co-generation. How do you feel

about that?

Mr. MCGINNIS. Senator, in particular, I would want to know

what the costs would be. If I’m an investor in a company that is

newly faced with an additional requirement for mercury reductions,

before I make an investment of reasonable size, I would want to

know what those costs would be to meet that new hurdle. And in

the absence of such knowledge, I have to add that to the list of

other uncertainties about that entity. I’m likely to migrate, my

choice is likely to migrate to a company that has greater certainty

perhaps in another sector.

Senator VOINOVICH. Thank you.

Ms. Nappier, the Energy Information Administration has projected that electricity prices would raise by some 25 to 30 percent

if the 4-P bill was adopted from last year. Natural gas prices would

risk dramatically. How could that be good for the shareholders of

a utility and for that matter, and I don’t know what the mix or

where you get your energy from, but in a State like my State,

where we would fuel switch, our manufacturers would have to pay

about 45 percent more for their electricity and commercial about 35

and our homeowners about 25. How does it make it better if you

add a fourth P to this legislation?

Ms. NAPPIER. Based on the way you’ve described the scenario, it

would erode shareholder value.

Senator VOINOVICH. I’m sorry?

Ms. NAPPIER. I said, based on the way you’ve described the scenario, it wagtail erode shareholder value. You don’t need to be a

rocket scientists to understand that. My concern is this, that we

need to have full, accurate disclosure of the climate change as a

risk. We’re not getting that kind of information from companies.

We’re asking companies not only to begin to quantify the financial

risk but to also take steps to come up with plans that will help to

mitigate that risk. And we want to know that. We want to know

what it’s going to cost our company in the long term and how it’s

going to impact shareholder value. We don’t have access to that information.

There was a carbon disclosure project that was completed a while

ago and surveyed 500 companies. Of the 500 companies that responded to the survey, 80 percent say that they are aware that climate change is a financial risk factor. But only 40 percent are

doing anything about it. Only 40 percent are beginning, they’re

taking steps to assess the risks, financially, operationally,

reputationally. Only 40 percent.
385

From my perspective, I want to know that. If what you’re saying

is absolutely true, in terms of my portfolio companies, like AEP,

then that’s vital information we need to make our investment decisions. And we don’t have that information today.

Senator VOINOVICH. If the 3-P legislation, the President’s Clear

Skies legislation is passed, for sure you’ll have certainty about that

area, which is uncertain today in terms of most people’s opinion.

So that’s, I would think, would be a step forward.

Ms. NAPPIER. Yes, I believe the 4-P legislation establishes a mandatory cap. But I’m not sure that that legislation speaks to the

right of shareholders to have clear and accurate disclosure of information regarding a company’s future health as it relates to climate

change. I’m not sure it does that.

Senator VOINOVICH. I think that’s something that——

Ms. NAPPIER. Regulation does bring on uniformity and that’s

good.

Senator VOINOVICH. The issue is you’ve got Dr. Thorning here,

you’ve got Mr. McGinnis, is the fact that that information is available going to make a difference in terms of, do you think, in terms

of the price of shares of stock?

Ms. THORNING. I’d like to weigh in. I think we need to keep our

eye on the big picture, which is that addressing climate change is

going to take a global effort. Shareholders in the U.S. cannot materially impact the growth in CO2 concentrations. We need a global

approach that will help the developing world where the growth is

coming, slowly reduce their greenhouse gas intensity. Greenhouse

gas intensity is falling in the U.S. If the Bush Administration plan

is implemented and if tax provisions are made more favorable for

pulling through the capital stock faster, we will be able to meet the

targets, and shareholder value will be enhanced.

As I pointed out earlier in my testimony there are many uncertainties associated with adopting carbon caps, including the fact

that the targets will continually tighten. If we go down that path,

it’s going to be very hard to get off of it.

Mr. MCGINNIS. I would just point out that while I’m sympathetic

to the argument that developing a price signal, and institutional

investors would like a price signal on what would happen with carbon emissions, again without knowable technologies and knowable

costs and time tables, the price signal is distorted. So we wouldn’t

get a very clear read on what those costs would be. So it would create greater uncertainty rather than less.

Senator VOINOVICH. Senator Carper?

Senator CARPER. I want to revisit, and I’m sure we’ll revisit this

one a lot, but the assertion that our chairman made with respect

to the cost of a 4-P bill versus that of a 3 pollutant bill. He mentioned 25 percent. I’ve not heard 25 percent, I’ve heard 3 percent.

As we go forward, we’ll have to find out, which is it, 25 or 3 or

something in between. Because that’s an important element here

and an important factor in the decision that’s before us.

I do know this, that 25 percent of the greenhouse gases created

in the world today come from the United States. And I do know

this, that 40 percent of the greenhouse gases that emanate in the

United States come from our utility industries. While we’re looking

for a global solution, and there’s clearly plenty of other sources of
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greenhouse gases around the world other than just utilities, we as

a nation are a significant contributor, and the utility industry is a

significant contributor, too.

Mr. Brownstein, I just want to salute you and your utility also,

those whom you mentioned, the utilities that are interested in trying to find a balanced approach to the problems before us. You said

if we only remember one thing from what you said, leaving here

today, you talked about balance. Just re-emphasize for us the critical point, and I’m going to ask Mr. Cogan to come back to a critical

point that he would have us keep in mind as we leave here today.

Mr. BROWNSTEIN. And I think the discussion that’s been had

here this morning just in this last panel has illustrated that very

nicely. There’s no question, Senator, that if carbon caps are set in

an unrealistic fashion, you’re going to stress out the industry and

create more uncertainty, as opposed to create less. That’s one of the

reasons why we think it’s so important that No. 1, we be realistic

about what we can accomplish in the near term, and No. 2, that

we couple that with flexibility mechanisms.

Certainly, if you set a carbon cap and you limit the compliance

ability just to within the industry, we’re going to find ourselves in

trouble very quickly. But if you set a carbon cap in such a way that

it incentivizes utilities to go out and find low cost reductions in

other industrial sectors and even around the world, I might add,

our first wind turbine project was in Chile. Because it made sense

economically and also was consistent with their developmental

goals.

That if you incentivize through a cap program, you’ll discover

those costs. With respect to our friend from Morgan Stanley with

whom we often do business, sometimes it’s just a question of where

you set the bar and how you share information between parties

that give people confidence that there is a way forward. That’s

what we mean by balance. I certainly don’t want to be in a position

where we go forward and we make investments in NOx and SO2

and mercury technologies, put off the climate debate for 10 years

and find that we made a fundamental error in how we viewed the

overall picture.

Senator CARPER. Thanks, Mr. Brownstein. Mr. Cogan?

Mr. COGAN. I would concur with everything Mr. Brownstein said,

Senator. Two additional points I would make. Several references

have been made during the course of this hearing, one to the patchwork of current regulations that are in place, and second to the

question of uncertainty going forward. My concern in the research

that we do for institutional investors is that neither of those issues,

the patchwork of regulation or the uncertainty, will go away under

a 3-P bill.

There is a patchwork in place right now with respect to carbon

dioxide regulation. The vacuum in effect at the Federal level is

being filled by some States that are passing their own legislation,

regional air quality groups that are also looking at this issue, and

certainly at the international level with the Kyoto Protocol and

many countries that are implementing its terms.

So there is a patchwork that these countries and companies already have to deal with. That’s not going to go away if there isn’t

a Federal standard that’s put in place.
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And the uncertainty won’t go away either. The concern is that

unless there’s a dramatic change in the way the science of this

issue looks, and the trajectories of the emissions being what they

are, there’s a misguided focus on the emissions intensity of production. But we don’t want to lose sight of the fact of what the overall

emissions trends are.

An analogy I might draw is to someone who has their cholesterol

checked, and an emissions intensity ratio is a helpful piece of information if you know your HDL to LDL level. That’s a good piece of

information to have. But you also want your doctor to tell you what

your overall cholesterol level is and whether the trend is up, and

whether you’re in a level where you’re facing a greater risk of contracting heart disease. We don’t want to lose sight of the fact that

overall emissions in this country and in the world are continuing

to rise and that therefore, the risk of climate change compounds

going forward.

So the uncertainty will still be there in terms of addressing this

issue. The one certainty that we would have with a 3-P bill is that

we would be committing, as has been said again by Senators in

this committee, to the most aggressive clean air initiative in history, very well intentioned and I think broadly supported in this

country, but also very expensive. And the concern would be that as

we get down the road, committing these tens of billions of dollars,

we find that we’re not going to be able to fully depreciate the value

of those investments because we find that the science and the other

concerns, the economic risks and opportunities posed by climate

change are so compelling that we have to shift in midstream.

That’s our concern. That’s the fundamental uncertainty that we

feel could be addressed.

Senator CARPER. Let me ask a question of Mr. McGinnis, and I

think probably Mr. Cogan as well. Do you find that investors are

shying away from the electric generating sector now due to the uncertainty of environmental regulations?

Mr. MCGINNIS. It’s hard, Senator Carper, to understand when a

stock price goes down what the specific ratio of rationale was, what

one investor chose as his motivation to sell versus another to buy

or more to sell for one reason or another. So it’s hard to pinpoint.

But in general, the focus on destruction of value in the merchant

power sector has been from overbuilding in places which don’t require as much supply. So environmental concerns from companies

who have been focused on new construction have not been as important as concerns like access to financing and the spark spreads,

or that is the margins that they experience from making power

from gas-fired plants in certain regions to be robust.

So it’s not been the prime driver of a lot of the issues for the industry. There have been cases, and RG is an example of a case

which Ms. Nappier from Connecticut would be familiar with, in

which pollution control and environmental issues, and NEG in New

England, pollution control and environmental issues are very much

a part of the economics of some of their investments. That has hurt

those companies and that has hurt their share prices.

Senator CARPER. Mr. Cogan, do you want to take a shot at that

question, please?
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Mr. COGAN. Yes, you have to think about the type of institution

that’s holding the shares as well. The work that we do is largely

for institutional investors who are managing pension, insurance

and endowment assets. By definition, they tend to be in these companies for the long term. The trend has been toward index investing, and so you’re in basically whatever is in the index and you’re

not going to sell it.

Electric utilities are a vitally important part of that index, as

they are a vitally important part of our economy. So therefore, the

institutional investors have to look beyond kind of the ebbs and the

flows and the swings of this industry, again to see where the long

term trends are and where it may head. That’s why I continue to

emphasize this need for a longer term perspective, a 15 year perspective perhaps, as Mr. Brownstein said.

The way I’d actually like to think of this issue in terms of a governance perspective for corporations and shareholders is that this

issue presents a fundamental gap in governance decisionmaking. A

CEO of a company typically is in that position for about three to

5 years and the investment planning horizon that a CEO has tends

to match that same time interval.

In the case of a long-lived asset like a power plant, the investment planning horizon may look out 15 years. But the fact is, the

power plant itself will exist for perhaps 30 or 40 years, and then

emissions from that power plant, the carbon dioxide, will remain

in the atmosphere for over 100 years. So long after the CEO is retired, even long after the plant is retired, there is the legacy of the

emissions from that plant that need to be addressed. This is the

gap in governance decisionmaking.

The way institutions can help close this gap is by recognizing

that they hold assets that are as long, they span generations, they

are intended to be in perpetuity if they’re for endowments and pensions. They have that long term interest as well to see that the

issues are addressed over the long term to maintain not only the

vitality of the industry but of the economy as a whole, and the

global environment as well.

Senator CARPER. Your mention of the long term, long-lived assets, let me just ask one last question for our State Treasurer, Ms.

Nappier. Chairman Voinovich suggested earlier that Clear Skies

will provide more certainty for the industry, at least in certain respects. But it’s my impression that utilities invest on more like a

30 year time horizon. Do you believe that investors would benefit

from having carbon dioxide on the table, given the length of these

investments?

Ms. NAPPER. I’m not sure I understand your question. Investors

are long term. You invest for the long haul.

Senator CARPER. Do you believe that investors would benefit

from having carbon dioxide on the table, given the length, sort of

the long term length of the investment cycle?

Ms. NAPPIER. When you say on the table, what do you mean by

that? Do you mean regulated? I believe that regulation is inevitable. So if it’s going to happen, then we should do it in concert

with everything else that’s going on that could have an impact on

a company’s long term health. So I’m very much concerned, for instance, what it will do to a company if you say today they have to
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do X, Y, Z and make these capital commitments, and then 50 years

down the road, all of a sudden, the rules change. And they’re incurring additional expenses, unanticipated.

So we know that there is a need for more research and development to quantify the financial risk exposure to a company. And I

would hate to have us move forward and just regulate for the sake

of regulating and then realize that we have contributed immensely

to the demise of an industry.

Senator CARPER. Thank you very much.

Senator VOINOVICH. Thank you. I’d like to thank all the witnesses for coming today. I thought this was a very interesting hearing, and certainly there’s a difference of opinion between the witnesses here today. Thank you very much.

The meeting is adjourned.

[Whereupon, at 12:40 p.m., the subcommittee was adjourned, to

reconvene at the call of the Chair.]

[Additional statements submitted for the record follow:]

STATEMENT OF DR. RANDALL KROSZNER, ACTING CHAIRMAN, COUNCIL OF ECONOMIC

ADVISORS

Mr. Chairman, and members of the committee, I am pleased to appear before you

this morning to discuss the Clear Skies Act of 2003. At this time, it is valuable to

pause and reflect on this piece of landmark legislation. Strict enforcement of environmental rules can be dated as early as 1306-when a man was allegedly executed

for burning coal in London. In the United States, concern for air quality dates back

to the mid-nineteenth century, when many municipalities issued smoke ordinances.

The responsibility of regulating air polluters rested almost exclusively with States

and localities until 1970. The early 1970’s marked an unprecedented increase in environmental awareness. During these years, the Federal Government began to take

a more active role in environmental regulation with passage of the National Environmental Policy Act and the Clean Air Act. Later in the 1970’s, the Clean Air Act

Amendments of 1977 modified these air quality regulations.

One common thread over time has been that the United States’ air quality regulatory policy, indeed environmental regulation in general, typically relies on command-and-control regulation. This type of regulation generally mandates technologies or processes, does not take advantage of the power of markets and is, therefore, by its very nature more expensive and less efficient than is necessary.

In contrast, the Bush Administration has crafted an initiative that will clean our

air using a proven, market-based method. Announced on February 14, 2002, the

Clear Skies Act would be the most significant and aggressive step America has ever

taken, if enacted, to cut power plant emissions of three harmful pollutants sulfur

dioxide, nitrogen oxide, and mercury. The proposal, which builds upon the highly

successful 1990 acid rain trading program, will cut emissions by approximately 70

percent over the next 16 years.

Clear Skies employs a dynamic approach to regulation that mandates specific

emission reduction caps while providing managers with the flexibility to reduce

emissions in the most efficient and least costly manner possible. Through a marketbased cap and trade program, Federal emissions limits, or caps, are set and emissions permits are distributed to electricity generators. Managers then have the advantage to determine the most efficient means of action whether it is the sale or

purchase of unused allowances or banking of credits for later use. Clear Skies provides regulatory certainty and lays out the timeframes necessary for managers to

design a cost-effective strategy tailored to both their current budgets and their future plans. With this structure, we uphold a principal feature of the President’s initiative improving air quality more cost-effectively so that Americans can continue

to rely on clean and affordable electricity.

To improve air quality, Clear Skies will achieve faster reductions than the current

Clean Air Act by creating incentives for ‘‘overcompliance’’ and innovation power

plants that develop means to reduce pollution more than or earlier than required

can generate and sell extra credits. The Clear Skies Act will improve human health,

visibility, and diverse range of ecosystems by reducing emissions and deposition of

NOx, SO2, and mercury. In short, Clear Skies will result in dramatic progress toward solving our nation’s persistent air quality problems.
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At What Cost?

As you are well aware, a crucial element of any regulatory policy is not only recognition of the benefits received from emissions reductions, but also the resource

costs associated with the policy. These resource costs, it must be emphasized, are

ultimately borne by citizens, whether stockholders of companies making the reductions or consumers, or both. Therefore, the Administration takes the economic modeling of Clear Skies quite seriously. In this respect, over the past several years we

have gained a better understanding of the costs to abate NOx and SO2. Yet, our

understanding of the removal costs associated with mercury is in a nascent stage.

The goal of Clear Skies is to reduce mercury emissions by approximately 70 percent from current levels by 2018 with an interim cap reducing emissions by approximately 50 percent by 2010. That is, mercury emissions would be reduced from current levels of approximately 48 tons to 15 tons in 2018 with an interim cap of 26

tons in 2010. Consistent with the principal of improving air quality cost-effectively,

Clear Skies is designed to meet the Clean Air Act goal of reducing mercury with

a trading program that is more cost-effective than the program currently required

by the Clean Air Act. The interrelationship of cap levels for NOx, SO2, and mercury

is also a key feature of Clear Skies for providing regulatory certainty, flexible capital planning cycles, and the co-benefit of mercury reductions from NOx and SO2

emission controls.

The Administration has been examining, among other things, the total resource

cost of achieving the mercury reductions required under Clear Skies, the marginal

cost of mercury removal, and the level of mercury co-benefits that could be expected

from the NOx and SO2 limits in Clear Skies. We have also addressed what additional mechanisms and technologies will be needed to meet the 2010 mercury cap,

using different assumptions and models. Major assumptions in our models have

been extensively reviewed and, if necessary, updated over the past several months.

Before I share our latest results with you, I should highlight that any modeling

of the effectiveness of mercury control technology is uncertain since mercury is not

currently regulated in the power sector. Current modeling assumptions for mercury

are based on data collected during the Environmental Protection Agency’s (EPA)

Mercury Information Collection Request (ICR), pilot-scale testing, and some fullscale testing. Because the data set we are working with is evolving, uncertainties

exist in how to interpret the data. For example, emissions test data collected for

EPA’s ICR often reflect a large variation in mercury reduction on units with identical emissions controls and coal type burned. These differences most likely were associated with the operation of the control equipment, but additional testing continues to be conducted to understand these differences.

In general, there is agreement that selective catalytic reduction (SCR) technology

provides enhancement of mercury reduction for bituminous coals. For subbituminous coal, however, there is some disagreement on whether SCR technology also

provides this enhancement of mercury reduction. With only one set of test data on

a subbituminous-burning unit currently available and more tests currently scheduled, this issue continues to be unclear, but more work is being done. For one of

the most common coal plant configurations, a plant with a cold-side electrostatic

precipitator for particulate control, the Energy Information Administration (EIA)

and EPA agree that adding a SCR for NOx control and a scrubber for SO2 control

will result in 90 percent of the mercury being removed from bituminous coals. For

subbituminous coals, however, the assumed percent removed ranges from 27 percent

for EIA to 66 percent for EPA. There is an ongoing dynamic research process sponsored by EPA, the Department of Energy (DOE), the Electric Power Research Institute (EPRI), and vendors specifically aimed at furthering our understanding of mercury control, with new data being made available on a continuous basis.

With these uncertainties in mind, I will briefly highlight some of the empirical

estimates of interest. As you may recall, the first phase mercury reduction cap in

Clear Skies is designed to take advantage of the interrelationship of NOx, SO2, and

mercury emissions. More specifically, in addition to considering economic consequences and benefits of this multi-emission approach, we relied on an estimate of

mercury removal achieved through installation of NOx and SO2 controls (SCR and

scrubbers, respectively). This removal estimate is commonly termed ‘‘co-benefits.’’ Concerning our updated empirical estimate of co-benefits, when the NOx and SO2

limits in Clear Skies are modeled without a mercury cap (i.e., without a market signal promoting mercury removal), estimates of annual mercury emissions in 2010

after installation of NOx and SO2 controls vary between 34 tons and 46 tons. An

important point to understand in this context is that the mercury emissions remaining after installation of NOx and SO2 controls are most sensitive to assumptions regarding emission modification factors, or EMFs, which is the amount of mercury removal assumed when particular combinations of NOx and SO2 controls are in-
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stalled. As discussed earlier, mercury reduction is dependent on coal type burned

as well as the existing particulate matter, and NOx, and SO2 control devices. For

example, in the Administration’s modeling, we assumed that a bituminous-burning

unit with a SCR and wet scrubber can achieve 90 percent mercury removal. Other

key assumptions including electricity demand growth, natural gas prices, and coal

distribution patterns and prices, however, have not in isolation materially changed

projected 2010 mercury emission levels.

While differences exist in this ‘‘co-benefit’’ figure, the Administration estimates

the incremental costs of complying with the 2010 cap to be $650 million to $700 million per year. A key feature of understanding this cost is the safety valve mechanism in Clear Skies. This safety valve sets a maximum price of $35,000 per pound.

Reducing mercury emissions to the level at which the ‘‘safety valve’’ would be activated between 27 tons and 30 tons is projected to cost between $650 million and

$700 million in 2010. These costs reflect some units adding NOx and SO2 controls

to enhance mercury reductions, the addition of supplemental fabric filters with activated carbon injection (ACI) (approximately 6 GW of about 300 GW of coal-fired

generation), and fuel switching between coal types. Little fuel switching to natural

gas is projected as a result of the incremental costs of meeting the 26 ton cap.

In sum, the President’s Clear Skies legislation calls for a 70 percent reduction in

power plant emissions of NOx, SOx and mercury in the next 15 years. This legislation will meet the required health-based standards laid out under the Clean Air

Act—but it will achieve those results sooner than required and at a much lower cost

to consumers. We look forward to working with the committee and Congress to create a market-based system that will provide early reductions and affordable energy

prices for consumers.

Thank you, Mr. Chairman. I look forward to answering any questions you or the

members of the committee may have.

STATEMENT OF DR. LARRY MONROE, PROGRAM MANAGER OF POLLUTION CONTROL

RESEARCH ON BEHALF OF THE SOUTHERN COMPANY AND EDISON ELECTRIC INSTITUTE

My name is Larry S. Monroe and I am the Program Manager of Pollution Control

Research for Southern Company. Southern Company is a super regional energy

company serving customers in Alabama, Florida, Georgia, and Mississippi. Southern

Company is the second largest user of coal in the utility industry with some 21,626

megawatts of coal-fired generating capacity. I hold a Ph.D. in Chemical Engineering

from MIT, and have been involved in research on pollution control for coal-based

power plants for over 20 years in university, not-for-profit research institute, and

corporate settings. At Southern Company, I manage a research group that evaluates, develops, demonstrates, and troubleshoots technologies to control particulates,

SO2, NOx, and hazardous air pollutants, including mercury, from fossil-fired power

plants.

For the last 2 years, I have been engaged in the national effort to develop technologies to control mercury emissions from coal-fired power plants, resulting from

EPA’s decision in December 2000 to develop Maximum Available Control Technology (MACT) mercury regulations for coal plants. I serve as the utility co-chairperson of the EPRI program tasked with developing and evaluating mercury control

technologies. I have also directed Southern Company’s efforts, along with our partners including other utilities, EPRI, the Department of Energy, and the Environmental Protection Agency, in an attempt to develop cost-effective controls of utility

mercury emissions.

I have been representing Southern Company and the industry on the Utility

MACT Working Group, a subcommittee formed under the Clean Air Act Advisory

Committee to provide advice to the Environmental Protection Agency. As a member

of the MACT Working group, I have been intimately involved in the discussions

with all of the stakeholders including the environmental community, the State/local/

tribal regulatory agencies, and the industry stakeholders on the form of the regulation and its impacts on the industry and the price of electricity. As a part of this

effort, I have been the leader of the industry stakeholders on advising EPA on our

view of the performance and cost of the available mercury control technologies.

Working with EPRI, DOE, and EPA, Southern Company is one of the leading utilities in the national effort to develop mercury controls. We hosted the first full-scale

power plant testing of mercury control ever performed in the United States, and are

just starting a long-term follow-on test at the same site. Southern has also established a unique program to explore the fundamentals of mercury chemistry in coal

power plant flue gas, partnering with EPA, TVA, EPRI, and several other utilities.
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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.

State of Technology

The state of technology development for control of mercury emissions from coalfired power plants is very much in its infancy. Some early efforts at measuring the

mercury emissions from power plants were attempted in the mid–1990’s, but the

sampling techniques used were not adequate, and much of that data is questionable.

The mercury content in typical coal-fired power plant flue gas is very low, measured

at the parts per trillion level. A good analogy that describes the low concentration

of mercury in coal-fired power plant flue gas is to imagine a pipe, one foot in diameter, built from the earth to the moon. If this pipe, all 238,000 miles long, were to

be filled with coal-fired power plant flue gas, and the mercury all magically brought

to one end, it would only take up the first 18 inches of this pipe. If we compare

the mercury in coal-fired power plant flue gas to the other criteria pollutants (e.g.,

particulates, NOx, and SO2) you find that the mercury is one million times less concentrated than those other species. The low concentrations of mercury, along with

the propensity of mercury to react in the sampling equipment, contribute to the difficulties in accurately measuring and controlling mercury emissions at cost effective

levels.

The state of knowledge of mercury chemistry and mercury emissions from power

plants has been so scarce that, in 1999, the Environmental Protection Agency (EPA)

required all power plants to sample their coal supply and test for mercury content,

and required a selected number of power plants to sample for the different mercury

species before and after the flue gas entered existing pollution control devices.

