A CB O STUD Y 

# Th e Clea n Ai r Act , th e Electri c Utilities , an dth e Coa l Marke t Apri l 1982



# O n Congres s o f th e Unite d State s U Congressiona l Budge t Offic eTH E CLEA N AI RACT ,

TH E ELECTRI C UTILITIES , AN D TH E COA LMARKE T

Congres s o f

th e Unite dState s Congressiona

l Budget Offic e

Fo r sale b y th e Superintenden t o f Documents , U.S . Governmen t Printin g Offic e Washington , D.C . 2040 2NOTE S Excep t wher e noted , al l dolla r figure s are expresse di n 198 0 dollars . Al l date s are expresse di n calenda r years . Th e projectio n perio danalyse dbegin s i n 1980 an dend s i n th e yea r 2000 . Th e mos t

recen t year fo r whic hmos t

actua l dat aar e availabl e i s 1979 .

iiPREFAC E

I n 1981 , th e Congres s began t o consider amendin g th e Clean Ai r Act ; tha t proces s i s stil l underway . Amon g th e critica l area s bein g examine dar e th e federa l standard s tha t regulat e ai r

pollutan t emission s fro mne w electri c powe r plant s usin g coal . Whethe r th e regulation s no w i n forc e ca n contro l pollutant emission s effectivel y withou t imposin g undu e cos t

burden s o n th e utilitie s an dwithou t

affectin g th e distributio n o f U . S . coa

l productio n ar e critica l question s i n th e Congressional debate . Th e Congressional Budge t Offic e ha s prepare dthi s analysi s o f thes e interrelate dissues , focusin g bot h o n th e curren t standard s an dfou r

alterna

tiv e policie s tha t

woul dcontribut e t o abatin g pollutan t emission s fro mne w coal-fire dpowe r

plants . Th e stud y wa s undertake n at th e reques t

o f Senato r Rober t T . Stafford , Chairma n o f th e Senate Committe e o n Environmen t an d Publi c Works . I n keepin g wit hth e CBO' s mandat e t o provid e objectiv e analysis , thi s pape r

offer s n o recommendations . Joh n Thornasian o f

CBO' s Natura l Resource s an dCommerc e Divisio n prepare dth e study , unde r th e supervisio n o f

Davi dL . Bodde an dEveret t M . Ehrlich . Th e autho r

wishe s t o expres s specia l thank s t o Hoff

Stauffe r o f ICF , Incorporate dfo r

hi s assistanc e i n preparin g th e coal-marke t analysis , t o Johann aZacharia s fo r assistanc e i n draftin g th e paper , an dt o Angel aZ . McColloug hfo r

typin g th e manuscrip t an dpreparin g i t

fo r publication . Valuabl e contribution s als o wer e mad e b y Emil y W . Fo x an dPau l Ginsbur g o f CBO , Richar dL . Gordo n o f Pennsylvani aStat e University , an dJ . Steve n Hero do f th e U . S . Departmen t

o f Energy . Alic e M . Rivli n Directo r Apri l 198 2

11 1CONTENT S

PREFAC E H i SUMMAR Y xii i CHAPTE RI . INTRODUCTIO N 3

Coal an dPollutan t

Emission s 3 Regulator y Mechanism s 4 Issue s Befor e th e Congres s 5 Pla n o f th e Paper

6 CHAPTE RH . STANDARD S AFFECTIN GTH E ELECTRI C

UTIUT Y INDUSTRY—THEI REFFECT S O N EMISSION S AN D COST S 7 Clean Ai r

Ac t Requirement s Affectin g Electri c Utilitie s 7 Effect s o n Pollutan t

Emission s . . . . . 1 3 Nationwid e Pollutio n Contro l Cost s t o Utilitie s an dt o Electricit y Consumer s .. . 1 5 CHAPTE Rm . POLLUTIO N CONTRO LAN D TH E

ELECTRI C UTILITIES ' FINANCIA L CONDITIO N 1 9

CHAPTE RIV . Financial Conditio n o f th e Industry an d Regulatio n b y Publi c Utilit y Commission s . Contributio n o f

Ai r Pollutio n Contro l Cost s t o Industry Capita l Expense s ... . Th e Effec t

o f Ai r Pollutio n Contro l Cost s o n th e Electri c Utilities ' Financia l Positio n PROMOTIN GRELIANC E O N COA LAN D TH E EFFECT S O FTH E CLEA N AI RAC T . Prevailin g Regulation s fo r Coal Conversion s . Cos t Analysis—Th e Potentia l Benefit s o f Reconversio n o r

Replacemen t

Compare dt o Continuatio n o f

Oi l o r Ga s Us e ... . Inhibitin g Factor s Th e Immediat e Prospect s fo r Conversio n . 1 9 2 2 2 3 2 9 3 0 3 1 3 4 3 5CONTENT S (Continued ) Pag e CHAPTE RV . TH E U . S . COA LMARKE T AN D

TH E CLEA N AI RAC T . . 3 7 Th e Natur e o f

th e U . S . Coa

l Marke t ... . 3 7 Th e 197 1 Ne w Sourc e Performanc e Standard s an dU . S . Coa

l Consumptio n ..... . 4 2 Th e Revise dNSP S an dProjection s fo r U . S . Coal'Market s ....... . 4 6 CHAPTERV LCHOICE S FO RNE WSOURC E PERFORMANC E STANDARD S 5 3 Alternativ e Emission s Standard s 5 3 Compariso n o f

Alternativ e Emission s Standard s . 5 8 Conclusion s fro mth e Analysi s 6 9 APPENDIX A . EFFECT S O FTH E PS D PROGRA M ... . 7 7 APPENDIX B . ANALYTICA LASSUMPTION S AN D

METHODOLOG Y .......... . 8 3 APPENDI X C . FINANCIA LEFFECT S O FDIFFEREN T

ACCOUNTIN GMETHOD S FO RCONSTRUCTIO N WOR K I N PROGRES S ; 9 5

viiTABLE S Page

TABL E 1 . TABL E 2 .

TABL E 3 .

TABL E 4 .

TABL E 5 . TABL E 6 . TABL E 7 . TABL E 8 .

TABL E 9 .

TABL E 10 . TABL E 11 . TABL E 12 . NE WSOURC E PERFORMANC E STANDARD S

FO RCOAL-FIRE D ELECTRI C UTILITIE S . . < NATIONA LAMBIEN T AI RQUALIT Y STANDARD S AN D ALLOWABL E INCREMENT S UNDE R PREVENTIO N O FSIGNIFICANT DETERIORATIO N PROVISION S BON D RATIN GDISTRIBUTIO N O F10 0 RATE D ELECTRI C UTILITIE S AN D SAMPL E SUBGROUP S WITH INVESTMENT S IN ENVIRONMENTA L CONTRO L, CAPITAL AN D GENERATIN GCOST S FO RA 500-MEGAWATT OIL-FIRED , RECONVERTE D OIL , AN D NEW COAL-FIRE D POWERPLANT . PROJECTE D REGIONA LGROWT H I N COAL

FIRE D ELECTRICITY , T O YEA R200 0 . . . REGIONA LCOA LPRODUCTIO N FO R197 9 AN D PROJECTE D T O TH E YEA R200 0 . . . SUMMAR Y O FCURREN T AN D ALTERNATIV E EMISSION S STANDARD S TOTA LPROJECTE D SULFU RDIOXID E EMISSION S AND COMPARISO N O FCOS T EFFECTIVENES S UNDE RCURREN T LA W AN D ALTERNATIV E STANDARD S . . . . PROJECTE D COS T EFFECT S O N TH E UTILIT Y INDUSTR Y O FALTERNATIV E EMISSION S STANDARD S UTILIT Y COA LCONSUMPTIO N I N 197 9 AN D PROJECTE D FO RTH E YEA R2000 , B Y REGIO N REGIONA LCOA LPRODUCTIO N FO RTH E YEA R200 0 UNDE REAC H ALTERNATIV E . . ESTIMATE

D LO WSULFU RCOA LPRODUCTIO N IN 2000 , B Y REGIO N

ix 1 2

2 5

3 2 4 9 5 0 5 4

6 0
6 2 6 6 7 0 7 2

93-28 1 0-82- 2FIGURE S Pag e

FIGURE 1 . ACTUA L AND PROJECTED POLLUTAN T

EMISSION S FRO M ELECTRI C UTILIT Y PLANTS—TOTAL AMOUNT S AN D AVERAG E RATE S 1 4 FIGUR E 2 . FINANCIA L TREND S I N INVESTO ROWNE D

ELECTRI C UTILnTE S ACCORDIN G T O TW O MEASURES : 1970-198 0 Z l FIGURE 3 . U . S . COA L FIELD S AND PRODUCIN G REGION S . 3 9 FIGUR E 4 . TOTAL U . S . COA L PRODUCTIO N B Y REGIO N

AND MININ G METHODS : 197 9 3 9 FIGUR E 5 . MONTHL Y DELIVERIE S O FCOA L T O U . S .

ELECTRI C UTILITIES , B Y SULFU RCONTENT : 1974-1980 4 3 FIGUR E 6 . U . S . COA L SUPPLY REGION S 4 5 FIGUR E 7 . U . S . COA L DEMAN D REGION S 4 5 FIGUR E 8 . U . S . COA L PRICES , B Y SULFU RCONTENT :

1974-1980 47

x iSUMMAR Y

A s th e Congres s consider s revisin g portion s o f th e Clean Ai r

Act , i t confront s th e sometime s difficul t balanc e betwee n tw o federa l objectives : o Achievemen t

an dmaintenanc e o f

environmenta l quality , an d o Assuranc e o f

areliabl e an dlow-cos t suppl y o f

electricit y derive d fro mcoal , th e nation' s most abundan t

domesti c energ y source . A t present , coal combustio n i n utilitie s furnishe s roughl y hal f o f th e nation' s electricity-*-a t

th e sam e tim e emittin g nearl y two-third s o f al l th e sulfu r dioxide , agaseou s pollutant , release dint o th e Unite dStates ' atmosphere . UNDERLYIN GISSUE S Th e Clean Ai r

Act' s ne w sourc e performanc e standard s (NSPS) , b y regulatin g pollutan t

emission s fro mne w powe r plants , wil l ultimatel y brin g abou t ageneratio n o f

coal-fire dfacilitie s tha t wil l b e markedl y cleaner tha n thos e supplyin g mos t

electricit y today . B y th e tur n o f th e nex t

century , th e amoun t o f pollutio n utilitie s releas e relativ e t o th e volum e o f fue l consume d wil l b e reduce dwel l belo w curren t levels , though/th e actua l quantit y o f eac h pollutant , excep t

particulat e matter , wil l continu e t o gro w throug h th e year 2000 . Sometim e afte r tha t date , ameasurabl e reductio n i n tota l utilit y emission s o f

pollutant s shoul dbegi n t o materialize . Bu t becaus e o f

th e ver y natur e o f

th e NSPS , whic h se t

standard s fo r

ne w o r modifie dfacilitie s only , muc h o f th e emission s contro l benefi t o f th e regulation s li e far ahead * Th e Rol e o f

th e Electri c Utilitie s Th e neare r

ter mwil l largel y b e aperio do f investmen t

i n cleane r powe r plants ; thes e wil l no t

outnumbe r

thei r mor e pollutin g predecessor s fo r anothe r tw o o r eve n thre e decades . Th e electri c utilit y industr y wil l carr y a larg e share o f

tha t ai r pollutio n contro l investment . I n complyin g wit h th e NSPS , utilitie s burnin g coa l wil l dedicat e som e 2 0 percen t o f al l thei r capita l investmen t

t o ai r pollutio n contro l i n th e nex t tw o decades . Mor e tha n hal f

o f thi s investmen t

wil l involv e meetin g th e curren t standard s regulatin g emission s o f sulfu r dioxide . xii iTh e Coa l Market' s Rol e Th e U.S . coal industr y wil l als o play apart , thoug h amor e passiv e one , i n pursuin g th e tw o federa l goal s o f clean ai r

an denerg y self-sufficiency . Th e industry wil l benefi t significantl y fro mth e utilities ' expande dus e o f coal . Coal consumptio n i n powe r plants , th e nation' s larges t coa l user , ha s already rise n b y 6 5 percen t fro m197 0 t o 1979 ; ove r th e comin g tw o decades , i t

wil l mor e tha n double . No t al l coa l producer s wil l share equall y i n thi s boom , however . Western producer s stan dt o achiev e agreate r gai n tha n thei r counterpart s i n th e Midwes t an dEast . Th e Congres s ha s alread y linke dconcern s o f

th e coa l marke t t o provision s o f

th e Clean Ai r

Act . I n th e 198 2 debat e o n th e act , similar issue s wil l almos t

certainl y recur : Wha t effect s wil l th e curren t o r alternativ e NSPS—particularl y sulfu r dioxid e standards—hav e o n U.S . coa l development ? COAL , SULFU RDIOXID E EMISSIONS , AN D NE WSOURC E PERFORMANC E STANDARD S A n intrinsi c chemica l propert y o f coal—specifically , it s sulfu r con tent—directl y affect s th e amoun t o f sulfu r dioxid e tha t

result s fro mcoal combustion . Whe n burn t i n a500-megawat t

powe r plan t withou t emission s control , ahigh-sulfu r

coa l coul dgenerat e roughl y 91,98 0 ton s o f sulfu r dioxid e ayear . Conversely , combustio n o f alow-sulfur

coa l i n th e sam e powe r plant coul dyiel droughl y 7,66 5 ton s o f sulfu r dioxid e ayear. Thoug h coa l i s produce di n al l thre e subdivision s o f th e country—th e East , th e Midwest , an dth e West—sulfu r conten t varie s markedly . Eastern deposit s contai n bot

h low

- an dhigh-sulfu r coal ; midwester n coa l range s fro m moderat e t o hig h i n sulfu r content ; western coa

l i s generall y lo w i n sulfur . The NSP S o f

197 1 Th e act' s original provision s regulatin g ne w sourc e pollutan t emis

sions—elicitin g th e utilit y NSP S o f 1971 , whic h applie dt o al l ne w fossil

fuel-fire dgenerators—di dno t tak e thes e difference s int o account . Th e 197 1 NSP S mandate dtha t th e utilitie s mee t

amas s sulfu r

dioxid e emission s limi t o f 1. 2 pound s per

millio n Britis h therma l unit s (BTUs ) o f coa l burnt , a s wel l a s placin g limit s o n nitroge n oxide s an dparticipat e matter . Utilitie s coul dcompl y b y whateve r mean s wa s mos t

economical , an dmos t

electe dt o burn low-sulfu r

coal . On e resul t

wa s aslowin g o f

sulfu r dioxide emission s growth ; asignifican t

reductio n i n participat e pollutio n occurred ; bu t ther e wa s littl e succes s i n curbin g nitroge n oxid e emissions . xi vAnothe r result , perceive db y high-sulfu r coal producer s an di n turn , b y th e Congress , wa s tha t

impositio n o f

th e NSP S woul dchang e th e distributio n o f U.S . coa

l production—specifically , tha t th e 197 1 NSP S coul dencourag e th e productio n an dus e o f abundan t

low-sulfu r

wester n coa

l over it s high

sulfu r counterpar t

i n th e Midwest . Thi s perception , togethe r wit hth e desire t o promot e th e us e o f

contro l technology , le dt o th e revision s i n th e utilit y NSP S tha t

becam e effectiv e i n 1978 . Th e NSP S o f

197 8 Revision s implemente di n 197 8 wer e conceived , i n part , t o counte r th e relocatio n o f

U.S . coa

l production . Th e 197 8 standards , whic hremai n i n effec t an dgovern al l powe r

plant s no w bein g planned , wer e purposefull y designe dt o mak e high-sulfu r coa l a s economicall y attractiv e t o utilitie s a s low-sulfur

coal . T o accomplis h this , th e revision s stipulate dno t onl y tha t th e ol dmas s emission s limi t ( a"ceiling" ) mus t

b e met , bu t

als o tha t afixe d percentag e o f

al l sulfu r

dioxid e b e remove dfro mal l powe r plant s burnin g coal . I n recognitio n o f th e sulfur-conten t

variation s i n coal , th e revise d NSP S permitte daslidin g scal e fo r emission s removal , t o rang e betwee n 7 0 an d9 0 percent , dependin g essentiall y o n th e sulfu r conten t o f coal used . Th e effec t

o f th e provision s unde r

th e 197 8 NSPS , whic har e quit e rigi dcompare dt o th e older standards , i s t o mak e th e us e o f flu e ga s desulfurizatio n technology—calle d"scrubbers"—mandatory . T o date , scrub

ber s ar e th e primar y contro l techniqu e tha t i s commerciall y availabl e t o hel p utilitie s mee t

th e NSP S i n conventiona l boilers . N o matte r wha t coal i s t o b e used , al l ne w plant s subjec t t o th e 197 8 standard s mus t b e equippe d wit hscrubber s o r

som e othe r

suitabl e contro l method . Th e cost s o f desulfurizatio n wil l b e th e singl e mos t importan t

elemen t i n th e utilities ' futur e cost s fo r

ai r pollutio n control . TH E COST S O FEMISSION S CONTRO L Th e utilitie s hav e already investe dsizabl e sum s o f mone y t o curb pollutan t emissions , an dthe y are likel y to continu e to d o so . I n eac h yea r sinc e 1973 , th e industry devote dfro m5 t o 7 percen t o f al l capital expenditure s t o emission s contro l hardware . Ove r th e comin g tw o decade s (th e bas e perio dfo r

th e Congressiona

l Budge t Office' s projections) , invest

men t i n ai r pollutio n contro l equipmen t i s projecte dt o involv e 2 0 percent , or $33. 4 billio n (in 198 0 dollars ) o f th e roughl y $167 billio n neede dto construc t ne w coal-fire dgeneratin g capacity (no t includin g transmissio n an d distribution) . x v

### Th e utilities 1 

### annual air pollutio n contro l costs , includin g operatio n o f scrubbers , fixe dcapital charges , an dpremium s o n low-sulfu r fuel , ar e expecte dto ris e fro m$5.3 5 billio n i n 198 0 to $14. 1 billio n i n th e yea r 2000 . B y tha t year , thes e cost s translat e t o anationwid e averag e o f 3.43 mill s per kilowatts-hour , representin g roughl y 6 percen t o f th e averag e electricit y charg e t o residentia l consumer s i n 1980 . Pollutio n contro l at ne w units—b y definition , subjec t

t o th e 197 8 NSPS—i s expecte dt o cos t approximatel y 6 mill s pe r kilowatt-hou r

fo r wester n powe r

plants , whic hca n us e locall y mine dlow-sulfu r

coa l an dlower-cos t

scrubbin g methods , an d1 0 mill s pe r kilowatt-hou r

fo r eastern facilities , whic htypicall y wil l us e loca l high-sulfu r coa l an dexpensiv e scrubbin g methods , o r wil l ship low-sulfu r

coal fro m othe r region s t o lowe r

scrubbin g costs . Effect s on Th e Utilities * Financial Conditio n Becaus e o f

th e hig hcapital cost s o f ai r pollutio n control , i t

i s reasonabl e t o questio n whethe r th e Clean Ai r

Ac t i s placin g a n unmanage abl e burde n o n th e electri c utilities . Woul dth e industry' s finance s b e stronge r i f ther e wer e n o nee dt o inves t i n pollutio n contro l measures ? Th e finding s o f

th e CB O analysi s indicat e that , thoug hcontrollin g emission s i s indee dcostly , i t

ha s no t playe damajo r

rol e i n impairin g th e utilities ' financia l position , an di s ho t likel y t o d o s o i n th e future . A compariso n o f th e bon drating s o f

tw o sampl e group s o f

firm s wit happreciabl e investment s i n pollutio n contro l agains t th e industry a s awhol e suggest s tha t utilitie s wit hcommitment s t o pollutio n contro l ten dt o far e n o bette r an dn o wors e tha n all electri c utilitie s i n general . Specia l tax provision s an dothe r mitigatin g factor s directe da t easing th e investmen t

cost s o f

pollutio n contro l may accoun t

i n part fo r wh y th e cost s o f

emission s contro l ar e no t especiall y detrimental . Overall , mos t utilities , regardles s o f

investmen t

i n emission s control , hav e experience dsom e financia l declin e (indicate dby downgrade dbon dratings) , bu t thi s patter n ma y b e mor e properl y ascribe dt o othe r causes . Stated-Mandate dAccountin g Methods . Accountin g method s require db y th e states ' regulator y publi c utilit y commission s ofte n ten dt o mak e capita l investment s i n ne w facilitie s burdensome . I n mos t states , an electri c utilit y canno t incorporat e th e cost s o f

ane w powe r

plan t i n it s rat e base s unti l th e facilit y become s operational ; hence , th e utilit y canno t receiv e aretur n o n it s investmen t

fo r roughl y eight

t o 1 2 years , th e usual constructio n perio d fo r powe r plants . O n th e othe r hand , risin g fue l cost s ofte n ma y b e recovere dimmediatel y fro mconsumers , wit hth e resul t tha t continue d operatio n o f

olde r powe r plant s burnin g oi l o r

gas , thoug hcoxnmonl y mor e expensive , i s th e preferre dalternativ e t o investin g i n scrubber-equippe dne w facilitie s entailin g hig hcapita l expenses . xv iEFFECT S O N U.S . COA L MARKET S

Th e westwar dshif

t i n coa l productio n see n ove r th e pas t

decad e canno t b e directl y linke dt o th e Clea n Ai r Act , althoug h suc h ashif t i s certainl y clear . In I960 , the producin g state s in the Eas t accounte dfor

95 percen t o f tota l production . B y 1970 , th e East f s shar e ha ddecline dt o 8 5 percen t and , b y 1979 , t o roughl y 7 5 percent . B y th e yea r 2000 , th e Wes t

i s projecte dt o hol daful l 6 6 percen t shar e o f

th e nation' s tota l coal production . Regardin g wester n coal shipment s east , sulfu r dioxid e limita

tion s o f th e NSP S hav e influence dthi s onl y partly , an ddespit e th e inten t o f th e revise dNSP S t o counte r thi s trend , wester n producer s ar e projecte dt o captur e astil l greate r shar e o f

th e tota l midwester n an deaster n coal market s i n th e future . I n 1979 , wester n producer s shippe dsom e 2 2 millio n ton s o f coal eas t

t o utilities ; b y th e year 2000 , som e 12 7 millio n ton s o f wester n coal , o r

7 percen t

o f th e tota l 1. 9 billio n ton s produce di n tha t year , ar e expecte dt o b e shippe deast . Th e curren t

NSP S appea

r t o hav e littl e influenc e t o bolste r mid

wester n an deaster n coal productio n agains t suc h growt h i n th e West . Wester n coa

l productio n i s risin g fo r severa l intrinsi c reasons . First , lower

cos t minin g method s predominat e there . Second , wit h thi s initia l cos t advantage , wester n coal ca n b e shippe dlon g distances , an deve n i n th e fac e o f hig h an drisin g rai l shipmen t costs , i t

ca n ofte n compet e favorabl y wit h indigenou s midwester n coal . Third , th e Wes t i s slate dfo r

asizabl e expansio n o f

it s coal-fire delectrica l capacity , whic h wil l rais e loca l deman d fo r wester n coal . Thus , th e prospect s fo r th e curren t

NSP S t o revers e th e coal market' s westwar dshif t i n productio n appea

r slight . ALTERNATIV E APPROACHE S T O TH E CURREN T NE WSOURC E PERFORMANC E STANDARD S FO RELECTRI C UTILITIE S Al l fou r o f th e polic y choice s th e CB O ha s examine dwoul daffec t th e act' s curren t

NSP S a s the y pertai n t o sulfu r dioxid e emissions . Thre e o f th e alternative s woul dfollo w th e genera l approac h o f existin g standards , i n tha t the y woul dappl y only t o ne w coal-fire dpowe r plants . Th e fourt h woul d depar t fro mestablishe dapproache s i n allowin g ol da s wel l a s ne w source s t o participat e i n th e contro l o f emission s unde r

th e standards . Afte r abrie f descriptio n o f

th e option s (als o displaye di n th e Summar y Table) , th e followin g analysi s focuse s o n thre e potentia l effects :

xv u

93-28 1 0-82- 3SUMMAR Y TABLE . ALTERNATIV ESULFU RDIOXID E EMISSION S STANDARD S (Projecte dt o yea r 2000 ; emission s limit s i n pound s per

millio n BTU s o f

fue l consumed ) Option s an d Description s Effect s o n Emission s Curren t NSP S Set s aceilin g o f

1, 2 pound s an dafloo r

o f 0. 6 pounds ; 9 0 percen t

scrubbin g require d fo r emission s abov e floor , an d7 0 percen t fo r thos e belo w floo r

a / Total emission s growt h

limite dt o annual 2 1 millio n tons ; ne w plan t emission s tota l 1. 6 millio n ton s ayea

r Optio n I Set s aceilin g o f

1. 2 pound s Optio n H Set s aceilin g o f

1. 2 pound s an dafloo r

o f 0. 8 pounds ; 7 0 percen t

scrubbin g require dfo r

emission s abov e floo r

a / Optio n I E Set s aceilin g o f

1. 2 pound s an dafloor

o f 0. 6 pounds ; 9 0 percen t

scrubbin g require dfo r

emission s abov e floo r

a / Optio n I V Require s sam e tota l emission s contro l a s under

curren t NSPS ; allow s emission s tradin g betwee n ol dan dne w source s t o mee t overal l limi t Total emission s growt h limite dt o annual 22. 8 millio n tons ; ne w plant emission s tota l 4 millio n ton s ayea

r Total emission s growt h limite dt o annual 22. 1 millio n tons ; ne w plan t emission s tota l 2. 8 millio n ton s ayea

r Total emission s growt h limite dto annual 21. 9 millio n tons ; ne w plan t emission s tota l 2 millio n ton s ayea

r Tota l emission s growt h limite dto annual 2 1 millio n tons ; ne w plan t emission s tota l 2. 5 millio n ton s ayea

r a / Applie s to ne w electricit y source s only . (continued )SUMMAR Y TABLE . (Continued )

Cos t Effectivenes s Relativ e t o 197 1 NSP S Capita l an dOperatin g Cos t Effect s Coa l Marke t