Southern Company participated in that effort by tracking every coal to every one

of our power plants and further by sampling two of our plants for mercury species

and emissions. Unfortunately, this EPA Information Collection Request (ICR) data

base, while suffering from some flaws in data collection and power plant selection,

remains the best publicly available data base of mercury emissions, with and without controls, and of mercury chemistry for U.S. power plants.

There are currently no commercial technologies that are available for controlling

mercury from coal-fired power plants. That is, there are no vendors that are offering

process systems that are supported by guarantees from the vendor for mercury control performance under all the conditions that an ordinary power plant is expected

to encounter over the course of normal operating conditions and timelines. Of

course, there are vendors that will offer their best guess at how a particular technology will perform, but the risk of non-performance rests with the utility. The reliance on vendor warranties is standard practice within the utility industry, and the

inability of the vendors to issue guarantees is indicative of the pre-commercial status of all mercury control technologies.

The most promising two technologies for mercury control in power plants are cocontrol by flue gas desulphurization (FGD) processes and the use of activated carbon

injection (ACI) processes. To understand the co-control of mercury by FGD processes

and the possibility of increased mercury control by NOx control processes, namely

selective catalytic reduction (SCR) systems, a basic understanding of mercury chemistry is needed. First, coal is no different than any other solid material dug from

the earth’s crust when it comes to the mercury content. In other words, coal is not

enriched in mercury compared to ordinary rocks. The mercury in coal is there mainly as a sulfide compound, at a concentration that averages 50 parts per billion by

weight. These sulfur-mercury compounds are the most common form of mercury

found in nature and they tend to be very stable solids, only dissolved by a mixture

of strong acids. Most everyone is familiar with mercury, the metal that is a liquid

at room temperature and used widely in thermometers and blood pressure instruments seen in a physician’s office.

It is not a surprise that a metal that is liquid at room temperature would boil

at much lower temperatures than ordinary metals, and mercury boils at only 674

F. Similarly, when coal burns in a utility boiler, mercury in the coal vaporizes and

produces the vapor of the metal in the high temperature zones of the flame. This

form of mercury is commonly referred to as elemental mercury, meaning that it exists in a form that is not combined with any other element. It is also known as

‘‘mercury zero,’’ a reference to the chemist’s shorthand of referring to the electron

state of a pure element as zero, or Hg0.
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As the temperature of the coal flue gas is cooled by the process of making and

superheating steam, the elemental mercury vapor can react with other elements to

form compounds. Our best knowledge of mercury chemistry suggests that mercury

vapor can react with either chlorine or oxygen to produce mercury chloride (HgCl2)

or mercury oxide (HgO). Since the electronic state of the mercury atom is now ‘‘plus

two,’’ this form is sometimes called ‘‘mercury two,’’ ionic mercury, or oxidized mercury. These are all equivalent terms that describe the chemical state of the mercury.

Finally, either of these two forms of mercury, the elemental or the ionic, can attach

to solid particles, either fly ash or partially burned coal particles, and is typically

referred to as ‘‘particulate mercury,’’ which is a physical description of the mercury

form. To summarize, we generally classify the mercury in coal flue gas as being one

of three forms: elemental, ionic, or particulate.

The proportions of the three chemical forms of mercury have a great influence

over the behavior of the mercury in the flue gas in pollution control processes. The

particulate form of mercury is the easiest form to remove, with high efficiency capture being normal along with the coal ash in electrostatic precipitators (ESPs) or

bag houses. Unfortunately, in most power plants, the fraction of mercury contained

in the particulate form is only a minor amount of the total mercury.

Flue Gas Desulphurization (FGD)

The most common method to remove sulfur dioxide (SO2) from coal-fired power

plant flue gas is a wet scrubber. This device is a large tower, where the flue gas

enters the tower near the bottom and flows upward, exiting through the top. When

the flue gas is flowing, hundreds of nozzles spray a mixture of powdered limestone

and water. The flue gas essentially flows up through a rain storm of these limestone-water droplets. Since SO2 is an acid, it reacts with the alkaline limestone solids and is neutralized.

The acid and base chemistry is so fast that the performance of the wet scrubber

is dependent on the mixing between the flue gas and the droplets. Therefore, it is

necessary to use multiple, large pumps and a large number of nozzles to produce

the small droplets needed. The combined limestone-SO2 product from the scrubber

is typically calcium sulfate, better known as gypsum the white powder found inside

wallboard (also called sheetrock). Gypsum is a naturally occurring compound, mined

both for fertilizer and wallboard.

In this common FGD process, the wet limestone scrubber, the form of the mercury

in the flue gas entering the scrubber appears to be the most important factor in the

efficiency of mercury capture. The ionic form of mercury, that which has reacted

with oxygen or chlorine, tends to be soluble in water and is therefore captured along

with the SO2, while the elemental mercury, being insoluble in water, passes through

most of these processes. Therefore, our best understanding of the co-control of mercury with SO2 control processes suggests that the efficiency of mercury capture by

these processes is related to the amount of the mercury that has converted from the

elemental form to the ionic form. Anything that would help convert the elemental

mercury to the ionic form will presumably increase the overall mercury control in

plants equipped with wet scrubbers. (NOx control processes using selective catalytic

reduction systems appear under some circumstances, and with some coals, to increase the amount of ionic mercury, and this will be discussed later.)

The biggest influence on the eventual form of mercury in the flue gas, and the

apparent subsequent capture efficiency, appears to be the chlorine content of the

coal. Coals with higher chlorine levels, when burned in a power plant, produce flue

gas that is typically higher in the ionic form, the form which is most easily captured

in an SO2 scrubber system. In general, the domestic coals found east of the Mississippi River tend to be much higher in chlorine content than the coals found in

the West.

More specifically, the rank of the coal tends to be a good predictor of chlorine content. Coal rank is an indicator of the age of the coal and there are four major classifications of coal rank, listed in the order of high rank (or older coal) to low rank

(or younger coal): anthracite, bituminous, sub bituminous, and lignite. Most coal

found in the Eastern U.S. is bituminous coal, although there are some lignite deposits found in the Alabama-Mississippi coastal plain. These lignite reserves are not

important to the coal-fired utility industry, however. Conversely, most of the coal

found in the Western U.S., including Texas, is either sub bituminous or lignite rank

coal. The exception in the West is some bituminous coal found in Colorado extending

into New Mexico. All of the coals in the Western U.S., including the Western bituminous coals, are characterized by low chlorine contents, while the bituminous coals

in the Eastern U.S. have much higher chlorine contents. Therefore, the expected

amount of ionic mercury and consequently the expected capture in a scrubber will

be much higher for coals from the Eastern U.S. than from those in the Western U.S.
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Typical coal-fired power plant flue gas produced from combustion of the bituminous coals found in the Eastern U.S. would contain the following proportions of

the mercury species: 60 percent ionic mercury, 38 percent elemental mercury, and

2 percent particulate mercury. The particulate mercury would be removed in the

power plant’s electrostatic precipitator. We would expect the scrubber to remove 90

to 95 percent of the ionic mercury, and none of the elemental mercury. The overall

mercury removal in this simple example would then be 56 percent (90 percent of

the ionic and nearly 100 percent of the particulate mercury removed). This example

is in good agreement with recent testing where, at three bituminous-fired power

plants studied by EPRI, the FGD system removed 43 to 51 percent of the mercury.

However, most of the coals from the Western U.S. when used in a power plant

produce much less ionic mercury, with typical estimates of: 25 percent ionic, 74 percent elemental, and less than 1 percent particulate. A scrubber on this power plant

would then only be expected to remove 90 percent of the ionic and the electrostatic

precipitator or bag house to remove nearly 100 percent of the particulate mercury.

Therefore, the total mercury removal would be only 23.5 percent. The ICR data base

shows that power plants burning low rank coals ranged from near zero to 38 percent

mercury capture without wet scrubbers, and 11 to 56 percent on those plants with

scrubbers.

A problem with capturing mercury in wet FGD scrubbers has been discovered

through analysis of the EPA Information Collection Request data base. In some

power plants that were tested for mercury species and also had wet SO2 scrubbers,

the apparent high capture of ionic mercury was offset by an increase in the amount

of elemental mercury as the flue gas moved through the scrubber. So, while the

ionic mercury appeared to be captured at efficiencies approaching 95 percent, some

of the ionic mercury, after being captured in the scrubber, was converted back to

the elemental form, which evaporated from the scrubber and was then emitted as

elemental mercury.

An example may help explain the effect. Say that, before the scrubber, there are

10 micrograms (one millionth of a gram or 2 billionth’s of a pound) of mercury in

one cubic meter (about 35 cubic feet) of flue gas. Furthermore, let’s say that 60 percent of that is ionic and the balance is elemental, or 6 micrograms per cubic meter

ionic and 4 micrograms per cubic meter of elemental mercury. In a power plant that

shows this mercury release phenomena, we might see less than 0.1 microgram per

cubic meter of ionic mercury at the stack exit, an apparent capture of 98.3 percent

of the ionic mercury. But, we see the stack exit containing maybe 5.5 micrograms

per cubic meter of elemental mercury, an increase of 37.5 percent.

The elemental mercury is not being captured but is actually increasing across the

scrubber. When looking at the total mercury, the 10 micrograms per cubic meter at

the scrubber inlet is reduced to only 5.6 micrograms per cubic meter (5.5 elemental

and 0.1 ionic) at the stack, a total reduction of only 44 percent. The only logical explanation to explain these example numbers is that some of the captured ionic mercury is being re-released as elemental mercury. In this case, the ionic mercury is

only being captured at 73 percent, when the re-released mercury is included.

This scrubber mercury re-release is not well understood at this point. An analysis

by EPRI notes a correlation between an increase in the amount of fly ash captured

in the scrubber and an increase in the mercury re-release. Further work by EPRI

on a bench-scale scrubber shows that this phenomenon is transient, and it is not

easy to predict when it will occur. Additionally, private testing by Southern Company at our DOE-sponsored flue gas scrubber at Georgia Power’s Plant Yates, south

of Atlanta, has shown that this effect is present at some times, and not present at

others. The significance of this effect is that the overall capture of mercury by a wet

scrubber may be less over time than a short test period would indicate. Further research of this phenomenon is needed.

Most of the previous discussion assumes that the FGD process used is the wet

limestone, forced-oxidation scrubber. Another process for SO2 control, used widely

for low sulfur Western coals, is a lime-based spray dryer followed by a bag house

that collects both the reacted lime along with all of the coal ash. The EPA Information Collection Request testing in 1999 indicates that this spray dryer-bag house

FGD process may give very high mercury removals with bituminous coals. However,

this is a rare application of this technology, and unfortunately is not widely applicable to all bituminous coal applications. The technology is only effective for SO2 control for low sulfur coals, is more expensive than the alternatives, and creates a large

waste stream that has to be carefully handled for disposal. While this approach may

be used in a few power plants burning Eastern bituminous coal for combined SO2

and mercury control, I do not expect it to be very widely selected because of these

limitations.
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Ironically, the best application of this FGD process is for Western coals, but there

it appears to make the mercury control worse than just particulate control alone.

That is, the use of a spray dryer-bag house system on most low rank coals (sub bituminous and lignite) is normally the best engineering and low-cost FGD solution for

plants burning these coals for SO2 control, but the evidence suggests that it may

worsen the mercury collection efficiency as compared to the use of a bag house

alone. For example, EPA states that sub bituminous coal plants in the ICR data

base with only bag houses average 72 percent mercury control, while those with a

bag house and a spray dryer for SO2 control average only 24 percent mercury removal.

Various technologies are being investigated to attempt to further oxidize elemental mercury to ensure higher removal in a FGD system. Chemical injection,

plasma discharges, and dedicated catalysts are all being tested and developed.

These approaches are all under development, and only slow progress is being made.

Selective Catalytic and Non-Catalytic Reduction (SCR & SNCR) NOx Controls

One of the most intriguing possibilities is the ability of NOx control selective catalytic reduction (SCR) systems to enhance the amount of ionic mercury in the flue

gas. A report on research done by a large German utility company in the early

1990’s claims that the catalyst used in a SCR system was effective in converting

a high fraction of the elemental mercury to the ionic form, which was then captured

in FGD equipment. The German claim was that the SCR catalyst changed the chlorine chemistry, making it more likely to convert elemental mercury to ionic mercury.

Based on this German research, EPA originally assumed that any power plant

equipped with a SCR and FGD, burning any type of coal, would see: (1) almost all

of the elemental mercury converted to ionic; (2) the ionic mercury captured in a

scrubber in a high proportion; and (3) no mercury re-released from the FGD process

all adding up to an estimate of an overall 95 percent reduction in mercury emissions

from those plants. A 95 percent mercury capture would require that the SCR catalyst be 97.5 percent effective in converting elemental to ionic mercury. Furthermore,

the FGD system would have to be 97.5 percent effective in removing the ionic mercury that is, not only does the scrubber have to perform at least as well on mercury

as the SO2 (even though the mercury is one-millionth times as concentrated), but

no re-release of mercury can occur. EPA’s assumptions were highly optimistic and

recent power plant testing has shown these assumptions are not always true.

SCR catalyst degrades over time in its performance to reduce NOx, requiring replacement every three to 5 years. The catalytic activity is reduced by exposure to

flue gas, either by poisoning of the catalyst active ingredient from the chemicals in

the flue gas or by physical plugging of the catalyst surface by ash particles. It is

not known, at present, how this catalyst deactivation affects its ability to oxidize

mercury. The mercury oxidation of the catalyst could be reduced at the same rate

as the NOx reduction, or it might be slower or faster. EPRI testing has only looked

at two power plants and only in two ozone seasons (May 1 to September 30). So

we have limited information, both in the number of plants tested and the time between tests. Therefore, any estimate of the long-term potential for co-benefits of

SCR and FGD for mercury reductions must consider the possibility of catalyst aging

and the subsequent potential loss in mercury oxidation.

For the lower rank coals, and particularly those found in the Western U.S., this

SCR mercury oxidation does not appear to occur. Given the German claim of the

effect being based on higher chlorine content, this is not much of a surprise. The

low rank coals are typically low in chlorine, and to make matters worse, the ash

of these coals is alkaline, so that whatever chlorine that is present, being an acid,

is usually neutralized by the fly ash before it can ever reach the SCR catalyst. Testing in an EPRI program sponsored by utilities (including Southern Company) along

with the Department of Energy (DOE) and the EPA has shown that mercury reduction in low rank coals do not seem to be helped by the addition of a SCR system.

Since the majority of the mercury in the flue gases from these coals in the elemental

state, the addition of any type of FGD system does not appear to control mercury

emissions to any significant degree. In other words, for low rank coals (typically

Western U.S. coals), we do see modest benefits on mercury control by adding wet

FGD systems, but do not see any mercury co-benefits from adding an SCR to the

power plants burning these coals. EPA has also seen the results of the testing, and

we think that they have revised their assumptions about co-benefits for lignite and

sub bituminous coal to reflect this new knowledge, that is, there are only modest

mercury reductions based on co-benefits of NOx and SO2 reductions for these coals.

At the beginning of the MACT development process, EPA had assumed that selective non-catalytic reduction (SNCR) systems would contribute to increased mercury
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removal, and explicitly had assumptions about its performance in their models.

SNCR uses ammonia injection at elevated temperatures (1900–2400 F) to reduce

NOx without the use of a catalyst. Two years of testing have shown that this NOx

reduction technology has no influence on mercury control in any plant with any coal

rank. Finally, we think that the Agency has conceded this point and we hope that

they no longer count SNCR as having any influence on mercury control.

Summarizing the current state of knowledge of controlling mercury via co-benefits

of SO2 and NOx reductions, there are only a handful of power plants that have been

tested for short time periods. Given this limited amount of data, we think that for

bituminous coals the mercury reductions with a SCR and FGD will probably be between 80–90 percent for the best case, and that for sub bituminous and lignite coals

the reduction will be a modest 20 percent. These estimates are optimistic taking

into account the previous discussions of catalyst aging in SCR systems and mercury

re-release for FGD systems, and are likely to be reduced even further in the future.

We think that EPA is currently using an estimate of 90 percent for bituminous coals

and something less than 90 percent for lignite and sub bituminous.

Activated Carbon Injection

The second near-commercial technology for mercury control from coal-fired power

plants is activated carbon injection (ACI). Activated carbon is a specially prepared

product of coal or biomass that is able to adsorb many chemicals from gases or liquids. One of the primary uses of activated carbon is the treatment of drinking

water. Water filtering systems sold for home use in home improvement stores are

typically cartridge systems that include activated carbon as part of the filter. Activated carbon is being used currently to remove mercury from the flue gases from

municipal, medical, and hazardous waste incinerators. In those applications, activated carbon can routinely collect over 90 percent of the mercury from the flue gas.

However, the mercury concentrations in the stack after the activated carbon treatment in these incinerators are typically higher than that found in coal flue gas before treatment. That is, the amount of mercury in every cubic foot of incinerator

stack gases after the control system using activated carbon is typically 5 to 10 times

the amount in untreated coal flue gases from power plants. Another way to look at

a comparison between incinerators and power plants is that most every power plant

would meet the incinerator mercury regulations without any control technologies.

Simply, incinerator mercury control by activated carbon stops where power plant

flue gases begin. Therefore, it is not useful to use the experience of activated carbon

in incinerators to inform the debate on its use in power plants.

The design of activated carbon injection for mercury control relies upon the existing equipment used to remove fly ash from the flue gas to also remove the added

activated carbon. There are many side issues associated with the use of activated

carbon in this mercury process approach, including contamination of the fly ash

with carbon and interruption of the normal fly ash control by the added load of activated carbon. The injection ahead of electrostatic precipitators, which are in use by

about 80 percent of the U.S. coal power plants, may require large amounts of activated carbon to achieve reasonable mercury control. The carbon will contaminate

the fly ash making it unusable for recycling and may threaten the performance of

the electrostatic precipitator for its intended use of removing fly ash. Injection of

activated carbon in a bag house will not need as much activated carbon as an electrostatic precipitator, but will also contaminate the fly ash.

There have been only a handful of tests on the use of activated carbon to control

mercury from coal-fired power plants. The very first test at full-scale in the United

States was performed at a Southern Company power plant, Alabama Power’s E.C.

Gaston Unit 3, located in Wilsonville, Alabama. This was the first in a series of four

power plant tests in a sequence performed by ADA-Environmental Solutions of

Littleton, Colorado. The test program was sponsored by DOE’s National Energy

Technology Laboratory (NETL) with significant co-funding by participating utilities

and vendors. All of these four sites are somewhat unique, and unfortunately do not

well represent the nation’s power plant fleet.

Gaston Unit 3 is one of only four power plants in the U.S. that have an advanced

particulate control system that consists of a small bag house installed downstream

of the existing electrostatic precipitator. This arrangement, known as COHPACTM,

is a patented EPRI invention. The activated carbon can be injected between the

electrostatic precipitator and the bag house. The electrostatic precipitator collects

over 95 percent of the fly ash, while the bag house collects the remainder of the

ash and the activated carbon. This approach to activated carbon injection avoids

contamination of the fly ash and does not jeopardize the operation of the electrostatic precipitator with additional carbon loading. The bag house is a large filter,

which has hundreds of fabric bags that separate the solid ash and carbon from the
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flue gases, much like the paper bag in a household vacuum cleaner. Because the

activated carbon can sit on the surface of the bags for several minutes and see a

substantial amount of flue gas, it can effectively collect more mercury from the flue

gas than injection into an electrostatic precipitator.

The activated carbon injection testing at Gaston, which burns an Eastern U.S. bituminous coal, ended with a 7-day test of mercury control, where the average mercury reduction over that time period was just under 80 percent, with a high of over

90 percent and a low of only 36 percent. This was a short-term test and probably

does not reflect the ability of this system to always perform at this level. We found

in this testing that the bag house at Gaston is not big enough to accommodate the

amount of activated carbon needed to consistently achieve 90 percent mercury control for even just 1 week of testing. The testing was promising and DOE/NETL has

funded a follow-on project that will test the mercury control at this location for one

calendar year. This length of testing will allow a better estimate of the potential

mercury control from this technology over the course of that 1 year. We are just

starting this longer term testing, and the initial results were presented at an international pollution control conference sponsored by DOE, EPA, and EPRI just 2

weeks ago here in Washington. The initial results are not encouraging we cannot

repeat the performance of the 7-day test performed in 2001. The electrostatic precipitator ahead of the bag house at Gaston Unit 3 is not performing as well as it

was during the earlier testing, and we cannot inject much activated carbon into this

system without causing damage to the bag house. Two conclusions can be drawn

from the first few weeks of operation of the long-term testing: (1) the bag house at

this unit is simply not big enough to handle both the fly ash and carbon loading

over all operating conditions, and (2) the 80 percent average mercury control seen

in the earlier 1 week test cannot be sustained over the long term. It may be possible

to achieve levels higher than 80 percent in other power plants with this configuration, assuming that the additional capital investment is made to build a large bag

house. Again, this is a test at a power plant burning Eastern bituminous coal.

The three other tests of full-scale mercury control using activated carbon in the

joint industry-DOE project all involve the injection of activated carbon into the inlet

of an electrostatic precipitator. The first electrostatic precipitator injection test was

performed at Wisconsin Electric’s (now We Energies) Pleasant Prairie Power Plant,

which burns a Western U.S. sub bituminous coal from the Powder River Basin in

Wyoming and Montana. This unit has a large electrostatic precipitator that is likely

to be able to handle the additional particle loading from the activated carbon. The

test that occurred over one to 2 weeks was able to achieve a mercury control of between 60 and 70 percent, but notany higher, regardless of the amount of carbon injected into the system. The logical conclusion from the testing seems to indicate that

there is a chemical limitation on the amount of mercury control from low rank coals

like lignite and sub bituminous, and maybe for Western U.S. bituminous coals from

Colorado and New Mexico. It appears that, similar to the SCR oxidation of mercury,

the activated carbon needs sufficient chlorine in the flue gas to collect the mercury.

Again, this result was over a very limited time span test and may not be repeatable

over a yearlong period. Longer term testing of this approach in several power plants

needs to be performed before any judgment of the mercury performance can be reliably made.

An additional consequence became clear during the test at We Energies’ Pleasant

Prairie Power Plant. This site is able to sell all of the fly ash it produces for recycling into concrete. The activated carbon made the ash not usable for this purpose

during the test period, but also contaminated the ash for about 4 weeks after carbon

injection was discontinued. Southern Company declined a similar test at one of our

sub bituminous coal plants, due to the expense of lost ash sales plus the added ash

disposal costs.

The other two tests of activated carbon injection into electrostatic precipitators for

mercury control were both performed in Massachusetts, at PG&E National Energy

Group’s Salem Harbor and Brayton Point power plants. Salem Harbor is peculiar

in that it produces a large fraction of unburned coal particles that persist into the

electrostatic precipitator, possibly a result of the large amount of South American

coal being burned there. This high level of carbon produced seems to remove a significant amount of mercury, with a baseline removal ranging from 87 to 94 percent

with one coal, but dropping to 50 to 70 percent with a second coal, all even before

activated carbon injection. The activated carbon injection was able to increase the

mercury capture to over 90 percent. Of course, this testing has shown that a change

of coal supply can dramatically change the mercury baseline performance and the

subsequent increased capture by activated carbon injection.

Brayton Point is also a peculiar arrangement with two electrostatic precipitators

in series. In the DOE test, activated carbon was injected between the two electro-
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static precipitators, much like the injection between the ESP and bag house at the

Gaston station. The baseline mercury removal, that is, the removal before activated

carbon injection started, was 90.8 percent. This is very high as compared to historical data from that unit that recorded baseline mercury removals of 29 to 75 percent. The results in the 10 days of testing suggest that, for short periods, the injection of activated carbon can increase the mercury removal from a baseline of 90.8

percent to 94.5 percent with the addition of activated carbon (10 pounds carbon injected for every million cubic feet of flue gas). Again, the short time of the test and

the potential change in behavior with a change in coal supply makes it hard to extrapolate this performance much beyond the actual period of testing.

All of the electrostatic precipitator tests of activated carbon injection to date have

involved relatively large, oversized equipment where the additional burden of collecting the injected activated carbon did not impact the operation, at least in the

tests of under 2 weeks duration. For the same mercury collection efficiency as a

COHPACTM bag house, the added carbon cost is substantial enough to justify the

capital investment to build the bag house.

Another potentially large problem with this technology is that the supply of activated carbon is currently not sufficient to support any significant use for utility

mercury control. I have publicly stated that, due to current uncertainties, Southern

Company may use anywhere between 500 tons per year to 100,000 tons per year

of activated carbon. The major U.S. manufacturer of activated carbon, Norit Americas, based in Atlanta, Georgia, have told us that they could supply an additional

20,000 tons per year with their existing capacity. Without long-term commitments

from buyers, the activated carbon suppliers will very likely not make the needed investments to ensure that a large demand from the U.S. utility market could be met.

In the 1970’s, the activated carbon industry built capacity in anticipation of clean

water regulations and those investments resulted in a severe price decrease caused

by oversupply, when the demand did not appear. The activated carbon suppliers are

not likely to make the same speculative capital investments today. Add to this reluctance to invest ahead of demand the fact that it will likely take at least 5 years

to design, finance, permit, and build activation carbon production facilities, and it

becomes apparent that, if activated carbon injection becomes the technology of

choice for power plant mercury control, the supply will not be available at the beginning.

There may be foreign supplies of activated carbon. As discussed at a recent conference, there may be about 50,000 to 60,000 tons per year available from a major

European supplier. Also, China has started supplying activated carbon into the U.S.

market, but initial experience with this material has shown quality control problems

with its performance. All in all, there may be sufficient carbon available to supply

a small part of the industry with today’s global supply, but there is not enough supply for any major use across the Nation by the utility industry.

In early modeling efforts by EPA on the performance of activated carbon, the assumptions made about performance and the actual amount of activated carbon were

grossly optimistic. The Agency used some estimates made by DOE in 1999, and the

subsequent testing at full scale power plants has demonstrated that the performance is not as good as the earlier estimates. We think that the current set of performance and cost numbers offered by the Utility Air Regulatory Group in the

MACT Working Group are the best estimate for mercury control processes using activated carbon.

In summary, the limited testing of activated carbon injection for power plant mercury control does not represent the average configuration of the U.S. power plant

fleet, and the short-term tests that have taken place only represent what a wellcontrolled and well-managed test period performance could be in other words, are

likely to be close to the best case. Additional testing at the Southern Company plant

has already shown that the earlier performance cannot be matched at this moment.

Certainly additional testing, including long-term tests of at least 8 months are needed to understand what the actual performance of activated carbon injection over

longer times would be, with the wide variety of coals in use today. At this moment,

the DOE/NETL is evaluating a number of proposals from utilities, vendors, and research contractors to test activated carbon for longer periods of time on a variety

of plants, especially those that burn low rank coals.

With sufficient capital investment to build a COHPACTM bag house large enough

to handle both the fly ash and activated carbon, short-term performance of 90 percent mercury removal with bituminous coals may be possible, but, across the industry, an average removal of 80 percent is more likely to be achieved with today’s

technology. This estimate is based on only one power plant, tested for only 7 days,

however. It appears that low rank coals, such as lignite and sub bituminous coals,

may have a limit of 60–70 percent mercury removal, regardless of the amount of
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activated carbon used or whether a bag house has been installed. Again, only one

power plant has been tested for less than 2 weeks to establish this estimate. Under

certain circumstances, activated carbon injection into a large ESP may be able to

get incremental mercury control, but only two power plants have been tested for less

than 2 weeks. Finally, the supply of activated carbon is not sufficient today to accommodate a substantial demand from the utility sector and it may take 5 years

to bring new activated carbon production facilities on line.

Other Technologies

There are other technologies that show some promise in controlling mercury emissions from power plants, but they are all still research projects and are nowhere

close to commercialization. Some of the multi-pollutant processes being developed do

claim that mercury control is also removed along with SO2, particulates, and NOx.

While this may be true, there are large questions about the costs, reliability, and

long-term performance of these technologies. Most of these multi-pollutant processes

make either fertilizer or acid chemical feedstocks from the NOx and SO2, and the

ability to sell either of these waste streams in the future is questionable. The larger

the penetration of these technologies into the utility market, the more of the byproducts that are produced, quickly over-saturating any potential market.

Possible future technologies that are being researched include capture of mercury

by gold-plated surfaces, the use of chlorine addition to low rank coals to increase

the mercury oxidation, injection of sulfur compounds to change the elemental and

ionic mercury gases to solid sulfides that can be captured in the existing particulate

control devices. Additionally, a large number of alternative sorbents to replace activated carbon, either with a less costly material cost or improved performance with

less material injected, are under development. Unfortunately, we cannot predict

whether these efforts will succeed, and we cannot base national energy policy on the

hope that something is invented in time to produce the perceived needed level of

mercury control.

Timing of Mercury Reductions

The timing of mercury reductions required, whether by regulations under a MACT

provision or by a legislative process, needs to take under consideration both the

state of knowledge about mercury control and the ability of the nation’s utility industry to install the required controls. Already, in the installation of NOx controls

for the 2003 summer ozone season, we have experienced some labor shortages and

tight supplies of steel, cranes, and auxiliary equipment such as fans, pumps, electric

motors, switchgear, etc. If mercury control proceeds under a MACT regulation, every

coal-fired power plant will have to meet the stated emissions requirements, and depending on the technologies being used, we expect shortages of steel, bag house

bags, labor, and auxiliary equipment, not to mention the activated carbon supply

issues discussed earlier. Southern Company estimates that the time required to install mercury controls under MACT would be at least 7 years, and the time needed

for the additional NOx and SO2 controls in Clear Skies would take probably eight

to 9 years.

Estimates of Benefits of Utility Mercury Reductions

EPRI and EPA are both engaged in research to attempt to predict the net effect

on human health from reductions in emissions from U.S. coal-fired power plants.

EPRI has just published their initial findings, and we think that EPA is working

on similar model predictions. In the EPRI study, mercury deposition on the continental U.S. is predicted using a global mercury source and deposition model. The

results indicate that the majority, around 70 percent, of the mercury falling on the

U.S. is from sources outside the U.S. Additionally, this study predicts that U.S. utility emissions are estimated to contribute less than 8 percent of the mercury depositing in the U.S. This result is significant, because it indicates that reductions of

mercury emissions from domestic utility sources will have a limited response on the

amount of mercury depositing. In other words, since most of the mercury falling on

the U.S. comes from overseas, controlling domestic utility emissions can have only

a limited impact.

The EPRI study goes on to estimate the change in human exposure from significant reductions in utility mercury reductions. The only significant route of exposure

to humans is through the consumption of large fish, captured in the wild. By estimating the change in U.S. deposition from reductions in utility emissions, the

change in mercury in aquatic systems, and subsequently in fish, can be found. Taking the analysis one step further, EPRI has estimated the change in exposure to

humans in the U.S. from utility mercury reductions.

The EPRI study looked at mercury reductions in a Clear Skies Act approach and

in a mercury MACT regulation scenario. The results indicate under the Clear Skies
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approach, in the year 2020, mercury deposition in the continental U.S. would be reduced by an average of 1.5 percent, exposure of women of childbearing age to mercury would be reduced by 0.5 percent, and the fraction of the population above the

reference dose for mercury would be reduced by only 0.064 percent. In the MACT

approach, also for the year 2020, mercury deposition would be reduced by 1.2 percent, exposure of women of childbearing age to mercury would be reduced by 0.4

percent, and the fraction of the population above the reference dose would be reduced by 0.055 percent. Since U.S. utility emissions are only a small contributor to

mercury in the environment, it is not surprising that significant reductions in those

emissions will not greatly affect human exposure. One significant difference in the

two approaches is that the present value incremental cost for mercury controls by

2020 is estimated to be about $6 billion for CSA and $19 billion for MACT.

Summary

There are no commercially available technologies for mercury controls for coalfired power plants. There are systems in use in the waste incinerator industry, but

the EPA requirements for mercury control for incinerators allow emitted concentrations to be five to ten times higher than uncontrolled coal power plant emissions.

In an engineering sense, the low concentrations mean that you have to work that

much harder to get each molecule of mercury. NOx and SO2 stack concentrations

are one million times higher than mercury, so you have to work one million times

harder to collect mercury as compared to either NOx or SO2.

There are two near-commercial mercury control technologies at present: co-control

by FGD systems, with possible beneficial mercury chemical changes from SCR systems on plants burning bituminous coals, and the injection of activated carbon into

existing or new particulate control devices, either ESPs or bag houses.

Plants burning bituminous coal from the Eastern U.S. which have installed SCR

systems and wet scrubbers are likely to have between 80 and 90 percent mercury

control in the beginning. There are large uncertainties about the potential adverse

scrubber chemistry that could re-release captured mercury and also about the extent

of SCR catalytic mercury oxidation over time, so it is likely that these estimates

may decrease as we learn more.

For low rank coals such as sub bituminous and lignite (along with bituminous coal

from the Western U.S.), the SCR systems do not appear to have any beneficial effects on mercury chemistry, probably due to the low chlorine content of the coals.

Additionally, the addition of a wet FGD scrubber system may increase mercury control slightly, say by 20 percent, but the addition of a spray-dryer FGD system may

even decrease the mercury removal as compared to the pre-FGD mercury removal

performance.

Activated carbon tests to date have been short, less than 2 weeks, and have

shown some promise, but also some difficulties. The only long-term test that is being

performed is at Southern Company’s Plant Gaston, and the year long test is just

beginning. The limited data from this one short test suggests that activated carbon

injection into a COHPACTM bag house installed at a plant burning bituminous coal

may be able to achieve short-term performance of 90 percent mercury removal, but

an average across a year is more likely to be around 80 percent. We do not know

what operation problems may occur after an extended period of activated carbon injection, but even at the beginning of the year long test, we are not able to match

the previous short term performance.

Activated carbon injected into an electrostatic precipitator at a plant burning

Powder River Basin sub bituminous coal has shown mercury removal of 60–70 percent, but only for a short test, and with serious consequences for ash sales and disposal. The chemistry of low rank coals like these may limit the final mercury removal that can be achieved with activated carbon. Again, based on this one power

plant test for a short period, it is likely that a bag house and activated carbon injection would still only achieve 60–70 percent mercury removal on these coals.

Activated carbon supply is also an unanswered question. Activated carbon vendors

have estimated the U.S. utility market may be between 500,000 and 1,500,000 tons

per year. Between domestic supply and spare European capacity, there may be up

to 150,000 tons per year available today. Without firm commitments, the suppliers

are unwilling to make the investments to increase the supply, indicating that widespread use by the utility industry may create a worldwide shortage of activated carbon. Given that it takes roughly 5 years to bring a new activated carbon production

facility on line, the prospects for widespread availability of activated carbon may be

questionable.

In addition, the shortages encountered during the installation of NOx controls

over the last several years have shown that shortages of labor, steel, cranes, and

auxiliary equipment can occur, and installation of mercury controls under a MACT
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regulation or installation of more NOx and SO2 controls will surely cause even

greater material and labor shortages. The only way to alleviate the shortages is to

extend the required performance date to install the equipment. These shortages

could spill over into other industries and cause price increases across the board.

There are other technologies under development for mercury control, but they are

all very much still in a research stage. Various multi-pollutant processes are being

touted, but they suffer from questions about performance, cost, and waste disposal

issues. Other processes to specifically affect or capture mercury are also under development, but are at least eight to 15 years away from deployment, if they work

at all.

More tests and longer tests are needed to be able to reliably estimate performance

and design the appropriate equipment and processes for mercury reductions in

power plants with different equipment installed and burning different ranks of coal.

The Department of Energy is currently evaluating a number of proposals from the

utility industry, vendors, and research organizations to test a wide variety of plants

and coals for mercury control, over a longer test period. The electric power industry,

along with EPRI and equipment vendors, is engaged in a large, coordinated effort

to develop and optimize cost-effective mercury emission reduction processes.

EPRI modeling suggests that U.S. utility emissions of mercury are only a small

contributor to deposition of mercury in the continental U.S. Significant reductions

of those emissions, either under a CSA or MACT approach, will only reduce deposition in the U.S. by 1.5 percent, and will only decrease exposures of the most sensitive population of women of childbearing age by 0.5 percent in 2020, as compared

to 1999.

The utility industry does not have proven technologies to reduce mercury emissions, but we know that some reductions will occur as SO2 and NOx control systems

are installed, either under Clear Skies or business-as-usual. The industry does not

hold the position that mercury reductions should not occur, but asks that right

timeline should be followed, one that considers the practical aspects of the cost and

impact of making these reductions. Mercury emission reductions that are required

before the technology has been fully developed will lead to significantly increased

costs, to likely fuel switching from coal to natural gas, and to possible disruption

of the nation’s energy supply.

STATEMENT OF DR. STEVE BENSON, ENERGY AND ENVIRONMENT RESEARCH CENTER,

THE UNIVERSITY OF NORTH DAKOTA

Thank you, Mr. Chairman and members of the subcommittee, for the opportunity

to testify today. My name is Steve Benson, and I am a Senior Research Manager

at the Energy & Environmental Center (EERC) at the University of North Dakota

in Grand Forks, North Dakota. I have conducted and managed research, development, and demonstration projects on combustion and environmental control systems

for the past 25 years.

The EERC has worked in the area of mercury research for over 20 years through

projects supported by U.S. Department of Energy (DOE), the U.S. Environmental

Protection Agency (EPA), State agencies, and industry and is recognized as a world

leader on mercury measurement and control. One result of this work has been the

establishment of the Center for Air Toxic Metals (CATM). Specifically, the EERC

has conducted work in the following areas related to mercury emissions from coalfired power plants:

• Mercury science and chemistry

• Mercury sampling, measurement, and speciation in flue gases

• Transformations of mercury forms during combustion and gas cooling

• Mercury sorbent development and testing

• Bench-, pilot-, and field-scale demonstrations of mercury control technologies

• Mercury oxidation technologies

• Coal properties impacts on mercury control

Today, I plan to provide a perspective on the challenges of controlling mercury

emissions from power plants, with a focus on the issues related to western low-rank

coals. Specifically, I will discuss the impacts of coal type on mercury speciation and

control, options for control, and challenges to overcome.

Mercury Speciation and Control

Mercury emissions from utilities burning U.S. coals were determined under EPA’s

Information Collection Request (ICR), which mandated mercury and chlorine analyses on coal shipped to units larger than 25 MWe during 1999 and required emis-
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sions testing on 84 units selected to represent different categories of air pollution

control equipment and coal rank.

Based on ICR data, western coals (lignite and subbituminous) on average contain

lower levels of mercury, chlorine, and sulfur than either eastern Appalachian or interior bituminous coals. Western coals are also distinguished by their much higher

calcium and sodium contents. These differences in constituents have been shown to

have important effects on the quantity and form of mercury emitted from a boiler

and on the capabilities of different control technologies to remove mercury from flue

gas.

The high chlorine content that is characteristic of eastern bituminous coals has

been consistently shown to increase the fraction of the more easily removable

oxidized form of mercury in the total mercury emission, as reported both in ICR

tests and other mercury emission studies. Conversely, the experimental results indicate that the low chlorine content of western coals is associated with the emission

of predominantly elemental mercury that is substantially more difficult to remove.

The high calcium content of western coals appears to further reduce the oxidizing

effect of the already low chlorine content by removing part of the chlorine throughout the combustion process. In short, distinctive differences for western coals result

in significantly different mercury conversion mechanisms in the combustion process

that present a unique challenge and employment of effective control technologies.

Measurements of total mercury and speciated mercury forms were made before

and after the last pollution control device in the plants selected for testing under

the ICR. These data provide a good starting point and valuable guidance for an experimental program targeted at developing mercury control technology for western

coals. The changes in mercury speciation and removal measured across different pollution control devices have been correlated with fuel properties. Mercury removals

were consistently lower for low-chlorine coals and, therefore, for western coals. For

example, removals across a cold electrostatic precipitator (ESP) averaged about 35

percent for bituminous coal compared to 10 percent for western low-rank coal (lignite and subbituminous), and removals across a cold ESP followed by wet flue gas

desulfurization (FGD) averaged 65 percent for bituminous coal compared to 35 percent for low-rank coal.

The percentage of elemental mercury in the flue gas leaving the furnace and

ahead of the pollution control system tended to drop sharply, from over 85 percent

to about 10 percent at coal chlorine contents greater than 150 to 200 ppm, which

distinguishes western coal from eastern bituminous coal. In general, plants burning

coals with low levels of chlorine did not reduce oxidized mercury across particulate

control devices, whereas plants burning coals with high levels of chlorine did show

some removal of oxidized mercury across particulate control devices. Additionally,

fabric filters were the only particulate control devices that appeared to remove any

appreciable amount of elemental mercury, but again, significant removal occurs only

at coal chlorine contents above 200 ppm.

Both spray dryer absorbers and wet scrubbers remove approximately 90 percent

of the oxidized gaseous mercury entering but essentially none of the elemental mercury. Therefore, they can be quite effective for mercury removal overall for highchlorine coals but ineffective for low-chlorine coals.

In summary, the available experimental and field data indicate that existing pollution control technologies are not effective in controlling the emissions of elemental

mercury emitted by low-chlorine western coals.

Mercury Control Options Being Investigated

Currently, the mercury control strategies for western coal-fired power plants involve, first, the enhancement of existing control technologies and, second, the investigation and development of new control technologies. The enhancement strategies

include sorbent injection with and without flue gas modifications upstream of an

ESP or fabric filter, and mercury oxidation upstream of a wet or dry FGD. The new

technologies include mercury capture using the gold-coated materials, baghouse inserts, and carbon beds.

Sorbent injection upstream of an ESP or fabric filter. Many potential mercury

sorbents have been evaluated, including carbon-based, calcium-based, and metalbased (i.e., gold, silver, etc.) sorbents. Activated carbon injection is the most promising and mature technology available for mercury control. However, the commercial

experience is primarily from application of the technology at waste incinerators

where very high chlorine levels are present. The projected annual cost for activated

carbon adsorption of mercury in a duct injection system for a coal-fired utility is significant. Carbon-to-mercury weight ratios of 3000 18,000 (lb of carbon injected per

lb of mercury in flue gas) have been estimated to achieve 90 percent mercury removal from a coal combustion flue gas containing 10 μg/Nm3 of mercury. Lower-cost
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and noncarbon-based sorbents that have less impact on fly ash sales and more effectively designed sorbent injection processes are needed to reduce costs of sorbent injection.

Recently pilot-scale testing of mercury removal efficiencies for activated carbon injection upstream of an ESP only and an ESP baghouse (fabric filter) was conducted

for a Fort Union lignite coal. The results, illustrated in Figure 1, for the ESP only

were compared to those obtained at full-scale utility boilers, while injecting activated carbons into a bituminous coal combustion flue gas upstream of a ToxiconTM

(pulse-jet FF) and into bituminous and Powder River Basin (PRB) subbituminous

coal combustion flue gases upstream of an ESP. For the ESP cases, the pilot-scale

lignite and utility-scale eastern bituminous coal tests showed mercury removal efficiency increased with increasing activated carbon injection rates. Conversely, mercury removal efficiency was never greater than 70 percent, regardless of the activated carbon injection rate into the PRB subbituminous coal combustion flue gas.

This limitation is probably caused by the low amount of acidic flue gas constituents

such as chlorides that promote mercury-activated carbon adsorption.

The use of the ESP fabric filter showed good control efficiencies for lignite and

bituminous coal because of the longer contact time with the activated carbon

sorbents. However, testing conducted at a lignite-fired power plant equipped with

a spray dryer baghouse firing Fort Union lignite indicated poor performance of conventional activated carbon injection to control mercury. The results indicate poor

control efficiency for two different types of activated carbons. Mercury removal efficiencies were less than 35 percent. The poor results are due to the low chlorine containing flue gas and the high proportion of elemental mercury in the flue gas

stream. These results re-emphasize the challenges associated with mercury control

for low-rank western coals.

Researchers are striving to attain a more thorough understanding of mercury species reactions on activated carbon surfaces in order to produce more efficient

sorbents. Sorbents for elemental mercury control must both oxidize the mercury and

provide a binding site.

Figure 1. Pilot-scale ESP and full-scale ToxiconTM (ESP FF) and ESP mercury

removal efficiencies as a function of activated carbon injection rate.

Mercury oxidation upstream of wet and dry scrubbers. Mercury oxidation technologies being investigated include catalysts, chemical agents, and cofiring materials. The catalysts that have been tested include selective catalytic reduction (SCR)

catalysts for NOx reduction, noble (palladium) metal-impregnated catalysts, and

oxide-impregnated catalysts. The chemical agents include chlorine-containing salts

and cofiring fuels that contain oxidizing agents.

SCR catalysts have been tested for their ability to oxidize mercury. The ability

to oxidize mercury has shown mixed results. Mercury speciation sampling has been

conducted upstream and downstream of SCR catalysts at power plants that fire bituminous and subbituminous coals. The results of testing indicate evidence of mercury oxidation across SCR catalysts when firing bituminous coals. However, when

firing subbituminous coal, the results indicate limited oxidation. This is based on

a limited number of tests, and more testing needs to be conducted on low-rank coals.

The ability of SCR systems to contribute to oxidation appears to be coal specific and

is related to the chloride, sulfur, and calcium content of the coal as well as temperature, specific operation of the SCR catalyst, and duration of exposure to flue gas.

Western coal ash can cause blinding of the SCR catalyst and, therefore, limit the

use of SCR for western coals.

Noble metal-impregnated catalysts have shown high potential to oxidize elemental

mercury. Results from a slipstream device at a North Dakota power plant indicated

that over 80 percent conversion to oxidized mercury is possible for periods of up to

6 months. Additional larger-scale, longer-term tests are still needed to determine if

the technology is feasible. Tests were also conducted using iron oxides and chromium, with little success of oxidation.

Fuel additives for mercury oxidation have shown the potential to oxidize mercury.

Chemical additives or oxidants such as chlorine-containing salts added to the lignite

have shown the ability to convert elemental mercury to more reactive oxidized

forms. Recent short-term testing conducted at a full-scale pulverized-coal-fired

North Dakota power plant indicated the injection chloride salts resulted in increased mercury oxidation in the flue gas. Mercury oxidation of up to 70 percent

was observed at a salt injection rate that resulted in an HCl concentration of 110

ppm in the flue gas. In addition, the injection of salt resulted in enhanced removal

of mercury across the spray dryer baghouse with removal efficiencies of up to 50

percent in short-term field testing. Significant operational impacts were observed

during the short-duration testing. Pressure drop across the spray dryer baghouse increased with salt addition. Air heater pluggage was observed with some of the salt
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compounds. The short tests also do not show the potential long-term impact on corrosion, operations, and waste disposal.

Conclusions

Currently, there is no single best technology that can be applied broadly to control

mercury emissions from coal-fired power plants. Combinations of available control

methods may be able to provide up to 90 percent control for some plants but not

for others, depending upon coal type. Lignite-and subbituminous coal-fired power

plants are faced with the most significant challenge because reliable, demonstrated

control technologies for highly unreactive elemental mercury are not commercially

available. Only limited short-term tests have been performed to date. Significant research, development, and field testing are required to prepare the electric utility

sector for implementation of mercury standards.

STATEMENT OF DR. RICHARD BUCHER, W.L. GORE AND ASSOCIATES

Good morning, Chairman Voinovich, Ranking Member Carper and members of the

subcommittee. My name is Richard Bucher, and I am here to speak on behalf of

W.L. Gore & Associates, Inc. about some exciting technical advances that may offer

a solution to the vitally important challenge of reducing mercury emissions.

Gore is a leading company in the field of advanced materials that provide creative

solutions to long-standing problems. We believe that a new mercury capture system

we have developed, and that has recently been tested at the EPA, may well offer

dramatic improvements in the effectiveness, efficiency and cost of mercury capture

from flue gas. We are very excited by this development, as an improvement of this

kind in mercury control could greatly contribute both to the long-term sustainability

of power generation from coal, and to the health of all Americans.

I greatly appreciate the opportunity to testify today. My employer, W.L. Gore &

Associates, is best known as the maker of GORE-TEX fabrics. Many of you may own

or use GORE-TEX garments for hiking, hunting or running. Gore has been using

the same high-performance polymer membrane that makes our fabrics waterproof,

windproof and breathable in many other applications for more than 30 years. We

manufacture a wide range of electronic, medical and industrial materials and devices. Of main interest to us today is the application of the GORE-TEX membrane,

and related membranes, to the field of industrial filtration.

Gore has built a reputation since the 1970’s as a leading supplier of high-performance filter bags to the energy industry, cement kilns, chemical and metals production facilities, waste incinerators and other industrial applications. Beginning in the

1990’s, Gore scientists and engineers have discovered and developed a series of radical improvements to our bags through embedding additional materials and properties into the structure that makes the bags work. These advances have led to new

applications for capturing over 99.99 percent of fine particulate, for catalytically destroying over 99 percent of dioxins and furans, and most recently for capturing over

90 percent of mercury in flue gas streams. The result is a cleaner, safer, healthier

environment and more sustainable industry.

Our invention in the area of mercury capture has moved well beyond the lab

bench and shows dramatic promise for the future. Our product relies on the same

basic technique as the best current technology using activated carbon to capture

mercury but in a way that is up to two orders or roughly 100 times more effective—

and that has dramatic positive implications for the waste handling and cost features

of our solution.

Current technologies to control mercury emissions from coal fired power plants include activated carbon injection, wet scrubber technology, selective catalytic reduction (SCR) technology, combinations of these, as well as a host of other potential

options. The United States Environmental Protection Agency’s ‘‘Mercury Study Report to Congress’’ from December 1997 presents an exhaustive review of the technological options and their associated financial impact. This report indicates that active carbon injection represents the greatest potential for the lowest cost, most technically feasible solution.

Unfortunately, activated carbon injection has significant drawbacks that make the

technology incompatible with some coal fired power facilities and fiscally prohibitive

to others. A primary drawback of activated carbon injection is contamination of the

facility’s fly ash. Not only does the presence of the carbon render the fly ash unsalable, but also the presence of mercury has the potential to require the fly ash

to be classified as a hazardous waste and be disposed of accordingly. Additionally,

the literature remains inconclusive regarding the ability of activated carbon to consistently control elemental mercury emissions, making this technology potentially
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incompatible with many existing facilities burning lignite and Powder River Basin

(PRB) coals. Activated carbon injection also requires a coal fired power plant to purchase, store, inject and dispose of a large volume of material. This has the secondary

impact of requiring additional footprint and capital expenditures related to the necessary equipment, and also further burdens the particulate capture equipment with

additional dust loading and pressure drop. Wet scrubber technology is incapable of

controlling elemental mercury emissions, and SCR (selective catalytic reduction)

technology is prohibitively expensive when employed solely for mercury control.