Change s $2,41 1 per

to n o f sulfu r dioxid e remove d Tota l capita l outlay s

o f $33. 4 billion ; annual operatin g cost s $14. 1 billio n i n year

200 0 Hig hmidwester n an d

lowe r wester n pro duction ; 12 7 millio n ton s wester n coa

l shippe deas t

Basi s o f Compariso n Tota l capita l outlay s

o f $1 4 billion ; annual operatin g cost s $9. 8 billio n i n year

200 0 Hig hwester n an dlo w

midwester n coa

l pro duction ; 15 1 millio n ton s wester n coal shippe deas t $1,92 9 per

to n o f sulfu r dioxid e remove d Tota l capita l outlay s

o f $14. 6 billion ; annual operatin g cost s $11. 1 billio n i n year

200 0 Hig hwester n an dlo w

midwester n coa

l pro duction ; 16

4 millio n ton s wester n coa

l shippe deas t $3,40 0 per

to n o f sulfu r dioxid e remove d Tota l capita l outlay s

o f $17. 1 billion ; annual operatin g cost s $12. 8 billio n i n year

200 0 Hig hwester n an dmid

wester n coal pro duction ; 14 5 millio n ton s wester n coal shippe deas t $55 0 per to n o f sulfu r dioxid e remove d Tota l capita l outlay s

o f $14. 7 billion ; annual operatin g cost s $10. 8 billio n i n yea

r 200 0 Hig hwester n an d

moderat e midwester n coa l production ; 14 9 millio n ton s wester n coa l shippe deas t SOURCE : Congressional Budge t Offic eo Emissions , o Th e electri c utilities ' cost s t o mee t th e standard s an dth e options ' cos t effectiveness , an d o Effect s o n U.S . coa l markets . I n th e analysis , n o attemp t i s mad e t o weig hcost s agains t benefits . Thoug h th e cost s o f

suc h governmenta l regulation s a s pollutio n contro l are reason ably amenabl e t o bein g quantifie dan dcompared , th e benefit s ar e not . N o generall y acceptabl e measure s exis t fo r gaugin g healt

h improvements , preservatio n o f

natura l an dstructura l assets , o r othe r societal gain s tha t may resul t

fro mfedera l emission s limits . Thus , th e CB O ha s no t assessed measurabl e cost s o f

abatemen t

agains t importan t

bu t intangibl e benefits * Optio n I . Rever t

to th e NSP S o f

197 1 Reenactmen t

o f th e original NSP S woul deffectivel y rescin dth e presen t requiremen t

tha t al l ne w powe r

plant s b e equippe dwit hscrubbers . Th e onl y standar dwoul db e amas s emission s limi t o f 1. 2 pound s o f

sulfu r dioxid e per

millio n BTU s o f

fue l consumed ; n o fixe dpercentag e o f tha t pollutan t woul dhav e t o b e removed . Thus , combustio n o f low-sulfu r

coa l woul doffe r

an acceptabl e mean s o f compliance . Optio n n . Achiev e 7 0 Percen t Contro l o f

Sulfu r Dioxid e Emission s an dSe t a 0. 8 Poun dFloor Followin g th e general structur e o f th e curren t

NSPS , thi s optio n woul d require scrubbin g fo r

som e plant s bu t

no t all , dependin g o n th e coa l used . Sulfu r dioxid e emissions , betwee n amaximu mpermissibl e ceilin g o f l. Z pound s an dafloo r

o f 0. 8 pound s per

millio n BTU s o f

fuel , woul dhav e t o als o b e reduce db y 7 0 percent . Fo r emission s belo w th e floor , n o specifi c percentag e reductio n level s woul db e mandated . Thus , low-sulfu r coa l coul d b e burn t wit hlittl e o r

n o scrubbing ; high-sulfu r coa l woul dhav e t o b e scrubbe dt o remov e at

leas t 7 0 percen t

o f sulfu r dioxid e emissions . Optio n ffl . Achiev e 9 0 Percen t Contro l o f

Sulfu r Dioxid e Emission s an dSe t a0. 6 Poun dFloo r A varian t o f Optio n n an dth e curren t standards , thi s alternativ e woul d stipulat e th e sam e sulfu r dioxid e emission s ceilin g (1. 2 pound s pe r millio n x xBTUs ) bu t woul destablis h a

n emission s floo r

o f 0. 6 pounds . Th e percentag e remova l fo r

emission s betwee n th e ceiling an dfloo r woul db e 9 0 percent , whil e n o contro l requirement s woul db e specifie dfo r emission s belo w th e floor . Thi s optio n woul dthu s retai n th e curren t scrubbin g requiremen t

fo r high-sulfur

coal , reduc e th e amoun t necessar y fo r low-sulfu r

coals , an d eliminat e i t

entirel y fo r

ver y low-sulfu r

coals . Optio n IV . Constrai n Tota l Emission s Growt hb y Balancin g Sulfur Dioxid e Emission s fro mOl dan dNe w Source s Thi s option , afundamenta l departur e fro mothe r approaches , woul d allo w ol da s wel l a s ne w source s to b e involve di n meetin g emission s standards . Whil e still directe dat ne w sources , th e standard s woul dpermi t a ne w facility t o trad e emission s with other existin g powe r

plant s t o achiev e th e sam e quantity o f

emission s contro l a s require dunde r th e presen t

NSPS . Withi n agive n area—i n thi s example , astate— aplanne dplan t woul db e allowe dt o fin datradin g partne r amon g existin g sources . I f th e ol dsourc e coul dmee t

standard s sufficientl y belo w it s applicabl e regulations , it s ne w sourc e tradin g partne r

coul dexcee dth e limi t

b y an equa

l amount , s o lon g a s th e ol dsourc e continue dt o operate . Thi s approac h i s terme dne w sourc e "bubbling" , sinc e i t

allow s contro l to b e balance dbetwee n al l emission s withi n agiven atmospheri c area , s o lon g a s th e tota l quantit y leavin g th e bubbl e remain s constant . Acceptabl e method s o f complianc e woul dinvolv e bot h scrubbin g an dlow-sulfu r fuel s at both ol dan dne w powe r plants . Effect s o f

th e Alternative s o n Futur e Emission s I n contras t

t o th e curren t

NSPS , whic hwoul dhol dth e growt h o f sulfu r dioxide emission s fro melectri c utilitie s t o atota l o f 2 0 percen t

over th e comin g tw o decades , Optio n I woul dallo w emission s to ris e b y 3 0 percent . Thi s translate s int o 2 1 millio n ton s under curren t law an d22. 8 millio n ton s unde r Optio n I . Thes e figure s represen t th e upper

an dlowe r

bound s o f emission s contro l achievabl e unde r al l th e options . Inasmuc h a s ol dsource s are projecte dt o account fo r som e 8 0 percen t

o f al l sulfu r dioxid e emission s throug h th e yea

r 2000 , ther e i s littl e roo mfo r improvemen t

t o b e achieve d ove r th e projectio n perio db y regulation s governin g ne w source s only . Similarly , Optio n IV , whil e reducin g th e cost s o f emission s contro l an d spreadin g th e burde n betwee n ne w an dol dsources , canno t b e expecte dt o brin g abou t

any radical chang e i n overal l emission s levels , sinc e th e contro l level s are base do n curren t NSPS . Ne w powe r

plant s constructe dsubjec t t o Optio n I woul demi t

roughl y twic e th e amoun t o f sulfu r dioxide a s thos e constructe dunder

th e curren t

standards . Thes e difference s i n tota l xx iemission s woul dbecom e measurabl e only whe n th e olde r generatio n o f dirtie r facilitie s retire , sometim e aroun dth e yea r 2010 . Cos t Effec t o n Utilitie s Althoug h th e CB O analysi s suggest s that capital cost s fo r

ai r pollutio n contro l may no t

b e detrimenta l t o th e utilities ' financia l condition , th e hig h capital expens e o f

scrubbin g doe s appea

r to rais e overal l cost s fo r th e utilitie s an dth e consumers * Th e curren t NSP S woul drequir e th e greates t capital outlay ($33. 4 billion ) an dwoul dresul t i n th e highes t

annual cos t ($14. 1 billio n b y th e yea r 2000) . I n contrast , Optio n I (th e previou s NSPS) , whic h woul dallo w widespreadus e o f low-sulfui

- coal , woul drequire only $1 4 billio n i n capital an d$9. 8 billio n i n annual cost s b y th e yea r 2000 . Th e othe r options , b y promotin g differen t mixe s o f

scrubbin g an dlow-sulfu r coa l combustion , fal l somewher e i n between , althoug h th e capita l requirement s o f each o f thes e option s appea

r no t to b e nearl y so hig h a s th e current standards . ' ' - • •" " •-.- f '' ".

—.- . ' .-• . ---;••--. . -, 5 , Cos t Effectiveness ^ A tru e measure o f th e cost difference s betwee n eac h optio n can only b e mad e whe n difference s i n emission s ar e als o take n into account . A roug h gaug e o f cost effectivenes s ma

y b e derive db y measurin g th e cost s o f

reducin g sulfu r

dioxide emission s belo w th e highes t level s projected--i n thi s case , th e 22. 8 millio n ton s per yea r projecte dunde r Optio n I . The curren t

NSP S woul dcos t

$2,41 1 fo r

eac h to n o f

sulfu r dioxide remove dbelo w tha t

level . Optio n n woul dcos t $1,929 , an dOptio n m—th e mos t costl y i n thes e terms—$3,40 0 per to n removed . Optio n IV , i n contrast , offer s th e prospec t

o f lowerin g sulfu r

dioxide level s a

t acos t o f only $55 0 per to n remove dfo r

a s long a s existin g oldsource s remai n i n operation ; th e reaso n fo r

thi s potential econom y i s th e abilit

y to adhiev ^ low-cos t emission s reduction s at

existin g facilities b y relyin g o n lower-sulfu r fuels . For example , convertin g a500-megawatt plan t fro mhigh

- t o low-sulfu r coa l woul dcos t

$43 1 fo r

each to n o f

sulfu r dioxide remove dfro mpreviou s emission s levels ; such reduction s migh t b e use di n atrade . Cost s fo r ane w plant , i n contrast , migh t tota l som e $1,23 0 per

to n to achiev e simila

r level s o f reductio n belo w th e 1. 2 pound s sulfu r dioxide emission s limi t

o f Optio n I . Coal Marke t

Effect s Fro mth e standpoint

o f th e U.S . coa

l market , an y emission s standard s tha t woul dplac e heav y emphasi s o n th e us e o f scrubber s shoul ddiscourag e th e purchas e o f

nonloca l coa l t o mee t emission s standards . Conversely , de

emphasizin g contro l technolog y i n favo r o f mas s emission s limit s shoul d xxi iincreas e th e deman dfo r an dvalu e o f

low-sulfu r

coal . Thes e effect s ar e partl y born e ou t

i n projection s o f

th e coa l marke t unde r eac h alternative . Thus , implementin g Option s I o r IV woul dten dt o perpetuat e th e tren d observe ddurin g th e 1970s , durin g whic hlow-sulfu r coal productio n gre w an d wester n coa

l sale s expande deastward . Optio n n , becaus e o f it s lo w scrubbin g requiremen t

an dhig h emission s floor , als o woul dpromot e th e us e o f low-sulfu r

coal . Onl y continuin g th e curren t NSP S o r adoptin g Optio n ffl , both o f whic hwoul dentai l sizabl e amount s o f scrubbing , woul dten dt o counter tha t trend , fosterin g greater us e o f high-sulfur

coa l fro mth e Eas t an dth e Midwest . / Neithe r th e curren t

NSP S o r an y o f th e alternative s examine dappear s t o hav e great

potentia l t o ste mth e growt h o f wester n coa

l productio n o r

th e penetratio n o f

western low-sulfu r

coa l int o market s t o th e east . Eve n th e curren t NSPS , wit h thei r

universal requiremen t

o f scrubbing , can only slo w th e rat e o f

shipment s o f

western coa

l t o utilitie s i n th e Midwes t an dth e East . Option s I an dI V woul doffe r n o provision s tha t

woul dcounte r

thi s trend , an dOption s n an dffl , wit h some scrubbin g requirement s bu t les s tha n th e curren t

NSPS , woul dhav e almos t a s littl e effect . A s ha s ibee n observe d sinc e th e earl y 1970s , inheren t factor s i n western an dcoa l productio n are expecte dt o continu e t o overwhel man y influenc e o n coa l market s arisin g fro mpollutan t

emission s standards . Circumstance s tha t coul dsignificantl y alter thi s projecte dpatter n include higher-than-anticipate drai l shipmen t rate s an dsignificantl y lowe r cost s fo r contro l technology . CONCLUDIN GREMARK S Whic ho f th e federa l government' s goal s receive s highe r Congressiona

l priorit y woul ddetermin e whic h o f th e option s analyze doffer s th e bette r prospects . Th e Clean Ai r Act' s curren t

NSP S are bes t

suite dto holdin g dow n emission s an dsafeguardin g midwestern coa l production , bu t

a t sizabl e cost s t o th e utilit y industry . Th e utilitie s woul db e bette r serve db y Option s I I o r m , bu t a t som e sacrific e i n pollutio n abatement . Unde r Option s I o r

IV , th e act' s pollutio n contro l goal s woul db e advance dt o differen t degree s at minima l costs , bu t

th e coa l producer s o f

th e Midwes t

woul dpay apric e i n market s los t

t o western suppliers . I n short , th e analysi s suggest s tha t th e several objective s o f

constrainin g sulfu r

dioxide emissions , easing th e electri c utilities ' financia l burden , an dprotectin g midwester n coa l producer s canno t al l b e pursue dwit hequa l emphasis .

xxi nTH E CLEA N AI RACT , TH E ELECTRI C UTILITIES , AN D TH E COA L MARKE T

93-28 1 0-82- 4CHAPTE RLINTRODUCTIO N

Federal policie s tha t

woul dprotec t

th e nation' s ai r

quality an dother s tha t woul densure areliable , low-cos t supply o f

electricity can sometime s interac t i n difficul t

ways . Thi s stud y examine s th e questio n o f whethe r clea n ai r an denerg y policie s a s the y affec t th e electri c utilitie s are i n fac t o n acollisio n course . Th e mechanism s b y whic hth e air quality goa

l i s sought ar e embodie di n th e Clean Ai r Act , administere db y th e Environ

menta l Protectio n Agenc y (EPA ) an dlas t amende di n 1977 . I

/ Th e estab

lishmen t o f asecure an dinexpensiv e powe r suppl y rest s o n encouragin g greate r us e o f th e Unite dStates ' mos t abundan t

energ y source : coal . Sinc e 1970 , coal combustio n ha s supplie droughl y hal f o f al l yearl y electrical productio n an dpromise s t o furnis han eve n greate r share i n th e comin g decades . Thoug h plentifu l an dno t vulnerabl e t o foreig n suppl y interruptions—an dinexpensiv e i n compariso n wit hoi l an dgas—coa l i s als o a majo r sourc e o f

ai r pollution . Th e burnin g o f coa l b y utilit y plants , whic h accoun t fo r mor e tha n four-fifth s o f th e nation' s tota l coa

l consumption , account s fo r

approximatel y 6 0 percen t o f al l sulfu r

dioxide emission s i n th e Unite dStates , 2 5 percen t o f al l nitroge n oxid e emissions , an d1 5 percen t o f al l particulat e emissions . 2 / Th e contro l o f

thes e pollutants—especiall y sulfu r dioxide—i s expensive , complicatin g th e interactio n betwee n clea n ai r polic y an dth e desir

e t o promot e coa

l us e i n electricit y production . COA LAN D POLLUTAN T EMISSION S Chemica l characteristic s uniqu e t o coal hav e ha dadirec t bearin g o n th e shapin g o f

federa l emission s contro l regulation s an dthei r effect s both 1 . Firs t enacte di n 196 8 a s Publi c Law 88-206 , th e Clean Air Ac t ha s undergon e severa

l majo r legislativ e revision s sinc e tha t date . Th e structur e o f

th e ac t tha t prevail s today , underlyin g th e analysi s i n thi s paper , wa s adopte dunde r th e Clean Ai r

Ac t Amendment s o f

197 7 (Publi c Law 95-95) . 2 . Thes e data , supplie db y th e EPA , reflec t estimate dpollutan t

level s fo r 1979 , th e mos t

recen t yea r fo r whic hdat aar e available .o n utilit y companie s an do n th e coal industr y itself . Whe n coa l i s burnt , i t generate s noxiou s gase s (sulfur dioxid e an dnitroge n oxides ) an dparticipat e matte r (unburn t materia l an dash) . I n particular , th e generatio n o f sulfu r dioxid e ha s th e greates t

bearin g o n ho w emission s regulation s ca n affec t th e utilit y an dcoa

l industries . Th e amoun t o f sulfu r dioxid e produce ddurin g coa l combustio n i s adirec t functio n o f

th e sulfu r

conten t o f th e ra w fuel . Coal' s sulfu r

conten t varie s fro msourc e t o source , rangin g betwee n les s tha n 1 t o greate r

tha n 4 percen t

b y weight . Mine s i n th e Wes t generall y produc e coa

l lo w i n sulfu r

content ; medium

- an dhigh-sulfu r coal s predomi

nat e i n th e Midwest ; eastern mine s produc e coal s wit haful l rang e o f sulfu r contents . Th e higher

coal' s sulfu r

content , th e higher

it s emission s o f

sulfu r dioxide . Th e evolutio n o f emission s regulation s fo r utility plaint s unde r

th e Clean Ai r

Act , an dth e debat e surroundin g suc h regulations , reflec t thes e particular

propertie s o f

coal . REGULATOR Y MECHANISM S I n it s presen t

form , th e ac t

i s designe dt o protec t

ai r qualit y throug h several chief

mechanisms . 3 /

Th e primar y objectiv e o f th e ac t i s t o ensure tha t al l area s o f

th e country achiev e ai r quality equa

l t o o r bette r tha n national ambien t

ai r quality standard s (NAAQS) , whic hare establishe db y th e EPA . Thes e standard s reflec t th e maximu macceptabl e pollutan t concentration s tha t

offe r asafe environmen t

fo r th e public' s healt h an d welfare . Tw o importan t program s ar e designe daroun dth e NAAQS . A "nonattainmen t

program " require s state s t o develo p plan s providin g fo r attainmen t

o f al l NAAQ S i n area s no t currentl y meetin g them ; th e preven tio n o f significan t

deterioratio n (PSD ) progra mdirect s th e EP A an dth e state s t o limi t

th e increas e o f

pollutio n i n area s wit h ai r bette r tha n th e NAAQS . Finally , a s an ai di n limitin g pollutio n growt h an dmaintainin g th e NAAQS , th e ac t

direct s th e EP A t o establis h unifor mnationwid e emission s limit s fo r mos t majo r ne w facilities . Thes e standards , terme dne w sourc e performanc e standard s (NSPS) , appl y t o specifi c categorie s o f ne w an d modifie dai r

pollutio n source s nationwide , an dthe y reflec t th e minimu m acceptabl e level s o f

contro l fo r

thes e facilities . Th e effect s o f thes e NSP S o n th e utilit y an dcoa

l industrie s ar e amajo r

focu s o f thi s study . Sinc e th e act' s passage , th e EP A ha s twic e establishe dNSP S fo r th e electri c utilit y industry . Thes e regulation s affec t all ne w an dmodifie d 3 . Fo r furthe r informatio n o n th e Clean Ai r Act , se e Nationa l Commis

sion o n Ai r

Quality , T o Breath e Clean Air , Final Repor t (Marc h1981) .facilitie s buil t afte r th e effectiv e dat e o f

th e particular

standar dan dlimi t th e emission s o f

mos t gaseou s an dsoli dpollutants . I n general , thes e standard s hav e me t

wit hlittl e controversy ; however , th e emission s contro l requirement s fo r

sulfu r dioxid e hav e remaine dasubjec t o f intens e debate . Th e firs t se t o f NSP S wa s establishe di n 197 1 an dwa s designe dt o allo w th e utilitie s t o mee t sulfu r dioxid e emission s standard s usin g eithe r low-sulfu r

coa l alon e o r

high-sulfu r

coal wit h specia

l equipmen t

develope d t o reduce sulfu r

dioxid e emissions . Th e equipmen t use dt o reduc e suc h emission s i s flu e ga s desulfurizatio n technology , commonl y referre dt o a s "scrubbers. " Thoug h availabl e at th e tim e o f

th e firs t NSPS , scrubber s wer e expensive , an dsinc e the y wer e no t mandatory , utilit y manager s generall y avoide dinstallin g the mi n ne w units . Instead , low-sulfu r coal wa s typicall y employe da s an emission s contro l strategy . A s aresult , controvers y aros e ove r th e 197 1 regulation s wit hrespec t t o thei r

possibl e effect s o n th e nation' s coal market , focusin g o n whethe r the y woul dencourag e th e productio n o f

low-sulfur

coa l (primaril y awester n product ) at th e expens e o f medium

- an dhigh-sulfur coa l produce di n th e Midwes t an dEast . I n amendin g th e Clea n Ai r Ac t i n 1977 , th e Congres s change dth e criteri ao n whic hth e EP A base s emission s standard s fo r facilitie s usin g fossi l fuels . Tw o factor s underla y th e change : concer n over th e apparen t regiona l inequitie s i n th e coa l marke t fostere db y th e ol dregulations , an d inten t t o encourag e us e o f

pollutio n contro l technology . Th e ne w emission s regulation s th e EP A adopted—th e NSP S o f 1978 , whic h are stil l i n ef

fect—requir e tha t

al l newl y buil t

powe r plant s cur

b sulfu r dioxid e emission s fro man y coa

l the y burn . I n effect , thes e NSP S dictat e tha t scrubber s b e installe di n al l ne w utilit y units , sinc e n o othe r commerciall y availabl e technolog y can mee t

th e EP A standards . A s aresult , sinc e scrubber s becam e virtuall y mandatory , utilit y manager s no w hav e littl e motivatio n t o us e low-sulfu r

coa l excep t wher e i t i s mos t readil y available--that

is , wher e i t i s locall y produced . Implemen t io n o f thes e regulations , i t

wa s believed , woul dminimiz e ne w emission s everywher e an dwoul dcorrec t regiona l inequitie s i n coa

l production . ISSUE S BEFOR E TH E CONGRES S Tw o controversie s no w surroun dth e NSP S fo r sulfu r dioxid e emissions : o Whethe r

th e hig h capita l cost s o f scrubber s overburde n th e utilit y industry i n proportio n t o th e contro l the y achieve ; an d o Whethe r

th e cost s o f

scrubber s jeopardiz e th e economi c advan

tag e o f coa l relativ e to costlier

fuels , namel y oi l an dgas .Wit hthes e issue s i n mind , th e Congres s ha s already begu n t o consider furthe r revision s t o th e Clean Ai r Act . Fo r

athir dtime , legislator s wil l likel y reasses s th e provision s b y whic hth e ac t require s th e utilitie s t o contro l emissions . T o assis t i n clarifyin g th e issue s unde r Congressional debate , thi s stud y explore s fou r

critica l questions : o Wha t

i s th e likel y futur e effec t o f th e curren t

NSP S o n sulfu r dioxid e an dothe r

pollutan t

emissions ? o Wha t

are likel y t o b e th e cost s o f reducin g pollutan t

emission s at coal-fire dpowe r

plants , an dwha t

financia l burde n d o thes e cost s pu t o n electri c utilities ? o Ho w migh t

emission s standard s influenc e th e pattern s o f coa l productio n an dus e i n th e Unite dStates ? o Wha t

othe r form s migh t

emission s contro l standard s take , an d wha t migh t thei r effect s b e o n th e utilit y an dcoal industries ? A s before , question s o f economi c efficienc y will probabl y aris e agai n i n th e cours e o f

th e debate . Wil l th e societal benefit s o f pollutio n abatemen t

warran t thei r considerabl e economi c costs ? Onl y s o lon g a s th e benefit s outweig hth e cost s can thos e cost s b e justified . I n considerin g thi s question , th e Congres s wil l wan t t o identif

y emission s regulation s tha t wil l achiev e an economicall y correc t leve l o f abatement . Becaus e th e damag e tha t environmenta l deterioratio n ma y cause—t o publi c health , agriculture , structures , an dothe r

national assets—i s difficul t t o quantify , th e benefit s t o b e gaine dfro mclea

n ai r polic y ar e equall y difficul t t o gauge . Thoug h criticall y importan t

i n Congressional decisionmaking , thes e issue s ar e beyon dth e scop e o f

thi s paper . PLA N O FTH E PAPE R Chapte r n o f thi s pape r

describe s th e cost s o f

th e Clean Ai r

Ac t t o th e electri c utilit y industry . Chapte r HI review s th e presen t

financia l conditio n o f utilitie s an dexamine s th e cost s t o the mo f pollutio n control . Chapte r I V analyse s th e effect s o f

th e Clea n Ai r

Ac t o n th e prospect s fo r

conversio n an dreplacemen t

o f oil

- an dgas-fire dgeneratin g capacity wit hcoal . Th e focu s o f Chapte r V i s o n th e Clean Ai r

Act' s implication s fo r

th e U.S . coa

l market . Th e closin g portio n o f th e paper , Chapte r

VI , outline s fou r alternativ e emission s standard s fo r th e utilities , explorin g th e potentia l o f thos e choice s o n sulfu r

dioxid e emissions , o n utilities ' capital an doperatin g costs , an do n th e U.S . coa l market .CHAPTE Rn . STANDARD S AFFECTIN GTH E ELECTRI C UTILIT Y INDUSTRY—THEI REFFECT S O N EMISSION S AN D COST S Th e curren t

air pollutio n contro l regulation s require db y th e Clean Ai r Ac t wil l brin g abou t

ageneratio n o f

power-producin g facilitie s tha t wil l b e significantl y cleaner

tha n thei r

predecessors , bu t

at considerabl e expens e t o th e electri c utilit y industry . Meetin g th e act' s emission s contro l require

ment s wil l requir e significan t capital investmen t

fo r th e industry durin g th e comin g tw o decades . Accordin g t dth e Congressional Budge t Office' s analysis , th e tota l electri c capacity o f U.S . utilitie s betwee n 198 0 an dth e yea r 200 0 wil l increas e b y some 4 4 percent , fro m58 8 gigawatt s t o 84 4 gigawatts . \J