The lack of a financially and technically compelling alternative for mercury emissions control from coal fired power plants led W.L. Gore and Associates, Inc. to create a technology project focused on investigating the feasibility of efficiently trapping and immobilizing gaseous mercury compounds from flue-gas streams using a

reactive filter system. The progress to date of this work is summarized in this testimony.

Initial work at Gore focused on developing a wide variety of reactive mercury

trapping formulations. A bench-top screening experiment was then conducted to

identify formulations with the best opportunity for long-term success. To add credibility and confidence to this study,

all testing was performed at the EPA’s research facility in Research Triangle

Park, North Carolina. The mercury test reactor utilized allowed for control of inlet

concentrations of mercury, SO2, NOx, H20 and O2. Analysis methods included both

continuous mercury monitoring and the widely accepted standard Ontario Hydro

test procedure. To accelerate the testing an inlet mercury level of 1 ppm Hg, far

in excess of typical coal fired power plant emissions, was selected. To further challenge the samples, testing was conducted at 185 C (365 F), significantly above typical baghouse conditions.

The performance of the highly active samples were then compared with state-ofthe-art mercury absorbent technology as reported in the literature. Most comparison

materials represented treated and untreated activated carbons. A summary of the

data is shown in figure 1, with traditional activated carbon capacities shown in blue

(as reported in the literature) and capacities for Gore technology shown in maroon.

As illustrated the Gore technology shows a dramatic increase in the adsorption capacity in comparison to conventional materials.

Figure 1: Mercury adsorption capacity comparison of conventional technologies with

Gore technology.

The key to our technology lies in this increased capacity to capture and hold mercury. This advance has the potential to allow the coal fired power industry to move
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the function of mercury control from a consumable material, as with traditional activated carbon injection, to a system component, such as a filter bag or a filter bag

insert. Retrofitting a facility with a fabric filter bag-house already in place can be

as easy as dropping mercury trapping inserts into the existing filters, requiring no

additional system infrastructure or space. Most significantly this approach does not

contaminate the fly ash with mercury-laden activated carbon, allowing facilities to

continue to sell, as opposed to landfill, this valuable by-product of the coal fired

power industry. Finally, our technology is completely passive in nature. Once installed it is always operating, continuously protecting the air we breathe, and does

not require additional operators, maintenance or monitoring.

Full size samples have been produced to test mechanical performance and integrity in a full-scale commercial facility. Figure 2 shows a photograph of a full size

Gore-Tex filter bag with a mercury capture insert. Two such prototypes have been

installed on a commercial incineration facility and have been successfully operational since November 2002. This test continues to run to demonstrate long term

mechanical integrity.

Figure 2: Filter bag, mercury capture insert system.

As indicated, the development of our technology has progressed from the laboratory/bench scale phase to pilot testing. Our most significant testing to date was conducted at the EPA on their pilot scale coal combustion unit. The 7-week trial, with

24-hour operation, was designed to test the long-term viability of the technology

under a variety of conditions, burning both Powder River Basin (PRB) coal and Lignite coal. Coal burning trial results, illustrated in Figure 3, indicate mercury capture rates consistently in excess of 90 percent.
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Figure 3: Mercury test results before and after the Gore mercury capture system.

Tests conducted with PRB Coal, Lignite Coal and Mercury doped Nature Gas (to

simulate high mercury inlet levels)

These results, assuming further successful field verification, would allow coal

burning facilities to easily comply with the most stringent regulations set forth in

the CLEAR SKIES Act of 2003, and the CLEAN AIR PLANNING Act of 2003, and

would even approach the control levels required in the CLEAN POWER Act of 2003.

As a private company serving the air pollution control industry for over 30 years,

we at W.L. Gore & Associates clearly realize that even the most advanced technology must provide our customers an economic advantage. Our mercury technology

is being designed to provide the benefits stated above, while potentially costing considerably less than activated carbon injection. The EPA research and development

report titled ‘‘Performance and Cost of Mercury Emission Control Technology Applications on Electric Utility Boilers’’ identifies carbon injection as the most cost-effective approach available to date for utilities without existing scrubbers and SCR systems. For example activated carbon injection for a 110 MW facility is projected to

cost approximately $700,000 per year. When the lost revenue of un-salable fly ash

is added, these numbers inflate to a range from $1.1MM to $1.5MM per year. Current estimates indicate our technology could be 38 percent to 83 percent lower than

these values, making our approach both easier to implement, and more cost effective.

Although we have not begun marketing this technology to the coal fired power industry, our interactions with prospective customers have been nothing short of extremely encouraging. Owners and operators of our nations coal fired power plants

have expressed enthusiastic support for our concept, citing the ease of implementation, minimal impact on system performance, and most of all the preservation of fly

ash value which is so critical to their bottom line. Indeed initial support has been

so strong that most facilities we’ve interacted with have eagerly volunteered as locations for future field-testing.

Once again, I appreciate the opportunity to testify before you today regarding the

important issue of mercury emissions control. W.L. Gore & Associates remains committed to developing innovative, economically feasible technologies to address our

nation’s air quality challenges. We look forward to continuing to work with the committee, the EPA and the coal fired power industry to make this technology a commercial reality.

Thank you again for allowing me to testify, and I’m pleased to answer any questions you may have for me.

GORE-TEX is a Registered Trademark of W.L. Gore & Associates, Inc.
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STATEMENT OF HON. DENISE NAPPIER, TREASURER, STATE OF CONNECTICUT

Good morning. My name is Denise Nappier, and I am Treasurer of the State of

Connecticut. I appear before you as an institutional investor and the principal fiduciary of a $17 billion pension fund representing 160,000 beneficiaries and plan participants. As Treasurer, I am elected by the people of my State, who, like millions

of Americans, have sought to ensure their families’ economic future through investments in the capital markets.

I appreciate the opportunity to testify today on the relationship between climate

change, corporate governance, and the well-being of institutional and individual investors.

I am sure you have heard considerable testimony from others more expert than

I am on the science of climate change, so I won’t go there. What I will do is give

you the perspective of an institutional investor whose responsibility it is to look to

the long term value of our pension fund.

You know, we all learned a number of very painful but very valuable lessons from

Enron and the corporate scandals that followed, and we must not allow ourselves

to lose sight of those lessons. We learned about the disastrous impact on our investment savings, our jobs and our economy. That is when transparency, accountability

and an honest assessment of risk are not viewed by companies as priorities, either

by design or otherwise.

As institutional and individual investors, we need accurate and complete disclosure of information that could affect the current and future health of the companies

we invest in and that goes beyond accounting to include, among other things, climate change as a risk factor.

The consequences for those companies that do not act responsibly today and take

steps to assess and mitigate the risk associated with climate change can be quite

devastating. For example, companies could face the prospect of losing their competitive edge, incurring litigation costs, or being saddled with unforeseen capital expenses, just to name a few. All of these factors and others can erode shareholder

value and place today’s seemingly solid investment in jeopardy.

Climate change may well be about our planet’s future, but it is also about the financial risks to corporations, and the impact on the retirement savings of millions

of Americans. As a result, we have every right to know what is being done about

it and how America’s corporations will protect their bottom line, and thereby the

value of our investments.

I believe that this issue is quickly becoming the leading edge of the next wave

of corporate governance issues, and that the market place must begin to closely

scrutinize companies to determine whether they have honestly, directly and thoroughly evaluated climate change as a risk factor and developed a proper response

to it.

You know, in finance, where there is risk, there can also be reward. A report by

the Rose Foundation last year, ‘‘The Environmental Fiduciary’’, reviewed the findings of a number of studies on this issue, and concluded that ‘‘in many cases improving environmental performance provides a measurable boost to profitability and

shareholder value, especially over the long term.’’

So, we have a real opportunity here to not only protect our shareholder value, but

also to achieve added value.

While you in Congress are debating the merits of a legislative response to climate

change, such as whether or not to enact mandatory caps on carbon emissions, other

nations are preparing to implement the provisions of the Kyoto Protocol which include mandatory provisions. Many of the companies in which we invest particularly

companies such as GE, ExxonMobil, and Daimler Chrysler operate in a global economy. For them, carbon regulation is not a future possibility, it is an imminent reality. And many State governments are also considering, and enacting, legislation

addressing climate change.

Beyond the regulatory environment, shareholders are now advancing this issue.

This year, resolutions on climate change were introduced at 23 U.S. companies and

the Connecticut pension funds filed two of these and co-filed on a third.

Shareholders are asking companies to report on their greenhouse gas emissions,

or to set a goal to reduce emissions, or to report on the potential future financial

risk to the company from their past, present, and future emissions and to issue a

plan to mitigate that risk.

Some of these resolutions were withdrawn after productive discussions between

shareholders and management. Most of the resolutions, however, were opposed by

management and the directors. That opposition may prove to be shortsighted penny

wise and pound-foolish.
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At the annual shareholder meeting of American Electric Power held this past

April, the climate change resolution sponsored by Connecticut received the support

of 27 percent of shareholders voting. While some people may say 27 percent is not

a majority, I believe this vote is both extraordinary and virtually unprecedented.

And I should add that an article in the Wall Street Journal the next day shared

that view.

In fact, the percentage of shares voted in support of climate change resolutions

has doubled in the last 2 years, according to data from the Investor Responsibility

Research Center. Make no mistake, there is significant investor concern about the

impact that climate change could have on our nation’s economy.

In addition to the shareholder resolutions, other efforts to encourage disclosure of

potential risk are underway:

• Connecticut is a signatory of the Carbon Disclosure Project which surveyed the

500 largest companies in the world, and found that while 80 percent acknowledge

the importance of climate change as a financial risk, only about 40 percent were actually taking action to address the risks and opportunities.

• We also participated in a year-long dialog sponsored by the Coalition for Environmentally Responsible Economies (CERES), which brought together investors, environmental activists and electric power companies to discuss the potential financial

impact of climate change and efforts to mitigate its effects. That final report is to

be issued shortly.

• We have joined other investors in urging the Securities and Exchange Commission to insist on more comprehensive disclosure of climate risk.

• And I have begun organizing an Institutional Investor Summit which will be

held this fall in New York City to discuss these issues and set an agenda for action

to protect the long-term value of our investments.

In conclusion, to look at climate change only as an environmental issue misses

the point. Climate change is an investor security issue of the highest magnitude,

and the work of corporations, legislators, regulators, and investors is intertwined

and interdependent. That’s why it is so important that we work together to protect

the long-term value of our investments, as well as our economic well-being.

I appreciate the opportunity to share my views with you today, and stand ready

to work with you in the future. Thank you very much.

STATEMENT OF DR. MARGOT THORNING, CHIEF ECONOMIST, AMERICAN COUNCIL FOR

CAPITAL FORMATION

Executive Summary

U.S. economy. The reason that the Bush Administration rejected the Kyoto Protocol approach to addressing climate change was that they had analyzed the costs

of sharp, near term emission reductions and found that the economic costs were significant and the benefits(in terms of reduced global concentrations of CO2) were

negligible. A range of credible macroeconomic models showed that reducing U.S.

CO2 emissions to the Kyoto Protocol level(7 percent below 1990 levels by 2010)

would reduce U.S. GDP by 2 to almost 4 percent annually.

Impact of Clear Skies Act of 2003 (S. 485) on the Financial Health of the Utility

Sector. Most observers conclude that pollution reduction targets in S. 485 will be

a challenge for utilities and add billions of dollars to utilities costs. Nonetheless,

some in the industry believe that the Clear Skies goals are achievable and can be

reached without sharp impacts on electricity prices or on the financial viability of

the industry. Providing certainty to investors for the next decade and a half as to

the targets for the three pollutants is, in this instance , likely to reduce the risk

and the cost of capital for utility investors.

Impact of Carbon Emission Emission Targets on the U.S. Utility Sector. Proponents of carbon emission caps for the utility sector argue that eventually the U.S.

will decide to impose carbon caps and that utilities would feel that ‘‘safer’’ about investing if they were told now what the carbon reduction target would be. The argument has several weaknesses. First, imposing carbon caps such as those proposed

by Senator Jeffords, which requires a reduction in CO2 in the range of the cut required by the Kyoto Protocol would be just the first step in a series of ever more

severe emission reductions. Second, unlike their competitors in the EU, U.S. firms

would be compelled to meet the emission caps mandated by government legislation.

Thus, European companies are not generally threatened with harsh legal penalties

as are U.S. firms when targets are missed. Third, carbon caps will increase the price

of electricity. As U.S. economic growth slows in response to higher electricity prices,

demand for electricity falls and profits decline. Thus, by weakening demand for the
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product (electricity) carbon caps will increase the the risk and uncertainty of investment in utilities.

A Positive Step to Reducing the Risk and Increasing Certainty for Utility Investment. Many experts conclude that the depreciation allowances provided for utility

investments under the Federal tax code are out of date. Now that utility markets

are becoming increasingly deregulated, investors have no assurance that their investment will actually pay off. Thus, shorter capital cost recovery periods could materially reduce the risk of investment because the payback period would be shorter.

Climate is a Global Issue, Requiring a Global Perspective. Any threat of climate

change associated with greenhouse gas emissions is linked to global emissions, not

emissions in any one country or one industry. And given that emissions in developing countries like China and India are projected to account for 84 percent of the

increase in global emissions between 1990 and 2010, any climate policy that does

not address developing country emissions is doomed to failure.

Introduction

My name is Margo Thorning and I am pleased to present this testimony to the

Senate Environment and Public Works Committee, Subcommittee on Clean Air, Climate Change, and Nuclear Safety.

The American Council for Capital Formation represents a broad cross-section of

the American business community, including the manufacturing and financial sectors, Fortune 500 companies and smaller firms, investors, and associations from all

sectors of the economy. Our distinguished board of directors includes cabinet members of prior Republican and Democratic administrations, former Members of Congress, prominent business leaders, and public finance and environmental policy experts.

The ACCF is now celebrating its 30th year of leadership in advocating tax, regulatory, environmental, and trade policies to increase U.S. economic growth and environmental quality.

We commend Chairman Voinovich and his committee for their focus on positive

changes to the Clean Air Act as contained in the Bush Administration’s Clear Skies

proposal. The Clear Skies proposal calls for reductions in SO2, nitrous oxides (NOx),

and mercury, but does not regulate CO2 emissions. The focus of my testimony will

be on the potential impact of the Clear Skies Act of 2003 and proposals to cap power

plant carbon emissions, such as those put forward by Senator Jeffords, on the financial health and vitality of the utility sector. Other proposals include caps on emissions for other sectors of the economy.

Impact of Carbon Caps on the U.S. economy

The reason that the Bush Administration rejected the Kyoto Protocol approach to

addressing climate change was that they had analyzed the costs of sharp, near term

emission reductions and found that the economic costs were significant and the benefits(in terms of reduced global concentrations of CO2) were negligible. A range of

credible macroeconomic models showed that reducing U.S. CO2 emissions to the

Kyoto Protocol level(7 percent below 1990 levels by 2010) would reduce U.S. GDP

by 2 to almost 4 percent annually.

The models on which the Administration relied showed that as carbon emissions

are capped or constrained, economic growth slows due to lost output as new energy

taxes are imposed and prices rise for carbon-intensive goods, which must be produced using less carbon and more expensive production processes. In addition, the

capital stock accumulates more slowly reflecting the premature obsolescence of capital equipment due to the sharp energy price increases required to meet a target

of reducing emissions to 93 percent of l990 levels by 2010.

Instead, the Administration has chosen a different strategy, one based on accelerating the downward trend in U.S. greenhouse gas (GHG) emission intensity. The

goal of reducing economy wide GHG intensity per dollar of GDP by 18 percent over

the next decade(compared to a 14 percent reduction under the baseline) will allow

continued economic growth while encouraging a slowing of the rate of growth of

CO2 emissions. This alternative approach does, however, require a major commitment to incentives for deploying new technology, a long term research and development program for carbon sequestration, alternative energy sources for electricity

generation, transportation and energy conservation.

Given the quality and quantity of empirical research by demonstrating that near

term targets and timetables for CO2 emission reductions will cost U.S. jobs, economic growth and competitiveness (see www.accf.org for testimony before the Senate Governmental Affairs Committee in June, 2001 for more details), it seems unwise to propose hobbling the U.S. utility sector with the same type of regime which

the U.S. Senate rejected by a vote of 95 to 0 in l997 for the U.S. economy as a
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whole. Impact of Clear Skies Act of 2003 (S. 485) on the Financial Health of the

Utility Sector.

The focus of the Committees’ hearing today is to assess the effects of S. 485, the

‘‘Clear Skies Act of 2003’’ on the ability of the utility sector reduce pollution from

SO2, NO2 and mercury and meet the expected growth in demand for electricity as

well. Most observers conclude that pollution reduction targets in S. 485 will be a

challenge for utilities and add billions of dollars to utilities costs. Nonetheless, some

in the industry believe that the Clear Skies goals are achievable and can be reached

without sharp impacts on electricity prices or on the financial viability of the industry. Providing certainty to investors for the next decade and a half as to the targets

for the three pollutants is, in this instance, likely to reduce the risk and the cost

of capital for utility investors.

Impact of Carbon Emission Emission Targets on the U.S. Utility Sector

Proponents of carbon emission caps for the utility sector argue that eventually the

U.S. will decide to impose carbon caps and that utilities would feel that ‘‘safer’’

about investing if they were told now what the carbon reduction target would be.

The argument has several weaknesses.

First, imposing carbon caps such as those proposed by Senator Jeffords, which requires a reduction in CO2 in the range of the cut required by the Kyoto Protocol

would be just the first step in a series of ever more severe emission reductions (see

Figure 1). This agenda was clearly understood by the architects of Kyoto in 1997.

For example, Tim Wirth, the former Clinton Administration climate policy negotiator, testified in 1997 that carbon emissions had to be cut by up 10 times the

Kyoto target (a 70 percent reduction). The UK has recently announced a target of

a 60 perecent reduction by 2050. Adopting a proposal such as S. 366, which requires

cuts almost as large as the Kyoto Protocol would increase the pressure on the U.S.

from the European Union to adopt the EU’s next emission reduction target for the

second commitment period. The EU is expected to push for a 60 percent reduction

from 1990 emission levels by the year 2050 at the COP 9 meeting later this year

in Italy. Thus, even if the U.S. imposes a carbon cap like that in S. 366, there can

be no certainty those caps will hold in the future and that the goal posts will not

be moved back in response to pressure from the EU.

Second, unlike their competitors in the EU, U.S. firms would be compelled to meet

the emission caps mandated by government legislation. In contrast, the relationship

between the regulators and the regulated is different for industry in the EU; there

is more accommodation and willingness to let targets slip if they are not achieved.

Thus, European companies are not generally threatened with harsh legal penalties

as are U.S. firms when targets are missed. In addition, the European Union’s own

projections indicate that the EU is not likely to meet its first GHG emissions reduction target.

Third, carbon caps will increase the price of electricity. As U.S. economic growth

slows in response to higher electricity prices, demand for electricity falls and profits

decline. As utilities attempt to switch from coal to natural gas to reduce CO2 emissions, gas prices rise which in turn raises the cost of feedstocks to the chemical and

fertilizer industries and fuel to other industrial sectors. As previous research has

demonstrated, carbon caps will make it harder for U.S. manufacturing to keep its

operations at home and will increase the attractiveness of locating in areas like

China with low cost labor and no carbon emission caps. Thus, by weakening demand

for the product (electricity) carbon caps will increase the the risk and uncertainty

of investment in utilities.

A Positive Step to Reducing the Risk and Increasing Certainty for Utility Investment

Many experts conclude that the depreciation allowances provided for utility investments under the Federal tax code are out of date. Now that utility markets are

becoming increasingly deregulated, investors have no assurance that their investment will actually pay off. Thus, shorter capital cost recovery periods could materially reduce the risk of investment because the payback period would be shorter. A

U.S. Department of the Treasury report to Congress released in 2000 noted that the

current class lives for utilities may no longer be appropriate because of increased

competitiveness in the industry.

If the United States is to meet the challenges of maintaining strong productivity

growth, then new investment in all types of assets, including energy supply, will be

required. For example, investorowned utilities estimate needed capital expenditures

of almost $90 billion over the 2001–03 period. A study commissioned by the ACCF

Center for Policy Research shows that the United States ranks in the bottom third

or below in terms of capital cost recovery allowances for transmission and generation of electricity, as well as investments in pollution control (see Figure 2 and
412

Table 1). For example, after 5 years, a U.S. company recovers only 29 percent of

its investment in a combined heat and power generation facility compared to 51 percent in Germany, 53 percent in Japan, 100 percent in the Netherlands, and 105 percent in China. Thus, investment costs are recovered much more quickly in these and

other countries with which the United States competes or where U.S. business

might choose to locate or expand manufacturing operations. (See previous ACCF testimony at www.accf.org for additional international comparisons.)

Corporate tax rates are also high in the United States relative to our competitors,

and this tendency is worsening. The average top corporate income tax rate in the

European Union has dropped from 34.4 percent in 1995 to 31.7 percent in 2001; the

top U.S. corporate income tax rate was 35 percent in 1995 and remains at that level

today.

Climate is a Global Issue, Requiring a Global Perspective

Any threat of climate change associated with greenhouse gas emissions is linked

to global emissions, not emissions in any one country or one industry. And given

that emissions in developing countries like China and India are projected to account

for 84 percent of the increase in global emissions between 1990 and 2010, any climate policy that does not address developing country emissions is doomed to failure.

Promoting a voluntary, economy-linked goal for developing countries encourages

their participation in a global effort without threatening their goal of improving living standards for their citizens.

Pro-growth tax changes, including faster depreciation and enhanced tax credits

combined with regulatory reform could strengthen the U.S. economy and reduce

emissions intensity.
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414
415

STATEMENT OF WES TAYLOR, PRESIDENT, PRODUCTION, TXU ENERGY

Introduction and Background

Mr. Chairman and members of the subcommittee, I am privileged to appear today

on behalf of TXU and participate in this subcommittee’s ongoing review of S. 485,

the Clear Skies Act. I applaud the comprehensive nature of the subcommittee’s

hearing process for S. 485, and I hope that you will find my statement today on

electric generator capital investment decisions helpful during your continued deliberations.

TXU supports President Bush’s efforts to reduce SO2, NOx and mercury emissions

through a three pollutant framework such as that used in the Clear Skies Act. However, if the Clear Skies Act is to avoid harmful fuel switching, the Clear Skies legislation must base Phase I mercury limits on ‘‘co-benefits’’ (i.e., that level of mercury

emission reduction that results from meeting SO2 and NOx emission limitations)

and should not mandate controls on carbon emissions. Only under these conditions

can the Clear Skies Act meet the goal of promoting long-term planning certainty for

the electric generator sector and achieving significant reductions in emissions of

NOx, SO2 and mercury.

My statement today will first discuss the general approach used by TXU and

other electric generators to analyze capital investment decisions relating to emission

control equipment. Typically, this approach includes identification of all potential

compliance options, including shutting down power plants and switching fuels, and

an extensive long-term cost/benefit analysis for each compliance option.

The second part of my statement will focus specifically on TXU’s selection of the

SO2 and NOx controls necessary to meet current State and Federal emissions requirements. It has been critical that TXU accurately estimate both the cost and effectiveness of the available control technologies. Notably, TXU’s efforts to significantly reduce NOx and SO2 emissions as required by Texas law and the Texas State

Implementation Plan under the Clean Air Act have been extraordinarily successful,

resulting in early compliance with all applicable mandates in 2003.

Finally, my statement will address the capital investment analysis that would be

employed by TXU to evaluate the emission reductions proposed in the Clear Skies

Act legislation, where mercury controls are expected to be the key planning issue.

Currently, there is no commercially demonstrated control technology for mercury

and the technologies used in pilot projects have achieved inconsistent results at ex-
416

treme expense, especially for lignite. Because meeting the Clear Skies Act SO2 and

NOx limits will require significant capital investment by electric generators, adding

a requirement for unproven and expensive mercury control technology could result

in very costly fuel switching by coal-fired plants. Fuel switching would contribute

to price spikes in the natural gas market that would impact not only the electric

generator sector, but also consumers and many industries that use natural gas as

a raw material or feedstock. The Phase I mercury emission reduction contained in

the bill needs to be set at the SO2 and NOx ‘‘co-benefits’’ level, which is not expected

to result in significant fuel switching by electricity generators.

Even if the Phase I mercury emission reduction contained in the bill is revised

and set at the SO2 and NOx ‘‘co-benefits’’ level, meeting the Phase II mercury level

of 15 tons in the year 2018 is wholly a bet on future technology. Such uncertainty

presents significant investment capital planning problems for electric generators,

and may very well overwhelm an electric generator’s capital investment analysis for

the Phase I SO2 and NOx limits. Moreover, the mercury emission controls would

not significantly reduce global loading of mercury—the Environmental Protection

Agency has stated that U.S. electric generators comprise less than 1 percent of the

global mercury emissions.

General Approach To Capital Investment Decisionmaking For Emission Controls

By way of background, TXU is a major energy company with operations in North

America and Australia. TXU manages a diverse energy portfolio with a strategic

mix of over $30 billion of assets.

In its primary market of Texas, TXU’s portfolio includes 19,000 megawatts of generation with a fuel mix of coal/lignite, natural gas/oil, nuclear power and wind. TXU

serves five million customers in North America and Australia, including 2.7 million

competitive electric customers in Texas where it is the leading energy retailer.

TXU’s commitment to environmental excellence is well-demonstrated. The Company is one of the nation’s largest coal/lignite generators, yet TXU’s SO2 emission

rate in 2001 was 21 percent below the national average (52 electric generation companies had higher SO2 emission rates than TXU in 2000). Similarly, while TXU is

the 8th-largest generator of electricity in the Nation, the Company’s NOx emission

rate in 2001 was 18 percent below the national average (61 electric generation companies had higher NOx emission rates than TXU in 2000). Additionally, TXU’s CO2

emission rate in 2001 was 8 percent below the national average and TXU has implemented the largest voluntary greenhouse gas reduction program among all the investor-owned electric generation companies in the United States.

The first step in an electric generator’s capital investment analysis for emission

controls is to identify all viable alternate investment scenarios for compliance with

a new emissions standard. During this step of the investment analysis, the alternate

investment scenarios can range from: • Attempting a smaller level of capital investment for emissions control technologies at a power plant—but typically a smaller investment in control technologies

results in a significant loss of electricity production capacity at the power plant;

• Committing to significant levels of capital investment for emissions control

technologies in order to achieve the least possible loss of electricity production capacity at the plant;

• Fuel switching at a power plant; or

• Closing down a power plant, losing all the generating capacity at that power

plant but avoiding new capital investment.

Next, the company will calculate the total economic cost of each alternative over

the lifetime of the power plant, taking into account any income associated with each

alternative. This is a detailed net present-value analysis that, among other things,

requires accurate information on the operational costs of a particular control technology and its performance in reducing emissions over the remaining life of each

power plant. Specifically, this long-term economic cost analysis of each alternate investment scenario will focus on:

• The amount of capital investment needed up-front and known to be needed in

the future;

• The operating expenses associated with the current capital investment and

known future capital investment;

• The overall operating expenses of a power plant under the alternative investment scenario (this might include the purchase of emissions credits);

• Whether the alternative investment scenario has operating restrictions that

would reduce the production of electricity (and thus reduce income);

• The potential income, if any, from the alternative investment scenario (this

might include the sales of emissions credits or byproducts generated by the emissions control equipment).
417

Armed with the net present value figures, and the pro-forma financial statements

related to the net present values, the company will evaluate the financial impacts

of each alternate investment scenario against any potential financial constraints

faced by the company, such as borrowing limits, debt covenants, or limits on financial ratios. From this process, the company will select a viable alternative investment scenario with the highest overall economic value.

Capital Investment Decisions Relating To Existing SO2 and NOx Requirements

It may be helpful to review briefly TXU’s capital investment decisionmaking process for SO2 requirements under the Clean Air Act’s acid rain program, and for NOx

reductions required under Texas State law. Both of these capital investment decisionmaking processes used the general framework discussed earlier, but each also

had unique factors that shaped the analysis. Critical to both types of evaluation,

however, was the availability of accurate information on the costs and effectiveness

of the available options for emissions control equipment.

For example, under the Federal acid rain program, SO2 reductions were achieved

by a two-phased national cap without additional mandatory plant-by-plant restrictions. Accordingly, TXU and other affected electric generators could assess decisions

over their entire fleet of power plants, choosing investments and controlling those

plants where emissions reductions made the most economic sense. For its capital

investment analysis, TXU developed alternate investment scenarios using options

available throughout its entire portfolio of lignite/coal fueled units while maintaining compliance with local SO2 emissions limits.

The primary control technology used to achieve significant reduction of SO2 emissions is called a ‘‘scrubber.’’ To a lesser extent, fuel switching to a low sulfur subbituminous coal can also reduce SO2 emissions. In its analysis of SO2 control equipment investment options, TXU found a wide, plant-by-plant variation in the cost of

scrubbers, mainly due to different plant designs. Variations in cost were dependent

on factors such as existing control equipment and available space in the plant configuration for installation of a new scrubber. In certain instances, elaborate plant

modifications would be required to withstand the impact of increased scrubbing. Installation deadlines also significantly impact the cost of installation. Other key drivers in TXU’s analysis were the operating costs of the scrubbers, and whether the

scrubbers could be expected to perform at planned removal rates for the life of the

facility.

TXU’s decisionmaking process for compliance with the acid rain program was enhanced by our knowledge of well-tested scrubber technology, coupled with accurate

information on the annual operational costs for such equipment. Using this information, TXU could develop precise alternate investment scenarios and compare the scenarios to other compliance strategies, such as purchase of emission credits in the

open market.

There are nine coal-fired units in the TXU fleet, five of which are scrubbed, accounting for 61 percent of our coal-fired generation. The cost estimate for installing

scrubbers at the four remaining coal-fired units is approximately $400 million.

In contrast to TXU’s experience with the acid rain program, the NOx controls required to meet Texas’ State NOx limits involved a much more complex analysis of

alternate investment scenarios. Under a Texas State law adopted in 1999, electric

generators in Texas were required by May, 2003 to achieve a 50 percent reduction

in NOx emissions from certain of its plants, as compared to 1997 emissions. TXU

and other generators also faced deadlines for achieving other NOx reduction targets

in various Texas regions to meet the State Implementation Plan requirements

under the Clean Air Act. Additionally, TXU was required to achieve a 25 percent

reduction in SO2 emissions from certain of its plants. TXU achieved all those NOx

and SO2 reductions, plus more, ahead of schedule. Accordingly, TXU’s experience in

developing a capital investment plan to meet the Texas NOx limits may be instructive as to what electric generators would face under the Clear Skies Act.

Generally, two factors increased the complexity of TXU’s capital investment analysis relating to the Texas NOx requirements:

• First, in contrast to the SO2 scrubber analysis, there were many different NOx

technologies that could potentially achieve reductions at each power plant. This

probably holds true for the NOx emission limitations contained in the Clear Skies

Act as well.

• Second, rather than fleet-wide emission limit (as in the SO2 example), TXU

was required to comply with no less than five different localized or regional NOx

limits for its power plants.

This increase in the number of variables complicated the alternative investment

analysis. Additionally, localized and multiple regional NOx limits degrade the mar-
418

ket for NOx emission allowances, reducing the ability of the NOx emission allowance market to reduce overall compliance costs.

TXU will spend approximately $230 million to complete the NOx retrofits required in order to comply with State regulations, through 2005.

Although somewhat more complicated than the SO2 acid rain program alternative

investment analysis, the analysis of TXU’s NOx alternative investment scenarios

was again aided by our knowledge of well-tested, proven removal technologies and

accurate information on the annual operational costs for such equipment. Under the

Federal acid rain program and the Texas State NOx limits, TXU has committed

hundreds of millions of dollars for capital investment in control technologies. However, the company made that commitment after an extensive economic analysis,

with relative certainty of the reductions it expected to achieve.

Potential Additional Capital Investment Under The Clear Skies Act

TXU supports a three pollutant framework such as that used in the Clear Skies

Act. However, if the Clear Skies Act is to avoid harmful fuel-switching, the Clear

Skies legislation should not mandate controls on carbon emissions and must base

Phase I mercury limits on ‘‘co-benefits’’ (i.e., that level of mercury emission reduction that results from meeting SO2 and NOx emission limitations). Only under these

conditions can the Clear Skies Act meet the goal of promoting long-term planning

certainty for the electric generator sector and achieving significant reductions in

emissions of NOx, SO2 and mercury.

As introduced, the Clear Skies Act contains the following schedule for reductions

in SO2, NOx and mercury emissions:

The Clear Skies Act contains major reductions in SO2 and NOx emissions when

compared to today’s emission levels. Achieving these reductions will require an unprecedented number of state-of-the-art emission controls. With the significantly increased number of emission controls being installed, an electric generator’s capital

investment analysis must now also include dealing with limitations on the amount

of emission control equipment that can be installed at any one time, based on system reliability requirements for the availability of power plants, as well as the

shortage of trained professionals that perform such installations and the manufacturing capability to handle a major surge in orders for emission reduction equipment.

Appropriately, the Clear Skies Act does not regulate carbon emissions. Carbon is

not a regulated pollutant under the Clean Air Act, nor should it be. Presently, carbon reductions are costly and complex. Given these circumstances, TXU supports

the voluntary carbon reduction goals established by the President, as well as funding additional research concerning carbon emission reduction technologies.

However, the mercury provisions of the Clear Skies Act legislation may cause fuel

switching by electric generators in order to meet emissions limits. Currently, there

is no commercially demonstrated control technology for mercury. Several pilot tests

have used activated carbon injection technology, but much remains unknown with

that technology and it appears to be prohibitively expensive.

Accordingly, the Environmental Protection Agency’s initial position was that the

Clear Skies Phase I mercury limit of 26 tons in 2010 would not require a power

plant to install mercury-specific emissions controls—the Phase I mercury limit could

instead be met solely by the amount of mercury removed as a ‘‘co-benefit’’ of the

SO2 and NOx emission controls installed under the Clear Skies Act. There is now

considerable doubt as to whether the Phase I mercury limit can be met through

such ‘‘co-benefits’’. If the Phase I mercury limit cannot be met by ‘‘co-benefits’’,

power plants must in the near term install unproven and expensive mercury-specific

emission control technology, or fuel switch.

Given the already significant capital investment required of electric generators to

meet the Clear Skies Act SO2 and NOx limits, the Phase I mercury emission reduction required by the bill should be revised and set at the SO2 and NOx ‘‘co-benefits’’

level, as was initially suggested by the Administration. It is important to remember

that, even if the Clear Skies Act Phase I mercury level is revised and set at the

SO2 and NOx ‘‘co-benefits’’ level, meeting the Phase II mercury limit of 15 tons in

the year 2018 is a bet on future technology.

The lignite coal used by TXU and other electric generators faces additional hurdles with regard to mercury removal. The mercury content of lignite is higher than

that of bituminous or subbituminous coal. In addition, the combination of mercury

and other constituents in lignite coal is believed to be more difficult to remove using

the pilot-tested activated carbon injection technology. The lack of a demonstrated

emissions control technology could result in fuel switching for lignite-powered

plants, if not plant closings.
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This high level of uncertainty with regard to mercury emissions reductions from

lignite-powered coal plants requires that TXU factor its approach for compliance

with the 2018 Phase II mercury levels into the planning and decisionmaking process

for the Phase I SO2 and NOx levels. That result occurs because TXU’s different compliance options for Phase I (for example, continued use of lignite with scrubbers or,

alternatively, fuel-switching for the SO2 limit) may have very different implications

for meeting the Phase II mercury levels. This decision tree is outlined at Figure 1.

In summary, the lack of a demonstrated emissions control technology for mercury

prevents accurate long-term planning by the electric generating sector. Companies

have no idea of the long-term costs associated with mercury removal technology or

the effectiveness of the technology once it is installed. This situation is in sharp contrast to the SO2 and NOx analysis discussed earlier, and significantly complicates

the capital investment analysis.

Conclusion

TXU supports President Bush’s efforts to reduce SO2, NOx and mercury emissions

through a three pollutant framework such as that used in the Clear Skies Act. However, if the Clear Skies Act is to avoid harmful fuel switching, the Clear Skies legislation must base Phase I mercury limits on SO2 and NOx ‘‘co-benefits’’ and should

not mandate controls on carbon emissions. The Phase II mercury limits beyond ‘‘cobenefits’’ need to be predicated on the existence of a viable, commercially available

mercury emission control technology. Only under these conditions can the Clear

Skies Act meet the goal of promoting long-term planning certainty for the electric

generator sector and achieving significant reductions in emissions of NOx, SO2 and

mercury.

STATEMENT OF JIM MCGINNIS, MANAGING DIRECTOR, MORGAN STANLEY

Introduction

Good morning. My name is Jim McGinnis, and I am a Managing Director in Morgan Stanley’s Investment Banking Division, with responsibilities in providing advice

on capital raising, restructuring and mergers and acquisitions involving companies

in the energy sector. I have focused my work on power and energy providers, utilities and unregulated competitors alike, through a 15-year period characterized by

nearly continuous, and episodically chaotic structural change in the sector.

My comments today will address certain of the potential effects on capital formation in the power industry which we expect from the enactment of multi-emissions

technology legislation. In particular, I will focus my remarks on the need for and

benefits of clarity in the context of a major capital expenditure program such as the

one this legislation envisions. Also, I will discuss a few indicators of the economic

health of the industry at this time, one characterized by companies seeking to repair

balance sheets and regain investor confidence following a tumultuous period in the

sector

My predecessors, colleagues and I at Morgan Stanley have been very active in

raising new capital on behalf of companies in this industry since the Firm’s formation some seven decades ago, through sharply different market environments and

economic cycles.

I believe that we institutionally understand the challenges faced by our industry

clients today in competing for investor capital through new issues and consistently

providing a competitive return on such capital to ensure access to capital for future

projects. But today, just as in past decades, providing access to capital on reasonable

terms to this industry is not just a business niche; it is a critical underpinning of

a healthy national economy.

The utility industry is a reasonably large user of domestic investor capital, with

over $800 billion of institutional and individual investment dollars deployed in the

nation’s power and gas utility and generation sectors. Yet, despite that large number, investor sensitivities to cash-flows, requirements for debt repayments or significant new capital spending can sharply affect any individual company’s access to capital. An event-related swell of concern in the market can, and has in the past 12

months, effectively cutoff capital access for even financially sizable companies for

significant periods of time.

Interruptions or limitations on capital access in our industry sector can have farreaching impacts—impacts as gradual and relentless as forcing power-intensive industries to relocate facilities elsewhere in search of cheaper power; or as immediate

and dramatic as rolling blackouts in times of supply crisis.
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The Need for Clarity

Our focus on multi-emissions legislation today is a particularly important dimension of this continuous provision of access to capital. I believe the various sets of

actors in the industry its senior management, workforces, local regulators, employees, customers and investors generally recognize and accept the impending, reasonably sized investment in emissions control technologies as a necessary and useful

expenditure.

Indeed, we can observe that some such impending expenditures are expected by

the market a fact made evident by the market’s neutral-to-slightly positive response

to Dominion Resources’ recent announcement, made April 18th, of its $1.2 billion

agreement with the Environmental Protection Agency to reduce emissions across its

24,000 MW generation portfolio. This agreement, achieved by a financially strong

entity with supportive local regulatory treatment provided clear costs and benefits

to its signors.

In contrast, capital providers to the industry can be expected to react poorly to

financially significant expenditures required of utilities and unregulated generators

in the absence of clarity and permanence, but rather in the context of potentially

shifting requirements, unproven technologies and uneven regulatory treatment. This

need for clarity has heightened importance now, at a time when industry participants have been roiled by unprecedented financial disruptions and failures, and by

persistent uncertainties elsewhere in the public policy arena. Investors and company

leaders are currently wrestling with a variety of fundamental uncertainties: stateby-state changes in policies related to industry restructuring; purchased power contract disputes, as in California; accounting standards revisions related to energy

purchasing, trading and hedging activities; uncertainty over aspects of currently

pending energy legislation such as PUHCA reform; FERC transmission policy,

transmission siting rules, and transmission-related tax policy on transfers in ownership; and certain aspects of bankruptcy code reform, just to name a few.

Clarity as to the durability of legislative requirements is, for investors in the

power sector, not just a modest benefit, it is a defining attribute. Typically, utility

companies’ economics depend predominantly on the policy decisions of State regulators, and the framework of regulatory decisionmaking has very significant comparative impacts on those companies’ access to and cost of capital. To wit, California

utilities, which, in my view, have experienced many years of regulatory antagonism

and turmoil, exacerbated by and culminating in the 2001 statewide energy crisis,

trade at a consistent discount to non-California utilities. For example, today, the average non-California utility enjoys a 32 percent price-to-earnings valuation premium

to the average of the three major California investor owned utilities. It is in the context of such selective localized uncertainty that Federal policies related to large, new

emissions-reduction expenditures must be unambiguous and durable.

One important attribute of legislation to reduce power generator emissions which

supports the objective of clarity is the abundance of market signals from freely traded emissions allowances. Allowance trading improves the ability of affected companies to make clear choices as to the most cost effective of various strategies they

can deploy in meeting emissions-reductions targets and promotes capital efficiencies

when capital is scarce.

Stress in the Sector

The basic requirement for clarity in policy decisions related to what one of your

prior witnesses has identified as one of the largest private industry investment initiatives ever conceived comes at a time when the financial health of the industry

is, at best, on the mend from a dramatic and troublesome financial cycle.

Rather than recount the multiple factors and contributing exogenous occurrences

which created the downturn in the merchant energy sector and its related impacts

on utilities, I will focus on its current health and the cost-of-capital implications of

that current state.

One co-determinant of the cost of funds and access to bond investors for industry

participants is the credit rating agency’s public assignment of a rating to a particular issuer or a particular security issued by a company. In a stable industry and

economic environment, investors might expect to see an equal number of upgrades

to downgrades to such ratings.

The electric sector industry is in the midst, though perhaps the trailing end, of

the worst ever period for credit rating deterioration. Since January 1, 2002, we have

seen 232 separate rating downgrades (some of multiple rating categories at one

time) versus only 18 ratings upgrades. These downgrades are a symptom, and effect

of massive investor losses on bonds and bank loans to companies in the sector, and

in the merchant power generation market in particular.
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Whereas underlying US Treasury yields have improved materially and access to

high yield or sub-investment grade bond markets has also improved markedly over

the last 12 months, these helpful indicia should not obscure a central point: the industry has been systematically downgraded in relative risk/reward terms. This fact

may well have a large, adverse impact on cost of and access to capital long after

the current rally in Treasuries or junk bonds subsides.

Also, during the 2 years ending March 31, 2003, equity losses for investors have

been staggering as well. The collective equity market capitalizations of seven selected merchant power industry participants alone, even excluding Enron, declined

by $93 Billion from 2 years earlier, when the same entities were capitalized by the

market at $102 billion, a staggering loss across some of the then most admired

names in the industry.

There are broader impacts on the power sector of the recent merchant power sector value destruction episode. In recent years, statewide restructuring in California,

New York, Illinois, Texas, Pennsylvania, Ohio, Delaware and Washington, DC, has

resulted in the large legacy generation portfolios of incumbent utilities to be transferred in those locations to unregulated power merchants, many of which have experienced a sharp decline in financial strength. This creates some potential for new

counterparty exposures for electric distribution companies who rely on unregulated

megawatt-hours to meet supply needs.

Indeed, some 2/3’s or more of the generation capacity sold by ConEd in New York

City, by DQE in Pittsburgh, by Pepco in Washington, DC, by Commonwealth Edison

and by Illinova in Illinois, is now owned by one of the merchant power owners

caught up in the financial turmoil referred to above. These generation companies

are rated significantly below investment-grade rated by the credit rating agencies

and are experiencing limited access to new capital.

Thus, in some cases, even those utilities whose parent companies did not embark

upon a growth-focused expansion into unregulated merchant power in 2001–2002

now find a different, vexing credit issue: a weak counterparty on which they depend

for the bulk of their reliable power supply. These unregulated counterparts are poorly equipped to absorb a large financial obligation, particularly in the context of any

lack of clarity on the costs and benefits of such expenditures.

Clarity Will Drive Capital Access

In evaluating legislation to reduce power generator emissions which envisions one

of the nation’s most ambitious private industry investment programs ever conceived,

I would submit that committee members examine several important market dynamics: multiple critical uncertainties in upcoming energy policy and regulatory decisions, uncertainties related to fuel cost and availability, and, generally, the weakened financial capacity of the industry’s generation participants.

In this context, moving forward with legislation that provides clarity, durability

and an efficient means to allocate expenditure decisions can be an important step

toward assuring that sufficient, well-priced capital will be available from private investors to make such significant future expenditures. That assurance is important

both for the success of an emissions-control policy objective, and also for the health

of a critical infrastructure industry in this nation’s economy.

STATEMENT OF DOUGLAS COGAN, DEPUTY DIRECTOR, SOCIAL ISSUES SERVICE,

INVESTOR RESPONSIBILITY RESEARCH CENTER

My name is Douglas G. Cogan. I am the Deputy Director of Social Issues for the

Investor Responsibility Research Center. IRRC is an independent research firm,

based in Washington, DC, that provides impartial information on corporate governance, social and environmental issues affecting investors and corporations worldwide. Founded in 1972, IRRC serves more than 500 institutional investors, corporations, law firms, universities, foundations, religious institutions and other organizations.

IRRC does not take advocacy positions on public policy issues. Accordingly, I will

not be commenting on the merits of specific clean air bills being considered by this

committee. I will address three broader issues as they relate to the merits of legislation that includes CO2 emissions controls. These issues are:

1. The inevitability of carbon dioxide controls.

2. The need for more corporate disclosure and investor certainty on the climate

change issue.

3. The connection between climate change and good corporate governance practices.
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Inevitability of carbon dioxide controls

IRRC has long served as an early warning system for the business and investment community. In the 1970’s, IRRC published reports on the coming deregulation

of the electric utility industry and obstacles facing nuclear power. In the 1980’s,

IRRC issued studies on the advent of renewable energy and utility energy efficiency

programs. In 1992, IRRC published a book written by me on business and investment responses to climate change.

Climate change is playing an increasingly important role in capital investment decisions, especially for the electric power industry. Our nation’s electricity providers

account for nearly 40 percent of America’s and 10 percent of the world’s manmade

CO2 emissions. Addressing global warming necessarily involves this industry. Companies and investors that ignore this fact do so at their own peril.

The question is not whether there will be CO2 controls on power plant emissions,

but when. Investors need more disclosure and guidance on this issue. Congress can

help by passing legislation that enables utilities and investors to plan effectively for

the future and reduce prevailing uncertainties.

Need for more corporate disclosure and investor certainty

Climate change is the greatest environmental challenge facing the electric utility

industry. Yet many companies still hardly acknowledge the issue in their disclosure

statements to investors. At best, companies say CO2 emissions controls could have

a material impact on their financial condition, but cannot gauge the magnitude of

the effect. At worst, they say virtually nothing at all.

Investors are left to wonder whether this paucity of disclosure reflects a lack of

guidance and foresight, or a reluctance to acknowledge the strategic and material

risks posed by climate change. Neither answer is acceptable to investors.

Electric utilities are committing tens of billions of dollars to upgrade their coalfired power plants and install modern pollution control equipment. Yet these investments do nothing to address carbon dioxide emissions. The most expensive climate

change response strategy will be to institute CO2 emissions controls after investing

in equipment to control sulfur dioxide, nitrogen oxide and mercury emissions. A

more prudent and cost-effective approach would be to consider these four emissions

sources together as part of an integrated strategy.

Consider what James Rogers, Chairman and CEO of Cinergy Corp., one of the nation’s largest coal-burning utilities, told this committee 2 years ago. Chairman Rogers said: ‘‘Who will make a decision to invest a billion dollars in a new coal plant

if you can only guess about future regulation? [A] new power plant bill that fails

to address CO2 will be as dated in 5 years as current law is today.’’

Investors have raised this very issue with electric utilities over the last 10 years

through the filing of shareholder resolutions. With mounting support from large

pension systems and endowments, shareholder support for these resolutions has increased dramatically. In the 2003 annual meeting season, the average support level

for climate change disclosure resolutions averaged almost 25 percent at three of the

nation’s largest electric utilities AEP, Southern and TXU. No other type of proposal

in the 32-year history of shareholder activism on social and environmental issues

has garnered this level of investor support. Such institutional backing is consistent

with voting trends that IRRC is seeing across most industries on the global warming issue. (See Figure 1.)

Corporate governance climate change connection

Utilities are under pressure from many quarters to address climate change. States

are enacting legislation to fill the policy vacuum at the Federal level. Overseas, the

Kyoto Protocol is poised to enter into force, affecting U.S. utilities and other multinationals with operations abroad. The Bush Administration is pressing for more voluntary corporate commitments to control greenhouse gas emissions.

What can utilities do to respond to these pressures? And can you do to help them?

In terms of what utilities and their investors can do for themselves, IRRC in a

soon-to-be-released report commissioned by CERES finds that companies can integrate climate change into good governance practices. Our study lists 14 specific actions. I highlight three vitally important ones here:

• First, companies should provide regular assessments of the climate change

issue to shareholders, based on systematic board reviews of company risks and opportunities. In place of blanket statements in securities filings that climate change

poses undeterminable material risks, at a minimum companies should identify the

risk factors and parameters involved in board assessments.

• Second, companies need to set CO2 emissions baselines and provide annual

emissions data by which investors can gauge prevailing emissions trends. Utilities

have been reporting such data to the U.S. Environmental Protection Agency for 10
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years. They should make this information directly available to shareholders as well.

(Some are already doing so.) • Most important, utilities should be making forward-looking disclosures of their

CO2 emissions. As an industry, electric utilities have pledged to reduce the carbon

intensity of their emissions by 3 to 5 percent by 2012. But actual emissions projections and the effects of proposed CO2 controls vary substantially from company to

company, and such information typically is not shared with investors. (See the attached IRRC Proxy Issues Reports on Southern Company and TXU Corp. as examples.) Investors cannot begin to make meaningful evaluations of the potential impacts of CO2 legislation on their portfolio holdings until they have access to such

forward-looking information.