Th e cumulativ e capital requirement s fo r ne w nuclea

r an d coal plant s alon e (no t

includin g transmissio n an ddistributio n facilities ) ar e projecte dt o b e $32 0 billio n over thi s period ; o f

tha t sum , roughl y $17 6 billio n wil l b e attributabl e t o an anticipate d16 8 gigawatt s o f ne w coal-fire d capacity . Effort s t o mee t th e federa l ne w sourc e performanc e standard s (NSPS ) fo r

utilit y plant s and/

t o alesse

r extent , local ai r

pollutio n contro l regulations , wil l accoun t fo r roughl y one-fift h($33. 4 billion ) o f tha t $17 6 billion . Thi s chapte r

present s an analysi s o f ho w th e NSP S an dothe r ke y provision s o f

th e Clean Ai r

Ac t influenc e bot h th e quantit y o f pollutan t emission s nationwid e an dth e cost s o f generatin g electricity . GLEA N AI RAC T REQUIREMENT S AFFECTIN GELECTRI C UTILITIE S T o hel p mee t

an dmaintai n nationa l ambien t ai r qualit y standard s (that is , th e act ? s NAAQS ) several ke y provision s o f th e ac t serv e t o regulat e pollutan t emission s fro melectri c utility plants . Fo r plant s buil t

befor e th e firs t federa l emission s regulation s fo r utilitie s i n 1971 , th e state s ar e require dt o develo p plans , includin g emission s limit s fo r individual plants , t o achiev e an dmaintai n th e NAAQS . Thes e plan s are calle dstat e implementa

tio n plans . Th e ac t

als o require s th e EP A t o limi t th e amoun t

o f ai r pollutio n tha t

ane w o r

modifie dfacilit y may emit . Thes e regulation s ar e th e NSPS ) an dthe y are establishe d(andreviewe dever y fou r years ) b y th e 1 . A gigawat t

i s auni t o f powe r equa l to on e billio n watts . A commercia l generato r o f 50 0 megawatt s (0. 5 gigawatts ) operatin g at a7 0 percen t capacity facto r

can produc e approximatel y 3. 1 billio n kilowatt-hour s o f electricity ayear, th e amoun t consume db y roughl y 371,00 0 households .EP A fo r man y categorie s o f

pollutio n sources , includin g utilities . Finally , t o ensure tha t

area s already meetin g NAAQ S preserv e thei r goo dair quality , th e EPA , together

with th e states , operate th e preventio n o f significan t deterioratio n (PSD ) program . Thi s programestablishe s an elaborate revie w an dpermi t

procedur e fo r

ne w facilitie s an dallow s state s an dth e EP A t o adop t contro l measure s eve n tighte r tha n th e NSPS , (The PS D provision s are discussedi n greate r

detai l below ; thei r

effect s o n utility emission s limit s an dadministrativ e cost s are discussedi n Appendi x A. ) Th e mai n focu s o f

thi s study i s o n th e NSP S (particularl y th e sulfu r dioxide limits ) fo r

electric , utilities ; t o alesse r extent , th e stud y als p consider s th e PS D provisions . Th e majorit y o f futur e electri c generatin g capacity wil l b e buil t

i n area s already meetin g th e NAAQS , an dth e majorit y o f futur e cost s fo r

ai r pollutio n contro l wil l b e attributabl e t o th e NSPS , althoug h asmal l portio n o f thes e expense s wil l resul t fro mth e tighte r

stat e an dloca l standards , implemente di n mos t case s unde r

th e PS D provision s o f th e act . Th e Ne w Sourc e Performanc e Standard s o f 197 1 an d197 8 Becaus e o f

th e great

variatio n i n sulfu r

conten t o f coa l acros s th e country , coal-fire dpowe r plant s coul demi t

sulfu r dioxide i n widel y differin g amount s i f

suc h emission s wer e no t controlled . Fo r

example , an uncon trolle d500-megawatt

powe r plan t coul demi t

sulfu r dioxide at

rate s rangin g fro mles s tha n 0. 5 t o mor e tha n 6 pound s o f that ga s per on e millio n Britis h therma l unit s (BTUs ) tf

f fue l consumed . In th e cours e df ayear , thi s rang e woul dtranslate int o les s tha n 7,66 5 an dmor e tha n 91,98 0 ton s o f sulfu r dioxide . The ,NSP S introduce di n 197 1 tinder th e Clea

n Air Ac t focuse d directl y o n thi s problem , settin g aunifor mnationwid e limi t o f 1. 2 pound s o f sulfu r dioxide emission s per

millio n BTU s fo r

al l ne w o r

modifie dpower plant s burnin g coal . 2/

Simila r limit s were establishe dunder th e NSP S fo r nitroge n oxide s an dparticulat e emissions . The 197 1 NSP S were set with consideration s o f

economi c effects , energ y costs , an denvironmental an d publi c healt

h concern s take n int o account . I n 1978 , thes e standard s wer e revised , wit hmuc hstricte r sulfu r diox

id e an dothe r

emission s limit s se t

fo r th e electri c utilities . Th e revision s i n Regulation s unde r

both th e NSPS,appl y als o to gas - an doil-fire dplants . The limi t se t fo r ne w oil-burnin g plant s wa s 0. 8 pound s o f sulfu r dioxide emission s per

millio n BTU s o f

fue l consumed *197 8 reflecte dafundamenta l chang e i n th e act' s NSP S provisions , change s

tha t wer e designed , i n part , t o encourag e th e us e o f contro l technolog y an d t o foste r th e us e o f

local coa

l regardles s o f

it s sulfu r

content . Tabl e 1 contrast s th e provision s o f th e tw o set s o f

ne w sourc e performanc e standards * TABL E1 . NEWSOURC E PERFORMANC E STANDARD S

FO RCOAL-FIRE D ELECTRI C UTILITIE S Pollutan t 197 1 Maximu m

Allowabl e Emission s 197 8 Maximu m Allowabl e Emission s Sulfu r Dioxid e

Nitroge n Oxide

Participat e Emission s 1. 2 pound s per millio n BTU s o f any coa l consume d

0. 7 pound s per

millio n BTU s o f al l anthracite , bituminous , an dsub

bituminou s coal s con sumed ; 0. 6 pound s fo r lignite 0. 1 pound s pe

r millio n BTU s o f fue l consume d N o mor e tha n 1. 2

pound s per

millio n BTU s o f fue l con sume dplu s 9 0 percen t emission s reduction , n o mor e tha n 0. 6 pound s per

millio n BTU s o f fue l consume d plu s 7 0 percen t

emis

sion s reductio n 0. 6 pound s per

millio n BTU s o f anthracite , bituminous , an dlignite coa l consume d 0.0 3 pound s per

millio n BTU s o f fue l consume d SOURCE : U.S . Environmenta l Protectio n Agency . NOTE : Tabl e doe s no t sho w emission s limit s applyin g to either oil-o r gas-fire dutilit y plants . Se e 3 6 Federal Registe r 1570 3 (Decem

ber 23 , 1971 ) and44 Federal Registe r 3358 0 (Jun e 11 , 1979) .

93-28 1 0-82- 5The 197 8 revision s di dno t supersede the olde

r NSPS . Plant s license d t o operat e unde r

th e 197 1 NSP S remaine d(an dstil l are ) subjec t t o them . Rather , th e ne w standard s adde dstringen t requirement s fo r

thos e ne w plant s to whic hthe y woul dapply . Beside s limitin g emission s to 1. 2 pound s o f sulfu r dioxide per

millio n BTU s generate dfro mcoal , ne w o r modifie d plant s burnin g coa

l (o r an y fossi l fuel ) mus t

no w als o remov e afinit e percentag e o f

tha t pollutan t

fro memissions . 3 /

Th e leve l o f

mandator y pollutan t removal i s no t

uniform , however , requirin g that betwee n 7 0 an d9 0 percent o f al l sulfu r

dioxide emission s b e eliminated . Th e determinan t o f wha t percentag e sulfu r

dioxid e remova l aplan t mus t achieve , base do n it s fina l emission s rate , i s whethe r th e plan t wil l bur n high

- o r

low-sulfu r

coal . Method s o f

Complianc e an dEffects . A typical metho dfo r autilit y plant' s meetin g th e 197 1 NSP S wa s t o us e fue l wit hinherentl y lo w emission s characteristics—tha t

is , low-sulfu r

coa l o r oil . Unde r

th e ne w NSPS , however , sulfu r

dioxide emission s mus t b e reduce dfro man y variet y o f coa l bein g burnt . A t

present , th e only commerciall y availabl e devic e tha t can achiev e th e require dreduction s i n conventiona l powe r plant s i s ascrubber ; thus , i n effect , th e 197 8 NSP S mandate s th e us e o f scrubber s i n al l ne w coal-fire dpowe r

plants . Though n o ne w o r modifie dcoal-fire dutilit y generator s plannin g t o us e scrubber s unde r th e 197 8 regulation s are ye t i n ful l Commercia l operation , th e effec t o f scrubbin g wil l b e t o cu t emission s b y mor e tha n ahal f fro mlevel s allowe dunde r th e ol dNSPS . 4/ Th e 70-9 0 percen t

slidin g scal e fo r

sulfu r dioxid e emission s remova l effectivel y give s utilitie s a n economi c choic e betwee n usin g "wet " an d n dry n scrubbers , dependin g o n th e sulfu r conten t o f th e coa l the y plan to burn . 5/ 3 . Th e regulatio n chiefl y affect s ne w coa l plants , sinc e th e Power Plant an dIndustrial Fue l Us e Ac t o f 197 8 prohibit s th e burnin g o f oi l o r ga s i n majo r ne w powe r

plants . 4 . I n vie w o f

th e tim e la g tha t

intervene s betwee n afirm' s decisio n t o buil dane w plan t

an dth e tim e tha t

plan t i s actuall y generatin g power , th e effect s o f

th e 197 8 NSP S canno t

b e expecte dt o materializ e befor e wel l int o th e 1990s . 5 . We t scrubber s remov e sulfu r dioxid e b y passing exhaus t gase s throug h an aqueou s chemica l spray tha t absorb s th e sulfu r

dioxide , leavin g th e exhaus t ga s wit halowe r

sulfu r dioxide concentration . (Particulate s ar e

1 0We t

scrubbers , whic hcan remov e 9 0 percen t o r mor e o f th e sulfu r

dioxide a powe r plan t emits , ar e b y far

th e costlier

choice ; installatio n o f awe t scrubber ca n ad da s muc h a s 2 0 percen t o f th e initial capital cost s o f ane w plant . The y do , however , permi t combustio n o f

medium

- an deve n high

sulfur-conten t

coal . Dr

y scrubbers , capabl e o f 7 0 percen t

sulfu r dioxide remova l an dconsiderabl y cheaper—accountin g fo r perhap s 1 0 percen t

o f initia l capital outlay s fo r ane w plant—ar e suitabl e onl y fo r low-sulfu r

coa l combustio n unde r

th e presen t

regulations * Commercia l experienc e wit hdry scrubber system s o n utilit y plant s i s lacking , becaus e th e technolog y i s relativel y new ; however , i t i s afairl y wel l prove n technology , an dman y utilit y system s hav e dry scrubber s o n order fo r thei r ne w plants . Preventio n o f

Significan t

Deterioratio n Fo r area s no w attainin g th e NAAQS , th e Clea n Ai r Ac t mandate s that , i f possible , ai r

qualit y b e prevente dfro mdeterioratin g t o th e leve l o f th e NAAQ S becaus e o f

ne w ai r pollution . Th e act' s provision s applyin g t o suc h region s are encompasse di n th e PS D program , an da s th e ter mimplies , the y cover region s wher e th e ai r

quality i s relativel y goo dat th e tim e autilit y fir mo r othe r industry contemplate s locatin g ane w plan t there . Th e PS D provision s ar e designe dt o preserv e ai r quality whil e at

th e sam e tim e avoidin g hindranc e o f

industrial growth . Th e amoun t o f pollution-cause d degradatio n allowe di n an are a(possibl y u p t o bu t

no t exceedin g th e NAAQS ) i s denote db y specifie dincrement s or classes , show n i n Tabl e 2 . The Clean Ai r Ac t Amendment s o f

197 7 classifie dcertai n areas , suc h a s nationa l parks , a s mandatory Clas s I . Othe r publi c us e areas , suc h a s national recreatio n areas , wer e originall y classifie da s Clas s n an dmay no t b e change dto Clas s m . Al l other area s wer e originally classifie da s Clas s n an dmay b e redesignate db y th e stat e wit hth e governor' s approval . Unde r th e PS D program , autility considerin g constructio n o f ane w powe r plan t undergoe s arigi dpreliminar y revie w process , o f whic htw o component s are especially influentia l both t o cost s an dt o ai r quality . First , th e planner s o f

ane w facilit y mus t

demonstrat e t o th e stat e an dregional 5 . (Continued ) remove dprio r

t o scrubbing. ) Th e produc t o f th e scrubbe r

i s a precipitat e o f

hig h wate r

content , whic htypicall y i s filtere dan d chemicall y stabilize dbefor e disposal . A dr y scrubbe r involve s muc h les s wate r

an dcombine s both participat e an dsulfu r dioxid e remova l i n th e fina l step , leavin g adry produc t fo r disposal .

1 1TABL E 2 . NATIONA LAMBIEN T AI RQUALIT Y STANDARD S AN D ALLOWABLEINCREMENTS UNDE RPREVENTIO N O F SIGNIFICANT DETERIORATO N PROVISION S (I n microgram s per

cubi c meter ) Increment s Unde r PS D Pollutant s NAAQ S Clas s I a / Clas s H b/

Clas s mc/ Sulfu r Dioxide Annual averag e 24-hou r averag e d

/ Three-hour

averag e d

/ Total Suspende d Particulat e Matte r Annual averag e 24-hou r averag e d

/ 8 0 36 5 1,30 0 7 5 150 2

5 2 5 5 1 0 2 0

9 1 51 2 1 9 3 7 4 0

182 70 0 3 7 7 5 SOURCE : U.S . Environmental Protectio n Agency . a / Designe dto protec t

pristin e area s suc h a s Nationa l Parks . b/ Area s meetin g NAAQ S bu t no t originally designate dClas s I i n 1977 . £ / Certai n Clas s n area s ma y b e redesignate dto Clas s i n to allo w greate r development ; non e hav e been redesignate dto date . d / No t t o b e exceede dmor e tha n onc e ayear . environmenta l protectio n authoritie s tha t emission s fro mth e plan t con templated , combine dwit hemission s already present fro mothe r

source s i n th e sam e locale , wil l no t excee dcertai n maximu mlimit s establishe db y PS D increment s (see Tabl e 2) . Backgroun dpollutio n levels , plu s th e specifie d PS D increment , are combine dt o establis h th e upper boun do f

allowe d pollutio n i n th e area , provide dsuch total s woul dno t jeopardiz e th e NAAQS . Emission s fro man y ne w facility i n th e are amus t no t caus e aviolatio n o f thi s maximu mallowabl e limit .

1 2A secon dcritica l featur e i n th e PS D revie w proces s entail s th e us e o f

th e "bes t availabl e contro l technology " (BACT ) i n ane w generatin g facility . Determination s o f

wha t th e bes t availabl e contro l technolog y actuall y is , i n light o f specifi c costs , environmenta l effects , energ y costs , an dothe r con siderations , are mad e o n acase-by-cas e basi s b y th e reviewing agencies , includin g both federa l an dstat e environmenta l officials . I n theory , bes t

availabl e contro l technolog y shoul db e stric t enoug h t o allo w furthe r

growt h i n th e are aan dpreserv e PS D ai r pollutio n limits , whil e neve r exceedin g th e applicabl e NSPS—an dofte n surpassin g i t i n stringency . I n practice , however , th e reviewin g agencie s commonl y establis h BAC T at level s commensurat e with th e applicabl e NSPS , unles s sitin g choice s an dth e characteristic s o f

th e are awoul dcaus e emission s at NSP S level s t o violat e th e applicabl e PS D increment . I n th e cas e o f powe r plant s locatin g i n PS D areas , BAC T limit s hav e bee n se t tighte r tha n NSP S onl y i n certai n instances ; thi s ha s occurre dmor e ofte n unde r th e NSP S o f

197 1 tha n unde r th e NSP S o f

1978 . Sinc e adoptio n o f th e 197 8 NSPS , mos t

BAC T designa

tion s fo r ne w power

plant s requir e n o mor e tha n NSPS-mandate dlevels , excep t i n som e wester n states . Fo r th e purpos e o f

thi s analysis , th e NSP S ar e considere dth e dominan t influenc e o n futur e utilit y emissions , excep t fo r assumption s regardin g som e wester n states ' emission s limit s (se e Appendi x A an dassumption s outline di n Appendi x B) . EFFECT S O N POLLUTAN T EMISSION S Th e NSP S promulgate di n 197 1 hav e ha dmixe deffect s o n national utilit y emission s o f

th e thre e pollutant s discusse di n thi s study . A s o f 1979 , the mos t marke dimprovement—attribute din par t to the federa l NSP S and i n par t t o stricte r

stat e regulations—wa s i n participat e emissions . Thes e decline db y aful l 6 2 percent fro m197 0 levels , despit e majo r increase s i n th e utilities 1 us e o f

coa l (whic hros e b y 5 0 percent) . 6 / Effect s o n gaseou s emissions , however , wer e inconsistent . Th e clearer improvemen t

wa s i n emission s o f

sulfu r dioxide , whic hincrease donl y slightly , primaril y becaus e o f utilities ' effort s t o us e mor e low-emission s fuels—mostl y oi l an dlow

sulfu r coal . Succes s i n controllin g nitroge n oxide emission s wa s minimal , however ; thes e increase db y 5 0 percent . Thi s apparen t failur e i s ascribe d largel y t o th e lac k

o f availabl e contro l method s fo r thi s pollutant . 6 . Se e Environmenta l Protectio n Agency , Nationa l Air Pollutio n Emissio n Estimate s 1970-197 9 (Marc h1981) .

1 3I n spite o f th e shar

p tightenin g o f

th e NSP S enacte di n 1978 , projection s o f

th e nationa l utilit y emission s trend s over th e comin g tw o decade s sho w n o dramati c reversal s i n overal l emissions , althoug h th e averag e emission s rate s o f th e industry shoul dfal l a s cleane r facilitie s are adde dto existin g tota l capacity (see Figure 1) . Particulat e emission s fro m utilit y combustio n are likel y t o continu e declinin g b y a s muc h a s 6 percen t (fro mth e 1, 7 millio n ton s o f 197 9 to 1. 6 millio n ton s b y th e yea r 2000) . Emission s o f

sulfu r dioxide are likel y t o ris e somewha t mor e steepl y tha n i n the 1970s , increasin g b y 1 7 percen t (fro m1 8 millio n to 2 1 millio n tons) . The proble mo f

nitroge n oxide emission s i s expecte dt o worsen , wit hemission s increasin g b y 2 9 percen t (fro m8. 3 millio n ton s to 10. 7 tons) . Th e caus e underlyin g th e continue dhig h emission s level s wil l b e th e utilities ' con tinuin g us e o f

older-generatio n (pre-NSPS ) powe r generators . B y fa

r th e bul k o f anticipate demission s o f each pollutant—a s muc h a s 8 0 per cent—wil l b e attributabl e t o thes e older sources , at

leas t throug h th e year 200 0 an dperhap s unti l 2010 . Afte r th e tur n o f

th e nex t

century , however , th e prospect s shoul d brighte n a s antiquate dgenerator s are phase dou t an dnewe r

one s capabl e o f emittin g far

les s pollutio n tak e thei r place . Sometim e aroun dth e yea r 2010 , atren di n significantl y lowe r emission s can reasonabl y b e expected . Th e remainde r

o f thi s chapter

examine s th e cost s o f

attainin g that

improvemen t throug h th e comin g tw o decades . Figure 1 . 

## Actua l an d Projecte d Pollutan t Emission s fro m Electri c Utilit yPlants-Tota l Amount s an d Averag e Rate s Tota l Amount s Averag e Rate s 2 2 1 8 1 4 1 0 Sulfu rDioxid e

Nitroge n Oxide s ^.»—— «

I I I I I I I I 197 0 J

_

197 3 197 9 200 0

197 6 197 9 200 0 197 0 197 3 197 6 Year s Years SOURCES : Actua l dat a derive d fro m U.S . Environmenta l Protectio n Agency , National Ai r Pollution

Emission Estimates

(Marc h 1981) , an d U.S . Departmen t o f Energy , Th e 1980Annual

Report t o Congress (Apri l 1981) . Projection s base d o n CBO/IC F analysi s (se e Appendi xB) . NOTES : Show s onl ythos e pollutan t emission s regulate d unde rClea n Ai rAc t ne w sourc e performanc e

standards. Projection perio d start s a t 1979 , th e las t yea ro f actua l data . 1 4NATIONWID EPOLLUTIO N CONTRO LCOST S T O UTILITIE S

AN D T O ELECTRICIT Y CONSUMER S T o mee t federa l an dstat e ai r

pollutio n contro l requirement s estab

lishe dove r

th e las t decade , th e utilit y industry ha s alread y mad e sizabl e capita l investments . Betwee n 197 3 an d1980 , th e utilities 1 expenditure s fo r pollutio n contro l ros e a

t an averag e annual rat e o f 10. 7 percent , whil e tota l capita l expenditure s ros e at th e slowe r

rat e o f 8. 9 percent . 7 /

Durin g thi s period , investment s i n pollutio n contro l equipmen t range dbetwee n 5 an d7 percen t o f th e industry' s tota l yearl y expenditures . I n 1980 , th e industry' s tota l capita l commitment s reache d$29* 2 billion , o f whic h$1. 8 billio n ( 6 per cent ) wen t

fo r pollutio n control . Th e tren do f

hig h capital investmen t fo r pollutio n contro l i s expecte d t o continu e ove r

th e nex t tw o decades . Th e principa l caus e underlyin g th e persistenc e o f

hig h utilit y capita l investmen t commite dt o pollutio n contro l i s th e rigi dstandard s establishe di n 1978 . Betwee n 198 0 an dth e yea r 2000 , th e utilit y industry wil l inves t mor e tha n $17 6 billio n i n ne w coal-fire d powe r plant s alone , wit hroughl y $33. 4 billio n (1 9 percent ) dedicate dt o ai r pollutio n control . Becaus e o f th e requirement s o f

meetin g th e 197 8 NSPS , th e utilities ' ai r

pollutio n contro l investmen t cost s wil l b e higher

b y $19. 4 billio n tha t

the y woul db e i f

onl y th e older

NSP S wer e i n force . Aggregat e dat ao n th e capital cost s exacte db y controllin g ai r pollutan t emission s giv e onl y apartia l picture ; othe r essential component s includ e th e charge s fo r

operatin g pollutio n contro l equipmen t (scrubber s an d particulat e contro l devices ) i n plant s burnin g high-sulfu r coa l an dth e incrementa l cost s o f

usin g low-sulfu r

fuel s a s amean s t o contro l emission s i n plac e o f

les s expensive , higher-sulfu r fuels . I n 1980 , thes e tw o factor s combine dentaile dan annual expens e totalin g $5. 4 billion , wit h contro l equipmen t

accountin g fo r

$4. 2 billio n an dlow-sulfu r fue l premium s account in g fo r $1. 2 billion . B y th e yea r 2000 , cost s o f

thes e tw o component s ar e expecte dnearl y t o triple , reachin g an annual tota l o f $14. 1 billion . Expresse di n term s o f

averag e generatin g charge s pe r kilowatt-hou r fo r al l form s o f

electricit y generation , thi s $5. 4 billio n i n 198 0 break s dow n

7 . Gar y Rutledg e an dothers , "Capital Expenditure s b y Busines s fo r Pollutio n Abatement, " Surve y o f Curren t Business , U.S . Departmen t o f Commerc e (Jun e 197 8 an dJun e 1980) .

1 5int o a n averag e o f

2.3 4 mill s per

kilowatt-hour * Th e averag e charg e i n 198 0 to residential consumer s o f electricity wa s 53. 6 mill s per kilowatt-hour . 8

/ Thus , fro mth e ratepayers 1 standpoint , th e cos t o f ai r pollutio n contro l i n 198 0 accounte dfo r

4. 4 percen t

o f a n averag e residential electricity bill . B y th e yea r 2000 , however , ratepayer s are likely t o se e an increas e o f 4 4 percent , bringin g th e cos t fo r pollutio n contro l to 3.4 3 mill s per kilowatt

hour purchased—jus t

1.0 9 mill s mor e tha n i n 1980 o r 6 percen t

o f tha t year' s electricity rate . Althoug h thi s reflect s apotentiall y shar p increas e i n operatin g cost s fo r

contro l ai r

pollution , th e averag e nationwid e contribu

tio n o f thi s expens e t o tota l futur e generatin g cost s shoul dremai n quit e small . Regiona

l cost s will diffe r

markedly , however . Regiona l Difference s i n Ai r

Pollutio n Contro l Cost s Aggregate an daverag e nationa l data , thoug h usefu l fo r polic y analysis , mas k regiona l difference s tha t

hav e very explicit

cos t consequence s fo r

both utilit y companie s an dconsumer s i n differen t area s o f th e country . (Figure s 6 an d7 i n Chapte r

V displa y th e coal-producin g an dcoal-deman dregion s o f th e Unite dStates. ) Thre e principal factor s influenc e th e regional variation s i n pollutio n contro l costs : what fue l i s burnt , wha t

stat e an dloca

l emission s standard s apply , an dth e vintag e o f mos t o f th e electricity generator s i n use . I n an are awher e alow-emission s fue l predominates^-th e Gul f states , wher e indigenou s natura l ga s i s th e primar y energ y source , are an example—ai r

pollutio n contro l cost s are negligible . Th e Ne w Englan d states , i n contrast , typif y adifferen t

situation ; there , thoug h low-emission s fuel s (mainl y oil ) furnis hmos t utilit y generation , pollutio n contro l cost s are higher becaus e o f

th e premium s pai dt o mee t rigi dloca

l emission s standard s withlow-sulfur

fuels . Th e cost s o f

air pollutio n contro l range s betwee n 3. 7 an d6. 2 mill s per

kilowatt-hou r

generate di n tha t

area . A utilit y plant' s ag e als o influence s regional difference s i n pollutio n contro l costs , particularl y with regar dt o coal-fire dplants . I n an are awher e th e majorit y o f

electricity come s fro mcoal-burnin g facilitie s tha t predat e th e firs t NSP S o f 1971 , pollutio n costs ma y b e hig h but

only modestl y so , 8 . Averag e residential consumer s o f electricit

y us e betwee n 50 0 an d1,00 0 kilowatt-hour s per

mont hi n th e cours e o f ayear ; thus , averag e electricit y bill s i n 1980 range dfro m$2 7 t o $5 4 pe r month , o f

whic h4. 4 percen t coul db e attribute dto air pollutio n control .

1 6precisel y becaus e o f th e relativ e lenienc e o f th e governin g standards . Th e Ohi o Rive r

Valley , wher e man y existin g coal-fire dgenerator s ar e no t subjec t t o eithe r

NSPS , ai r

pollutio n contro l cost s averag e 3. 9 mill s per kilowatt-hou r

fo r thes e facilities , whic hi s near th e lo w en do f

th e oil-fire d powe r plan t cost s i n Ne w England . Sinc e th e mid-1970s , mos t ne w majo r

capacity tha t

ha s bee n con structe di s coal-fired . Newe r plant s buil t

unde r th e 197 1 NSP S incu r

contro l cost s rangin g fro mahig ho f roughl y 8. 6 mill s pe r

kilowatt-hou r

i n th e Eas t an dNort h Centra l area s t o les s than 3. 2 mill s per kilowatt-hou r

i n th e wester n Mountai n region . I n som e cases , stric t loca l standard s i n several area s o f th e Wes t resul t i n cost s at

th e higher

en do f thi s range . Th e highest-cos t

electricity plant s i n term s o f ai r pollutio n contro l wil l b e thos e coal-fire dgenerator s tha t are bein g buil t

subjec t t o 197 8 NSPS , whic himplicitl y requir e us e o f scrubbers . Her e again , though , wid e variation s wil l occur , wit hemission s contro l cost s rangin g fro m5. 7 mill s t o 10. 1 mill s per

kilowatt-hour . Cost s i n th e eastern Centra l state s shoul dfal l a t th e upper

en do f th e range , aroun d1 0 mill s per kilowatt-hour , becaus e medium

- an dhigh-sulfur coal s predominat e there , necessitatin g us e o f expensiv e we t

scrubbers . I n th e Pacifi c an dMountai n regions , low-sulfu r coa l i s readil y available , permittin g utilitie s t o mee t th e rigi dfedera l standard s wit hcheaper

dry scrubbers , bringin g pollutio n contro l cost s neare r t o th e 5. 7 mill s per

kilowatt-hou r

rate .