Congress can facilitate this disclosure process by requiring utilities and other

major carbon emitters to report not only past emissions data, but also future projections in securities filings. To be fully transparent in this disclosure, aggregate emissions data as well as emissions intensity ratios should be provided.

The most helpful thing this Congress can do, however, is to establish once and

for all that carbon dioxide is an emissions source that will be controlled. Many investors see this coming. Regardless of the targets and timetables, this act alone

would provide essential guidance for investors and company directors that have put

climate change on their corporate governance agenda.

What has made this issue so difficult to address is a gap in governance decisionmaking. A CEO typically looks out only three to 5 years when making a big capital

investment, or about as long as he or she normally serves in office. The investment

planning horizon for a long-lived asset like a power plant may extend up to 15

years. But the power plant will operate for 30 years or more. Carbon dioxide emissions from that power plant will stay in the atmosphere for 100 years or more long

after the CEO and even the plant itself is retired. (See Figure 2.)

Institutional investors suffer the consequences of this governance gap. e are the

ones entrusted with pension, insurance and endowment assets designed to span generations. These investors have a fiduciary duty to advance governance reforms to

ensure the long-term viability of these assets and the economy as a whole. As our

nation’s elected representatives, you play a complementary role and are in a position to bridge this governance gap.

A more detailed treatment of these issues appears in the forthcoming IRRC report

commissioned by CERES, Climate Change and Corporate Governance: Making the

Connection. Excerpts are attached to my written testimony. They include profiles

of the top five carbon emitting investor-owned electric utilities. These profiles illustrate the wide divergence in board oversight and current reporting mechanisms

used by these companies and demonstrate the need for a more concerted approach.

Thank you for this opportunity to testify. I am happy to answer your questions and

assist you in any way I can.

IRRC SOCIAL ISSUES SERVICE, 2003 COMPANY REPORT—J2

SUMMARY

Resolution

RESOLVED: That the Board of Directors report by August 2003 to shareholders

on (a) the economic risks associated with the Company’s past, present and future

emissions of carbon dioxide, sulfur dioxide, nitrogen oxide and mercury emissions,

and the public stance of the company regarding efforts to reduce these emissions

and (b) the economic benefits of committing to a substantial reduction of those emissions related to its current business activities (i.e., potential improvement in competitiveness and profitability).

Similar resolution last year? No

Proponents

Benedictine Sisters Charitable Trust (200 shares), Congregation of the Sisters of

Charity of the Incarnate Word and Congregation of the Holy Cross, Southern Province (70). The proponents are church groups affiliated with the Interfaith Center on

Corporate Responsibility.

At Issue/New Developments

TXU is the nation’s seventh largest investor-owned electric utility, with more than

19,000 megawatts of generating capacity in Texas. Largely reliant on natural gas

and coal, TXU is the 5 industry emitter of carbon dioxide, accounting for 3.2 percent

of U.S. utilities’ CO2 emissions in 2000, according to an independent benchmarking

study. TXU also is a large industry emitter of sulfur dioxide and nitrogen oxides
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pollutants that contribute to acid rain, smog and human health problems. Management opposes the requested report as being ‘‘unreasonably speculative with respect

to any future emissions reductions’’ of these pollutants.

TXU is making substantial investments in pollution control technology to comply

with the Clean Air Act. Management does not say what portion of its overall capital

expenditures are being spent to meet these requirements, however. TXU notes in

its 2002 Form 10-K that a ‘‘significant portion’’ of its generating fleet was constructed ‘‘many years ago’’ and ‘‘may require significant capital expenditures’’ as

well as ‘‘periodic upgrading and improvement.’’ Future government controls of CO2

emissions could threaten the economic viability of some of TXU’s planned power

plant retrofits.

New developments at the company: In October 2002, TXU announced plans to terminate and write off its European operations. TXU’s stock plunged on the news. The

company and its managers now are defendants in several derivative shareholder

lawsuits.

Economic Impact on the Company

While TXU is making large investments to meet Clean Air Act requirements likely totaling hundreds of millions of dollars a year such investments will not reduce

TXU’s CO2 emissions. New government controls on such emissions could render

some of its power plant upgrades uneconomic. Management does not provide shareholders with a clear sense of how much it is spending on pollution control, nor does

it indicate whether future CO2 emissions controls would have a material impact on

the company. The requested report seeks more definitive answers to these questions.

I. TXU CORP. AND GLOBAL CLIMATE CHANGE

TXU Corp. is the nation’s seventh largest investor-owned electric utility, serving

5 million electricity and gas customers in the United States and Australia. (TXU

is working with creditors to sell its operations in Europe.) TXU also provides wholesale energy sales, merchant energy trading and risk management, energy-related

services and telecommunications.

TXU owns or leases 19,000 megawatts of generating capacity in Texas, where 2.7

million of its electricity customers are located. (TXU’s Texas operations are subject

to competition, beginning in 2002.) TXU also sells about 200 billion cubic feet of natural gas annually to 1.4 million customers. TXU Australia serves about 1 million

electricity and gas customers, and owns and operates 1,280 MW of generating capacity. As of Dec. 31, 2002, TXU employed 14,600 people.

Financial Performance

2002 2001 % change to

2002

Revenues (in billions $) ......................................................................................... 10.034 10.049 (0.1)

Net income (in millions $) ..................................................................................... (4,232) 655 NA

2002 financial results: TXU lost $4.2 billion in 2002, and the company’s book

value was cut in half. On a per share basis, TXU’s 2002 loss was $15.23 per share,

compared with earnings of $2.52 per share in 2001. This most difficult year in the

company’s 121-year history included a decision last October to discontinue and write

off its European operations. On Oct. 12, management announced it was cutting the

company’s common stock dividend by 80 percent, to 12.5 cents per share, in response to capital market concerns regarding the liquidity of TXU Corp. and its U.S.

and Australian subsidiaries. TXU and its top executives now are defendants in several derivative shareholder lawsuits, alleging (among other things) false and misleading statements in company securities filings, breach of fiduciary duty, abuse of

control, mismanagement, waste of corporate assets, and breach of the duties of loyalty and good faith.

Investment Performance

Data as of 12–31–2002

Total returns ( percent)

1 yr 3 yr 5 yr

TXU Corp. ................................................................................................................ ¥58.6 ¥38.1 ¥40.8

S&P 500 index ........................................................................................................ ¥22.1 ¥37.6 ¥2.9
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Investment Performance—Continued

Data as of 12–31–2002

Total returns ( percent)

1 yr 3 yr 5 yr

Industry group No information Industry description: Electric Utilities No. of

companies in group: 200.

Source: Compustat

Environmental expenditures and liability: TXU does not provide a breakdown of

its expenditures for capital projects related to the environment, nor does it provide

a projection of future such expenditures. In its 2002 Form 10-K, management notes

that a ‘‘significant portion of TXU Corp.’s facilities was constructed many years ago.

In particular, older generating equipment, even if maintained in accordance with

good engineering practices, may require significant capital expenditures to keep it

operating at peak efficiency. This equipment is also likely to require periodic upgrading and improvement.’’ TXU reported a total of $996 million in capital expenditures in 2002, down from $1.248 billion in 2001. Total capital expenditures are expected to be $1.1 billion in

2003, substantially all of which are for maintenance and organic growth of existing

operations.

Under the Clean Air Act and State electric utility restructuring legislation, ‘‘grandfathered’’ power plants (built before 1978) must achieve a 50 percent reduction in nitrogen oxides (NOx) emissions and a 25 percent reduction in sulfur dioxide

emissions by May 1, 2003. This requirement will be met through emission reductions at these facilities or through the purchase of credits from other permitted facilities as an alternative to achieve the same reductions. TXU reports in its 2002

Form 10-K that it has obtained all of the necessary permits to meet these requirements, and says it can expect recovery of reasonable environmental improvement

costs as part of the State-approved electric restructuring plan.

As part of the State Implementation Plan for the Clean Air Act, TXU also must

comply with a requirement calling for an 89 percent reduction in NOx emissions in

the Dallas-Fort Worth ozone non-attainment area and a similar 51 percent reduction from power plants in East and Central Texas. TXU says the cost of compliance

will be reduced because of the emission trading provisions in the rules.

TXU and Its Environmental Affairs

Board oversight: TXU’s nine-member board of directors has seven standing committees. No board committee is charged with explicit oversight of the company’s en- vironmental affairs. The board of directors has not conducted a formal review of the

climate change issue. The company has not set targets to reduce carbon dioxide or

other greenhouse gas emissions, but says it strives to develop and implement workable and economically viable emissions reduction projects.

Staff level: TXU employs about 150 environmental, health and safety professionals. The top EHS executive is Paul Plunket, Executive Vice President, who reports to Tom Baker, TXU Corp. Executive Vice President and President of TXU’s Oncor energy distribution business. There is one reporting level between Plunket

and the CEO of the company. TXU has conducted company-wide environmental audits since 1987; audits of major facilities are conducted every year. Its business

units are benchmarked against the ISO 14001 environmental management system

standard. The audit committee of the board of directors reviews audit results; audit

summaries are not made pubic. TXU says environmental performance is a factor in

the compensation of top executives, plant managers and other employees.

TXU is one of three U.S. utility companies listed on the Dow Jones Sustainability

Index. In June 2002, Innovest Strategic Value Advisors, Inc. recognized TXU as the

fourth highest-ranking company out of 28 utilities evaluated based on environmental risk factors, enviornmental management capacity and environmental opportunity factors. Innovest also found that TXU was below the industry average in

terms of its exposure to a possible carbon tax relative to its stock market capitalization (as of Jan. 1, 2000).

Environmental principles and reporting: TXU has issued an environmental report

annually since 1991. (The report and its Statement of Environmental Principles is

available in printed form and on the Internet at www.txucorp.com/globcit/envcom/

globalreport/principles.) The latest report includes a brief policy statement on climate change and carbon savings/offsets achieved in the United States and Australia. The report also includes statistics on TXU’s sulfur dioxide, nitrogen oxide and

carbon dioxide emissions rates as compared to national electric utility averages and

the company’s investments in wind energy.
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Under the Clean Air Act Amendments of 1990, TXU is required to collect hourly

emissions data on carbon dioxide, nitrogen oxides and sulfur dioxide. The power

plant emissions data are recorded in a data base maintained by the U.S. Environmental Protection Agency. The company also provides a summary of annual mercury emissions from its lignite/coal generating facilities on its website and annually

reports these emissions to the EPA, which makes the information publicly available

on the Internet in the Community Right-to-Know data base.

TXU and Global Climate Change

As part of its Statement of Environmental principles, TXU says it will ‘‘continue

to take prudent steps to voluntarily reduce our emissions of greenhouse gases and

to promote carbon sequestration programs.’’ It says it has set ‘‘challenging sustainability targets in the medium and long term’’ that include increased use of renewable fuels, reducing greenhouse gas emissions through more efficient electricity production and use, assisting carbon sequestration through reforestation and other

technologies, and actively promoting conservation and load management programs.

Quantitative targets have not been set, however.

In its 2002 annual report, TXU says it ‘‘supports a balanced, flexible, comprehensive and international approach to the global climate change issue.’’ It does not comment on the Kyoto Protocol, an international agreement that seeks a 5 percent cut

in industrialized nations’ CO2 emissions below 1990 levels by 2012. In its 2002 Form

10-K, management says, it is ‘‘unable to predict the impact of the [Bush] Administration proposal or related legislation’’ on climate change.

Carbon dioxide emissions: As noted above, TXU reports information to government agencies about its CO2 emissions, but it does not make this information readily available to shareholders. Through use of Continuous Emissions Monitors on its

major power plants, TXU reported carbon dioxide emissions equal to 66.8 million

metric tons (MMT) in 2000. Separately, TXU told IRRC that its operations in the

United States and Australia emitted 72.8 MMT of CO2 in 2001. TXU also collects

data on emissions of two other greenhouse gases, methane and sulfur hexafluoride.

According to an independent benchmarking study conducted by the Natural Resources Defense Council, TXU was the fifth largest utility emitter of carbon dioxide

in 2000, accounting for 3.2 percent of U.S. utilities’ CO2 emissions. That year, natural gas provided 61 percent of its generation; coal/lignite, 28 percent; and nuclear,

11 percent. TXU’s high ranking in the benchmarking study was mainly a function

of its large generating base, totaling more than 19,000 megawatts of capacity. Because its main source of fuel is natural gas (which has a lower carbon content than

coal or oil), it ranked 56th out of 100 utilities studied in terms of CO2 emissions

per megawatt-hour (MWh) of generation, and it ranked 71st out of 100 in terms of

CO2 emissions per MWh of generation from fossil energy plants. Other utilities with

lower rankings (i.e., closer to 1) had higher CO2 emissions per unit of power produced.

TXU reported in its 2001 environmental report that its CO2 emissions rate in

2000 was 11 percent below the national average (based on tons of CO2 emitted per

million Btus of energy produced). Similarly, its sulfur dioxide and nitrogen oxides

emissions rates were 33 and 15 percent below the national average, respectively.

The NRDC benchmarking study reported that TXU ranked fifth in terms of total

utility emissions of nitrogen oxides in 2000, and 12th in terms of sulfur dioxide

emissions.

Emissions savings: TXU has been a member of the U.S. Department of Energy’s

Climate Challenge program since 1995, and it has reported emissions savings under

the Section 1605(b) reporting program established by the 1992 Energy Policy Act.

TXU reported savings/offsets of 23 million metric tons of CO2 equivalent in 2001

and a total of 196 MMT of savings since 1991 more than any other U.S. investorowned electric utility. TXU says its CO2 emissions would have been 28 percent higher in 2001 were it not for savings and offsets achieved since 1990.

Most of TXU’s savings are from operation of its Comanche Peak nuclear units,

which came on line in the early 1990’s. The Energy Policy Act allows utilities to

count as savings any new generation from nuclear power plants that began operation or increased their output after 1990. (Comanche Peak is the only U.S. investor-owned nuclear plant completed after 1990.) Other sources of TXU’s emissions

savings include heat rate improvements in its fossil energy plants, demand-side

management programs, methane recovery, sulfur hexafluoride reduction programs

and tree planting.

In 2001, TXU reported 527,400 tons of emissions savings through its demand-side

management programs. The company has planted more than 20 million trees since

the early 1970’s, including 1.3 million in 2002. TXU Australia reported savings/off-
427

sets of 230,000 tons in 2001. TXU Australia is expected to achieve a 16 percent reduction in its total greenhouse gas emissions by 2004.

Renewable energy: TXU says it encourages ‘‘research and development of more efficient, environmentally benign sources of energy and, whenever warranted by market opportunity, to offer customers the benefits of energy produced from renewable

resources.’’ TXU offers a ‘‘green pricing’’ option in each jurisdiction it serves. TXU

has contracts for 382 megawatts of wind power in Texas, making it the fourth largest purchaser of wind power in the United States. It also has contracts for approximately 20 MW of wind power in Australia and 30 MW of hydro and landfill gas generating capacity. TXU says it is also evaluating photovoltaic, solar thermal, wasteto-energy and biomass technologies.

II. PROPONENTS’ POSITION

This is the second time that shareholder proponents affiliated with the Interfaith

Center on Corporate Responsibility have submitted a global warming resolution to

TXU Corp. In 1997, a resolution filed with its predecessor, Texas Utilities, was withdrawn. TXU was targeted again this year because it has been identified as one of

the top five carbon-emitting investor-owned electric utilities. The proponents met

TXU’s corporate secretary and members of the company’s environmental staff in

March 2003. Though the discussions were amiable, the proponents elected not to

withdraw the resolution on the basis that TXU was not willing to provide sufficient

forward-looking information on the climate change issue.

The resolved clause of the resolution has two elements. It asks the company’s

board of directors to report on:

(a) the economic risks associated with the Company’s past, present and future

emissions of carbon dioxide, sulfur dioxide, nitrogen oxide and mercury emissions,

and the public stance of the company regarding efforts to reduce these emissions

and (b) the economic benefits of committing to a substantial reduction of those emissions related to its current business activities (i.e., potential improvement in competitiveness and profitability).

In a presentation by Ceres, a coalition working closely with the Interfaith Center

on the 2003 shareholder campaign, arguments made in favor of the global warming

resolution filed with electric utilities are as follows:

1. Health and environmental risks from pollutants: Electric utilities account for

two-thirds of the nation’s sulfur dioxide emissions, one-third of its mercury emissions and nearly one-quarter of its nitrogen oxides emissions. These pollutants contribute to asthma, lung and heart disease and mercury bioaccumulation in humans,

and cause extensive damage to the environment, including acid rain, smog and mercury bioaccumulation in fish and other species. At the same time, electric utilities

account for 37 percent of the nation’s carbon dioxide emissions, the main gas tied

to global warming.

2. Government regulation of these pollutants: Emissions of sulfur dioxide and nitrogen oxides are regulated under the Clean Air Act. This Federal law will require

substantial additional reductions of these emissions as well as mercury in the years

ahead. Utilities will have to make major new investments in pollution control technology, but this technology will not control carbon dioxide emissions.

3. Risks of not factoring in carbon dioxide controls: The proponents believe domestic regulatory controls of CO2 are inevitable. Two States (New Hampshire and Massachusetts) have already passed laws restricting utility emissions of CO2, and Federal legislation has been introduced as well. At the international level, the Kyoto

Protocol is likely to go into effect this year (although the Bush Administration has

pulled the United States out of the agreement).

According to studies cited by the proponents, the most expensive choice utilities

could make is to retrofit existing fossil energy plants with new pollution control

equipment and then have to reduce CO2 emissions from these plants. The proponents argue that utilities should factor future CO2 controls into their investment

strategies now, since it could alter decisions about which power plants to retrofit

with new pollution control equipment and which to replace with new, cleaner energy

sources.

4. Need for greater disclosure by utilities: By some estimates cited by the proponents, many electric utilities face a ‘‘carbon exposure’’ of between 10 and 35 percent of their total market capitalization. (In other words, the cost of achieving carbon dioxide emission controls as specified by the Kyoto Protocol equals 10 to 35 percent of the current value of their stock.) Many factors go into making this calculation, including a utility’s generating assets, fuel mix, installed pollution control technologies and whether it is competing in a deregulated electricity market. ‘‘Investors

cannot assess this risk without more disclosure’’ from utilities, according to Ceres.
428

That is why the proposal calls on management to conduct a thorough economic

assessment of the risks and benefits of achieving substantial emissions reductions

of the four pollutants listed in the proposal. ‘‘We believe that taking early action

on reducing emissions and preparing for standards could better position companies

over their peers, including being first to market with new high-efficiency and lowemission technologies,’’ the proponents argue. ‘‘Changing consumer preferences, particularly those relating to clean energy, should also be considered. Inaction and opposition to emissions control efforts could expose companies to reputation and brand

damage, and regulatory and litigation risk,’’ it concludes.

III. MANAGEMENT’S POSITION

Management opposes the resolution seeking more disclosure on the company’s efforts to address climate change. It argues that the resolution would duplicate company reporting activities, increase costs and ‘‘require unreasonable speculation with

respect to the economic risks and benefits of emissions and future emission reductions.’’

Management says it complies with government requirements to monitor and annually report to the Environmental Protection Agency emissions of carbon dioxide,

sulfur dioxide, nitrogen oxides and mercury. The public can gain access to this information through government Internet sites.

TXU also publishes an annual environmental report that includes information

comparing its sulfur dioxide, nitrogen oxide and carbon dioxide emissions rates to

national electric utility averages. The report also highlights its voluntary reductions

in carbon dioxide emissions and other greenhouse gases and its investments in wind

energy. Management says its ‘‘public stance regarding efforts to reduce these emissions is embodied in its Statement of Environmental Principles and is summarized

in the company’s annual environmental report.’’

Management says additional information on the environmental risks associated

with emissions is available in public reports filed with the Securities and Exchange

Commission. ‘‘The reports address capital construction costs for sulfur dioxide and

nitrogen oxide emissions control equipment necessary under current regulations,

certain material risks associated with environmental compliance, and certain legislative and regulatory initiatives that may, in the Company’s determination, materially impact its operations,’’ according to the proxy statement.

Finally, in response to the proponents’ request for more information on the economic risks and benefits of future emissions controls and efforts to reduce these

emissions, management says it ‘‘cannot accurately predict the outcome of future

Federal or State legislative actions to regulate emissions’’ and that the requested

report would be ‘‘unduly speculative.’’

IV. IRRC ANALYSIS

SmartVoter Guidelines

Voting guidelines for this resolution are presented under issue number 3425 in

IRRC’s SmartVoter product.

Questions Raised

• Is TXU reporting adequately on the global warming issue?

• Could TXU do more to respond to this issue?

Adequacy of reporting: The proponents believe that management should provide

shareholders with more information on the company’s response to global warming.

In particular, the proponents want management to lay out the costs and benefits

of reducing greenhouse gas emissions as it invests in other pollution controls at its

fossil-fired generating facilities. Management says it is already making information

on its emissions publicly available and that the additional information requested by

the proponents would be ‘‘unduly speculative.’’

Management can legitimately say that it is providing some information to shareholders on this issue:

• Disclosure: It makes reference to the global warming issue in its 2002 annual

report and Form 10-K.

• Emissions: Its 2001 environmental report provides comparative statistical information on its emissions of carbon dioxide, sulfur dioxide and nitrogen oxides, and

its efforts to reduce these emissions.

• Data bases: Its proxy statement cites government data bases where shareholders can find more detailed information on the company’s emissions.

Shareholders who wish to conduct more than a cursory analysis of the company’s

response to global warming and its exposure to risks from controlling emissions may
429

find management’s level of disclosure inadequate, however. Here are some examples: • Disclosure: Management says in its 2002 annual report that it ‘‘supports a balanced, flexible, comprehensive and international approach to the global climate

change issue.’’ But it does not make any mention of the Kyoto Protocol, the pending

international agreement to address climate change, or indicate whether the company has any targets to reduce its greenhouse gas emissions. The Form 10-K statement also sheds little light on these questions. It says only that management is ‘‘un- able to predict the impact of the [Bush] Administration proposal or related legislation’’ on climate change. • Emissions: Management says in its environmental report that its emissions of

CO2, SO2 and NOx are below the national average per unit of electricity produced.

But it does not provide absolute emissions figures, which reveal the company to be

one of the nation’s largest emitters of each of these substances. Among U.S. electric

utilities in 2000, TXU ranked fifth in CO2 and NOx emissions, and 12th in SO2

emissions. • Data bases: Management makes reference to government data bases where its

aggregate emissions figures can be found. It says in its 2003 proxy statement that

such data bases demonstrate the company’s ‘‘support for, and progress toward, voluntary reductions of greenhouse gas emissions.’’ But management does not provide

links or Internet addresses to these government sites, which would assist interested

parties in tracking down this information. Moreover, management does not explain

why it omits aggregate emissions figures in its own reports to shareholders and instead normalizes the data based on electricity production. Providing aggregate data

would enable shareholders to better scrutinize management’s claims of progress toward absolute emissions reductions. • Financial implications of regulatory controls: Finally, management provides

very little information to shareholders about its capital expenditures related to environmental protection. It provides figures for recent and projected total capital expenditures for the company. It also notes that many of its power plants have had

to obtain permits to come into compliance with new Clean Air Act standards. But

it does not break out how much of its capital expenditures are being used for such

environmental purposes. Separately in its Form 10-K, management warns that a

‘‘significant portion of TXU Corp.’s facilities was constructed many years ago’’ and

that these facilities ‘‘may require significant capital expenditures’’ as well as ‘‘periodic upgrading and improvement.’’ But it attaches no dollar figures to such warnings. Shareholders are left to ponder whether these expenditures may be material

to the company’s operations and future financial condition.

Could TXU be doing more to respond to this issue? From the preceding discussion,

it is clear that TXU could be doing more to enlighten shareholders about the risks

and opportunities posed by efforts to reduce greenhouse gas emissions.

• Disclosure: Management could state in its annual report whether or not it believes the Kyoto Protocol reflects a ‘‘balanced, flexible, comprehensive and international approach’’ to the global climate change issue. It could list in its Form 10-

K examples of issues and uncertainties that render it ‘‘unable to predict the impact’’

of climate change proposals, and provide at least a broad outline of the possible

magnitude of such impacts.

• Emissions and data bases: Management could provide links or website information to government data bases to which it submits aggregate emissions data. Better still, it could provide this information in its own company reports. Best of all,

it could provide historic and projected emissions data so that shareholders can judge

for themselves how well the company is doing in ‘‘support for, and progress toward,

voluntary reductions of greenhouse gas emissions.’’

• Financial implications of regulatory controls: Management could provide a

breakdown of its capital expenditures related to environmental protection as most

other companies do in their Form 10-K reports. In particular, management could

provide information on its past investments and future projections to keep its fossil

energy plants in compliance with the Clean Air Act. In order to satisfy the proponents’ request regarding the effects of cutting greenhouse gas emissions, management also could give some indication of how efforts to achieve the goals of the Kyoto

Protocol or comparable U.S. legislation might affect its investments in retrofitting

and upgrading its older plants.

In the final analysis, shareholders who believe the global warming issue does not

yet pose a major policy and financial concern for TXU or who agree with management that further statements on the issue would be ‘‘unduly speculative’’ will be inclined to vote against this proposal. Shareholders who believe the issue does pose

concerns despite the legislative uncertainties that remain will be inclined to vote for

the proposal. This latter group of shareholders may conclude, in fact, that the uncer-
430

tain financial consequences of still-evolving response strategies to climate change

makes the issuance of a forward-looking report all the more valuable.

EXCERPT FROM TXU CORP.’S PROXY STATEMENT

SHAREHOLDER PROPOSAL RELATED TO AN ENVIRONMENTAL REPORT:

‘‘ELECTRIC UTILITY RESOLUTION

WHEREAS:

In 2001 The Intergovernmental Panel on Climate Change concluded that ‘‘there

is new and stronger evidence that most of the warming observed over the last 50

years is attributable to human activities.’’

In 2001 the National Academy of Sciences stated that the ‘‘degree of confidence

in the IPCC assessment is higher today than it was 10, or even 5 years ago there

is general agreement that the observed warming is real and particularly strong

within the past 20 years.’’

The United States government’s ‘‘Climate Action Report 2002,’’ concluded that

global climate change may harm the country. The report highlights risks to coastal

communities in the Southeast due to sea level rise, water shortages throughout the

West, and increases in the heat index and frequency of heat waves.

In July 2002, 11 Attorneys General wrote President Bush, outlining their concern

over the U.S. Climate Action Report’s failure to recommend mandatory reductions

of greenhouse gas emissions. They declared that States are being forced to fill the

Federal regulatory void through State-by-State regulation and litigation, increasing

the ultimate costs of addressing climate change. They urged a reconsideration of his

regulatory position, and adoption of a ‘‘comprehensive policy that will protect both

our citizens and our economy.’’

U.S. power plants are responsible for about two-thirds of the country’s sulfur dioxide emissions, one-quarter of its nitrogen oxides emissions, one-third of its mercury

emissions, approximately 40 percent of its carbon dioxide emissions, and 10 percent

of global carbon dioxide emissions.

Scientific studies show that air pollution from U.S. power plants causes tens of

thousands of premature deaths and hospitalizations, hundreds of thousands of asthma attacks, and several million lost workdays nationwide every year from pollutionrelated ailments.

Standards for carbon dioxide emissions and other air pollutants are emerging

across multiple fronts. Ninety-six countries have ratified the Kyoto Protocol, requiring carbon dioxide reductions. Massachusetts and New Hampshire have enacted legislation capping power plants emissions of carbon dioxide and other air pollutants.

In June 2002 the Senate Environment and Public Works Committee passed a bill

seeking to cap emissions from the generation of electric and thermal energy.

We believe that taking early action on reducing emissions and preparing for

standards could better position companies over their peers, including being first to

market with new high-efficiency and low-emission technologies. Changing consumer

preferences, particularly those relating to clean energy, should also be considered.

Inaction and opposition to emissions control efforts could expose companies to reputation and brand damage, and regulatory and litigation risk.

RESOLVED: That the Board of Directors report (at reasonable cost and omitting

proprietary information) by August 2003 to shareholders on (a) the economic risks

associated with the Company’s past, present and future emissions of carbon dioxide,

sulfur dioxide, nitrogen oxide and mercury emissions, and the public stance of the

company regarding efforts to reduce these emissions and

(b) the economic benefits of committing to a substantial reduction of those emissions related to its current business activities (i.e. potential improvement in competitiveness and profitability).’’

The Board of Directors recommends a vote AGAINST this proposal for the following reasons:

The Company believes that adoption of the shareholder proposal would unnecessarily duplicate ongoing Company reporting activities, would needlessly increase

costs and require unreasonable speculation with respect to the economic risks and

benefits of emissions and future emission reductions.

The Company routinely reports to regulatory agencies and the public regarding

significant environmental matters. Since 1991, the Company has voluntarily published an annual environmental report, available in printed form and on the Internet, which sets forth its Statement of Environmental Principles and presents statistics on the Company’s sulfur dioxide and nitrogen oxide emissions rates as com-
431

pared to national electric utility averages, voluntary reductions in greenhouse gas

emissions (including carbon dioxide), and investments in zero-emission wind energy.

The Company also annually reports emissions of sulfur dioxide, nitrogen oxide

and carbon dioxide, which are continuously monitored at the generating facilities as

required by law, to the State and Federal environmental agencies, including the

U.S. Environmental Protection Agency (EPA), which makes this information publicly available through the Emissions Scorecard data base on the Internet.

The Company also provides a summary of annual mercury emissions from its lignite/coal generating facilities on its web page and annually reports these emissions

to the EPA, which makes the information publicly available on the Internet in the

Community Right-to-Know data base.

The Company’s public stance regarding efforts to reduce these emissions is embodied in its Statement of Environmental Principles and is further reflected in its

record of compliance with State and Federal sulfur dioxide and nitrogen oxide emissions requirements and reductions, which is summarized in the Company’s annual

environmental report. The Company’s public support for, and progress toward, voluntary reductions of greenhouse gas emissions (including carbon dioxide) is reported

annually to the U.S. Department of Energy, which makes the information available

in the Public Use Data base on the Internet.

The Company routinely discloses the economic risks associated with emissions in

its public reports filed with the Securities and Exchange Commission. The reports

address capital construction costs for sulfur dioxide and nitrogen oxide emissions

control equipment necessary under current regulations, certain material risks associated with environmental compliance, and certain legislative and regulatory initiatives that may, in the Company’s determination, materially impact its operations.

In its normal course of business, the Company evaluates possible additional emissions reductions beyond those required by State and Federal regulations. The Company believes that a more detailed report on the economic risks and benefits of

emissions and emissions reductions would be unreasonably speculative with respect

to any future emissions reductions. For example, the Company cannot accurately

predict the outcome of future Federal or State legislative actions to regulate emissions.

In summary, adoption of the shareholder proposal would unnecessarily increase

costs and duplicate ongoing Company reporting activities.

The Board of Directors Recommends a Vote AGAINST This Shareholder Proposal.

[SOCIAL ISSUES SERVICE, MAY 6, 2003]

IRRC, 2003 Company Report J2

SOUTHERN CO.

Global Climate Change

(by Doug Cogan)

2003 Investor Responsibility Research Center

Proxy Statement Proposal Related IRRC report 1. Elect directors CG Proxy Report

2. Ratify amendment of by-laws permitting book-entry of shares CG Proxy Report

3. SP-Report on greenhouse gas emissions SI Background Rpt. J2

SUMMARY

Resolution

RESOLVED: That the Board of Directors report by August 2003 to shareholders

on (a) the economic risks associated with the Company’s past, present and future

emissions of carbon dioxide, sulfur dioxide, nitrogen oxide and mercury emissions,

and the public stance of the company regarding efforts to reduce these emissions

and (b) the economic benefits of committing to a substantial reduction of those emissions related to its current business activities (i.e., potential improvement in competitiveness and profitability).

Similar resolution last year? No

Shareholder proposals asking Southern to report on the costs and liabilities of climate change were filed and withdrawn in 1997, 1999 and 2002. A proposal on developing renewable energy was supported by 9.5 percent of shares voted in 2001 and

9.2 percent in 2002.
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Proponents

Sisters of Charity of St. Elizabeth (100 shares); United Church Foundation

(23,400 shares); Sisters of St. Dominic, Caldwell, N. J. (100 shares); affiliated with

the Interfaith Center on Corporate Responsibility.

At Issue/New Developments

Southern Company is the nation’s second largest electric utility, with 37,000

megawatts of generating capacity. Coal represents about two-thirds of Southern’s

fuel mix, making it the 2 industry emitter of carbon dioxide, accounting for 6.4 percent of U.S. utilities’ CO2 emissions in 2000, according to an independent study. It

is also the 2 industry emitter of sulfur dioxide, nitrogen oxides and mercury. Southern plans to spend more than $1 billion by 2004 for nitrogen oxides emissions controls at its coal-fired plants. It expects to spend an additional $4 billion or more by

2015 to further reduce emissions of sulfur dioxide, nitrogen oxides and mercury.

Government efforts to control CO2 emissions could call into question the economic

feasibility of some of these pollution control efforts. Southern has provided projections of its power generation and emissions through 2020. It estimates that its

power generation will increase 45 percent between 2000 and 2020 and that its CO2

emissions will increase 16 percent. Management says it is focused on ‘‘addressing

emissions of greenhouse gases such as CO2.’’

Economic Impact on the Company

Because electricity generation accounts for nearly two-fifths of the nation’s CO2

emissions, the principal greenhouse gas, imposition of new government controls on

CO2 could compromise the future value of Southern’s planned investments in pollution control equipment at many of its coal-fired power plants. Southern says in its

Form 10-K report that the ‘‘cost impacts of such [CO2] legislation would depend

upon the specific requirements enacted.’’ The requested report asks management to

provide a more detailed explanation of the costs and benefits of the company’s pollution control strategy, given that there may be material risks to the company and

its shareholders if that strategy fails to properly anticipate possible future CO2

emissions controls.

I. SOUTHERN CO. AND ITS ENVIRONMENTAL AFFAIRS

Southern Company is the nation’s second largest electric utility, serving 4 million

customers in Georgia, Alabama, Florida and Mississippi, with 27,000 miles of transmission lines. Its regulated utility companies Alabama Power, Georgia Power, Gulf

Power, Mississippi Power and Savannah Electric provide nearly 90 percent of earnings. The remaining portion of Southern’s business activities includes wholesale

power generation, a competitive retail natural gas business, energy-related products

and services, fiber optics and wireless communications, and leveraged leasing activities. Southern employed 26,178 people as of Dec. 31, 2002.

Southern had 34,739 megawatts of owned and leased generating capacity in its

retail system at the end of 2002. Southern Power, its electric wholesale generation

subsidiary, had 1,612 MW of natural gas-fired generating capacity in commercial operation. Southern Power expects to have a total of 6,600 MW on-line by the end of

2005. Southern’s generation sources in 2002 were coal, 69 percent; nuclear, 16 percent; natural gas, 12 percent; and hydro, 3 percent. Average fuel costs in 2002 were

1.61 cents per kilowatt-hour. Southern’s retail electric rates are 15 percent below

the national average.

Financial Performance

2002 2001 % change to

2002

Revenues (in billions $) ......................................................................................... 10.549 10.155 3.9

Net income (in millions $) ..................................................................................... 1,318 1,262 4.4

2002 financial results: Southern says its financial performance in 2002 was ‘‘very

strong and one of the best in the electric utility industry.’’ Net income of $1.318 billion from continuing operations increased 17.6 percent over income from continuing

operations reported in 2001. Diluted earnings per share from continuing operations

in 2002 were $1.85 per share, up from $1.61 in 2001. Dividends paid per share on

common stock in 2002 were $1.355, up from $1.34 in 2001. The company had an

average of 708 million shares of common stock outstanding in 2002, an increase of

2.7 percent.
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Future construction and environmental expenditures: Southern provides projections for construction expenditures, including environmental capital expenditures,

over the next 3 years. Its projected construction expenditures are as follows: $2.075

billion in 2003, $2.308 billion in 2004 and $2.354 billion in 2005. Its projected environmental capital expenditures are $257 million in 2003, $300 million in 2004 and

$346 million in 2005. Southern forecasts electricity demand growth of 3.5 percent

a year, and customer growth of 1.5 percent a year.

Investment Performance

Data as of 12–31–2002

Total returns (percent)

1 yr 3 yr 5 yr

Southern Co. ........................................................................................................... 17.6 123.8 124.9

S&P 500 index ........................................................................................................ ¥22.1 ¥37.6 ¥2.9

Industry group ......................................................................................................... No data

Industry description: Electric Utilities No. of companies in group: 200.

Source: Compustat

Southern and Its Environmental Affairs

Board oversight: Southern’s 10-member board of directors has five standing committees. No board committee is charged with explicit oversight of the company’s en- vironmental affairs. The audit committee is responsible for reviewing environmental

compliance audits along with other regulatory matters affecting the company. The

entire board receives updates on environmental management issues periodically.

The 2003 proxy statement makes no reference to environmental issues discussed by

the board of directors.

The board of directors has not conducted a formal review of the climate change

issue. The company has not set targets to reduce carbon dioxide or other greenhouse

gas emissions, but says it is considering them. It has provided projections of carbon

dioxide emissions out to the year 2020.

Staff level: Southern employs about 250 environmental, health and safety professionals at the corporate level. The top EHS executive is Dr. Charles H. Goodman,

Senior Vice President, Research and Environmental Affairs. Goodman reports to

Paul Bowers, President, Southern Co. Generation and Energy Marketing; and

Dwight Evans, President of External Affairs. There is one reporting level between

Goodman and the CEO of the company. Southern says environmental performance

is a factor in the compensation of top executives, plant managers and other EHS

employees.

Southern has conducted company-wide environmental audits since 1992. Audits of

major facilities are conducted every one to 2 years, and are conducted by corporate

and facility staff. The audit committee of the board of directors reviews audit results. Audit summaries are not made public.

Environmental principles and reporting: Southern issued its first environmental

policy statement in 1992 and its first environmental report in 1993; it has issued

the environmental report periodically since then. The report includes a climate

change policy statement, summary of greenhouse gas reduction efforts and a projection of future emissions trends.

Southern’s most recent statement on climate change was issued in August 2000.

Among other things, the policy statement says:

• Climate change is global and long-term in nature.

• Policies should seek to resolve climate change scientific uncertainties.

• Solutions must incorporate unrestricted use of market-based flexibility mechanism, and consider the broadest range of sources as well as sinks of greenhouse

gases, both domestic and international.

• Policies must protect a secure, economic and diverse energy supply, and promote long-term research, development and dissemination.

• Public and private partnerships should support development and commercialization of higher efficiency, lower emitting power generation technologies.

• Cost-effective means should be pursued to reduce, avoid and sequester greenhouse gas emissions.

Southern says in the statement that it is committed to ‘‘establishing and maintaining dialog with public and private interest groups to expand the understanding

of the climate change issue and to enhance the development and implementation of

appropriate climate change policy.’’ The full policy statement is available at: http:/

/www.southerncompany.com/planetpower.asp.
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Global Climate Coalition: Southern Company was a founding member of the Global Climate Coalition (GCC), which formed in 1989. For more than a decade, the

GCC was the leading industry group opposed to mandatory greenhouse gas controls

and U.S. adoption of the Kyoto Protocol. Southern was one of five companies that

withdrew from the GCC in late 1999 and early 2000. A Southern spokesman told

IRRC that the company was concerned the GCC was ‘‘as strident as its most strident member’’ and that Southern had decided not to align itself with other groups

on the climate change issue.

At the time it pulled out of the lobbying group, Southern was facing a global

warming shareholder resolution that highlighted its membership in the GCC. That

resolution subsequently was withdrawn. The GCC ended its corporate membership

program in March 2000, 1 month after Southern left the group, and it disbanded

altogether in January 2002.

Renewable Energy Development

Southern is not optimistic about the prospects for renewable energy development,

especially in its service area. It says on its website that ‘‘renewable energy is more

expensive and sometimes dramatically so than power generated by fossil fuels than

coal or natural gas. Even if costs weren’t a factor, some renewable energy sources aren’t available on a large scale in the Southeast.’’ A shareholder proposal filed with

Southern on developing renewable energy was supported by 9.5 percent of shares

voted in 2001 and 9.2 percent in 2002.

Southern does offer an ‘‘EarthCents green pricing’’ option that allows customers in Alabama and Mississippi to purchase 100 watt blocks of renewable energy for $5– 6 per month. Similar programs are awaiting regulatory approval in Georgia and

Florida. The energy will come from a portfolio of sources, including landfill methane,

wind and solar power. In addition, Southern is conducting research on biomass,

solar and landfill methane technologies. For example, Southern is adding

switchgrass (a biomass fuel) at two of its power plants to reduce the use of coal and

related emissions. It has also installed a 250-kW fuel cell demonstration plant. Fuel

cells emit less greenhouse gases inherently than boilers or engines that provide the

same energy.

In its 2002 Form 10-K, Southern acknowledges that commercial success of fuel

cells and renewables would pose a competitive threat to the company and its shareholders. Management states:

A key element of Southern Company’s business model is that generating power

at central power plants achieves economies of scale and produces power at relatively

low cost. There are other technologies that produce power, most notably fuel cells,

microturbines, windmills and solar cells. It is possible that advances in technology

will reduce the cost of alternative methods of producing power to a level that is competitive with that of most central power station electric production. If this were to

happen and if these technologies achieved economies of scale, Southern Company’s market share could be eroded, and the value of its electric generating facilities could

be reduced. Changes in technology could also alter the channels through which retail electric customers buy power, which could reduce Southern Company’s revenues or increase expenses.

II. SOUTHERN CO. AND ITS POWER PLANT EMISSIONS

Southern Company is the nation’s second largest electric utility and the nation’s second largest consumer of coal (behind American Electric Power). According to an

independent benchmarking study conducted by the Natural Resources Defense

Council, Southern was the second largest U.S. utility emitter of carbon dioxide, sulfur dioxide, nitrogen oxides and mercury in 2000. That year, Southern had 32,000

megawatts of capacity and coal provided 76 percent of its power generation. With

128 million metric tons of carbon dioxide emissions, Southern accounted for 6.4 percent of U.S. utilities’ CO2 emissions in 2000, according to the NRDC study. Southern has told IRRC that it is considering the adoption of CO2 emissions control targets.

To date, Southern has spent considerable sums to comply with the Federal Clean

Air Act, which addresses sources of air pollution. It estimates that its construction

expenditures have totaled $400 million to achieve significant reductions in sulfur dioxide and nitrogen oxide emissions under the first two phases of the Clean Air Act

Acid Rain provisions. In the 1990’s, Southern cut its sulfur dioxide emissions by 40

percent and its nitrogen oxides emissions by 28 percent, even as its electricity generation has increased by 20 percent.

In addition, Southern has spent $980 million to reduce nitrogen oxide emissions

from power plants in nonattainment areas around Atlanta, Ga., and Birmingham,

Ala., to meet a regulatory requirement that goes into effect in May 2003. Additional
435

construction expenditures for compliance in the Georgia nonattainment area are estimated at $305 million to achieve standards that will go into effect in May 2005.

Altogether, Southern expects to spend an additional $4 billion or more by 2015 to

further reduce its overall emissions-not including carbon dioxide.

Outlook to 2020: Unlike most utilities, Southern provides a long-term outlook for

its power supply and projected emissions, dating to 2020. Its key projections are as

follows:

• Power generation-Southern expects its annual power generation to increase

from 172 million megawatt-hours in 2000 to approximately 250 MWh in 2020, an

increase of 45 percent.

• Fuel mix-Southern expects its power supplied from coal to decrease from 76

percent in 2000 to 38 percent in 2020; its power from natural gas to increase from

4 percent to 53 percent; its power from nuclear energy to fall from 16 percent to

6 percent; and its power from hydro and oil to stay at about 3 percent.

• Sulfur dioxide and nitrogen oxide emissions-Southern expects its emissions of

sulfur dioxide to fall from nearly 1.5 million tons in 1990 to about 300,000 tons in

2020, a decrease of about 80 percent. It expects its emissions of nitrogen oxides to

fall from 400,000 tons to about 127,000 tons, a decrease of about 68 percent.

• Carbon dioxide emissions-As a result of generation growth, Southern expects

its carbon dioxide emissions to increase from 128 million metric tons in 2000 to approximately 148 MMT in 2020, an increase of about 16 percent. It says, ‘‘Although

our current projections indicate a rise in the years ahead, much focus is being

placed on how we can continue to meet the energy needs of our customers while

addressing emissions of greenhouse gases such as CO2.’’ From 1990 to 2020, Southern projects that its CO2 emissions will increase by a total of 45 percent.

Carbon dioxide emissions reduction programs: Since 1991, Southern has avoided

or offset a total of 55 million metric tons of CO2 equivalent. It has registered these

savings with the Department of Energy under Section 1605(b) of the 1992 Energy

Policy Act. The savings have been achieved mainly through improved performance

of three nuclear power plants, thereby offsetting generation and emissions from

coal-fired units. Southern has received 20-year license extensions for two of its three

nuclear power plants, which will extend their expected life of operation past 2030.

Southern has also sequestered carbon through a reforestation program that has

planted more than 35 million trees. Other carbon dioxide emissions savings include

3.6 MMT from demand-side management programs, 0.2 MMT from biomass co-firing

in coal-fired power plants, 0.6 MMT of CO2 equivalent from methane reductions and

0.8 MMT of CO2 equivalent from reductions in sulfur hexafluoride, a potent greenhouse gas.

Congressional Legislation

Several major bills have been proposed in Congress to impose more stringent

emissions limitations under the Clean Air Act. Three of these bills-the Bush Administration’s Clear Skies Act, the Clean Power Act of 2002 and the Clean Air Planning

Act of 2002-propose to further limit power plant emissions of sulfur dioxide, nitrogen oxides, and mercury. The latter two bills also propose to limit emissions of carbon dioxide. Though none of these bills was enacted into law in the last Congress,

similar bills have been introduced in 2003.

Carbon dioxide legislation: In addition to the Clean Power Act and Clean Air

Planning Act of 2002, other bills have been introduced in Congress, including the

Climate Stewardship Act of 2003, which proposes capping greenhouse gas emissions

by 2010 and returning them to 1990 levels by 2016. In its 2002 Form 10-K, Southern does not indicate whether these bills would have material impacts on the company’s operations and financial condition. It says the cost impacts of such legislation

would depend upon the specific requirements enacted.

Management does say in the Form 10-K that domestic efforts to limit greenhouse

gas emissions have been spurred by international discussions surrounding the

Framework Convention on Climate Change and specifically the Kyoto Protocol,

which proposes international constraints on the emissions of greenhouse gases.

Southern is involved in a voluntary electric utility industry initiative in partnership

with the Bush Administration, which does not support ratification of the Kyoto Protocol or other mandatory carbon dioxide reduction legislation. The Bush Administration’s voluntary climate initiative seeks an 18 percent reduction by 2012 in the rate

of greenhouse gas emissions relative to the dollar value of the U.S. economy. Electric utilities have pledged a 3 to 5 percent reduction in the carbon intensity of their

emissions by 2012. Absolute emissions of carbon dioxide would continue to rise. Because this initiative is still under development, Southern says it is not possible to

determine the effect on the company at this time.
436

New Source Review and Related Lawsuits

If Southern fails to comply with environmental laws and regulations, even if

caused by factors beyond its control, that failure may result in the assessment of

civil or criminal penalties and fines against the company. The U.S. Environmental

Protection Agency has filed civil actions against Alabama Power, Georgia Power and

Savannah Electric alleging violations of the New Source Review provisions of the

Clean Air Act. The EPA has also issued notices of violation to Gulf Power and Mississippi Power. Management says in its Form 10-K that an ‘‘adverse outcome in any

one of these cases could require substantial capital expenditures that cannot be determined at this time and could require payment of substantial penalties,’’ ranging up to $27,500 per day, per violation at each generating unit.

The New Source Review provisions of the Clean Air Act address older power

plants that do not meet the more stringent emissions control requirements imposed

on newest plants. The provisions were meant to require the installation of best

available pollution control technology on older power plants if they were overhauled

and underwent major modifications. Questions have arisen, however, over what constitutes major modification and what is considered routine maintenance for these

plants.

In December 2002, the EPA issued final and proposed revisions to the New Source

Review program that are intended to clarify which maintenance expenditures do not

warrant obtaining new Clean Air Act permits. Several Northeastern States petitioned the District of Columbia Circuit Court in February 2003 for a stay of the

final rules. The stay was not granted. The proposed rules were open to public comment and may be revised before being finalized by the EPA. Any final regulations

must be adopted by the States in the company’s service area in order to apply to

its facilities. Management says it cannot determine the effect of these proposed and

final rules concerning the New Source Review at this time.

Lawsuits: In November 1999, the EPA began a civil action against Alabama

Power, Georgia Power and Savannah Electric alleging violations of the New Source

Review provisions of the Clean Air Act. The lawsuit requests penalties and injunctive relief, including an order requiring the installation of the best available control

technology at six affected units. The EPA has issued a notice of violation relating

to each of these facilities as well as two others owned by Alabama Power.

The cases against Southern’s operating units have been stayed since the spring

of 2001. A ruling is pending by the U.S. Court of Appeals for the Eleventh Circuit

in the appeal of a very similar New Source Review enforcement action against the

Tennessee Valley Authority. Because the outcome of the TVA appeal could affect the

lawsuits pending against Southern’s operating units, Alabama Power and Georgia

Power have become parties to the TVA case as well. Southern believes its operating

units were engaged in ‘‘common and traditional maintenance activities’’ of its power

plants and ‘‘complied with applicable laws and the EPA’s regulations and interpretations in effect at the time the work in question took place.’’

Other Clean Air Act Issues

Southern’s 2002 Form 10-K addresses a number of other requirements concerning

the Clean Air Act and State clean air standards. These requirements are likely to

result in additional capital expenditures, although in each instance management

says it does not have enough information to characterize the possible impact on the

company’s operations or financial condition. These include:

National ambient air quality standards for ozone and fine particulate matter: The

U.S. Environmental Protection Agency will issue final implementation rules in 2004

that are expected to designate several areas within the company’s service area with

nonattainment under the new ozone and fine particulate matter standards. State

implementation plans to bring those areas into compliance could be required as

early as 2007. Those State plans could require further reductions in nitrogen oxide

and sulfur dioxide emissions from power plants sometime after 2007. Management

says the impact of any new standards will depend on the development and implementation of applicable regulations.