1 7
93-28 1 0 - 8 2 -CHAPTERm . POLLUTIO N CONTRO LAN D TH E ELECTRI C UTILITIES 1 FINANCIA LCONDITIO N Th e financia l conditio n o f th e electri c utilit y industry ha s undergon e a steady deterioratio n over th e pas t

tw o decades . Year s o f inadequat e revenue s i n th e fac e o f escalatin g real cost s fo r equipment , fuel , an d financin g hav e combine dto weake n th e utilities ' economi c position . Fe w o f thes e factors , particularl y equipment an dinteres t

costs , sho w sign s o f improvin g soon , an dalthoug h only moderat e electrical capacity growt hi s expecte dthroughou t

th e remainde r

o f thi s century , th e hig hcos t o f constructio n already i s expecte dt o strai n th e financia l capacitie s o f th e industr y a t leas t throug h thi s decade . Withrespec t to th e Clea

n Ai r Act , tw o interrelate dquestion s aris e i n thi s context : o T o what

exten t ar e emission s contro l standard s mandate dunde r th e ac t responsibl e fo r

th e utilities ' declinin g financia l state ? An dconversely , o What

implication s d o th e utilit y industry' s poo r financia l pro spect s hav e fo r

th e federa l government' s futur e pursui t o f clea n ai r policy ? I n othe r

words , wil l afinanciall y weakene dpowe r industr y provid e an adequate instrumen t fo r carryin g ou t

th e nation' s clea

n air policy ? Emission s contro l standards , becaus e o f thei r attendan t

hig h capital cost s t o electri c utilities , hav e ofte n bee n cite da s contributor s t o th e financial pressure s th e utilitie s are feeling . Availabl e evidenc e suggests , however , that , thoug h capital investmen t i n ai r pollutio n contro l probabl y doe s no t enhanc e autility' s financia l performance , i t probabl y canno t

b e blame dfo r

impairin g i t

either . Instead , th e mos t influentia l determinant s o f autility' s financia l conditio n appea r t o b e th e regulation s impose do n th e industry b y stat e publi c utility commission' s (PUCs)--th e rate-settin g bodie s withi n eac h state—an dmanagemen t decision s mad e b y aparticular fir m( a facto r tha t i s difficul t

t o gauge) . Thi s chapte r attempt s t o asses s th e relativ e influenc e o f

emission s regulation s o n th e utilities ' financia l perfor

mance , measure dher e a s credi t worthiness ; i n s o doing , i t explore s reason s why PU C rate-makin g decision s can overwhel mother influences . FINANCIA LCONDITIO N O FTH E INDUSTR Y AN D REGULATIO N B Y PUBLI C UTILIT Y COMMISSION S Amon g severa

l factors , th e continue dslo w erosio n o f adequat e reve nue s an dth e increase dcost s an ddifficult y o f obtainin g capital are stron g 1 9contributor s t o ageneral deterioratio n o f th e powe r

industry' s financia l health . Althoug h th e situatio n differ s markedl y amon g individual com panies , actua l rate s o f

retur n are generally belo w allowe drate s an deve n farthe r belo w th e actual cost s o f equity . I n 1980 , actual return s o n equity wer e abou t

11.5 percent , whil e allowe dreturn s wer e i n the 1 4 percent rang e an dth e cos t

o f capital abov e 1 6 percent . Investor s hav e responde dto thes e trends . A n averag e share o f commo n stoc k

fo r th e 10 0 larges t

privatel y owne dutilitie s solda

t abou t 7 5 percen t

o f boo k valu e b y th e en do f

1980 . A s aresult , utility management s ar e reluctan t t o ente r equity market s t o see k ne w capital , sinc e ever y shar e solddilute s th e valu e o f th e share s o f present stockholders . Deb t

market s are similarl y constrained , sinc e require

ment s fo r interes t coverag e ba

r man y companie s fro mthi s sourc e o f capital . (Utilities ' interes t

coverage , whic hi s th e rate s o f tota l earning s t o tota l interes t charges , a s agenera

l rul e i s prohibite dfro mfallin g belo w two) . T o alarg e extent , th e PUCs ' rate-makin g decision s hav e exacerbate dthes e problems . Treatmen t

o f Capita l an dFue l Cost s Accountin g procedure s uniqu e t o th e industry an dimpose db y PUC s hav e contribute dt o th e financia l difficultie s o f utilities , chiefl y throug h regulation s tha t

increas e th e cost s an drisk s o f capital investment . Typi

cally , autility ma

y include i n it s rat e bas e only th e cost s o f thos e facilitie s that th e PUC s defin e a s "usedan duseful" , meanin g that th e cost s fo r

ane w powe r plant—onc e requirin g fro mfiv e t o eight year s o f

constructio n an d no w requirin g fro meight t o 1 2 years—canno t

b e recoupe dunti l th e plan t begin s operation . T o offse t th e cost s o f

buildin g ane w plant , an electri c utility fir m usually i s grante da

n "allowanc e fo r

fund s useddurin g construction " (AFUDC ) account . Thi s account represent s areturn—generall y equa l t o th e company' s approximat e cos t o f capital—o n al l "constructio n work i n pro gress " (CWIP) . Eac h year , th e AFUD C account i s treate da s par t

o f th e firm' s ne t income , thoug h i t

doe s no t represen t

real cas h flow . Only whe n th e plan t i s completed , an dth e AFUD C account i s adde dt o th e plant' s tota l rat e base , can th e utility realiz e aretur n o n it s investment . Befor e plan t operatio n begins , however , th e cost s o f constructio n mus t

b e born e solel

y b y th e company . Sinc e an AFUD C accoun t represent s noncas h income , i t can lowe r

th e quality o f actual earnings . Furthermore , i t can degrad e th e marke t valu e o f th e firm' s stock , puttin g upwar dpressure o n th e cost s o f capital . Figur e 2 show s trend s i n both th e amoun t o f AFUD C representin g incom e an dth e rati o o f marke t pric e t o boo k

valu e i n stock s o f

th e investor-owne d

2 0Figure 2 .



## Financia l Trend s i n Investo rOwne d Electri cUtilitie s Accordin g t o Tw o Measures : 1970-198 0 Allowanc e fo rFund s Use d Durin g Constructio n a s a Percen t o f Ne t Incom e Rati o o fStoc k Marke t Pric e t o Boo k Valu e (Moody's ) 5 0 4 0 3 0 2 0

> I I I I I I J I 14 0 12 0 10 0 * 

## i '- 8 0 6 0 40 - V I I I I I I 197 0 197 2 197 4 197 6

Year s 197 8 198 0 197 0 197 2 197 4 197 6 Year s 197 8 198 0 SOURCE : Adapte d b yCB O fro m H . L . Culbreath , "A n Overvie wo f th e Financia l Difficultie s o f th e Electri c

Utilit y Industry, " Statemen t b yEdiso n Electri c Institut e befor e th e Hous e Committe e o n Energ y an d Commerce , Subcommitte e o n Energy , Conservatio n an d Powe r( 6 Apri l 1981) . utilities—tha tis , th e majority o f utilities . I n 1980 , AFUD C accounte d fo r 4 6 percentof

reporte d after-ta x income ; thre e years earlier , th e compar able figur e wa s 3 0 percent . I/ Unlik e capital expenditures , escalatin g fue l cost s may b e quickl y recovere d tindermos tPU C regulations . Mor e than half of th e nation' s PUC s provid e an automati c fue l adjustmentclaus e to utilitie s withi n thei r jurisdictions . 2

/ Underth e fue l adjustmen tprovisions , all o ratleas ta majo rpar to f

th e costincreases o f

fuel s may b e reflecte d immediatel y i n highe rrate s to consumers , wit h n o need fo rahearing o rothe radministra tiv e procedure . Thes

e provisions effectivel y protectutilitie s againstth e risks of reduce d revenue fro m higherfue l costs . 1 . Se e Statementof

H.L . Culbreath , fo rth e Ediso n Electri c Institute , "A n Overvie w o f

th e Financia

l Difficultie s o f

th e Utility Industr

y an d th e Impacton the Fundin

g of Necessar

y Futur e Construction, " given April 6 , 1981 , befor e th e U.S . House o f Representative s Committe e o n Energ y and Commerce , Subcommitte e on Energy , Conservation , and Power . Se e National Associatio n o f Regulatory Utilit y Commissioners , "197 9 Annua l Repor to n Utilit y and Carrie rRegulation " (Octobe r1980) .

2 1Th e combine deffec t o f detrimenta l regulatory treatmen t o f capital investment s an dadvantageou s fue l adjustmen t clause s i s t o discourag e replacemen t

o f expensiv e oil

- an dgas-fire dcapacity an dolder coal-burnin g facilities 9 typicall y meetin g standard s mor e relaxe dtha n th e curren t NSP S (se e Chapte r

n) . Th e short-termresul t i s tha t constructio n o f

capital

intensiv e ne w plants , whic hare cleaner burnin g an dmor e efficient , i s delaye do r

postpone dindefinitely . Thes e twi n outcome s d o littl e t o furthe r th e federa l objective s o f establishin g areliabl e futur e electricit y supply an d increasin g th e us e o f

coal . CONTRIBUTIO N O FAI RPOLLUTIO N CONTRO LCOST S T O INDUSTR Y CAPITALEXPENSE S I n par t becaus e o f

increase ddeman dfo r

electricity , delay s i n con struction , an dstee p rise s i n inflation , th e utilities ' expenditure s fo r powe r plan t constructio n hav e rise n sharpl y ove r th e las t decade , exacerbatin g th e capital-intensiv e natur e o f th e industry . Though th e tota l capacity growt h o f approximatel y 29 1 gigawatt s i n ne w coal-fire dan dnuclea r capacity expecte dover

th e nex t 2 0 year s i s only moderate , th e hig h cos t o f powe r plan t constructio n wil l severel y strai n th e industry . 3/ In 1970 , electri c utilitie s spent

roughl y $1 1 billio n (i n nomina l dollars ) fo r ne w equipment ; b y 1980 , annual expenditure s fo r ne w equipmen t

hadexceede d$29 billion . Thi s 16 0 percen t

increas e i n annual capital investment , however , augmente d tota l capacity b y only 4 0 percent , an dthi s tren di s expecte dt o continue . B y th e yea r 2000 , expandin g electrical capacity i s expecte dt o entai l capital investment s o f

mor e tha n tripl e th e 1980 leve l (i n nomina l dollars) , thoug h capacit y i s anticipate dto increas e b y only 4 4 percen t overall . Ai r pollutio n contro l cost s are partiall y responsibl e fo r thes e escala

tions . I n 1971 , coal-fire dpowe r plant s (equippe donly wit hcontrol s fo r participat e emissions ) cos t a n averag e o f

$21 0 per

kilowatt

(i n nominal dollars) . In 1980 , capital cost s hadrisen t o approximatel y $1,10

0 pe r kilowatt fo r afacilit y using we t

scrubbin g an dt o approximatel y $1,00 0 per kilowatt fo r afacilit y usin g dr

y scrubbin g (i n nominal dollars) . (Chapter I I describe s thes e processes. ) Thi s represent s areal cos t increas e o f

betwee n 15 0 t o 18 0 percent . O f

thi s total , air

pollutio n contro l requirement s ar e responsible for

approximatel y 2 5 percent , an dcos t escalation s i n basi c material s an dconstructio n account fo r th e remainin g 7 5 percent . 3 . The breakdow n o f

thi s projecte dtota l ne w capacity i s 16 8 gigawatt s o f coal-fire dgeneratio n an d12 3 gigawatt s o f nuclea r power .

2 2Th e Congressiona l Budget Offic e ha s estimate dthat deferrin g invest

ment s that

woul db e mad e to mee t th e NSP S o f

197 8 woul dsav e th e industry some $19. 4 billio n betwee n 198 0 an dthe yea

r 2000 . Thi s saving s woul d represent only abou t

6 percent

o f th e estimate d$320 billio n neede dfo r ne w coal-fire dandnuclea

r capacit y over the perio dand1 1 percent o f thos e expenditure s neede dsolel y for ne w coal-fire dcapacit

y ($17 6 billion) . 4

/ TH E EFFEC T O FAI RPOLLUTIO N CONTRO LCOST S O N TH E ELECTRI C UTILITIES ' FINANCIA LPOSITION Th e aggregate cost s o f air pollution , thoug h high , appea r no t to b e generall y responsibl e fo r th e utilities ' worsenin g finance s o r fo r thei r difficultie s i n raisin g capital . Th e CBO' s analysi s o f thi s issue , using bon d rating s a s ameasur e o f creditworthiness , lead s t o th e conclusio n that th e marke t perceive s utilitie s that hav e investe di n pollutio n contro l t o hav e muc hth e same financial soundnes s a s th e genera l populatio n o f

electri c utilities . I n a n attemp t

t o quantif

y th e effect s o f

pollutio n contro l investmen t o n financial integrity , th e CB O compare dbon drating s o f th e 10 0 utilitie s liste db y th e investmen t fir mSalomon Brother s agains t tw o subgroup s (se

e Tabl e 3) . &

/ Th e firs t

o f th e subgroup s i s asampl e o f 2 9 utilitie s that

had 1 5 percent

or more (that

is , ahig h proportion ) o f their construetion-work-in

progres s account s dedicate dto environmental contro l equipmen t i n 1979 * Th e othe r

subgroup , representin g utilitie s with significan t investment

i n flu e ga s desulfurizatio n technology , consist s o f 2 1 companies , eac h wit ha t leas t on e scrubber

syste mi n operation . Bot h o f th e subgroup s i n CBO f s analysis—tha

t is , thos e utilitie s wit

h substantial financial commitment s t o pollutio n control—ranke dgenerall y bette r i n term s o f

bon drating s tha n di dth e general populatio n o f 10 0 utilities . I n fact , th e scrubber grou p ranke dbest , wit h6 2 percen t o f rating s a t o r abov e th e straight

"A " ratin g (show n i n th e tabl e a s A/A) . Nex t i n 4 . Thes e dat ad o no t

reflec t cost s o f transmissio n an ddistribution . 5 . The Salomo n Brother s ratin g designation s represent acompilatio n o f bon drating s se t

b y other

investmen t

firms , specificall y Moody' s an d Standardan dPoor's ; henc e th e dua l appearanc e o f

th e Salomo n Brother s listings . A Salomo n Brother s "AAA/Aaa " listing reflect s Standardan d Poor' s AA A bon dratin g an dMoody' s Aa arating .

2 3order wa s the group with 1 5 percent o f construction-work-in-progres s investment s devote dt o environmental commitments . Th e genera l popula

tio n hadth e lowes t

distributio n rate dabov e A , with only 3 8 percent o f rating s highe

r tha n th e straight

A rating . I n both cases , th e deviatio n o f th e subgroups ' distribution s fro mtha t o f th e genera

l populatio n are significant , suggestin g that

pollutio n contro l investment s are mor e readil y undertake n b y financiall y sounde

r utilities . Usin g asecondanalytical approach , however , base do n arando msampl e o f utilitie s fro mth e genera l populatio n o f 10 0 firms , th e CB O foun dn o statistical correlatio n betwee n bon drating s an dth e rati o o f

tota l investmen t

fo r construction-work-in-progres s t o th e portio n devote dspecificall y t o environmental control . T o asses s whethe r

environmental contro l cost s hadaffecte dth e statu s o f bon drating s over

time , rathe r

tha n only measure th e rating s a s o f a specifi c date , th e CB O als o conducte dachec k o f bon drating s between 197 8 an d1980 . In a

n examinatio n o f

th e same thre e group s displaye di n Tabl e 3 , n o significan t

patter n o f

ratin g change s emerged . Th e only group tha t had n o upgrading s durin g that perio dwa s th e scrubber group , i n whic h thre e firm s withbon drating s belo w th e A leve l wer e downgrade db y on e point o r more . Thi s same group , however , als o containe dsome o f th e highes t

rate d electri c utilities . Th e abov e result s sugges t tha t factor s other

tha n pollutio n contro l investmen t

may mor e strongly influenc e th e utilities ' financial healt h a s measure db y bon dratings . Regulation s enacte db y publi c utility commis

sion s appea

r t o b e astron g influence . Accordin g t o variou s investigation s (includin g anothe r

CB O study 6/) , unfavorabl e regulations—thos e tha t pro hibi t o r dela y adequate retur n o n capital investment—ca n b e majo r factor s i n determinin g lower

bon dratings , leadin g i n tur n t o higher financin g costs . On e analysis , fo r

example , reporte dthat

9 0 percent

o f th e utilitie s wit hlo w bon dratings—betwee n A an dBB B a s se t b y Standardan dPoor's—ar e outsid e o f

jurisdiction s describe da s havin g "ver y favorable " regulatory climates . 7/

At th e sam e time , only 1 3 percen t o f thos e utilitie s with stron g bon dratings , a s hig h a s A A o r A AA , wer e foun dt o b e withi n th e jurisdiction s wit hPUC s though t t o hav e "unfavorable " regulations , a s asses se db y fiv e investmen t

firms . 6 . Se e forthcomin g CB O pape r o n regulatory reform . 7 . Se e Peter

Navarro , "Electri c Utilit y Regulatio n an dNationa l Energ y Policy, " Regulation , America n Enterpris e Institut e Journal o n Govern

men t an dSociet

y (January/Februar y 1981) .

24TABLE 3 . BON D RATIN GDISTRIBUTIO N O F10 0 RATE D ELECTRI C UTILITIE S AN D SAMPL E SUBGROUP S WITH INVESTMENT S I N ENVIRONMENTA LCONTRO L(Percent distribution ) Bond Rating s a / (Salomo n All 10 0 Electri c Brother s Utilitie s wit h Bond Compilations ) Rating s Top 2 9 Utilitie s wit hMinimu mo f 1 5 Percent

o f CWIP b / Fund s Dedicate dt o Pollutio n Contro l 2 1 Utilitie s

with Scrubber s i n Operatio n Aaa/AA A Aaa/A A o r Aa/AA A Aa/A A Aa/ A o r A/A A A/ A A/BB B or Baa/ A Baa/BB B Baa/BB B or Lower 1 1 2 6 1 0 3 2 8 1 9 3 Non e

3. 4 3 1 10. 3 3 1 3. 4 20. 7 Non e 4. 8

4. 8 38. 1 14. 3 28. 6 Non e 9. 5 Non e SOURCES : Salomo n Brothers , Industry Analysis , "Electri c Utilit y Commo n

Stoc k Marke t Data " (Marc h2 , 1981) ; U.S . Departmen t o f Energy , Statistic s o f

Privatel y Owne dUtilitie s i n th e Unite dState s (October 1980) ; Environmental Protectio n Agency , EP A Utilit y FG D Survey ; October-December 1980 (Februar

y 1981) . a . Doubl e listing s represen t arange . b . Fundin g fo r

constructio n work

i n progress .

2 5 93-28 1 0-82- 7Mitigatin g Factors—Federa l an dState Provision s I f th e conclusio n derive dfro mth e foregoin g analysi s i s correct—tha t investment s i n pollutio n contro l d o no t adversely affec t

th e financial performanc e o f

utilit y companies—the n i t i s reasonabl e t o as k

wh y not . What factor s ca n mitigat e th e hig hcost s o f effort s t o mee t

emissio n standards ? Th e CB O ha s explore dtw o area s i n whic hmitigatin g factor s can b e found : federa l ta x provisions , an dcertai n aspect s o f federa l an dstat e regulation s o n ratemakin g tha t specificall y mak e allowance s fo r environ

menta l contro l costs . Several federa l ta x program s tha t appl y t o th e utilitie s wor k t o eas e th e burde n o f

pollutio n contro l costs . Thes e includ e accelerate ddeprecia

tio n allowance s (als o calle drapi damortizatio n allowances) , an investmen t ta x credit , th e availability o f industria l developmen t bond s (IDBs ) t o financ e pollutio n contro l hardware , 8 / an dth e routin e tax treatmen t o f expendi

ture s fo r workin g hardwar e a s tax-deductibl e busines s expenses . Unde r th e accelerate ddepreciatio n provisions , whic heffectivel y con stitut e ata x subsidy , apowe r compan y wit hageneratin g plan t tha t ha s bee n i n operatio n sinc e befor e 197 6 may clai mdepreciate dvalu e fo r an y pollutio n contro l improvemen t

applie dt o tha t

plan t ove r a60-month period , eve n thoug h th e actua l usefu l life o f th e improvemen t

ma y b e considerabl y longer . Couple dwit hthi s provision , an investmen t tax credi t

o f 1 0 percent , grante dunder

th e Ta x Refor mAc t

o f 1978 , ca n b e use dwit hth e rapi d amortizatio n provisions , unles s IDB s (discusse di n mor e detai l below ) are use dt o financ e expenditures , i n whic hcas e onl y a5 percent tax credi t

can b e applied . Thes e specia l provisions , helpin g olde r utilitie s t o financ e pollutio n contro l efforts , ca n enhanc e short-ter mrevenue s an doffse t overal l financin g costs . Anothe r avenu e offerin g considerabl e ta x advantage s t o ne w utilitie s investin g i n pollutio n contro l i s availabl e throug h th e us e o f IDBs . Issuedfo r apubli c purpos e eithe r b y stat e o r

municipa l government s o r b y local industrial developmen t

authorities , IDB s fo r

pollutio n abatemen t

ca n furnis h long-ter mfinancin g o n whic hth e interes t t o buyer s i s tax-free . Thi s las t featur e allow s aprojec t

finance dwit han ID B t o cos t th e bon dissue

r les s i n interes t tha n i f ataxabl e for mo f

financin g wer e used . Whe n th e proceed s fro mabon dissue g o towar dapollutio n contro l system , th e ownin g fir m pay s al l principa l an dinteres t t o th e bondholders , ofte n throug h leas e agreements . I n effect , n o municipa l mone y i s involve di n suc h atransaction . 8 . Thes e are sometime s calle dpollutio n abatement revenu e bonds . 2 6I f

th e municipalit y doe s guarante e paymen t t o th e bondholders , th e IDB s ar e considere dgenera

l obligatio n bond s o f

th e municipality , wherea s n o suc h guarante e classifie s th e bond s a s revenu e issue s tha t depen dupo n th e fund s generate db y th e benefitin g firm . Utilitie s appea

r t o hav e relie dmor e heavil y o n thes e IDB s tha n hav e any othe r

industries ; betwee n 197 1 an d1978 , som e 5 2 percen t o f al l pollutio n abatemen t

revenu e bon dmonie s wen t t o utilities . Th e averag e cos t o f IDB s fo r pollutio n contro l hardwar e issue dfo r th e benefi t

o f thes e sam e utilitie s wa s 5.9 7 percent , whil e th e averag e cos t o f long-ter mdeb t t o utilitie s fo r

th e year s 197 1 throug h 197 8 wa s 7.98 . Thus , th e cos t o f capita l fro mthi s for mo f

financin g wa s lowere db y Z.0 1 percentag e points . Altogether , th e us e o f

thes e specia

l tax allowance s an dIDB s (o r othe r simila r revenu e bonds ) can reduc e utilities ' pollutio n contro l cost s signi

ficantly . A recen t

stud y tha t

examine dpollutio n contro l cost s fo r electri c utilitie s i n aportio n o f th e Ohi o Rive r

Valle y showe dtha t

ai r pollutio n contro l expenditure s coul db e reduce db y a s muc ha s 1 8 percen t throug h ful l exploitatio n o f

thes e variou s allowances . 9 7 Othe r provisions , notabl y certai n federa l an dstat e rate-makin g rule s o n pollutio n contro l investments , can als o b e credite dwit harol e i n easin g th e burde n o n utilitie s o f investin g i n pollutio n contro l hardware . Bothth e Federal Energ y Regulatory Commission—whic hregulate s interstat e electri

cit y rates—an dmor e tha n hal f o f al l it s stat e counterpart s (th e publi c utilit y commissions , whic hregulat e intrastat e rates ) allo w utilitie s t o collec t aretur n o n par t

o f o r al l investment s fo r

environmenta l construc tion-work-in-progress . 10 / (Thi s allowanc e i s distinc t fro mth e PUCs 1 typica l prohibitio n agains t

recovery o f

general constructio n costs , whic hutilitie s canno t incorporat e i n thei r

rat e base s unti l afte r

th e plan t

begin s operation. ) Th e advantag e o f

thi s allowanc e i s tha t

i t yield s actua l cas h earning s fo r utilitie s o n asset s bein g constructed ; i t als o obviate s th e creditin g agains t incom e o f

anoncas h allowanc e fo r fund s use ddurin g construction—a n accountin g metho dtha t can erod e earning s an dhenc e stoc k an dcredi t ratings . I n general , th e chargin g o f construction-work-in-progres s i n th e rat e bas e ca n resul t

i n lowe r capita l cost s t o th e utilit y an dlowe r lifetim e 9 . Se e JAC A Corporation , "The Economi c Impac t o f Regulatin g Ai r Pollutio n i n th e Ohi o Rive r Valley, 1 1 draf

t report prepare dfo r

th e Nationa l Commissio n o n Air Quality (Decembe r

1980) . 10 . Se e Nationa l Associatio n o f Regulatory Utilit y Commissioners , "197 9 Annual Report. "

27electricity cost s t o th e consumer , ll / (Thi s subjec t

i s discussedi n greate r detai l i n Appendi x C. )

11 . Thi s discussio n i s confine dto allowance s already i n existenc e befor e enactmen t

o f th e Economi c Recover y Tax Ac t o f 198 1 (P.L . 97-34) . Th e potential benefit s o f th e ne w law , whic hinclude s mor e liberalize d depreciatio n allowances , o n utilit y finance s an dcas h flo w hav e no t bee n include di n thi s analysis . Fo r adiscussio n o f

potentia l benefits , se e Donal dW . Kiefer , "The Impac t o f th e Economi c Recover y Tax Ac t o f 198 1 o n th e Publi c Utilit y Industry, " Congressional Researc h Servic e (January 15 , 1982) . 2 8CHAPTE RIV . PROMOTIN GRELIANC E O N COA LAN D TH E EFFECT S O FTH E CLEA N AI RAC T A majo r goal o f U.S . energ y polic y t o foste r th e nation' s independenc e fro mforeig n oi l supplier s i s t o promot e th e burnin g o f coa l i n electri c powe r generator s instea do f

oi l o r gas . Althoug hth e Unite dState s hold s aful l 3 1 percen t o f th e world' s recoverabl e reserve s o f coal , combustio n o f

tha t fue l furnishe s only abou t

one-half o f th e nation' s electricity , wit h oi l an dga s providin g som e 2 6 percent . (Nuclea r an dhydroelectri c powe r accoun t fo r th e balance. ) Thus , althoug h exploitatio n o f th e coa l resourc e ha s already rise n appreciably , opportunitie s t o replac e fa r greate r quantitie s o f

oi l an d ga s stil l exist . Bothth e Energ y Supply an dEnvironmenta l Coordinatio n Ac t (ESECA ) o f 1974 an dit s successor , th e Powe r Plan t an dIndustrial Fue l Us e Ac t (PIFUA ) o f

1978 , wer e specificall y designe dto reduc e oi l an dga s consump tio n i n both ne w powe r

plant s an dolder

facilitie s already capabl e o f burnin g coal . Under

th e latte r

legislation , th e PIFUA , th e federa l governmen t ca n order tha t utilitie s operatin g generator s tha t ha dat on e tim e bee n con verte dfro mcoa

l t o oi l reconvert

thos e generator s bac k

t o coal . I n addition , utilitie s are effectivel y prohibite dfro mburnin g oi l o r ga s i n ne w majo r powe r plants . Thus , amajo r goa l o f federa l energ y polic y i s als o t o encourag e th e accelerate dreplacemen t o f gas - an doil-fire dcapacity with coal-burnin g plants . Ai r pollutio n contro l policy , articulate db y th e federa l governmen t i n th e Clean Ai r

Ac t an db y stat e an dloca

l authoritie s i n thei r

ow n regulation s (stat e implementatio n plans) , can strongl y influenc e th e economic s under

lyin g th e utilities ' choice s betwee n reconversio n o f apowe r plan t o r it s replacement , an dcontinuin g to rel y o n ga s o r oil . Replacement—involvin g majo r capital investmen t

i n ne w plants , whic h are subjec t t o th e act' s 197 8 NSP S i s demonstrabl y expensive , a s indicate db y th e analysi s i n th e precedin g tw o chapters . Desulfurizin g flu e gase s b y mean s o f scrubbers , jus t on e o f th e cos t component s entaile di n meetin g th e 197 8 NSPS , i s a n expensiv e bu t

requisite technique . Reconversio n i s usuall y cheaper , sinc e i t rarel y entail s scrubbers . Reconversio n ha s it s ow n significan t costs , however , includin g th e possibl e nee dt o upgrad e th e boiler s an dburner s t o us e th e particular

coa l involved , upgrad e coal-handlin g equipment , an d modif y o r replac e participat e contro l devices . Thi s chapter

examine s th e influenc e o f th e Clea

n Air Ac t an dother factor s o n th e economi c choice s fo r utilitie s betwee n reconversion , replace

ment , o r maintenanc e o f

existin g oil

- o r

gas-fire dcapacity . Result s o f th e

29Congressional Budge t Office' s analysi s sugges t tha t th e cost s o f

reconver sio n can b e substantiall y les s tha n continuin g t o bur n ga s o r oi l i n coal

capabl e boilers ; the y als o conclud e tha t economi c benefit s associate dwit h coa l us e ar e possibl e eve n wit hful l replacement . A t th e sam e time , however , the y poin t

t o oi l price s a s astrongl y influentia l facto r i n th e cos t effectivenes s o f

turnin g t o coa

l t o generat e electricity . S o lon g a s th e growt hrat e o f

worl doi l price s remain s depressed , ful l replacemen t o f oil

an dgas-fire dcapacity ma y hav e difficult y provin g it s economi c benefit . If PREVAILIN GREGULATION S FO RCOA LCONVERSION S Distinc t fro mne w plants , whic har e uniforml y subjec t t o th e federa l NSP S o f 1978 , ol dplant s tha t

ar e candidate s fo r

reconversio n can fal l subjec t t o acomple x mi x o f federa l an dstat e regulations , includin g exemptions . Tw o type s o f reconversio n project s ar e exemp t fro mboth NSP S an dne w sourc e revie w unde r th e act' s "preventio n o f significan t

deteriora

tion " progra m(se e Chapte r n an dAppendi x A) : powe r plant s ordere dt o convert t o coa l unde r th e PIFU A o f

1978 , an dvoluntar y reconversio n o f plant s tha t

wer e capabl e o f

burnin g coa

l befor e Januar y 1 , 1976 . Mos t majo r utilit y reconversio n candidate s fal l int o thes e tw o categories . Botho f thes e type s o f

reconversion s mus t

mee t th e stat e emission s contro l require

ment s fo r

coal-fire dpowe r

plant s o f

thei r sam e vintage , o r

the y mus t compl y wit halternat e regulation s negotiate dwit hth e state s an dapprove d b y th e federa l governmen t (tha t is , th e EPA) . Al l othe r

reconversions , whil e generall y exemp t

fro mth e 197 8 NSPS , mus t underg o th e PS D ne w sourc e revie w process . Fe w i f an y reconversio n candidate s woul dfal l unde r thi s latte r category .