Regional Transport Rule: The EPA also is expected to issue final rules for a Regional Transport Rule for the fine particulate matter standard in 2005. This rule

would likely require year-round sulfur dioxide and nitrogen oxide emission reductions from power plants as early as 2010. If issued, this rule would likely modify

other State implementation plan requirements for attainment of the fine particulate

matter standard and ozone standard referenced above. Management says it is not

possible at this time to determine the effect such a rule would have on the company.

Regional haze: Further reductions in sulfur dioxide also could be required under

the EPA’s Regional Haze rules. The Regional Haze rules require States to establish

Best Available Retrofit Technology (BART) standards for certain sources that con-
437

tribute to regional haze. Southern says it has a number of plants that could be subject to these rules. State Implementation Plans for these rules are due in 2007 and

2008. Because new BART rules have not been developed and State visibility assessments are only beginning, management says it is not possible to determine the effect of these rules on the company at this time.

Compliance assurance monitoring: The EPA’s Compliance Assurance Monitoring

(CAM) regulations require that monitoring be performed to ensure compliance with

emissions limitations on an ongoing basis. Four of Southern’s operating companies

will be applying for renewal of operating permits between 2003 and 2005 that will

likely be subject to CAM requirements for at least one pollutant (in most cases particulate matter). The company is in the process of developing CAM plans, which

could indicate a need for improved particulate matter controls at affected facilities.

Because the plans are still in the early stages of development, management says

it cannot determine the extent to which improved controls could be required or the

costs associated with any necessary improvements.

Mercury: The EPA plans to issue final rules regulating mercury emissions from

electric utility boilers by the end of 2004. The program is being developed under the

Maximum Achievable Control Technology provisions of the Clean Air Act. Compliance could be required as early as the end of 2007. Because the rules have not yet

been proposed, management says the costs associated with compliance cannot be determined at this time.

Coal Research

Southern is committed to the continued use of coal as one of its main sources of

generation. It says on its company website that is pursuing development of coal

technologies that ‘‘could 1 day generate energy from coal while producing dramatically fewer emissions or no emissions at all.’’ Southern has managed more than $400 million in research and development efforts over the last 10 years, much of

it on clean-coal technologies. ‘‘During the transition period to new clean coal technologies and other cleaner generation, it is critical that existing units be kept in efficient, operational order to maintain the reliability of our electric power system,’’ the

company says. ‘‘Utilities must be able to operate and maintain their plants to meet

increases in demand for electricity.’’ At a facility in Alabama, Southern has successfully tested a technology that turns

coal into gas, which could be used to produce electricity more cleanly than traditional coal plants. Coal gasification would cut carbon dioxide emissions by more

than one third, relative to conventional coal plants, and emissions of sulfur dioxide,

nitrogen oxides and particulate matter also would be ‘‘significantly reduced,’’ according to the company. The research program is a partnership with the U.S. Department of Energy in which $271 million has been invested.

Southern is also one of eight large coal-burning utilities and coal companies to

form an alliance that seeks the creation of a ‘‘near zero-emission’’ coal-fueled power

plant. The alliance is in support of President Bush’s FutureGen Initiative, a 10-year

public-private partnership that seeks to advance the use of hydrogen through extraction from coal. An April 22, 2003, press release announcing the alliance States

that ‘‘The U.S. has more than a 300-year supply of coal; therefore, the effort to design near zero-emissions power plants promises to create a new way in which coal

can power our economy with minimal environmental impacts.’’ Southern also became the first utility to join the Zero Emission Coal Alliance. The

aim of the alliance is to test technology that generates electricity with coal in a process that stores carbon dioxide in a solid, mineral carbonate form, thereby eliminating greenhouse gas emissions. Hydrogen extracted from coal through an anaerobic process is used in a fuel cell to generate electricity. Rights to the proprietary

technology are now held by ZECA Corporation, which aims to be ‘‘the premier owner

and supplier of Zero Emission Coal and Carbon solutions.’’

III. PROPONENTS’ POSITION

This is the fourth time that shareholder proponents affiliated with the Interfaith

Center on Corporate Responsibility have submitted a global warming resolution to

Southern Company. Shareholder proponents withdrew resolutions asking the company to report on the costs and liabilities of climate change in 1997, 1999 and 2002.

The withdrawals came because ‘‘the company was willing to be forthcoming with

data we were asking for,’’ according to Sister Patricia Daly, executive director of the

Tri-State Coalition for Responsible Investment, who has been one of the lead filers

at Southern.

Earlier this year, the company once again sent representatives, including Dr.

Charles Goodman, Southern’s senior vice president for research and environmental

affairs, to meet with Daly and other shareholder proponents in New York. Daly told
438

IRRC that this year’s meeting was not as productive as in years past, ‘‘because they

clearly had not done their homework on what our new resolution is about.’’ Company executives presented an update of Southern’s environmental progress and initiatives. ‘‘But we’re in a whole new ballgame now,’’ Daly explained. ‘‘We want the

company to evaluate its data in terms of climate change risk, and we don’t have

any indication that anyone at the company is doing this.’’

The resolved clause of the 2003 global warming resolution has two elements. It

asks the company’s board of directors to report on:

(a) the economic risks associated with the Company’s past, present and future

emissions of carbon dioxide, sulfur dioxide, nitrogen oxide and mercury emissions,

and the public stance of the company regarding efforts to reduce these emissions

and (b) the economic benefits of committing to a substantial reduction of those emissions related to its current business activities (i.e., potential improvement in competitiveness and profitability).

In a presentation by Ceres, a coalition working closely with the Interfaith Center

on the 2003 shareholder campaign, general arguments made in favor of the global

warming resolution filed with electric utilities are as follows:

1. Health and environmental risks from pollutants: Electric utilities account for

two-thirds of the nation’s sulfur dioxide emissions, one-third of its mercury emissions and nearly one-quarter of its nitrogen oxides emissions. These pollutants contribute to asthma, lung and heart disease and mercury bioaccumulation in humans,

and cause extensive damage to the environment, including acid rain, smog and mercury bioaccumulation in fish and other species. At the same time, electric utilities

account for 37 percent of the nation’s carbon dioxide emissions, the main gas tied

to global warming.

2. Government regulation of these pollutants: Emissions of sulfur dioxide and nitrogen oxides are regulated under the Clean Air Act. This Federal law will require

substantial additional reductions of these emissions as well as mercury in the years

ahead. Utilities will have to make major new investments in pollution control technology, but this technology will not control carbon dioxide emissions.

3. Risks of not factoring in carbon dioxide controls: The proponents believe domestic regulatory controls of CO2 are inevitable. Two States (New Hampshire and Massachusetts) have already passed laws restricting utility emissions of CO2, and Federal legislation has been introduced as well. At the international level, the Kyoto

Protocol is likely to go into effect this year (although the Bush Administration has

said the United States will not be bound by the agreement).

According to studies cited by the proponents, the most expensive choice utilities

could make is to retrofit existing fossil energy plants with new pollution control

equipment and then have to reduce CO2 emissions from these plants. The proponents argue that utilities should factor future CO2 controls into their investment

strategies now, since it could alter decisions about which power plants to retrofit

with new pollution control equipment and which to replace with new, cleaner energy

sources.

4. Need for greater disclosure by utilities: By some estimates cited by the proponents, many electric utilities face a ‘‘carbon exposure’’ of between 10 and 35 percent of their total market capitalization. (In other words, the cost of achieving carbon dioxide emission controls as specified by the Kyoto Protocol equals 10 to 35 percent of the current value of their stock.) Many factors go into making this calculation, including a utility’s generating assets, fuel mix, installed pollution control technologies and whether it is competing in a deregulated electricity market. ‘‘Investors

cannot assess this risk without more disclosure’’ from utilities, according to Ceres.

That is why the proposal calls on management to conduct a thorough economic

assessment of the risks and benefits of achieving substantial emissions reductions

of the four pollutants listed in the proposal. ‘‘We believe that taking early action

on reducing emissions and preparing for standards could better position companies

over their peers, including being first to market with new high-efficiency and lowemission technologies,’’ the proponents argue. ‘‘Changing consumer preferences, particularly those relating to clean energy, should also be considered. Inaction and opposition to emissions control efforts could expose companies to reputation and brand

damage, and regulatory and litigation risk,’’ it concludes.

IV. MANAGEMENT’S POSITION

Management opposes the resolution seeking more disclosure on the company’s efforts to address climate change. It argues that the resolution would duplicate company reporting activities and be unduly speculative. It says in its proxy statement

that ‘‘the detailed information requested on future costs and risks would require
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knowledge of future governmental or other legal action,’’ beyond what is already discussed in company reports.

Management says the proponents’ request for information on the ‘‘economic risks

associated with the Company’s past, present, and future emissions’’ can be found in

the Southern’s Annual Report on Form 10-K, which is available on the Company’s website and the website of the Securities and Exchange Commission. In addition,

details on the company’s risk factors, including historic and anticipated environmental costs and known future contingencies, are included in the company’s Annual

Report to Stockholders in the Management’s Discussion and Analysis section.

Finally, management says the company’s environmental commitment and achievements are described in its Environmental Progress Report, which is available for

viewing and downloading on the company’s website and will be sent to stockholders

or others upon request.

Management does not offer any specific comments in its proxy statement on the

global warming issue or its expenditures to control emissions of pollutants regulated

by the Clean Air Act. It says only that Southern ‘‘is committed to complying fully

with all environmental laws and regulations as well as maintaining our commitment to environmental stewardship in such a way that appropriately considers our

customers and stockholders.’’

V. IRRC ANALYSIS

SmartVoter Guidelines

Voting guidelines for this resolution are presented under issue number 3425 in

IRRC’s SmartVoter product.

Questions Raised

• Is Southern responding adequately to the risks of global warming?

• Could Southern do more to report on these risks to shareholders?

Risks of global warming: As the nation’s second largest electric utility, and one

of the most heavily reliant on coal, Southern has a tremendous amount at stake in

the global warming debate. Carbon dioxide emissions from its power plants account

for nearly 2.5 percent of the nation’s CO2 emissions. As it expands its power generation, Southern expects these emissions to grow by another 16 percent by 2020-for

a total increase of 45 percent between 1990 and 2020.

Legislation proposed in Congress calls on companies to ‘‘cap and trade’’ their emissions. Under the Climate Stewardship Act, for example, companies would be required to return to 1990 emissions levels by 2016. The Kyoto Protocol (which the

United States has not endorsed) calls for more stringent controls-a 7 percent cut in

CO2 emissions below 1990 levels by 2012. Management says it is focused on ‘‘addressing emissions of greenhouse gases such as CO2,’’ but it has not indicated to

shareholders the extent of such controls and whether they would have a material

impact on the company’s operations and financial condition. It says the cost impacts

of CO2 controls would depend upon specific requirements of government legislation.

Meanwhile, Southern continues to make extensive investments in its aging fleet

of coal-fired power plants. As the utility industry’s #2 emitter of sulfur dioxide and

nitrogen oxides, Southern has spent $1.4 billion to install pollution control equipment under the acid rain and ozone nonattainment provisions of the Clean Air Act.

It expects to spend an additional $4 billion or more by 2015 to further reduce these

and mercury emissions. However, its spending on pollution control could be higher

and come sooner if it loses a series of court cases now before U.S. Court of Appeals.

At issue is whether Southern’s older coal plants must install best available pollution

control technology when they receive modifications. Management says that an adverse outcome in any one of these cases could require ‘‘substantial capital expenditures’’ and could require payment of ‘‘substantial penalties′′-ranging up to $27,500

per day, per violation at each generating unit.

The proponents are concerned that Southern may find itself making costly investments to retrofit existing fossil energy plants with new pollution control equipment

and later have to reduce CO2 emissions from these plants, compromising the future

value of these investments. The proponents argue that utilities should factor possible CO2 controls into their investment strategies now, since that could alter their

decisions about which power plants to retrofit and which to replace with new, cleaner energy sources. Accordingly, they are asking management to issue a report on

this issue.

Adequacy of reporting by Southern: Southern provides a much clearer outlook for

its power generation than most electric utilities. With projections out to 2020, management has informed shareholders that it expects its power generation to grow by

45 percent, even as it reduces its emissions of sulfur dioxide and nitrogen oxides

by 68 to 80 percent of 1990 levels. These reductions will be made possible not only
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by investments in pollution control equipment at its coal-fired plants, but also by

construction of new gas-fired plants to meet incremental power demand. Natural

gas is expected to account for about half of Southern generating mix by 2020, while

coal’s contribution is expected to fall from about two-thirds to just over one-third.

Because natural gas has a lower carbon content than coal and burns more efficiently, Southern also expects to reduce the ‘‘carbon emissions intensity’’ of its power

production. For every 3 percent increase in power generation, it is projecting only

a 1 percent increase in its CO2 emissions.

As detailed as this reporting is, it still does not answer the proponents’ fundamental question, however: What will the company do if it has to achieve stabilization or reductions in its CO2 emissions over the next 10 to 20 years? By 2020,

Southern’s CO2 emissions are projected to be 45 percent above 1990 levels. Accordingly, even achieving stabilization at 1990 levels would entail a substantial emissions reduction from the levels now being projected.

On this vital contingency, management offers very little guidance in its Form 10-

K or other securities filings. With respect to government policy, management says

the effects on the company would depend on the terms of legislative controls. With

respect to technology, management does acknowledge that the commercial success

of low-emitting technologies, such as fuel cells and renewables, could erode its market share and reduce the value of its electric generating facilities, if they achieve

economies of scale. But again management gives no indication of whether these developments would be material to the company and its shareholders. By inference,

the suggestion is that they could be.

By reviewing the company’s environmental report, shareholders are able to glean

some other useful pieces of information. With respect to renewables, Southern does

not see them posing much of a threat-or opportunity-in its service area because the

available resources are limited and the costs of generation are higher than power

from coal or natural gas. (This assumes no costs of carbon emissions will be added

to these fuels.) With respect to coal, Southern says it is pursuing development of

cleaner-burning technologies that ‘‘could 1 day generate energy from coal while producing dramatically fewer emissions or no emissions at all.’’ It does not give a clear

sense of the generating costs or technological hurdles that remain with clean coal

technologies, however, so it is not possible for shareholders to compare their prospects with those of renewables. Finally, with respect to the issue of climate change,

Southern continues to regard it as ‘‘global and long-term in nature,’’ and believes

that policies ‘‘should seek to resolve climate change scientific uncertainties.’’ Management’s key point is this:

During the transition period to new clean coal technologies and other cleaner generation, it is critical that existing units be kept in efficient, operational order to

maintain the reliability of our electric power system. Utilities must be able to operate and maintain their plants to meet increases in demand for electricity.

Herein lies the dilemma for investors. The proponents say management must provide better information on the costs and risks of this strategy, given that the cost

of achieving carbon dioxide emission controls ranges from 10 to 35 percent of the

current value of utility companies’ stock, according to some estimates. Management

says, however, that the detailed information requested by the proponents would require knowledge of future governmental or other legal action beyond what is already

discussed in company reports.

In the final analysis, shareholders who are satisfied with Southern’s current level

of reporting-which at least provides a clear outlook for the company’s generating

mix and projected emissions through 2020-will be inclined to side with management

and vote against this proposal. Those who feel that management could set some better financial parameters around the uncertainties in its outlook-especially what

legal, regulatory and legislative developments could be material to the company and

its shareholders-will be inclined to support the proponents’ call for a more detailed

report on the costs and benefits of Southern’s evolving response to climate change.

EXCERPT FROM SOUTHERN CO.’S PROXY STATEMENT

Shareholder Proposal Related To An Environmental Report:

‘‘ELECTRIC UTILITY RESOLUTION

WHEREAS:

In 2001 The Intergovernmental Panel on Climate Change concluded that ‘‘there

is new and stronger evidence that most of the warming observed over the last 50

years is attributable to human activities.’’
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In 2001 the National Academy of Sciences stated that the ‘‘degree of confidence

in the IPCC assessment is higher today than it was 10, or even 5 years ago . . .

there is general agreement that the observed warming is real and particularly

strong within the past 20 years.’’ The United States government’s ‘‘Climate Action Report—2002,’’ concluded that

global climate change may harm the country. The report highlights risks to coastal

communities in the Southeast due to sea level rise, water shortages throughout the

West, and increases in the heat index and frequency of heat waves.

In July 2002, 11 Attorneys General wrote President Bush, outlining their concern

over the U.S. Climate Action Report’s failure to recommend mandatory reductions

of greenhouse gas emissions. They declared that States are being forced to fill the

Federal regulatory void through State-by-State regulation and litigation, increasing

the ultimate costs of addressing climate change. They urged a reconsideration of his

regulatory position, and adoption of a ‘‘comprehensive policy that will protect both

our citizens and our economy.’’

U.S. power plants are responsible for about two-thirds of the country’s sulfur dioxide emissions, one-quarter of its nitrogen oxides emissions, one-third of its mercury

emissions, approximately 40 percent of its carbon dioxide emissions, and 10 percent

of global carbon dioxide emissions.

Scientific studies show that air pollution from U.S. power plants causes tens of

thousands of premature deaths and hospitalizations, hundreds of thousands of asthma attacks, and several million lost workdays nationwide every year from pollutionrelated ailments.

Standards for carbon dioxide emissions and other air pollutants are emerging

across multiple fronts. Ninety-six countries have ratified the Kyoto Protocol, requiring carbon dioxide reductions. Massachusetts and New Hampshire have enacted legislation capping power plants emissions of carbon dioxide and other air pollutants.

In June 2002 the Senate Environment and Public Works Committee passed a bill

seeking to cap emissions from the generation of electric and thermal energy.

We believe that taking early action on reducing emissions and preparing for

standards could better position companies over their peers, including being first to

market with new high-efficiency and low-emission technologies. Changing consumer

preferences, particularly those relating to clean energy, should also be considered.

Inaction and opposition to emissions control efforts could expose companies to reputation and brand damage, and regulatory and litigation risk.

RESOLVED: That the Board of Directors report (at reasonable cost and omitting

proprietary information) by August 2003 to shareholders on (a) the economic risks

associated with the Company’s past, present and future emissions of carbon dioxide,

sulfur dioxide, nitrogen oxide and mercury emissions, and the public stance of the

company regarding efforts to reduce these emissions and (b) the economic benefits

of committing to a substantial reduction of those emissions related to its current

business activities (i.e. potential improvement in competitiveness and profitability).’’

THE BOARD OF DIRECTORS RECOMMENDS A VOTE ‘‘AGAINST’’ ITEM NO. 3

FOR THE FOLLOWING REASONS:

The Company is committed to complying fully with all environmental laws and

regulations as well as maintaining our commitment to environmental stewardship

in such a way that appropriately considers our customers and stockholders.

The proposal requests a report to our shareholders on the ‘‘economic risks associated with the Company’s past, present, and future emissions.’’ The Company currently provides details regarding its risk factors including historic and anticipated

environmental costs and known future contingencies. This information is included

in the Company’s Annual Report on Form 10-K for the year ended December 31,

2002 (‘‘Form 10-K’’). The Form 10-K is available on the Company’s website and the

website of the Securities and Exchange Commission and may be obtained from the

Company. (See page 2 of this Proxy Statement for information on requesting a copy

of the Form 10-K from the Company.)

Details on the Company’s risk factors, including historic and anticipated environmental costs and known future contingencies, are also included in the Annual Report to stockholders in the Management’s Discussion and Analysis of Results of Operations and Financial Condition section and in the Notes to Financial Statements.

In addition, the Company’s environmental commitment and achievements are described in our Environmental Progress Report. This report is available for viewing

and downloading on the Company’s website and will be sent to stockholders or others upon request.

The Company opposes this proposal because the information the Company would

report is largely duplicative of information already provided. We also believe the de-
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tailed information requested on future costs and risks would require knowledge of

future governmental or other legal action and is too speculative to report and quantify as requested by the proposal, beyond what is discussed in the reports noted

above. We believe that it is in the best interests of our stockholders that the Company not be required to incur the additional expense of producing and distributing

such a report.

The vote needed to pass the proposed stockholders’ resolution is a majority of the

shares represented at the meeting and entitled to vote.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE ‘‘AGAINST’’ ITEM NO. 3.

STATEMENT OF MARK BROWNSTEIN, DIRECTOR OF ENTERPRISE STRATEGY, PSEG

SERVICES CORPORATION

I am honored to be here this morning to represent Public Service Enterprise

Group ( PSEG), and the Clean Energy Group. PSEG is a diversified energy company with over $25 billion in assets and over $8 billion in annual revenues. The PSEG family of companies includes Public Service Electric and Gas Company, New Jersey’s oldest and largest electric and gas delivery company, PSEG Global, which owns and operates energy production and distribution facilities overseas, and PSEG Power, one of the largest independent electric generating companies in the United States, with 13,000 megawatts of electric

generating capacity operating or under construction in New Jersey, New York, Connecticut, Pennsylvania, Ohio, and Indiana.

The Clean Energy Group (CEG) is a coalition of companies with more than

100,000 Mw of generation capacity nationwide, including coal, gas, oil, nuclear, and

renewables. The members of CEG—Consolidated Edison, Inc., Entergy, Exelon Corporation, KeySpan, Northeast Utilities, PG&E National Energy Group, Sempra Energy, and PSEG are committed to promoting progressive environmental policies that

are economically sound and sustainable.

PSEG, which celebrates its 100th anniversary this week, has long believed that

environmental performance is one indicator of overall business performance. Experience has taught us that proactive steps to improve environmental performance can

often lead to better bottom line results. That said we never take our eye off of bottom line results. In our view, environment and economics are inseparable, and, as

with many things in life, the secret to success is finding the right balance.

If you remember only one thing from what I say here today, please remember that

one word: balance. For PSEG and the CEG member companies, the single greatest

value to be derived from Federal multi-pollutant legislation aside from the public

health and environmental benefits themselves—is certainty. And the best way we

know to achieve certainty is through a public policy outcome that strikes the right

balance between environmental and energy policy objectives.

I am aware that this is the third hearing you have held on the many questions

surrounding multi-pollutant legislation. And I am also aware that various stakeholders have come before you to argue that the current proposals on the table go

too far, or do not go far enough. I suppose such a tug of war is common in politics,

but in business, we often worry when any one extreme carrys the day, for experience shows that a strong pull to any one extreme only invites an equal and opposite

backlash at some point down the road. From day one, our goal in this debate has

been to seek and encourage consensus for we believe that it is only through consensus that we can achieve the kind of regulatory stability essential to the health

of our industry.

You have heard from others here today about the importance of certainty, and I

echo that concern. This is a very capital intensive industry, where large investments

are made in assets that last 30 years or more. Making large bets on the future is

an inherently risky proposition, and no amount of legislative activity on your part

can offer us 100 percent certainty. But to the extent that the trajectory of future

environmental requirements looms large in the planning of any major player in our

industry, you can make a significant difference by crafting legislation that clearly

articulates expectations over the next 15 years, at least.

The past two and a half years have been tumultuous for our industry. We do not

need any more excitement. But where some people might argue that now is the

wrong time to set new environmental requirements, we would argue that to take

this ‘‘do nothing’’ advice would be to kill us with kindness.

Whether you believe that the current oversupply of generation and capital crunch

will last 2 years or 5 years, the fact of the matter is that current market conditions

in our industry are part of a cycle. At some point, hopefully soon, companies like
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ours will begin to make new investments in our nation’s energy infrastructure, and

when we do, it is critical that we have a clear understanding of the environmental

requirements we will have to meet. Otherwise, I fear, we will be making bad investments.

Nowhere is this more true than the issue of carbon dioxide regulation. First off,

let me state for the record, as we have said many times in the past, PSEG believes

that President Bush was right to reject the Kyoto Protocol. The reductions contemplated under that agreement demanded too much, too fast for our industry and

our economy to handle.

At the same time, we think the issue of climate change is real, and we believe

a domestic regulatory response is both necessary and inevitable. Given that our industry is singularly responsible for over a third of the nation’s greenhouse gas emissions and 10 percent of total manmade greenhouse gas emissions worldwide, we

cannot, and should not dodge this issue.

With this perspective in mind, we believe that we are better off as a company,

and as an industry, if we develop and implement a moderate response now rather

than wait 10 years, only to find that the political problem is now worse or that the

environmental problem requires a more drastic response, and the investment decisions made in the interim were dead wrong. This is one of the reasons why we think

the bill introduced by Senators Carper, Chafee, Gregg make such an important contribution to this debate, and why we have been such strong supporters of their efforts.

We are encouraged by the leadership that the Bush Administration has shown on

the issue of multi-pollutant legislation, and we deeply appreciate the leadership that

Senator Inhofe and, you, Senator Voinovich, have shown in tackling this very difficult issue. We encourage you in your efforts to find that balance that I talked

about earlier, and I pledge the full support of PSEG and the CEG companies in your

efforts.

Once again, thank you for the opportunity to testify before this committee. I will

be happy to answer any questions you may have.

Æ