1 . Sinc e earl y 1981 , astron g downwar dpressure i n worl doi l price s ha s occurre di n respons e t o exces s production . Thoug hresidual oi l price s hav e falle n i n th e spo t

markets , som e b y $ 7 pe r barre l fro mthei r

peak pric e (approximatel y $3 4 pe r barrel) , long-termcontrac t price s remai n hig h(approximatel y $3 3 pe r barrel) . Analyst s anticipat e tha t revive d economi c growt hi n th e Unite dState s an dothe r countrie s will , b y th e mid

- t o late-1980s , spu

r aresumptio n o f

risin g rate s i n worl doi l price s simila r t o thos e observe di n th e lat e 1970s . However , ho w lon g i t wil l tak e fo r oi l price s t o regai n thei r pea k level s (i n real terms ) i s unknown .

3 0COS T ANALYSIS—TH EPOTENTIA LBENEFIT S O FRECONVERSIO N O R

REPLACEMEN T COMPARE D T O CONTINUATIO N O FOI LO RGA S US E T o quantif

y an dcompar e th e economi c effect s o f Clean Ai r

Ac t regulation s o n powe r

plan t conversions , th e CB O calculate dth e annual capital an dmaintenanc e cost s o f tw o possibl e reconversio n case s an don e replacemen t

case . Th e lower-cos t

reconversio n case , requirin g n o scrubber bu t usin g low-sulfu r

coal , woul db e complete dat acapita l cos t

o f $15 0 pe r kilowatt . Th e higher-cos t example , requirin g awe t scrubbe r

t o mee t assume dstricte r

stat e standard s an dburnin g high-sulfu r coal , woul db e complete dat

acapita l cos t

o f $60 0 pe r

kilowatt . 2

/ Th e replacemen t exampl e woul drequir e acapita l cos t o f $1,160 pe r

kilowatt . (Al l case s examine dher e wer e assume dt o mee t th e applicabl e environmenta l stan dards . Th e tw o reconversio n example s ar e assume dt o mee t al l stat e an d loca l regulations ; th e on e replacemen t cas e i s assume dt o compl y wit hth e federa l 197 8 NSPS. ) Th e assumption s use di n th e analysi s reflec t upper-boun dcost s fo r both reconversio n an dreplacement . I n al l cases , a1 0 percen t rea l rat e o f interes t fo r capita l investment s wa s assumed , usin g a15-yea r perio dfo r reconversio n an da20-yea r perio dfo r

replacemen t

(accountin g fo r

th e possibl y shorte r

operatin g lif

e o f areconverte dfacility) . Th e pric e o f coa l i n al l case s wa s assume dt o ris e at area l annual rat e o f

2. 7 percent . T o allo w compariso n wit h th e cost s o f usin g oil , th e CB O als o compute dth e operatin g cost s o f oil-fire dcapacity unde r tw o differen t assumption s regardin g oi l prices . (The maintenanc e o f oil-fire dcapacit y wa s assume dt o entai l n o capital expenditures. ) On e assumptio n use dwa s n o rea l ris e i n oi l prices ; th e othe r applie daconstan t

2 percen t

rea l ris e ove r

a 20-yea r period . Th e resul t

yield s no t

only ageneral compariso n o f electricit y cost s a s determine db y fuel , bu t als o an illustratio n o f th e sensitivity o f

economi c benefit s fro mconversio n an dreplacemen t t o differ

in g behavio r

o f oi l prices . Thi s five-par t compariso n an da

n explanatio n o f al l underlyin g assumption s ar e displaye di n Tabl e 4 .

2 . Th e rang e o f

reconversio n cost s wer e obtaine dfro mplant-by-plan t reconversio n estimate s prepare db y th e Ediso n Electri c Institut e fo r us e b y ICF , Incorporated . Se e ICF , Incorporated , M APreliminary Economi c Analysi s o f

Reconversio n o f

Coa l Capabl e Utilit y Boilers, " prepare dfo r th e Ediso n Electri c Institut e (Apri l 25 , 1980) .

3 1TABL E4 . CAPITALAN D GENERATIN GCOST S FO RA 500-MEGAWAT T OIL-FIRED , RECONVERTE D OIL , AN D NEWCOAL-FIRED POWE RPLAN T I n mill s per kilowatt-hou r Capita l Annua l (In dollar s Fixe dAnnual Total Cas e pe r kilowatt ) Capita l Operatin g Fue l Generatin g A . Lo w Cos t Conversio n 15 0 B . Hig hCos t Conversio n 60 0 C . Replacemen t

1,16 0 3. 2 7. 5 26. 6 37. 3

12. 9 12. 6 19. 2 44. 7 22. 2 10. 1 19. 2 51. 5 D . E . Oi l Plan t

wit h N o Rea l Fue l Pric e Increas e Non e Oi l Plan t wit h 2 Percent Fue l Pric e Increas e Non e Non e 2. 0 48. 4 50. 4 Non e 2. 0 60. 0 62. 0

Wit heithe r

low

- o r high-cos t

plan t reconversion , th e generatin g cost s o f 37. 3 an d44. 7 mill s per kilowatt-hour , respectively , are lowe r tha n curren t oil-plant generatin g cost s o f

50. 4 mill s per

kilowatt-hour , eve n assumin g n o rea l ris e i n oi l prices . 3 / I n comparison , th e replacemen t cas e o f ane w coal-fire dpowe r plan t equippe dwit h ascrubber (havin g a generatin g cos t

o f 51. 5 mill s per

kilowatt-hour ) i s cos t

effectiv e onl y i f

oi l price s ris e b y 2 percen t

i n rea l term s ove r

th e nex t 2 0 years , resultin g i n a n oil-plant generatin g cos t

o f 62. 0 mill s per

kilowatt-hour . Th e generatin g 3 . Thes e reflec t

generatin g cost s only an dd o no t includ e th e cost s o f transmissio n an ddistribution .

3 2TABLE4 . (NOTE S O N ANALYTICA LASSUMPTIONS )

A . N o scrubber ; low-sulfu r coa l burnt ; averag e fue l cos t ove r 2 0 years , startin g a

t $3 8 per to n delivere dprice , risin g a t an annual real rat e o f 2. 7 percent ; 1 0 percen t rea l financin g cost s fo r reconversio n an d participat e emission s contro l upgrading . B . We t scrubber ; high-sulfu r

coa l burnt ; averag e fue l cos t ove r 2 0 years , startin g a

t $3 3 per to n delivere dprice , risin g a t an annual rea l rat e o f 2. 7 percent ; 1 0 percen t

rea dfinancin g cost s fo r reconversion , particu

lat e emission s contro l upgrading , an dscrubbe r retrofit . C . Ne w coal-fire dplan t wit hwe t scrubber , high-sulfu r

coal burnt ; fue l an d financin g cost s same a s Cas e B . D . N o capital outlays ; fue l cost s constant $31.5 0 per

barre l fo r

2 0 years . E . N o capital outlays ; averag e fue l cos t ove r 2 0 years , startin g a

t $31.5 0 pe r barrel , risin g at

an annual rat e o f

2 percent . SOURCE : Congressiona l Budge t Office . cos t o f ane w coa

l plan t burnin g low-sulfu r

fue l als o wa s calculated , assumin g aconstructio n cos t o f $97 5 per kilowatt . Interestingl y enough , th e resultin g generatin g cos t o f 50. 3 mill s per

kilowatt-hou r

(no t show n i n Tabl e 4 ) i s quite clos e to th e replacemen t exampl e o f

51. 5 mill s per

kilowatt-hour , whic hinclude s ascrubber . Althoug hful l powe r

plan t replacemen t

unde r thes e assumption s may no t b e economi c unles s oi l price s begi n t o ris e at som e real rat e fro mthei r 1980 level s o f

approximatel y $31.5 0 pe r barrel , i t

doe s becom e economi c eve n assumin g constan t real oi l price s i f

a6 percen t

rea l interes t

rate , rathe r tha n a1 0 percen t

rate , i s applied . For

analytical purposes , a1 0 percen t real rat e o f

interes t i s ofte n use di n assessin g effect s o f

regulation s an dwa s use di n thes e estimate s both to allo w compariso n wit h other

3 3 93-28 1 0-82- 8analyse s an dt o demonstrat e upper-boun dcosts . I n practice , however , rea l rate s o f 6 percen t

o r les s mor e accuratel y represen t tru e interes t

charge s o n capita l fo r

th e electri c utilities * INHIBITIN G FACTOR S Althoug h th e Clean Ai r Ac t appear s no t

t o b e adecisiv e facto r i n th e economi c advantage s o f reconversion , othe r

factor s d o imped e th e rat e a t whic h reconversion s ca n occur . Thes e resul t fro macombinatio n o f federa l an dnon f ederal regulations . Economi c Constraint s a t th e Stat e Leve l Underlyin g al l othe r

factor s tha t

ma y ten dt o discourag e reconversio n o r replacemen t

o f oil

- an dgas-fire dpowe r plant s ar e th e financia l conditio n o f th e individua l utilit y an drate-makin g regulation s impose db y th e publi c utilit y commission s (se e Chapte r HI) . Man y o f

th e larg e oil-consumin g utilitie s ar e i n poore r financia l conditio n tha n th e genera l utilit y populatio n an dwoul dfac e difficult y raisin g th e necessary capital . Examinatio n o f a lis t o f conversio n candidate s prepare db y th e Ediso n Electri c Institut e show s tha t onl y fou r

(22. 3 percent ) o f

th e 1 8 rate dutilitie s o n th e lis t hav e highe r tha n "A " rating s a s reporte db y both Moody' s an dStandar dan dPoor's . 4 / I n comparison , th e genera l populatio n o f 10 0 rate dutilitie s show n i n Tabl e 3 i n Chapte r ff l hav e 3 8 percen t

liste da

t rating s abov e A . Compoundin g thes e difficultie s ar e PUCs 1 decision s tha t discourag e reconversio n an dreplacemen t b y delayin g aretur n o n investmen t fo r constructio n project s bu t providing , throug h fue l adjustmen t clauses , imme

diat e relie f

fro mhighe r

fue l cost s (se e Chapte r HI) . Thes e factor s ten dt o perpetuat e dependenc e o n oi l an dgas . Th e ne t resul t o f suc h constraint s i s asystemati c bia s agains t capita l investment . A utilit y compan y tha t woul d experienc e asevere cash-flo w proble mwhil e pursuin g aconversio n projec t ma y defe r

an y suc h undertakin g indefinitely . Nonetheless , som e others , encourage db y th e eventua l prospec t o f saving s fro mburnin g coal (eve n a high-cos t

reconversio n plan t

o f 50 0 megawatt s can sav e roughl y $1. 4 millio n pe r month ) hav e tolerate dth e short-ter mfinancia l risk s an dproceede dwit h conversio n plans .

4 . Se e Salomo n Brothers , "Electri c Utilit y Stoc k Marke t Data, " Industr y Analysi s (Marc h 2 , 1981) . 3 4Administrativ e Impediment s i n th e Clean Ai r Ac t Man y o f th e problem s arisin g fro mth e Clean Ai r Ac t ca n b e charac

terize da s administrative . Mos t reconversio n project s fal l unde r individua l stat e emission s regulations , som e o f whic h ar e extremel y stric t a s aresul t o f encouragin g oi l consumptio n i n plac e o f coal i n th e 1960 s an dearl y 1970 s fo r environmenta l reasons . Utilit y companie s ma y see k t o rela x thes e state impose demission s limit s i n orde r t o cur b reconversio n costs , ofte n leadin g to lon g period s of

negotiatio n betwee n the utility , the state , andin som e case s th e EPA , whic hals o ha s authorit y t o enforc e stat e plans . T o arriv e at amutuall y acceptabl e emission s standard , th e utilit y fir mmus t submi t a detaile ddescriptio n o f

th e effect s o f

th e planne dreconversio n projec t o n ambien t ai r quality , includin g wha t measure s wil l b e take n t o contro l emissions . Th e submissio n an drevie w proces s i s time-consumin g an d require s considerabl e technica l expertise . Overall , bot h voluntar y conver sion s an dthos e mandate db y federa l regulation s ca n involv e tw o year s o r mor e o f administrativ e effor t

befor e th e star t

o f conversio n activities . Becaus e of

inflatio n anddeferra l of cheape r energy-producin g capa city , autilit y plannin g conversio n o f a500-megawat t

generato r

costin g $60 0 pe r kilowat t

can los e $3. 4 millio n amont h(i n nomina l dollars ) t o suc h administrativ e delays . Thi s may b e compare dt o th e monthl y saving s o f $1. 4 millio n (i n nomina l dollars ) obtainabl e b y tha t sam e conversion . Thus , thoug h conversio n t o coa l remain s economicall y advantageous , som e stream linin g o f th e administrativ e requirement s t o spee dimplementatio n o f conversio n plan s woul denhanc e tha t advantage . Technica l Problem s Durin g Work i n Progres s Onc e constructio n begin s o n aconversio n project , technica l problem s can slo w it s progress . Lat e delivery o f equipmen t

an dlabo r

shortage s can cos t afir msom e $3. 5 millio n amont h (i n nomina l dollars) , assumin g 3 0 percen t completio n o f

th e projec t

at th e start

o f delay (again , assumin g a 500-megawat t

plan t reconverte da t

$60 0 pe r

kilowatt) . Th e prospect s o f such delay onc e fund s hav e bee n committed—postponin g th e anticipate d saving s o f

$1. 4 millio n amonth—ca n b e particularl y discouragin g t o firm s i n ligh t o f PU C regulation s tha t

generall y prohibi t

recover y o f

capital invest

ment s fo r project s unde r

construction . TH E IMMEDIAT EPROSPECT S FO RCONVERSIO N Despit e thes e hindrances , man y conversio n project s ar e unde r wa y o r planned . I n arevie w o f

1 4 utilities , th e Genera l Accountin g Offic e reporte d

3 5tha t si x firm s wer e plannin g 2 5 reconversions , an dtw o othe r companie s ha d notifie dth e Departmen t o f Energ y that

the y plan t o reconvert fiv e additiona l units . 5

/ Conversio n o f

al l 3 0 unit s woul ddisplac e th e us e o f some 190,000 barrel s o f oi l pe r day . Potentia l fo r

eve n greate r

oi l displacemen t

i s projecte db y th e Departmen t o f Energy , whic h estimate s tha t a s man y a s 520,00 0 fewe r barrel s per

da y o f oi l o r ga s equivalent

migh t b e consume dthroug h conversions . 6 /

5 . Se e General Accountin g Office , "Financia l an dRegulatory Aspect s o f Convertin g Oil-Fire dUnit s t o Coal, 1 1 repor t t o th e Chairman , Senate Committe e o n Energ y an dNatura l Resource s (Novembe r 21 , 1980) . 6 . Se e Departmen t

o f Energy , "Fuel s Conversio n ProgramPowe r Plant Profiles " (January 1981) .

3 6CHAPTE RV . TH E U.S . COA LMARKE T AN D TH E CLEA N AI RAC T

T o whateve r

exten t th e Clean Ai r

Ac t influence s th e utilit y industry' s us e o f coal , i t may als o indirectl y affec t th e U.S . coa

l market . Th e analysi s i n thi s chapte r

assesse s tha t

indirec t bu t importan t

relationship , bot h a s i t appear s t o hav e operate dthu s far an da s i t ma y i n th e near

future . A s th e face t o f th e Clean Ai r

Ac t mos t influentia l t o utilities , an di n tur n t o th e coa l industry , th e evolvin g ne w sourc e performanc e standard s (see Chapte r n ) governin g gaseou s an dparticipat e pollutan t emission s are afoca l point o f thi s analysis . A s backgroun dfo r

evaluatin g th e act' s effect s o n coal markets , thi s chapte r give s an overvie w o f

th e natur e o f

th e coa l resourc e an dth e factor s tha t influenc e it s purchas e b y electri c utilities . Th e chapte r the n review s th e effect s seen t o dat e o f th e firs t NSP S o f 1971 . I t the n project s ho w th e mor e rigi dNSP S o f

197 8 are likel y t o influenc e th e suppl y an ddistributio n o f coa l throug h th e yea

r 2000 . TH E NATUR EO FTH E U.S . COA LMARKE T Th e electri c utilit y industry i s th e nation' s larges t user o f coal , toda y accountin g fo r

som e four-fifth s o f

al l domesti c consumption . Roughl y hal f o f al l U.S . electricity i s no w derive dfro mcoal . I n 1979 , som e 55 0 millio n ton s o f coa l wen t t o utilities ; b y th e en do f thi s century , i f

curren t emission s standard s remai n i n force , tha t figur e shoul dmor e tha n double , reachin g a n annual tota l o f

1. 2 billio n tons . V T o mee t thi s demand , coa

l productio n i n nearl y al l region s i s expecte dt o rise . Th e actual distributio n o f thi s increas e wil l probabl y no t b e uniform , however , an dth e Clean Ai r Ac t wil l hav e arol e i n alterin g th e pattern s o f growth . Despit e th e fairl y unifor mregiona l distributio n o f

th e nation' s coa

l deposits—al l bu t

afe w majo r

geographi c area s hav e at leas t some coa

l 1 . Whil e th e us e o f

coa l b y electri c utilitie s ha s bee n rising , deman di n othe r sector s o f

th e economy ha s been falling . Betwee n 197 0 an d1979 , coa l us e b y electri c utilitie s ros e som e 6 5 percen t bu t fel l i n al l othe r industries , includin g stee l making , b y acombine d3 0 percent . Residen

tia l an dcommercia l user s accoun t fo r only 1 percen t

o f al l coa l pur chases . 3 7deposits—th e marke t valu e o f coa l varie s betwee n an dwithi n regions . Tw o mai n characteristic s affec t th e valu e o f

th e delivere dpric e o f

al l coal : o Ho w i t

i s mined—whethe r

b y deep-mining , whic hi s typicall y th e costlier method , o r

b y surfac e techniques ; an d o What

distance s i t

mus t trave l fro mwher e i t

i s produce dt o wher e i t i s used . A thir dfactor—sulfu r

content—i s als o influential , thoug h o f lesse r impor

tance , inasmuc h a s th e deman dfo r low-sulfu r

coa l may b e enhance db y emission s limit s o n sulfu r dioxide . Energ y content , anothe r fuel-relate d value , ha s les s influenc e o n th e pric e o f coa l at th e min e tha n o n th e de

livere dprice , sinc e mor e volum e o f alow-energy-conten t

coa l mus t b e shippe dtha n o f

ahigh-energy-conten t

coal . Aside fro mthes e factors , whic h can influenc e delivere dprice , th e fue l valu e o f differen t coal s i s essentiall y unvaried , sinc e mos t

ne w powe r

plant s can b e designe dt o handl e an y parti

cula r coal chosen fo r

long-termconsumption . Regional Characteristic s o f Coal I n general , U.S . coa l productio n can b e divide dint o thre e regions : th e are aeas t

o f th e Ohi o an dMississipp i river s (particularly th e Appalachian region) ; th e Midwes t (fro mth e Mississippi t o th e wester n border s o f Minnesota , Nebraska , Kansas , Oklahoma , an dTexas) ; an dth e West . (Se e Figure 3. ) Withi n al l thre e regions , both deep

- an dsurface-minin g method s ar e used , thoug h t o differen t extents . I n th e East , th e choic e o f minin g metho di s roughl y equall y spli t betwee n surface

- (4 0 percent ) an ddeep

minin g (6 0 percent) . I n th e Midwes t an dth e West , however , far mor e surface

- tha n deep-minin g i s don e (see Figure 4) . Becaus e surface-minin g i s typicall y mor e productive , coa l recovere db y thi s metho dusuall y ha s a sizabl e cos t

advantag e ove r

coa l fro mdee p mines . 2

/ 2 . Th e locatio n o f

th e coa l resourc e generall y determine s th e recovery metho dused . Muc hAppalachian coa l i s burie di n seam s deep withi n mountain s o r

hills ; deep-minin g i s th e only metho davailabl e t o recove r muc ho f thi s coal . Fo r

mor e superficia l coal , larg e machine s can remov e th e overlyin g soil (overburden) , exposing th e coal . Thi s method , als o calle dstri p mining , tend s t o b e mor e productive . I n addition , becaus e o f

th e terrai n involve dan ddepth o f overburden , man y wester n surfac e mine s ar e mor e productiv e than easter n surfac e mines , thoug h othe r factors , such a s th e ag e o f th e mines , als o can influenc e • productivity . 3 8Figur

e 3 . 

### U.S . Coa l Field s an d Producin g Region s

SOURCE : Adapte d b yCB O fro m Th e President' s Commissio n o n Coal , "Coa l Dat a Book " (February , 1980) . Figure 4 . 

### Tota l U.S . Coa l Productio n b yRegio n an d Minin g Methods : 197 9 500,00 0 400,00 0

300,00 0 200,00 0 100,00 0 Surfac e Minin g Dee p Minin g

EAS TMIDWES T WES T SOURCE : Adapte d b yCB O fro m U.S . Departmen t o f Energy , Coal Production-1979

(Apri l 30 , 1981) . 3 9Th e regional patter n o f coal' s sulfu r

conten t als o varie s fro mregio n t o region , an dwithi n particular regions . Th e Eas t

contain s coals wit hsulfu r content s rangin g fro mbelo w 1 percen t t o abov e 3 percen t

b y weight . Th e Midwes t offer s littl e low-sulfu r coal ; mos t

coa l i n tha t regio n i s charac

terize db y moderate

- o r high-sulfu r

contents , generall y abov e 3 percent . Th e Wes t ha s sizabl e reserve s o f

low-sulfu r

coal ; mor e tha n three-fourth s o f al l wester n coa

l ha s asulfu r

conten t belo w 1 percent . I n contrast , th e energ y conten t

o f eastern an dmidwester n coa l reserve s i s generall y higher tha n i n th e West . Coal productio n i n th e Unite dState s ha s bee n shiftin g slowl y west ward . I n I960 , th e producin g state s o f th e Eas t accounte dfo r

9 5 percen t

o f tota l U.S . production . B y 1970 , th e East' s share o f th e marke t

ha ddecline d t o 8 5 percen t

an db y 1979 , t o approximatel y 7 5 percent . 3 / Th e reason s fo r thi s tren dar e th e hig hproductivit y o f wester n surfac e mines , th e growt h i n wester n energ y consumption , an dt o som e extent , th e increase dnation

wid e deman dfo r

low-sulfu r

coa l t o mee t

bot h stat e an dfedera l environ

menta l regulations . I n th e future , th e revise dfedera l emission s stan dards—th e NSP S o f

1978 , wit hthei r

implici t requiremen t

o f scrubber s o n al l ne w utilit y generators—ma y somewha t slo w thi s westwar dtren di n coal production , inasmuc h a s th e curren t regulation s provid e littl e i f an y economi c advantag e t o user s o f low-sulfu r

coal tha t

i s no t locall y produced . Factor s That

Influenc e Choice s o f

Coal Supply an dDelivere dPric e Althoug hcoal i s produce di n al l thre e region s o f th e country , muc h coal , particularl y wester n coal , i s shippe dt o othe r geographi c regions . Al

thoug hunde r

ideal condition s utilitie s woul delec t t o bur n local coal only , several factor s ofte n combin e t o influenc e the mt o d o otherwise . Local minin g costs , sulfu r

content , an dth e availability o f asecur e long-term suppl y ofte n promp t

utilitie s t o bu y coa

l produce di n othe r

areas , s o lon g a s the y obtai n th e lowes t

delivere dpric e fo r

th e fue l desired . Th e chie f facto r affectin g utilities ' coa

l purchasin g decision s i s th e fuel' s so-calle dfree-on

boar d(FOB ) price . Th e FO B price , coal' s counterpart t o oil' s wellhea dprice , i s it s cos t

a t th e plac e o f

production , includin g minin g an dprocessin g cost s an dproducers ' profit , bu t n o transpor t

cost . 3 . Se e Marti n B . Zimmerman , Th e U.S . Coa l Industry ; Th e Economic s o f Polic y Choice , th e MI T Pres s (1981) . Th e 197 9 figur e i s base do n th e CB O analysis .

4 0Minin g metho di s th e mos t significan t

facto r affectin g FO B costs . I n general , surfac e mine s ar e fro mtw o t o thre e time s mor e productiv e tha n undergroun dmines , an dcoa l fro msurfac e mine s ofte n sell s fo r abou t one hal f th e pric e o f

coa l fro mdeep mines . I n 1979 , th e averag e FO B valu e per to n o f deep-mine dcoa

l wa s $32.76 , whil e tha t o f surface-mine dcoa

l wa s $17.58 . 4 / T o determin e th e delivere dpric e o f aparticular

coal , however , transporta-tio n rate s an ddistance s haule dmus t b e adde dt o FO B costs . Mos t coal move s b y train . Rai l haulag e rate s generall y rang e fro m1 0 t o 3 0 mill s pe r

to n fo r eac h mil e transporte d(terme da"ton-mile") . Higher rai l rate s predominat e i n th e East , althoug h i n severa l western areas , rai l rate s hav e rise n steepl y over th e las t fe w years . A t

acos t o f 1 5 mill s per ton-mile , ahau l o f

30 0 mile s can increas e th e FO B coa l pric e b y $4.5 0 per ton . Fo r 1,000-mile hauls , $1 0 to $2 0 ca n b e adde dto th e pric e o f eac h to n o f coal . Though unusual i n th e East , wher e coa l haul s averag e 30 0 miles , 1,000-mil e haul s ar e no t

uncommo n i n th e West . Withi n aregion , coal' s delivere dpric e i s largel y afunctio n o f th e region' s predominan t

minin g method , sinc e th e valu e o f loca l coal estab

lishe s th e upper

valu e fo r

coa l shippe dfro mother

areas . Delivere dcoa l price s are highes t

i n th e East—wher e approximatel y hal f th e coa l i s mine d underground—rangin g fro m$3 7 to $4 4 per ton . Delivere dcoa

l price s i n th e midwes t are lower , rangin g fro m$1 8 t o $3 3 per ton , correspondin g t o th e greate r us e o f surface-minin g method s i n thi s area . Price s fo r coa l de

livere dto western users , where surface-minin g als o predominates , are lowest , rangin g fro m$1 4 to $1 8 per ton . 5/ Lo w minin g costs , together wit h regulation s encouragin g th e us e o f low-sulfu r

coa l (such a s stricte r

stat e standard s o n som e older powe r plant s an dth e 197 1 NSP S o n newe r units ) encourag e th e shipment o f muc hwestern coa l eastward . Mos t

coa l fro mwestern deposit s happen s t o b e lo w i n sulfu r content an dbecaus e i t

i s mostl y surface-mined , tend s to hav e lower FO B price s than eastern , deep-mine dlow-sulfu r coal . A s aresult , wester n surface-mine dlow-sulfur

coa l i s an attractiv e alternativ e to some buyer s i n th e Eas t an dth e Midwes t

i n particular . 4 . Se e U.S . Departmen t o f Energy , "Energ y Dat aReport, " Coa l Produc

tion-197 9 (Apri l 30 , 1981) . 5 . Se e U.S . Departmen t o f Energy , Cos t

an dQualit

y o f Fuel s fo r

Electri c Utility Plants—Decembe r 1980 , Monthl y Repor t

(Apri l 7 , 1981) .

4 1Severa l factor s limi t

th e deman dfo r

western coa

l i n th e Eas t

an d Midwest , however . Fo r

one , th e Eas t

(notabl y Appalachia ) hold s larg e quan titie s o f low-sulfu r

coals . Althoug h muc ho f thi s supply i s mine d(b y eithe r method ) at

ahigher cos t tha n western surface-mine dcoal , i t i s close r t o man y eastern purchaser s an dtransportatio n cost s thu s can b e lower . Fo r easter n users , th e cost s o f

shippin g western coa

l can ofte n rais e it s deliver

e dpric e abov e tha t

fo r comparabl e low-sulfu r

eastern coal . Anothe r

majo r facto r i s th e statu s o f

man y sulfu r

dioxide regulation s fo r

ol dpowe r

plants . I n man y area s o f

th e Midwest , th e absenc e o f stric t sulfu r dioxid e regula

tion s fo r man y older

powe r plants , allowin g the mt o us e indigenou s surface

mine dhigher-sulfu r

coal , obviate s th e nee dt o purchas e low-sulfu r coal fro m anothe r region . Finally , throug h th e impositio n o f astric t scrubbin g re quiremen t

o n al l coa

l use di n ne w powe r

plants , th e curren t

NSP S provid e littl e stimulu s fo r

increasin g th e import

o f low-sulfu r

coal . TH E 197 1 NEWSOURC E PERFORMANC E STANDARD S AN D U.S . COA LCONSUMPTIO N Concern s abou t

distortion s i n U.S . coa

l market s shape dth e Congress 1 revision s i n 197 7 o f

th e Clean Ai r

Act' s ne w sourc e performanc e standards . Under th e ol dNSP S o f

1971 , utility companie s could—an ddid—rel y heavil y o n low-sulfu r

coa l to mee t mandatory mas s pollutan t emission s limits . (A s state di n Chapte r

n , th e maximu mallowabl e amoun t o f sulfu r dioxide ga s emitte dfro masteamboiler fs stac k wa s 1. 2 pound s fo r

every on e millio n BTU s o f fue l burnt. ) Require donly t o mee t thi s mas s emission s limi t b y whateve r metho dwa s economical , man y utilit y manager s electe dt o burn low-sulfu r

coa l rathe r tha n instal l costl y an dstil l optiona l scrubbers ; scrubber s wer e chosen rarely , usually i n instance s i n whic hlow-sulfu r coa l wa s no t availabl e withi n areasonabl e distance . Fro mthi s apparen t

preferenc e fo r

low-sulfu r

coa l unde r regulation s promulgate di n respons e t o th e Clea n Ai r Act , th e Congres s conclude dtha t tw o relate ddistortion s i n nee do f correctio n existed : tha t deman dfo r

low

sulfu r coa l wa s gainin g a

n edg e ove

r higher-sulfu r

coal ; an dthat , accord

ingly , western coa

l coul dfloo dth e market , displacin g deman dfo r easter n an dmor e importantly , midwester n coal . Dat ao n th e tren di n demand s fo r high

- an dlow-sulfur

coa l ten dt o bear ou t thes e suppositions , bu t only partl y (see Figure 5) . Th e relativ e deman dfo r

low-sulfu r

coa l di dindee dgro w durin g th e lat e 1970s , coincident wit hth e utilities ' implementatio n o f plan s t o mee t

th e mas s emission s limit s

4 2Figur

e 5 . 

### Monthl yDeliverie s of Coa l t o U.S . Electri cUtilities , bySulfu rContent : 1974-198 0

High-Sulfu rCoa l (mor e tha n 3.0 1 percen t sulfur )

Low-Sulfu rCoa l (0.5 1 t o 1. 0 percen t sulfur )

197 4 197 5 197 6 197 8 197 7 Yea r SOURCE : Adapte d b yCB O fro m dat a provide d b yDat a Resources , Inc . a Dro p coinciden t wit h min e workers ' strike . 197 9 198 0 promulgate di n 1971 . 6 / At th e same time , th e rat e o f high-sulfur

coa l deliverie s slackened . Thoug h possibly relate dt o on e another an dreflectin g som e displacemen t

o f high

- b y low-sulfu r

coal , thes e tw o trend s canno t b e construe da s conclusiv e evidenc e o f th e Clean Ai r

Act' s effects . Othe r factor s als o hav e t o b e take n int o account . 6 . B y n o mean s shoul dth e divergenc e o f high

- an dlow-sulfu r

coa l deman d i n th e lat e 1970 s b e take n a s an y indicatio n o f th e effect s o f

th e revise d NSP S o f 1978 . Becaus e utilities 1 effort s at complianc e wit h th e revise d NSP S are stil l very muc h o n th e plannin g o r initial constructio n stages , th e 197 8 NSP S are unlikel y t o yiel dan y measurabl e effect s o n fue l market s fo r

anothe r decad e o r

more . Fa

r mor e reasonable , thoug h stil l tenuou s owin g t o an insufficienc y o f data , i s apossibl e correlatio n betwee n th e older

NSP S an dshift s i n th e coa l marke t i n th e lat e 1970 s an dearl y 1980s . Eve n so , muc h o f th e perceive dshift s may b e attri

butabl e t o tighte r

stat e regulation s unde r th e ac t limitin g th e emission s o f some olde

r powe r plant s no t

covere db y federa l emission s standards . 4 3Muc ho f th e increas e i n overal l low-sulfu r coa l deman dobserve di n th e 1970 s stemme dfro mth e larg e increas e i n low-sulfur western coa

l consump tio n als o observe ddurin g thi s period , a n increas e no t

necessaril y i n respons e t o sulfu r dioxide regulation s an dno t necessarily resultin g fro mregiona l shift s i n th e coa

l market . Thoug hconsumptio n o f western coa

l ros e b y 14 5 percent betwee n 1974 an d1979 , th e ris e ca n b e ascribe dmor e to increase d loca l consumptio n tha n t o th e attractivenes s o f wester n coal' s low-sulfur characteristic s t o distan t buyers . Durin g thos e years , annual coa l consump tio n i n th e Wes t

Sout h Central , Mountain , an dPacifi c area s alon e increase d b y 7 3 millio n tons ; th e nationwid e increas e fo r al l coal s durin g thos e year s wa s 9 4 millio n tons . (Figure s 6 an d7 outlin e th e specifi c U.S . region s o f coa l supply an ddemand , whic hare als o use di n th e coa l marke t projection s describe di n Appendi x B. ) A t th e sam e time , however , wester n coa l ship

ment s to mi dwestern consumer s i n Ohio , Illinois , an dIndian a(th e larges t user s o f western coa

l eas t o f th e Mississippi ) ros e b y only 1 0 millio n tons . 7/ Fo r th e mos t part , coal-burnin g utilitie s i n thos e state s continue dt o rel y o n loca l fuel , an do f

th e tota l increas e i n nationa l coa l consumptio n betwee n 1974 and1979 , les s tha n 1 1 percen t involve dincrease dshipment s o f western coa l t o th e thre e midwester n states . A s state dabove , mine s i n th e East , notabl y i n Appalachia , als o yiel dsignifican t amount s o f

low-sulfu r

coal . Thus , eastern supplier s to o may hav e share di n th e increase dus e o f low

sulfu r coal . Fo r th e portio n o f

low-sulfu r

western coa

l tha t wa s shippe deas t

durin g th e 1970s , minin g cost s ma y hav e bee n a s stron g a n elemen t

a s emission s regulation s i n stimulatin g it s demand . A s state dabove , muc hlow-sulfu r coal , b y virtu e o f

bein g locate di n th e Wes t wher e surface-minin g method s predominate , tend s t o incu r relativel y lo w recover y costs . Furthermore , western surfac e mine s ar e mor e productiv e tha n man y midwestern surfac e mines . I n 1979 , th e averag e FO B pric e o f surface-mine dcoa

l fro mMontan a an dColorad o range dfro m$9*7 6 to $13.1 3 per ton , whil e that

fro mIllinois , Indiana , an dOhi o range dfro m$19.2 1 to $21.1 3 per ton . 8 / Thus , thi s facto r to o may hav e contribute dt o th e increase dus e o f low-sulfu r

coa l durin g th e lat e 1970s . 7 . Se e U.S . Departmen t o f Energy , Bituminou s Coal an dLignite Distribu

tion , Calenda

r Year 197 8 (Apri l 1979) ; se e also , U.S . Departmen t o f Energy , Bituminou s Coal an dLignite Distribution , Calenda r Year 197 9 (Apri l 1980) . 8 . Se e U.S . Departmen t o f Energy , Coa

l Production-1979 .

4 4Figure 6 .



## U.S . Coa l Suppl yRegion s

Regio n Boundarie s Coa l Producin g Area s SOURCE : Adapte d b yCB O fro m ICF , Incorporated . Figur e 7 . 

## U.S . Coa l Deman d Region s 

# r \

East' \ Sout h Sout h \

Atlanti c Centra l

SOURCE : Adapte d b yCB O fro m ICF , Incorporated . 4 5Thoug hth e nationwid e deman dfo r low-sulfu r

coa l di dris e durin g th e 1970s , th e characteristi c o f low-sulfu r

conten t doe s no t

appea r t o hav e cause dtha t

fuel f s delivere dpric e t o b e significantl y higher tha n th e deliver

e dpric e fo r

high-sulfu r

coals . Throughou t

th e 1970s , th e pric e o f

bot h high

an dlow-sulfu r

coa l proceede dalon g roughl y paralle l upwar dpath s (see Figur e 8) , wit hlow-sulfu r coa l pricedonl y slightl y higher . Th e onl y anomal y i n th e pattern , als o eviden t i n th e illustratio n o f

deliverie s (Figure 5) , occurre di n 1978 , coinciden t wit hastrik e o f

min e worker s agains t

coal producers ; thoug hpronounce dan dcausin g abrief , inexplicabl e gai n fo r high

sulfu r coa l ove r low-sulfu r

coal , thi s episod e represent s onl y atemporar y disturbanc e o n th e otherwis e quit e regular cours e o f

bot h low

- an dhigh

sulfu r coa l prices . Th e fac t

o f n o significan t

differenc e betwee n th e de

livere dpric e o f

bot h coal s suggest s tha t buyers , at

leas t i n th e 1970s , wer e willin g t o pay only aslight premiu mfo r

low-sulfu r

conten t ove r th e cos t o f locall y availabl e coals . I n conclusion , thoug h increase ddeman dfo r low-sulfu r

coa l i n th e 1970 s ha s occurre droughl y simultaneou s wit himplementatio n o f utilities ' plan s t o mee t

th e 197 1 NSPS , n o fir mcorrelatio n can b e established , perhap s becaus e th e standard s hav e no t bee n i n effec t

lon g enough . Never

theless , th e perceive dpotentia l fo r futur e distortion s i n th e coa l marke t prompte dth e Congres s t o tak e preventiv e measure s i n amendin g th e Clea n Ai r Ac t i n 1977 . TH EREVISE D NSP S AN D PROJECTION S FO RU.S . COA LMARKET S B y requirin g th e installatio n o f scrubber s i n al l ne w coal-burnin g gen eratin g plants , th e revise dNSP S o f 197 8 wer e designe dt o remov e th e attractivenes s t o utilitie s o f usin g non-local low-sulfu r coal . Th e require

men t t o remov e afixe dpercentag e o f sulfu r dioxid e whe n burnin g an y typ e coal unde r

th e 197 8 NSP S wa s designe dto encourag e th e us e o f th e cheapes t coal available , usuall y alocall y produce dcoal . I n devisin g th e ne w regula

tions , th e EP A formulate dprojection s throug h 199 5 o n th e basi s o f acom pute r mode l simulation . 9/

Th e simulatio n indicate dthat , a s aresul t o f th e propose dne w standards , tota l pollutan t emission s woul db e reduce dthrough

9 . Se e ICF , Incorporated , "The Fina l Se t o f Analyse s o f

Alternativ e Ne w Sourc e Performanc e Standard s fo r Ne w Coal-Fire dPowe r Plants, " pre pare dfo r th e U.S . Environmenta l Protectio n Agenc y an dDepartmen t o f Energ y (Jun e 1979) .

4 6Figure 8 .



### U.S . Coa l Prices , bySulfu rContent : 1974-198 0 1.60 1.4 0 £1.2 0 £ B 11.0 0 iO.8 0 • 5 0.6 0 0.40 £ Low-Sulfu rCoa l

(0.5 1 t o 1. 0 percen t sulfur ) A

High-Sulfu rCoa l (mor e tha n 3.0 1 percen t sulfur )

197 4 197 5 197 6 197 7 Yea r 197 8 197 9 198 0 SOURCE : Adapte d b yCB O fro m dat a provide d b yDat a Resources , Inc . a Divergenc e coinciden t wit h min e workers ' strike . ou t th e projectio n period , an dtha t relianc e o n local coal woul dincreas e appreciably . A s par t o f areexaminatio n o f

th e NSP S o f

1978 , th e analysi s i n th e remainde r

o f thi s chapte r

attempt s t o asses s wha t effects , i f

any , th e revis

e dNSP S wil l hav e o n U.S . coa l market s throug h th e yea r 2000 . Sinc e th e ne w standard s wer e enacted , knowledg e abou t scrubbe r

costs , electricit y growth , an dcoa

l suppl y ha s increased . T o tak e accoun t o f thi s informatio n i n it s analysis , th e CB O requeste dICF , Incorporated , aconsultin g fir m specializin g i n coal-marke t information , t o examin e th e effect s o f th e 197 8 NSP S o n th e basi s o f ne w assumption s develope db y th e CBO . IC Fwa s chosen t o conduc t

th e modelin g becaus e i t operate s on e o f

th e mos t

detaile d coa l an dutilit y emission s model s available , an dbecaus e tha t mode l con tinue s t o b e use db y th e EP A an dothe r researcher s t o determin e th e effec t o f alternativ e standard s o n th e utilit y an dcoa l industries . Th e purpos e o f

th e modelin g wa s t o establis h abaselin e o f reasonabl e expectation s fo r

curren t polic y wit h regar dt o thre e set s o f issues : Wha t quantit y o f

ai r pollutan t

emission s ca n b e expecte dfro mth e utilit y secto r throug h th e year

2000 ? Wha t

ar e likel y t o b e th e annual an dcumulativ e

4 7cost s o f th e standard s limitin g thes e emissions ? An dwha t consumptio n an d regional productio n level s o f differen t coa l type s may b e anticipated ? (Thi s sam e mode l i s use di n th e analysi s i n Chapte r V I that compare s alternativ e emission s standard s fo r

sulfu r dioxide—th e mos t

influentia l emission s lim

it—agains t

thi s baselin e an dagains t eac h other. ) Th e remainde r o f thi s chapte r focuse s o n tw o aspect s o f th e thir dissue : What typ e o f coa l i s likel y t o b e use dwithi n eac h consumin g region , an dwher e wil l tha t coa l originate ? Th e analysi s i s base do n th e assumptio n tha t th e curren t

NSP S wil l remai n i n force . (Appendi x B detail s th e assumption s an dth e methodolog y used. ) I n th e yea

r 2000 , th e majorit y o f projecte dne w coal-fire dcapa city—tha t

is , plant s subjec t

t o th e curren t

NSPS—will b e i n th e Wes t Sout h Centra l are aan dAtlanti c seaboardstates . Almos t 10 0 gigawatt s (6 0 percent ) o f

th e 16 8 gigawatt s o f

ne w coal-fire delectri c capacity antici

pate dwil l b e locate di n thes e area s (se e Tabl e 5) . Th e are asee n t o experienc e on e o f

th e lowes t

growt h rate s i n ne w coal-fire dcapacity i s th e southern Midwes t

(encompassin g th e Eas t Sout hCentra l area) ; th e sizabl e commitmen t

t o ne w nuclea

r powe r i n tha t regio n wil l ten dt o lowe r th e Midwest' s growt hi n coal-fire dcapacity , thoug h recen t nuclea r plan t cancel

lation s may resul t

i n greate r

projecte dcoal-fire dcapacity . Wit hregar dt o th e sulfu r conten t o f coa l burn t b y ne w plant s subjec t t o th e curren t

NSPS , th e patter n o f

overal l consumptio n establishe dlat e i n th e 1970 s i s expecte dto continue . Low-sulfu r coa l (generatin g les s tha n 1. 2 pound s o f sulfu r dioxid e pe r

millio n BTUs ) i s projecte dt o mee t roughl y 6 0 percen t o f al l ne w coal-fire dutility deman db y th e yea r 2000 . Muc ho f

tha t consumptio n i s seen t o occu r i n th e Mountai n an dWes t Sout h Centra l region s (3 6 percent) , wher e low-sulfu r coa l naturall y predominates ; an dth e Sout hAtlanti c regio n (2 4 percent) , wher e low-sulfu r coa l i s availabl e fro m Centra l Appalachia . Hence , th e low-sulfu r coal consume di n thes e region s wil l com e largel y fro mlocal supplies . I n th e East , North , an dSout h Centra l area s o f th e Midwest , however , wher e low-sulfu r coa l i s no t mined , low

sulfu r coa l wil l supply approximatel y 6 0 percen t o f th e regional deman di n th e year 200 0 i n powe r

plant s covere db y th e NSPS . Mos t o f thi s suppl y wil l probabl y com e fro mth e West , indicatin g a n accelerate dtren dtowar d wester n coal supplies . Th e growt hi n midwester n coal productio n (se e Tabl e 6) , however , als o indicate s tha t man y ne w powe r

plant s wil l choos e t o burn th e locally produce dhigh-sulfu r coal unde r

th e NSPS . Thre e wester n area s ar e projecte dt o experienc e significan t increase s i n tota l coa

l production . I n th e Rocky Mountai n states , productio n i s seen t o ris e b y 57 8 percent ; i n th e Southwest , i t shoul dris e b y 46 8 percent ; an di n th e Western Norther n Great Plains , b y 26 8 percent . Thes e sizabl e growt h rate s ar e attribute dpartl y t o consumptio n b y user s i n th e Wes t an dWes t

4 8TABL

E 5 . PROJECTE D REGIONA LGROWT H IN COAL-FIRED ELECTRICITY , T O YEA R200 0

Regio n Total 20-Yea r Growt h i n Coal

Fire dCapacity (In gigawatts ) Total Projecte d

Annua l Coal Con

sumptio n (In million s o f

tons ) Percen t

Increas e i n Consumptio n fro m197 9 Eas t (Ne w Englan d an dMiddl e an d Sout h Atlantic ) 44. 2 29 0 11 0 Eas t Nort h Centra l 25. 5 24 1 5 0 Eas t Sout h Centra l 3. 6 8 8 2 3 Wes t Nort h Central 11. 8 13 4 8 2 Wes t Sout h Centra l 54. 2 27 5 53 5 Wes t (Mountai n andPacific ) 25. 0 14 6 13 4 Total 164. 3 1,17 4 11 4 SOURCE : CBO/IC Fanalysis . Sout h Centra l regions , an dpartl y t o increasin g deman di n th e Midwes t an d East . I n th e yea

r 2000 , wester n coa

l wil l supply approximatel y 2 1 percen t o f al l coa l burn t b y both ne w an dol dutilitie s eas t o f th e Mississippi . Th e majorit y o f

coa l use di n thes e areas , however , wil l stil l b e supplie db y mid

wester n an deastern (primaril y Appalachian ) producers . Thes e dat aindicat e som e importan t trend s i n coa

l markets . Mos t important , coa

l productio n i s seen to ris e i n al l U.S . regions , mos t notabl y i n th e wester n areas . Th e exceptio n i s Southern Appalachia ; aslowin g o f pro ductio n i n Appalachi ai s t o b e expected , sinc e thes e eastern reserve s hav e bee n mine dfo r

longe r period s an dare declinin g i n productivity . Als o importan t

i s th e increasin g amoun t o f western coa

l shippe deas t b y th e yea

r 2000 . I n 1979 , eastwar dshipment s o f western coa

l are esti

4 9TABLE 6 . REGIONA LCOA LPRODUCTIO N FO R197 9 AND PROJECTE D T O THE YEA R200 0 (In million s o f ton s per year) Regio n Northern Appalachi a Centra l Appalachi a Souther n Appalachi a Midwes t Central Wes t Gul f Easter n Northern Grea t Plain s Western Northern Grea t Plain s Rock y Mountain s Southwes t Northwest

/ Alaska Total Tota l Western Coa

l Shippedto Easter

n Utilitie s SOURCE : CBO/IC F Bas e Year Productio n (1979 ) 18 7 21 3 2 4 13 1 1 4 2 6 1 4 10 4 2 7 2 5 5 77 0 22a / analysis . a / Estimate obtaine dfro mdat ai n an dSubbituminou s Coa l an d Total Projecte d

Annual Productio n 33 1 342 2 1 25 2 1 7 11 9 44 38 3 18 3 14 2 3 3 1,86 7 12 7 Percent

Increas e 7 7 6 1 -1 3 9 2 2 1 35 8 21 4 26 8 57 8 46 8 56 0 14 2 47 7

U.S . Departmen t

o f Energy , Bituminou s Lignit e Distribution , Calenda r Yea r 1979 . 5 0mate dt o hav e bee n some 2 3 millio n tons ; b y th e year 2000 , thes e are pro jecte dto b e 12 7 millio n tons—a n increas e o f mor e tha n 45 0 percent . (Mos t western coal shippe deas t come s fro mPowde r

Rive r Basin i n Montan aan d Wyomin g an dgoe s to Ohio , Indiana , an dIllinois. ) Thi s increas e ca n b e com pare dt o growt h i n overal l coa l production , whic h i s estimate dt o ris e b y 14 2 percen t over approximatel y th e sam e period . Thus , eve n under th e curren t NSPS , with thei r

inten t t o promot e relianc e o n loca l resources , western coa l penetratio n o f

th e midwestern an deaster n market s i s seen to increas e sub

stantiall y throughou t

th e remainde r

o f thi s century . T o alarg e extent , th e increas e o f western coa

l sale s i n midwester n market s i s projecte dbecaus e inexpensivel y mined—henc e low-priced—west

er n coa l can b e shippe dlon g distance s an dstil l retai n acompetitiv e edg e over loca l coa l supplies . Fo r

example , i t

i s estimate dtha t

i n th e year

2000 , aWyomin g Powder

Rive r coa l shippe d1,000 mile s to Indian aa t 2 0 mill s per ton-mile—achievin g adelivere dcos t o f $1.6 4 per millio n BTUs—wil l stil l underpric e alocally produce dIndian acoa l shippe d10 0 mile s a

t adelivere d cos t o f $1.6 8 pe r millio n BTUs . 10

/ However , thi s slight

competitiv e edg e i s highl y sensitiv e to transportatio n rates , which , i f the y ris e higher

than projected , can resul t

i n muc h higher

delivere dprice s fo r

Wester n coal s shippe dlong distances . Th e differen t

contro l requirement s fo r high

- an dlow-sulfu r

coa l als o are expecte dto hav e some influence , thoug h asmal l one , o n U.S . coa l markets . Th e lower

contro l requiremen t

o f 7 0 percen t

fo r low-sulfu r

coa l (insteado f

9 0 percent ) wa s originally establishe di n recognitio n o f th e higher margina l cos t

o f reducin g sulfu r

dioxide fro mcoal s already lo w i n sulfu r content . Thi s lowe r

contro l requirement , however , i s expecte dt o provid e a smal l cos t

advantag e to som e user s o f non-loca

l low-sulfu r

coal . Fo r example , th e tota l cos t

differentia l o f

scrubbin g ahigh-sulfur midwester n coa l versu s that

o f scrubbin g alow-sulfu r

wester n coa

l i s roughl y 4. 5 mill s pe r kilowatt-hour , o r

approximatel y $8.7 0 mor e pe r to n tha n usin g th e low

sulfu r western coal . (Thi s estimat e i s base do n a500-megawatt powe r plant burnin g western coa

l with aheat

conten t o f 10,000 BTU s per

pound. ) Thi s differentia l woul dfavo r th e purchas e o f

low-sulfu r

coa l over an equivalent

cos t high-sulfu r

coa l withi n a

n approximat e radiu s o f 50 0 miles . Such dif

ferential s are no t

larg e enough , though , t o caus e large-scal e distortion s i n th e U.S . coa

l market . 10 . Becaus e Wyomin g Powder River coal an dIndian aInterio r Basin coa

l hav e differen t

energ y contents , thei r

delivere dpric e reflect s th e tota l cos t o f buyin g an dshipping th e equivalent amoun t o f fue l energy , expresse da s one millio n BTUs .

5 1Minin g cost s an dtransportatio n rate s remai n th e majo r determinant s o f coa l selectio n under

th e curren t

standards , whil e lo w sulfu r conten t i s onl y asmal l influence . I n thi s respect , th e curren t standard s shoul delimi

nat e onl y aportio n o f

th e perceive dencouragemen t t o us e non-loca

l coa l supplies . I n th e nex t

chapter , th e effect s o f

alternat e standard s ar e examin

e dan dcompare dt o th e curren t standard s t o determin e what effect , i f

any , differen t sulfu r dioxide emission s limit s may hav e o n tota l emissions , o n th e cost s o f compliance , an do n th e productio n an ddistributio n o f coal .

5 2CHAPTE RVI . CHOICE S FO RNE WSOURC E PERFORMANC E STANDARD S
Th e Congres s i s no w considerin g possibl e change s t o th e Clea n Ai r Act , an dth e debat e wil l almos t certainl y includ e areexaminatio n o f th e ne w sourc e performanc e standards . Thi s chapte r outline s variou s possibl e course s o f

actio n wit h respec t t o th e NSPS , alterin g onl y th e wa y the y restric t emission s o f

sulfu r dioxide . Th e analysi s focuse s primaril y o n thre e aspect s o f

th e alternativ e approaches : o Total projecte demission s o f sulfu r dioxid e unde r

eac h option ; o Th e cost s o f

eac h alternativ e t o th e electri c utilit y industr y an dt o consumers ; an d o Th e productio n an ddistributio n o f U.S . coal . ALTERNATIV E EMISSION S STANDARD S T o provid e aframewor k fo r Congressiona l consideratio n o f th e Clea n Ai r Act , th e CB O ha s projecte dth e possibl e outcome s o f fou r alternativ e standard s fo r

th e NSP S tha t

becam e effectiv e i n 1978 . Bein g curren t law , thoug h subjec t

t o chang e throug h EP A revie w a t interval s o f

fou r year s o r less , th e 197 8 NSP S are treate da s on e basi s agains t whic h th e alternative s ar e measured ; compariso n o f eac h alternativ e agains t th e other s i s equall y important , however , an di s acritica l par t o f th e analysis . Th e fou r alternative s t o curren t la w tha t

th e CB O ha s analyze dinclud e on e optio n tha t woul db e areversio n t o th e NSP S o f 1971 , asecon dan dthir dtha t woul d alter th e impositio n o f

percentag e reduction s fo r sulfu r dioxid e tha t

ar e stipulate di n curren t

law , an dafourt h tha t woul dallo w abalanc e o f sulfu r dioxid e emission s contro l betwee n ol dan dne w source s t o achiev e th e sam e leve l o f contro l a s woul dth e curren t NSPS . Descriptiv e detail s o f thes e fou r option s ar e give n o n th e followin g pages ; th e essential characteristic s ar e summarize di n Tabl e 7 . I /

1 . Th e mode l use dt o projec t th e effect s o f

th e option s i s describe di n Appendi x B . 5 3TABLE 7 . SUMMAR Y O FCURREN T AN D ALTERNATIV E EMISSION S STANDARD S Curren t La w an dOption s Mas s Emission s Limit s (I n pound s o f

sulfu r dioxid e per

millio n BTU s o f fue l consumed ) Curren t Law—Ne w Sourc e Performanc e Standar do f 197 8 a / 1. 2 poun dceilin g 0. 6 poun dfloo r Optio n I—Rever t

t o 197 1 Ne w 1. 2 pound s Sourc e Performanc e Standar da / Optio n n —Achiev e 7 0 Percen t Emission s Contro l an d

Se t an 0. 8 Poun dFloo r

fo r Sulfu r Dioxid e Emission s a

/ Optio n m—Achiev e 9 0 Percen t Emission s Contro l an dSe t a 0. 6 Poun dFloor

fo r Sulfu r Dioxid e Emission s a

/ Optio n IV-—Constrai n Total Emission s Growt h b y Balancin g Sulfu r Dioxid e Emission s Contro l Betwee n Ol dan dNe w Source s 1. 2 poun dceilin g 0. 8 poun dfloo r 1. 2 poun dceilin g 0. 6 poun dfloo r Ne w plan t

mus t mee t curren t NSP S emission s leve l i f

n o tradeof f used ; i f emission s are reduce da

t an existin g plan t ne w plan t

may increas e it s emission s beyon dcurren t NSP S leve l b y sam e amoun t

a / Applie s t o ne w o r

modifie dsource s only . Optio n I . Rever t

t o th e Ne w Sourc e Performanc e Standard s o f 197 1 Reenactmen t

o f th e 197 1 NSPS , a s describe di n Chapte r H , woul d require coal-fire dutilit y plant s t o limi t emission s o f

sulfu r dioxide ga s t o 1. 2 pound s fo r

every on e millio n BTU s o f fue l burnt . (For

brevity , th e 5 4TABL E 7 . (Continued )

Require dPercentag e Reductio n Leve l Comment s 9 0 percen t

fo r emission s betwee n floo r

an dceiling ; 7 0 percen t o r mor e i f emission s ar e belo w floo r Non e 7 0 percen t

fo r emission s betwee n floo r

an dceiling ; non e require di f

emission s are belo w floo r 9 0 percen t

fo r emission s betwee n floo r

an dceiling ; non e require di f

emission s are belo w floo r Sam e a s curren t

la w i f n o emission s tradin g used ; non e o r variabl e whe n tradin g used , dependin g o n reductio n neede dt o mee t

constraint s Require s al l coa l t o b e scrubbe d regardles s o f

sulfu r conten t Allow s low-sulfu r

eastern an d wester n coa

l t o b e use dwithou t scrubbin g Allow s muc h wester n an dsom e eastern coal s ver y lo w i n sulfu r conten t t o b e use dwithou t scrubbin g Eliminate s scrubbin g fo r som e low-sulfu r

wester n coals ; reduce s scrubbin g fo r

mos t wester n an dsom e eastern coal s Limit s projecte demission s t o thos e calculate dunde r

curren t law ; allow s ne w an dol dfacilitie s withi n astat e t o decid e individual contro l level s s o lon g a s th e limi t o n tota l emission s i s no t

violate d SOURCE : Congressiona l Budget Offic e followin g tex t

expresse s suc h astandar da s 1. 2 pound s SO

- per millio n BTUs. ) A n electri c utilit y subjec t t o thi s standar dcoul dcompl y eithe r b y usin g low-sulfu r

coa l withou t sulfu r dioxid e emission s control s ( ascrubber) , o r b y usin g ascrubber

an dburnin g acheaper higher-sulfu r

coal . Th e primar y distinction s o f

thi s standar dover

it s successor

ar e tha t i t leave s 5 5scrubber s optional an dthat i t doe s no t requir e ase t

percentag e reductio n o f potentia l sulfu r

dioxid e emissions . Optio n I LAchiev e 7 0 Percen t

Emission s Contro l an dSe t a0. 8 Poun dFloor fo r Sulfu r Dioxide Emission s Thi s alternativ e woul dscale dow n th e curren t standards ' requiremen t tha t utilitie s contro l sulfu r

dioxid e emission s b y 9 0 percen t whe n burnin g high-sulfu r

coal ; i t woul dals o eliminat e th e curren t requiremen t

t o us e scrubber s i n plant s burnin g very low-sulfu r coal . I t woul dcal l fo r

scrubbin g (o r anothe r techniqu e tha t

can desulfuriz e flu e gases ) only i f emission s wer e abov e amaximu mcontro l level , o r "floor" , se t

a t 0. 8 pound s SO

- per

millio n BTUs . N o contro l requiremen t woul db e specifie dfo r

emission s belo w thi s floor . Abov e th e floor , sulfu r dioxide emission s woul dhav e t o b e reduce db y a t leas t 7 0 percent , an di n n o cas e coul demission s excee dth e 197 1 NSP S ceilin g o f

1. 2 pound s SO

- per

millio n BTUs . Unde r thi s option , muc h wester n coa

l an dsom e eastern (notabl y Appalachian ) coa l coul db e burnt withou t scrubbers . Optio n HI . Achiev e 9 0 Percent Emission s Contro l an dSet a0. 6 Poun dFloor fo r Sulfu r Dioxid e Emission s Thoug hretainin g th e curren t NSP S requiremen t

o f 9 0 percen t

sulfu r dioxid e emission s contro l fo r utilitie s usin g high-sulfu r coal , thi s optio n woul dlower

th e curren t

contro l requiremen t

fo r som e low-sulfu r

coal s an d eliminat e i t

entirel y fo r

others . Th e alternativ e woul dstipulat e that sulfu r dioxide emission s b e reduce db y a t leas t 9 0 percen t

i f the y are betwee n 0. 6 an d1. 2 pound s per

millio n BTU s o f

fue l consumed , arequiremen t simila r t o th e curren t

standard . Unlike th e curren t standards , however , n o contro l requirement s woul db e specifie dfo r emission s belo w 0. 6 pound s SO

- per millio n BTUs . Unde r

thi s alternative , only som e western coal s coul db e burn t withou t scrubbers , althoug h th e contro l requiremen t fo r th e remainin g low-sulfu r

wester n an deastern coal s woul db e significantl y relaxed . Optio n IV . Constrai n Total Emission s Growt hb y Balancin g Sulfu r Dioxide Emission s Betwee n Ol dan dNe w Source s Tw o feature s ar e uniqu e t o thi s option : first , i t woul doperat e o n a state-by-stat e basi s withi n ageneral , nationwid e framework ; an dsecond , i t coul daffec t

ol dsource s a s wel l a s ne w ones . Total futur e sulfu r dioxid e emission s withi n eac h stat e woul db e limite dt o level s projecte dunde r th e 5 6curren t

NSPS , allowin g operator s o f ne w an dol dutilit y plant s withi n eac h stat e t o mee t

th e overal l emission s limi t b y usin g an y combination o f measures . Thus , th e alternativ e woul dallo w ne w plant s t o increas e thei r emission s abov e NSP S permitte dlevels , s o lon g a s commensurat e emission s reduction s occurre dat

existin g source s withi n th e sam e state . Thi s i s commonl y terme d"emission s trading, " o r "ne w sourc e bubbling. " 2 / Fo r purpose s o f

th e CB O analysis , becaus e wester n state s contai n fe w ol dcoal

fire dfacilities , emission s tradin g wa s treate da s permissibl e onl y i n th e 3 1 state s eas t

o f th e Mississipp i River . Al l othe r ne w powe r

plant s wer e assume dt o b e require dt o mee t curren t stat e o r federa l NSP S requirements , whicheve r

wa s lower . (Limitin g th e analysi s t o th e 31-stat e regio n reduce d computatio n tim e an dcost s bu t no t accuracy. ) Unde r suc h aplan , autilit y plannin g ane w plan t woul dfirs t

determin e th e quantit y o f

ne w emission s th e contemplate dplant woul dcontribut e t o th e area' s atmospher e afte r complyin g wit hth e curren t NSPS ; thi s woul d establis h abaselin e fo r

trading . Tha

t plan t coul dthe n increas e it s sulfu r dioxid e emission s b y ameasure damoun t abov e th e baseline , s o lon g a s emission s fro mon e o r

mor e already existin g source s wer e reduce db y an equa l amount . I n thi s procedure , overal l incrementa l emission s woul db e hel dt o curren t

NSP S levels , bu t

th e burde n o f

contro l coul db e distribute d betwee n utilitie s operatin g ne w an dol dsources . Fo r purpose s o f

analysis , emission s tradin g wa s treate da s bein g limite dt o intrastat e areas , assumin g tha t suc h aplan woul dno t allo w negotiatio n ove r stat e boundaries ; thi s assumptio n tende dt o produc e result s showin g higher cost s tha n plan s allowin g emission s tradin g betwee n states . 3 / I t wa s als o assume dtha t

thi s optio n woul dallo w ne w source s t o trad e emission s allowance s wit han existin g sourc e onl y s o lon g a s th e latte r continue dto operate . 4/

2 . "Bubbling " i s acalculatin g procedur e tha t envision s eac h stat e a s havin g an enclosin g overhea dbubbl e withi n whic hth e utilit y emission s o f tha t stat e ar e contained ; addition s an dsubtraction s o f pollutan t emission s ar e treate da s occurin g withi n th e confine s o f tha t bubble . 3 . Administratio n o f

thi s optio n woul dprobabl y b e comple x an dperhap s somewhat

costl y i n term s o f

both mone y an dtime . Becaus e th e administrativ e mechanic s o f implementin g thi s plan ar e purel y conjec

tural , thi s analysi s disregard s an y potentia l suc h cost s th e optio n migh t entail . 4 . Shoul dth e existin g facilit y b e retired , th e ne w sourc e woul dhav e eithe r t o apply th e tradeof

f t o anothe r

existin g facilit y i n th e regio n o r reduc e it s ow n emission s b y th e amoun t originally slate dfo r

trading . 5 7COMPARISO N O FALTERNATIV E EMISSION S STANDARD S Fo r acontinuatio n o f

curren t law an deac h o f

th e alternativ e emission s standard s outlined , th e CB O projecte dsulfu r dioxid e emissions , costs , an dcoa

l use . Effect s o n Emission s an dContro l Cost s Th e highes t

growt hi n sulfu r

dioxid e emission s fro mne w coal-fire dpowe r

plant s woul db e allowe dunde r Optio n I , increasin g tota l utilit y emission s fro man annua l 17. 6 millio n ton s i n 197 9 to 22. 8 millio n i n th e yea r 2000 . 5/ Both th e curren t

standard s an dOptio n I V woul dlimi t tota l emission s t o 2 1 millio n ton s b y th e year 2000 , th e lowes t

increas e o f al l th e alternatives . Total emission s unde r th e othe r choices—Option s n an d m—woul dten dt o fal l betwee n thes e uppe r an dlower

bounds . Tabl e 8 show s tota l projecte demission s o f al l th e alternative s examined , includin g th e curren t standards . 6

/ 5 . A s state di n Chapte r n , thes e increase demission s woul daccompan y th e additio n o f

16 8 gigawatt s o f

ne w coal-fire delectrical capacit y antici

pated . 6 . Four caution s mus t

b e noted , however , whe n comparin g th e cost s an d projecte demissions . First , th e curren t NSP S an dOptio n I V coul dyiel d th e lowes t

leve l o f futur e sulfu r

dioxide emissions . Thi s doe s no t giv e a measur e o f

th e health effect s o r

cost s o f allowin g pollutan t

level s t o ris e beyon dth e curren t standards ; whethe r

an y analyi s coul dasses s thes e effect s fro msuc h smal l difference s i n projecte demission s i s doubtful . Second , i f

ne w source s using emission s tradeoff s fro m existin g plant s wer e allowe dt o retai n th e higher emission s limit s afte r th e existin g plant s wer e retired , th e bubblin g approac h coul dleav e a dirtie r generatio n o f

ne w plant s tha n woul db e allowe dunde r th e curren t NSPS ; however , thi s analysi s assume s tha t regulation s unde r Optio n I V woul dno t

permi t this . Third , th e lon g operatin g lif e o f mos t electri c plants—usuall y abou t 5 0 years—suggest s tha t mos t existin g source s tha t

coul db e usefu l fo r

emission s offset s (a s unde r Optio n IV ) woul dcontinu e t o operat e throug h th e year 2010 , afte r

whic hashar

p dro p i n utilit y emission s coul db e expecte dbecaus e o f th e survivin g generatio n o f

cleaner plants . Sinc e th e survivin g plant s woul db e require dt o lowe r

emission s t o reac h th e origina l standards , the n th e predicte dcos t

effectivenes s ove r

th e lif e o f th e plant s coul ddro p (tha t

5 8Power plant s subjec t

t o neithe r

o f th e Clean Ai r

Act' s NSP S can emi t twic e t o si x time s th e volum e o f sulfu r dioxid e tha n d o plant s tha t ar e regulate dunde r

th e standards . Therefore , emission s fro mfacilitie s no t subjec t t o eithe r

standar ddominat e th e projection s show n i n Tabl e 8 . Ne w plant s unde r

th e mos t

stringen t

nationa l standards—th e curren t NSPS—wil l contribut e only 1. 6 millio n o f atota l projecte d2 1 millio n ton s o f sulfu r dioxid e emission s i n th e yea r ZOOO . Similarly , eve n unde r th e mos t

lenien t standards—Optio n I—ne w plant s wil l contribut e onl y 4 millio n o f atota l 22. 8 millio n ton s o f

sulfu r dioxide i n th e yea

r 2000 . Th e differenc e betwee n th e emission s projecte dfo r ne w unit s unde r

curren t la w an dOptio n I i s only 2. 4 millio n tons . I n bot h cases , roughl y eight-tenth s o f al l sulfu r

dioxid e emission s woul daris e fro munit s i n existenc e durin g th e earl y 1970s—that is , thos e facilitie s subjec t t o neithe r

NSPS . Thi s disparity i s attributabl e primaril y t o th e higher

emission s rate s associate dwit h older sources . Fo r example , th e averag e emission s rat e i n th e yea r 200 0 fro mapowe r

plan t tha t i s subjec t

t o neithe r

o f th e act' s emission s standard s i s estimate dt o b e 2. 6 pound s SO

- per

millio n BTUs , compare dt o an averag e emission s rat e o f 0. 4 pound s SO ^ pe r

millio n BTU s fo r

plant s operatin g unde r th e stringen t 197 8 NSPS . Judgment s abou t

cos t effectivenes s ca n b e mad e fro mcomparin g th e cost s incurre db y reducin g sulfu r dioxid e emission s fro mth e highes t projecte dlevels—i n thi s case , 22. 8 millio n ton s b y th e yea r 200 0 unde r Optio n I . Unde r

th e curren t

NSPS , sulfu r

dioxid e remova l i s projecte dt o cos t $2,41 1 aton . Remova l cost s unde r Optio n n woul db e $1,92 9 aton . Optio n IE—b y far

th e mos t

expensiv e choic e accordin g t o thi s mea sure—woul dincu r

aremova l cos t

o f $3,40 0 aton . Optio n IV , i n shar p contrast , woul dpermi t

sulfu r dioxid e remova l at

onl y $55 0 ato n at

th e en d o f th e projectio n period . Optio n I V woul doffe r

th e utilitie s th e greates t economi c efficiency , becaus e i t

woul dpermi t

fuel-switchin g a s asubstitut e fo r scrubbers ; 6 . (continued ) is , becom e mor e expensiv e pe r to n o f sulfu r dioxid e removed) , depend

in g o n th e cos t

o f th e ne w contro l techniqu e chosen . Finally , th e mandator y installatio n o f scrubber s unde r

th e curren t

NSP S provide s a for mo f insuranc e agains t

increase dlevel s o f

sulfu r dioxid e emission s tha t coul dresul t

fro mth e burnin g o f

high-sulfu r

coal , unde r

possibl e emergenc y situations . Fo r thes e reasons , onl y partia l conclusion s abou t th e ful l benefit s o f

eac h alternativ e relativ e t o cos t can b e draw n i n thi s study . 5 9TABL E8 . TOTALPROJECTE D SULFU RDIOXID EEMISSION S AN D COMPARISO N O FCOS T EFFECTIVENES S UNDE RCURREN T LA WAN D ALTERNATIV ESTANDARD S

Emission s Under Curren t La w an d Alternativ e Total Nationwid e

Sulfu r Dioxide Emission s (In million s o f ton s pe r year ) Incrementa l Cos t o f Sulfu r Dioxid e Reduction s Belo w 197 1 NSP S (I n 198 0 dollar s pe r to n reduction ) Standard s Curren t La w Total Ne w Source s Optio n I a

/ Total Ne w Source s Optio n H Total Ne w Source s Optio n m Total Ne w Source s Optio n IV Total Ne w Source s 197 9

17. 6 Non e 17. 6 Non e 17. 6 Non e 17. 6 Non e 17. 6 Non e 1990

20. 7 0. 4 21. 1 0. 8 21. 0 0. 6 21. 1 0. 4 20. 7 0. 4 200 0

21. 0 1. 6 22. 8 4. 0 22. 1 2. 8 21. 9 2. 0 21. 0 2. 5 1990 200 0 1,80 0 2,41 1

N/ A b/ N/ A b/

Non e 1,92 9

Non e c / 3,40 0

90 0 55 0 SOURCE : CBO/IC Fanalysis . a . Incrementa l cos t

o f sulfu r dioxid e emission s reductio n represent s cos t o f contro l beyon dthes e standards . b . No t applicable . c . N o significan t

emission s reductio n i s achieve dbeyon dOptio n I , althoug h annual cost s are increase db y $36 0 million . 6 0switchin g t o alower-sulfu r coa l a t existin g powe r

plant s t o reduc e th e contro l requirement s fo r ne w plant s woul dlowe r annual cost s whil e achiev

in g th e sam e emission s reduction s a s th e curren t NSPS . Fo r

example , switchin g a n existin g 500-megawat t plan t fro mahigh-sulfu r

coal at 3.3 3 pound s SO

- pe r

millio n BTU s t o amedium-sulfu r coal at 1.6 6 pound s SO ^ pe r millio n BTO s coul dreduc e emission s at arat e o f

$43 1 pe r to n removed . B y contrast , ane w plan t

o f comparabl e siz e bu t

equippe dwit hascrubbe r ma y incu r cost s o f $1,23 0 fo r

eac h to n o f

sulfu r dioxid e remove dbeyon dth e leve l tha t woul db e require dunde r Optio n I . Measure s o f

cos t effectivenes s can onl y b e take n a s roug h gauge s o f economi c efficiency , however . Fo r example , althoug h th e curren t NSP S cos t les s pe r to n o f sulfu r dioxid e remove dtha n woul dOptio n HE , the y ar e actuall y mor e expensiv e i n term s o f capita l an dannual charge s (th e nex t sectio n examine s thes e costs) . The y remov e mor e sulfu r dioxide , however , an dhenc e ar e les s costl y pe r to n removed . Thus , consideratio n o f thes e option s shoul dinclud e tota l cost s a s wel l a s cost s per ton . Cos t Effect s o n th e Utilit y Industry Annua l cost s o f

ai r pollutio n regulation s t o th e utilit y industry ar e a functio n o f

tw o factors : th e capita l an doperatin g cost s o f pollutio n contro l equipmen t

an dth e increase dpremium s associate dwit h purchasin g an d shippin g low-sulfu r

coal . Capita l Costs . I n general , th e capita l requirement s o f eac h alterna

tiv e ar e roughl y proportiona l t o th e amoun t o f scrubbe r contro l needed . Th e curren t NSP S ar e projecte dt o involv e th e greates t capita l outlay , approxi

matel y $3 3 billio n betwee n 198 0 an d200 0 (see Tabl e 9) ; tha t larg e capita l expens e i s attributabl e fo r th e mos t

par t t o th e nee dt o instal l scrubber s t o mee t th e standards . A t th e othe r

en do f th e spectrum , capita l outlay s fo r th e moderat e amoun t o f optional scrubbin g entaile di n meetin g th e NSP S o f 197 1 (Optio n I ) are projecte dt o tota l onl y $1 4 billio n ove r th e 1980-200 0 period . Th e tw o choice s tha t

stipulat e emission s floor s (Option s n an dffl ) woul dreduc e th e overal l cost s o f scrubbin g b y eliminatin g mandator y desulfurizatio n fo r

very low-sulfu r

coal s an db y allowin g man y coal s t o mee t th e emission s floo r

wit h onl y moderat e reductio n level s (7 0 percen t an d less) . High-sulfu r

coal s i n bot h o f

thes e option s woul dstil l nee dt o b e scrubbe db y eithe r

7 0 percen t

(Optio n n ) o r

9 0 percen t

(Optio n HI) , affectin g primaril y th e midwester n an dAtlanti c seaboar dstates ; i n bot h cases , th e 6 1

### TABL E9 . PROJECTE D COS T EFFECT S O N TH E UTILIT Y INDUSTR Y O F ALTERNATIV EEMISSION S STANDARD S Curren t Standard s Optio n I Optio n n Optio n IH Optio n I V Cumulativ e Capital Requirement s (I n billion s o f

1980 dollars ) 

### 1990 8.3 0 3.9 0 4.5 0 4.1 0 6.6 0 200 0 33.4 0 14.0 0 14.6 0 17.1 0 14.7 0 Projecte dNationa l Scrubber-Equippe dCapacity (In gigawatts ) 1980 45.7 0 45.7 0 45.7 0 45.7 0 45.7 0 199 0 81.6 0 55.8 0 59.0 0 55.3 0 73.0 0 200 0 213.5 0 73.3 0 77.4 0 87.3 0 123.4 0 Approximat e Annual Cost s (I n billion s of

198 0 dollars ) 

### 198 0 5.3 5 5.3 5 5.3 5 5.3 5 5.3 5 1990 8.1 0 7.3 8 7.3 8 7.7 4 7.7 4 200 0 14.1 0 9.7 6 11.1 1 12.8 2 10.7 5 Nationwid e Averag e Generatin g Cost s o f Air Pollutio n Contro l (I n 198 0 mill s pe r kilowatt-hours ) 198 0 

### 199 0 200 0 2.3 4

2.5 7 3.4 3 2.3 4

2.3 4 2.3 7 2.3 4

2.3 4 2.7 0 2.3 4

2.4 6 3.1 2 2.3 4

2.4 6 2.6 2 

### SOURCE : CBO/IC Fanalysis . us e o f an emission s floo r

requirin g n o furthe r

contro l woul dten dt o reduc e significantl y th e amoun t o f scrubbin g neede di n th e western states . Th e capital cost s fo r

Optio n n an dHI are estimate dto tota l betwee n $1 4 an d$1 7 billio n fo r

th e 1980-200 0 period .

6 2Optio n I V woul drequir e scrubbin g only i n instance s i n whic hane w

sourc e coul dno t

fin dan ol don e t o serv e a s atradin g partne r wit hwhic ht o balanc e emission s allowances . Becaus e o f th e hig h degre e o f

emission s contro l mandate di n thi s latte r option , mor e scrubbin g i s envisione dtha n fo r Optio n I (at

roughl y th e sam e capita l expense ) althoug h muc hles s tha n fo r th e curren t

standards . Generatin g Costs . Th e curren t NSP S woul dresul t

i n th e highes t expecte dannual cos t

($1 4 billio n i n th e yea r 2000) , whil e Optio n I woul d resul t i n th e lowes t

($1 0 billion) . Optio n I V woul dentai l lower annual cost s afte r 199 0 ($1 1 billio n per

year b y th e yea

r 2000 ) onc e significan t

coal-fire d capacity growt h ha dbegu n i n th e East , wher e th e mos t existin g capacity i s availabl e fo r

cost-effectiv e emission s tradin g purpose s (see Tabl e 9) . Th e curren t

NSP S woul dhav e th e highes t generatin g cos t

associate d wit h pollutio n contro l primaril y becaus e o f th e curren t

fixe dan dvariabl e charge s o f

usin g scrubbers . Th e 3.4 3 mill s per kilowatt-hou r

charg e i n 200 0 (show n i n Tabl e 9 ) unde r th e curren t

standard s woul dtranslat e int o approximatel y $1.7 2 fo r amonthl y electricity us e o f 50 0 kilowatt-hours . Thi s represent s approximatel y 6 percen t o f th e averag e residentia l electri

city charg e recorde di n 1980 . 7 / Optio n I woul dexac t

th e lowes t

averag e generatin g cost s fo r emission s control—2.3 7 mill s per

kilowatt-hour . Thi s cos t i s no t projecte dt o chang e appreciabl y throug h th e year 2000 , largel y becaus e th e proportio n o f presen t scrubber-equippe dcapacity compare dt o tota l capacity woul dno t chang e significantly . I n addition , thoug h th e standard s unde r Optio n I woul d encourag e us e o f

low-sulfu r

coal , an dthu s coul dslightl y rais e annual operatin g costs , tha t

increas e woul db e insignifican t whe n average dove r tota l electricity production . Overall , th e utilities 1 operatin g cost s fo r ai r pollutio n contro l woul dris e b y les s tha n 5 percent . Th e tw o alternative s tha t se t emission s floors , Option s n an dHI , woul d involv e averag e generatin g cost s highe r tha n unde r

Optio n I bu t

lowe r tha n unde r th e curren t

standards . Thi s cos t

woul doccur

becaus e bot h scrubbe r an dlow-sulfu r

coa l us e unde r

both option s woul dfal l somewher e betwee n tha t unde r Optio n I an dth e curren t standards . Th e pric e o f an ddeman dfo r low-sulfu r

coa l woul db e lowe r

tha n unde r

Optio n I bu t

higher tha n unde r 7 . Se e U.S . Departmen t o f Energy , 1980 Annual Report t o Congres s (Apri l 1981) .

6 3curren t NSPS ; conversely , th e scrubbin g cost s o f bot h Option s n an dI

E woul db e lowe r

tha n unde r

th e curren t

NSP S bu t

higher tha n unde r

Optio n L Aside fro mOptio n I , Optio n I V woul dresul t i n th e lowes t

generatin g cos t fo r pollutio n control—2.6 2 mill s per kilowatt-hou r

i n 2000 . A t

th e sam e time , Optio n I V woul dals o achiev e th e lowes t projecte demission s levels . Th e combinatio n o f lo w cos t an dhig h emission s contro l woul doccur becaus e man y ol dsource s woul dswitc h to low

- o r medium-sulfu r

coa l a s a n economical metho dfo r curbin g emission s an dreducin g th e burde n o f emission s contro l a

t newe r source s (throug h emission s trading) . Whe n th e olde r unit s use dfo r

emission s tradin g retired , however , th e annual gen eratin g cost s o f

Optio n I V migh t

rise . Assumin g norma l plan t retiremen t rates , however , thi s ris e woul dno t likel y occur

unti l afte r

th e yea r 2010 . Othe r Cos t Factors . Th e sensitivity o f electricit y cost s t o othe r factor s beside s pollutio n control—notabl y fue l transport—i s important . T o tes t thi s sensitivity , th e CB O als o examine dth e influenc e o f continue drea l increase s i n rai l rate s (i n additio n to th e generi c assumption s outline di n Appendi x B) . I n assessing Optio n I , th e CB O assume dhig h rai l rates ; th e result s showe dtha t

i f rai l rate s ros e a

n additional 1 5 to 2 5 percen t i n real term s durin g th e 1985-1990 period , th e incrementa l (tha t is , real ) cos t

t o electricit y user s i n th e yea r 200 0 woul db e 5.3 4 mill s per kilowatt-hour—u p 12 8 percen t

over th e presen t

rat e o f 2.3 4 mill s per

kilowatt-hou r

an dhigher tha n th e rat e resultin g fro meither th e curren t

standard s o r

fro man y other option . Interestingly , th e higher transportatio n cost s coul dstimulat e an increas e i n th e number s o f scrubber s buil t

fo r ne w plant s under

Optio n I , sinc e high-sulfu r

coal us e with scrubbin g woul dbecom e mor e economica l i n man y case s tha n shippin g low-sulfu r wester n coa l t o th e Midwest . Coal Consumptio n an dProductio n Becaus e o f

th e long lea

dtim e tha t

precede s ane w coal-fire dpowe r plant' s becomin g operational , effect s associate dwit h an y emission s contro l strateg y initiate dtoday woul dno t b e observabl e unti l th e mid

- t o late

1990s . Accordingly , coal-marke t effect s i n th e yea

r 200 0 woul dbes t indicate th e influenc e o f standard s enacte dno w a s alternative s t o th e curren t law 197 8 NSPS . Coal Consumption . Coal consumptio n b y electri c utilitie s generall y determine s th e productio n pattern s o f al l U.S . coals . Unde r eac h o f th e option s analyze dhere , a s wel l a s unde r curren t law , tota l coa

l consumptio n b y th e utilitie s i s seen t o b e divide droughl y betwee n th e western an d eastern halve s o f

th e countr y i n th e yea r 2000 . Th e Wes t

Sout h Centra l

6 4regio n (see Figur e 7 i n Chapte r V ) woul dexperienc e th e highes t growt h i n tota l consumption , fro m4 3 millio n ton s per yea r i n 197 9 t o betwee n 25 4 millio n ton s unde r

Optio n I t o 27 5 millio n ton s unde r curren t law (see Tabl e 10) . Thes e figure s delineate th e uppe r an dlowe r

bound s o f

growt hprojecte d fo r tha t region . Thi s patter n i s consistent wit hth e region' s expecte dhig h growt hi n coal-fire dcapacity (se e als o Tabl e 5 i n Chapte r V) . Th e interregiona l difference s i n tota l coa l consumptio n primaril y reflec t smal l variation s i n capacity us e an d"energ y penalties " associate dwit hscrubbing ; thus , th e curren t

NSPS , i n requirin g scrubber s o n al l ne w coal-fire dplants , sho w th e highes t

forecas t o f tota l coa

l consumption . 8

/ Althoug hoveral l coa

l consumptio n i s no t

significantl y influenced : b y standards , th e quantit y o f low-sulfu r

coa l use di s affected . Fo r example , becaus e Optio n I woul dhav e amor e lenien t contro l standar dthan th e othe r option s an dwoul dno t

mandat e scrubbers , mos t utilitie s subjec t

t o thi s standar dwoul dchoos e t o burn low-sulfu r coal ; i n th e yea

r 2000 , mor e than hal f o f al l coa l consume db y utilitie s woul db e low-sulfu r coa l (see Tabl e 10) . 9/ A t th e opposite extreme , th e curren t NSPS , b y requirin g scrubbers , woul ddiscourag e consumptio n o f low-sulfu r

coa l wher e i t

wa s no t locall y produced c I n th e yea

r 200 0 unde r

th e curren t

NSPS , only 4 0 percen t

o f th e coa l consume db y utilitie s woul dhav e alo w sulfu r content , reflectin g les s easter n an dmidwester n consumptio n o f low-sulfu r

coa l tha n woul doccur under Optio n I . Option s I

Ean dm , b y permittin g complianc e wit hemission s floors , woul dals o spu

r th e consumptio n o f

low-sulfu r

coal , thoug h t o alesse

r exten t tha n Optio n I . Similarly , Optio n IV , b y promotin g emission s trading , woul dincreas e low-sulfu r coa l consumption , sinc e tha t fue l coul db e use di n both ne w an dol dfacilitie s to achiev e relativel y inexpensiv e emission s reductions . Coa l Production . Where coa l i s produce dan dho w productio n i s affecte db y differen t

emission s standard s ar e othe r importan t

questions . Regardles s o f

whic ho f th e option s examine dher e wer e chosen , th e wester n state s woul dexperienc e th e highes t growt h i n coa

l productio n ove

r th e nex t tw o decades . Th e majo r reaso n fo r

thi s i s no t

s o muc hth e amoun t

o f 8 . Th e us e o f

scrubber s require s power , whic hmus t b e supplie db y th e utility . Thus , th e greate r amoun t o f scrubbin g employed , th e mor e coa l consume dto mee t

overal l electricity demand . (See Appendi x B o n scrubbe r assumptions. ) 9

- Fo r th e purpose s o f

thi s discussion , low-sulfu r coa l i s assume dto produc e les s tha n 1. 2 pound s sulfu r dioxide pe

r millio n BTUs . 6 5TABLE 10 . UTILIT Y COA LCONSUMPTIO N IN 197 9 AND PROJECTE D FO R TH E YEA R2000 , B Y REGIO N (I n million s o f ton s per year )

Regio n Baseline

Con

sumptio n (1979 ) a / Curren t

Standard s Total Percen t Con

- Low

sumptio n sulfu r Optio n I Tota l Percent Con

- Low

sumptio n sulfu r Eas t 20 8 Eas t Nort h Centra l 16 0 Eas t Sout h Centra l 7 2 Wes t North Centra l 7 4 Wes t Sout h Central 4 3 Wes t (Mountai n 29 0 24 1 8 8 13 4 27 5 4 1 2 1 2 1 3 3 4 9 29 1

24 3 9 0 128 25 4 4 8

3 5 2 8 4 6 7 9

an dPacific ) Total 6 2

61 9 14

6 1,17 4 47

4 0 14

6 1,15 2 6 7

5 1 (continued ) NOTE : Boundarie s o f

region s displaye di n Figure 7 . a / Percen t

o f tota l 197 9 low-sulfu r

coal consumptio n i s no t available . eastern an dmidwester n deman dfo r wester n coa

l arisin g fro meac h option , a s i t i s th e expecte dhig h growt h i n wester n coal-burnin g capacity . Beyon d th e West' s hig h projecte dus e o f local coa

l supplies , th e choic e o f emission s standard s can , however , influenc e th e West' s shar e o f th e eastern markets . Th e Midwest , wit h it s deposit s o f high

- an dmoderate-sulfur-conten t coal , i s th e are amos t

vulnerabl e t o standard s tha t encourag e consumptio n o f low

sulfu r coal . Continuatio n o f

th e curren t

standards , which , b y design , shoul dmitigat e th e economi c advantag e o f low-sulfu r

coa l a s amean s t o contro l emissions , woul dresul t

i n relativel y hig h productio n forecast s fo r th e Midwes t

( a9 2 percen t growt h i n productio n b y th e yea r 2000 ) an dth e lowes t

projecte d eastwar dshipmen t

o f wester n coa

l (127 millio n tons) . I n contrast , Optio n I 6 6TABL

E 10 . (Continued ) Optio n Total Percen t Con

- Low

sumptio n sulfu r Optio n Total Percen t Con

- Low

sumptio n sulfu r Optio n I V Total Percen t Con

- Low

sumptio n sulfu r 29 0 24 2 8 9 13 0 26 0 4 8

3 4 2 8 4 7 7 6 29 2

24 2 8 8 12 8 26 3 3 7

3 1 1 8 3 9 7 4 29 0

24 2 8 9 13 2 26 8 4 6

2 0 2 4 3 6 5 7 14 9 1,16 0 6 5

5 0 14 6

1,15 9 5 9

4 4 14 9

1,14 6 5 5

4 2 SOURCE : Baselin e 197 9 consumptio n fro mU.S . Departmen t o f Energy , Bituminou s an dSubbituminou s Coal an dLignit e Distribution , Calenda r Year 197 9 (Apri l 21 , 1980) . woul dencourag e th e us e o f low-sulfu r

coal ; thi s choic e woul dreduc e th e expecte dgrowt h rat e i n midwester n coa l productio n t o 7 6 percen t an drais e th e quantit y o f

low-sulfu r

wester n coa

l shippe deas t

t o an annual 15 1 millio n ton s b y th e yea

r 200 0 (se e Tabl e 11) . (Thi s amoun t woul db e higher

wer e i t no t fo r th e larg e quantit y o f

low-sulfu r

coal availabl e fro mNorther n an d Centra l Appalachian mines—se e Tabl e 12. ) Bot hwestern productio n an deastwar dshipmen t woul dris e a s aresul t o f policie s tha t

pu t apremiu mo n coa

l wit h asulfu r

conten t belo w 1. 2 pound s sulfu r

dioxid e pe r

millio n BTUs—coa l that , despite Centra l Appala

chian reserves , i s no t

abundan t i n th e East . Thus , Optio n n woul dfoste r th e eastwar dmovemen t

o f larg e quantitie s (164 millio n ton s i n 2000 ) o f wester n coal ; suc h transporte dcoa l woul dhelp user s t o mee t thi s option' s floo r

o f

6 70. 8 pound s sulfu r dioxid e per

millio n BTU s withou t

scrubbin g (see Tabl e 10) . A s aresul t

o f lowerin g th e floo r

to 0. 6 pound s sulfu r

dioxide per

millio n BTUs , a s i n Optio n m , however , th e supply o f coa l usabl e withou t

scrubbin g woul dbecom e limite dprimaril y t o tha t mine di n th e Rocky Mountai n an d Wester n Norther n Grea t Plain s regions . Thi s woul drestric t th e tota l eastwar dimpor t

o f western coa

l to an annual 14 5 millio n ton s i n th e yea r 2000 . Furthermore , th e limite davailabilit y o f western coa

l tha t can mee t th e standar do f

Optio n HI withou t

scrubbing , plu s th e cost s o f transport , an d th e emission s floo r

requirin g n o furthe r

contro l woul dal l ten dt o encourag e th e us e o f

loca l high-sulfu r

coa l i n th e Midwest . Th e resul t woul dleadt o productio n level s i n th e Midwes t simila r t o thos e encourage db y th e curren t standard s (se e Tabl e 11) . 10 / Compare dt o th e curren t standards , Optio n I V woul dincreas e wester n coa l productio n bu t

woul dno t

giv e ris e t o s o hig h ademan dfo r low-sulfu r coa l a s th e othe r

alternative s (see Tabl e 12) , sinc e medium-sulfu r coa l woul d ofte n supplant

high-sulfu r

coal . High-sulfu r

coa l productio n i n th e Midwes t woul db e lower

tha n unde r

th e curren t

standard s bu t

somewhat

higher tha n unde r Optio n I . Thi s smal l increas e coul db e expecte dt o resul t fro mgreate r us e o f existin g plant s with scrubber s an dfro memission s tradin g i n some area s tha t

allo w afe w plant s t o burn high-sulfu r coa l withou t

scrubbers . (Thi s latte r

situatio n migh t

no t b e desirable , an dan emission s ceilin g fo r ne w source s coul db e use dt o preven t it ; suc h aceilin g wa s no t include di n thes e estimates. ) Substitutio n o f

medium

- fo r

high-sulfu r

coa l (no t show n i n th e tables ) als o woul db e hig h under Optio n IV , sinc e thi s approac h woul dallo w utilitie s t o mee t acceptabl e emission s limit s at nomina l expense ; burnin g medium

sulfu r fue l woul dremai n appreciabl y cheape r tha n resortin g t o scrubbers . Us e o f low-sulfu r

coal , however , woul dremai n th e chie f strateg y t o reduc e emission s under

Optio n IV , an ddeman dfo r western coa

l fo r eastern utilitie s 10 . Becaus e mos t

midwester n coal i s surface-mine dan dhenc e cheape r tha n mos t Appalachian coal , whic hi s deep mined , some Appalachia n coa l productio n woul db e displace db y midwester n coal . Thi s woul dallo w midwester n coa

l productio n level s i n Optio n i n to remai n a s hig h a s unde r curren t standards , eve n thoug h mor e wester n coa l actuall y woul d b e shippe deastward . Withou t th e very lo w emission s floo r o f Optio n HI , however , th e cos t

t o eastern user s o f

purchasin g an dscrubbin g a midwester n coa

l woul db e higher

tha n buyin g alow-sulfu r coa l fro m nearb y Appalachi a(coal tha t mus t b e scrubbe deve n t o mee t ver y lo w emission s floor) , an dmidwester n coa l productio n level s woul dfall . 6 8woul dris e to 14 9 millio n ton s per year—highe r

tha n unde r

th e curren t standard s bu t

lowe r tha n al l other s excep t

Optio n m . Sensitivity t o Flu e Ga s Desulfurizatio n an dOthe r Cos t Assumptions , T o whateve r

exten t tha t th e cost s o f

flu e ga s desulfurizatio n technolog y drop , th e deman dfo r

low-sulfu r

coal woul dals o fall . Thi s effec t woul db e particularl y pronounce dunde r an y alternativ e standard s tha t emphasiz e scrubber s o r

an y simila

r sulfu r dioxid e contro l method . O n th e othe r hand , i f th e cos t o f usin g low-sulfu r

coa l increased , scrubbe r

capacity als o woul d rise . Fo r example , th e amoun t

o f low-sulfu r

coal shippe deas t

i s affecte db y rai l costs ; i f

rai l rate s are assume dto ris e 1 5 to 2 5 percen t betwee n 198 5 an d1990 (a s state dearlier , unde r modifie dassumption s fo r Optio n I) , only 94. 3 millio n ton s o f

wester n coa

l woul db e shippe deas t i n th e year

2000 . Thi s i s areductio n o f

almos t 5 7 millio n ton s fro mtha t originall y predicte d fo r th e sam e alternative . Th e hig h rai l rate s woul dforc e eastern an d midwester n coa

l user s t o tur n t o th e higher-price dbu t neare r low-sulfu r Appalachian coa

l an dto us e scrubbers , s o tha t chea p local high

- an d medium-sulfu r

coal s coul db e burn t

whil e meetin g astandar do f 1. 2 pound s sulfu r dioxid e per

millio n BTUs . I n thi s respect , increase drai l cost s alon e woul db e responsibl e fo r greate r shift s i n coa

l productio n an ddistributio n tha n woul db e th e expecte dchange s resultin g fro man y o f th e emission s contro l alternative s considered . CONCLUSION S FRO M TH EANALYSI S Th e CB O projection s sugges t tha t alternativ e emission s standard s fo r ne w electricit y source s can yiel dnominall y differen t level s o f

sulfu r dioxid e emission s at

widel y divergen t

costs . Adoptin g Optio n I—tha t is , revertin g t o th e NSP S o f

1971—woul db e th e leas t effectiv e i n controllin g ne w emis

sions , resultin g i n 22. 8 millio n ton s o f sulfu r dioxid e fro mutilitie s b y th e yea r 2000 . I n comparison , th e curren t NSP S ar e projecte dt o achiev e sulfu r dioxide emission s level s 8 percen t lower , bu t

at an averag e cos t

o f $2,41 1 fo r eac h to n o f

sulfu r dioxide eliminated . Th e tw o alternative s wit h emission s floors , Option s n an dID , eac h woul dentai l significantl y lowe r capital cost s tha n th e curren t NSPS , bu t

neithe r woul db e highl y cos t effectiv e i n reducin g emissions . Optio n H woul dlowe r emission s b y 3 percen t fro mth e previou s NSP S at acos t o f $1,92 9 pe r

to n o f sulfu r dioxid e removed , whil e Optio n i n woul dlowe r emission s b y 4 percent , bu t at acos t o f $3,40 0 per

ton . Finally , Optio n IV , wit hit s emission s tradin g feature , woul dachiev e th e sam e quit e hig h degre e o f emission s contro l a s th e curren t 197 8 standard s do , bu t

a t an averag e cos t

o f onl y $55 0 fo r

eac h to n o f sulfu r dioxide reduce dbeyon dth e level s forecas t fo r Optio n I .

6 9TABL E 11 . REGIONA LCOA LPRODUCTIO N FO RTH E YEA R200 0 UNDE REAC H ALTERNATIV E (I n million s o f ton s per yea * an dpercen t

increas e ove r

bas e year ) Bas e Year

Curren t

Standard s Productio n Pro

- Percent Regio n (1979 ) ductio n Increas e Northern Appalachi a Centra l Appalachi a Southern Appalachi a Midwes t Central Wes t Gul f Easter n Norther n Great Plain s Western Northern Great Plain s Rocky Mountain s Southwes t Northwes t an dAlask a Tota l 18

7 21 3 24 13 1 1 3 2 6 1 4 10 4 2 7 2 5 5 76 9 1 Tota l Wester n Coa l Consume d b y Easter n Utilitie s 2 2 a

/ 33 1 342 2 1 25 2 1 7 11 9 44 38 3 18 3 14 2 3 3 ,86 6 12 7 7 7 6 1 -1 3 9 2 3 1 35 8 21 4 26 8 57 8 46 8 560 14 3 47 7 Optio n I

Pro

ductio n 31 6 35 9 2 1 23 1 1 9 8 2 44 40 9 199 13 1 3 2 1,84 3 15 1 Percen t Increas e 6 9 6 9 -1 3 7 6 4 6 21 5 21 4 29 3 63 7 42 4 54 0 14 0 58 6 (continued ) a / Se e U.S . Departmen t o f Energ y , Bituminou s Coa l an dLignite tion , Calenda

r Year s 197 8 an d197 9 (Decembe r 21 , 197 9 and Distribu

Apri l 21 , 1980) . 7 0TABLE 11 . (Continued )

Optio n Pro

ductio n 31 2 35 0 2 0 23 4 1 6 94 4 5 40 1 21 6 13 2 3 2 1,85 2 16 4 

## n Percent Increas e 6 7 64 -1 7 7 9 2 3 26 2 22 1 28 6 70 0 42 8 560 14 1 64 5 

### Optio n m



### Pro

ductio n 30 2 35 6 2 0 25 4 1 5 8 7 4 5 38 5 23 1 126 3 2 

### 1,85 3 14 5 

### Percent Increas e 

### 6 1 67 -1 7 9 4 1 5 23 5 22 1 27 0 75 6 404 54 0 14 1 55 9 

### Optio n IV



### Pro

ductio n 31 4 35 4 2 0 23 9 1 6 11 2 4 5 40 2 18 0 14 8 3 3 

### 1,86 2 14 9 

### Percen t Increas e 6 8 6 6 -1 7 8 2 2 3 33 1 22 1 28 7 56 7 49 2 56 0 14 2 57 7 

### SOURCE : CBO/IC Fanalysis .

7 1TABLE 12 . ESTIMATED LOWSULFU RCOA LPRODUCTIO N IN 2000 , B Y REGIO N (I n million s o f ton s per year ) Regio n Norther n Appalachi a Centra l Appalachi a Southern Appalachi a Midwes t Centra l Wes t Gul f Eastern Norther n Grea t Plain s Western Norther n Great Plain s Rocky Mountain s Southwes t Northwest/

Alaska Tota l Curren t

NSP S 20. 8 203. 7 3. 4 0. 5 5. 1 Non e 1. 4 214. 0 122. 7 79. 7 21. 4 672. 7 Optio n I

24. 1 224. 9 3. 4 0. 4 6. 1 Non e 1. 4 268. 0 138. 7 84. 3 21. 4 771. 3 Optio n H

37. 1 207. 9 2. 9 0. 5 4. 7 Non e 1. 4 265. 4 161. 2 85. 3 21. 4 787. 8 Optio n HI

31. 8 217. 7 2. 9 0 4. 4 Non e 1. 8 247. 0 180. 4 77. 5 21. 4 784. 9 Optio n IV

29. 2 206. 7 3. 4 0. 5 5. 0 Non e 1. 4 245. 3 124. 7 82. 4 21. 4 720. 0 SOURCE : CBO/IC Fanalysis . NOTE : Figure s o n base year productio n no t

available . Th e lo w cos t

pe r to n o f Optio n I V highlight s tw o importan t points : o Emission s fro molde r source s no t

covere db y an y emission s standard s wil l dominat e nationa l emission s throug h th e year 200 0 an dbeyond—henc e th e rathe r narro w margi n withi n whic h emission s abatemen t

projection s fall ; an d 7 2o Th e leas t costl y contro l measure s no w availabl e ar e thos e tha t involv e substitutin g lower-sulfu r coal s at existin g source s no w usin g high-sulfu r

coals . Wit hregar dt o effect s o n th e utilities ' financia l requirements , th e result s indicat e tha t

th e curren t

NSP S ar e th e mos t

capital-intensiv e choice ; the y als o entai l th e highes t annual cost s becaus e o f fixe dan dvariabl e charge s associate dwit hscrubbers . Option s n an din , wit hthei r greate r relianc e o n low-sulfu r

coa l a s amean s t o achiev e emission s control , woul d resul t i n lowe r

capital requirements; the y als o involv e generall y lowe r annual costs , althoug h utilitie s woul dremai n vulnerabl e t o fue l an dtrans por t cos t escalations . Contro l level s equivalen t t o th e curren t

NSP S coul d b e achieve db y Optio n IV , an dat asignificantl y lowe r

cost ; th e burde n o f contro l woul db e mor e evenl y distribute damon g ne w an dolder facilities . I n ligh t o f th e curren t

cost s o f contro l technolog y an dth e abundanc e o f low-sulfu r

western coal , emission s standard s fo r ne w source s can alte r traditiona l pattern s o f

coa l suppl y an ddemand . I n particular , limitin g sulfu r dioxid e emission s withou t requirin g scrubber s fo r al l coa l types , a s unde r Optio n I , woul dten dt o increas e th e marke t shar e tha t

low-sulfu r

coal holds . That , i n turn , coul drais e th e volum e o f shipment s o f

wester n coa

l t o th e Midwes t an dEast , a s eastern low-sulfu r coa l cost s ris e an dsupplie s i n certai n instance s shrink . Nothin g shor t o f amandator y scrubbing , a s unde r curren t standards , coul dslow—an donl y slow—thi s eastwar dpenetration . Bot h Option s n an dHI , b y eliminatin g scrubbin g fo r only som e coal s (thos e foun dmostl y i n th e West) , woul dals o rais e th e amoun t o f wester n coa

l shippe dEast * N o matte r wha t emission s standar dar e i n force , midwester n an dsome easter

n coa l productio n woul dremai n vulnerabl e t o th e lower cos t an drapidl y growin g productio n o f western coal . Mitigatin g circumstance s tha t woul dhel p encourag e coa l productio n i n th e East , an di n particular , th e Midwest , are higher-than-expecte drai l rate s over th e nex t tw o decade s an d significantl y lowe r

cost s tha n anticipate dfo r flu e ga s desulfurizatio n technology . Th e latte r woul dentai l technological breakthrough s o r im

provement s no w bein g studie dbu t no t ye t foreseen . Finally , th e analysi s point s t o som e difficul t choice s fo r

th e Congres s i n assigning priorities , sinc e minimizin g sulfu r dioxide emissions , utilit y costs , an dlosse s i n midwester n coa l productio n canno t

al l b e don e simul

taneously . T o hol demission s t o thei r lowes t level s an dprotec t

midwester n coa l production , th e curren t standard s ar e th e bes t choice . If

, however , reducin g th e capital burde n o n utilitie s i s give n equall y hig h priority , the n Optio n HI—whic hlower s capital need s b y roughl y half, raise s emission s only slightly , an dyield s relativel y hig h midwester n productio n forecasts

— become s amor e preferabl e choice . I f bot h emission s contro l an dcos t are

7 3hig hpriorities , bu t safeguard s fo r

midwester n coa

l productio n ar e not , the n th e bes t alternativ e i s Optio n IV . Finally , i f cos t i s th e chie f

concern , the n Option s I an dn , whic hwoul dpromot e th e us e o f low-sulfu r

coa l thoug h allowin g greate r

emission s growth tha n th e curren t standards , ar e th e mos t suitabl e polic y choices *

7 4APPENDIXE SAPPENDI X A . EFFECT S O FTH E PS D PROGRA M

Th e CB O analysi s o f

th e Clean Ai r

Act' s potentia l influenc e o n th e electri c utilitie s include s assumption s abou t th e effect s o f

"preventio n o f significan t

deterioration " (PSD ) provisions . Thoug hprobabl y smalle r tha n th e effect s o f

th e ne w sourc e performanc e standards , an ddifficul t t o quantif y separatel y fro mthem , th e effect s o f th e PS D provision s ar e stil l o f interest . Th e followin g analysi s review s th e estimate dinfluenc e o f th e PS D progra mo n emissions , powe r plan t siting , an dconstructio n schedules . Onl y th e effect s o f

th e PS D progra mo n emissio n limit s wer e include di n th e projection s (see Appendi x B) , sinc e othe r costs , suc h a s administrativ e requirements , ar e believe dt o b e insignificant . EFFEC T O N EMISSION S LIMIT S I n arecen t

study , th e Nationa l Commissio n o n Ai r Quality ha s conclude dtha t

th e case-by-cas e "bes t

availabl e contro l technology " revie w proces s unde r

th e PS D progra mha s ofte n resulte di n emissio n limitation s stricte r tha n woul dhav e bee n require db y NSP S o r stat e implementatio n plans . \J Accordin g t o th e commission , al l PS D permit s issue dbetwee n Apri l 197 8 an dNovembe r 197 9 showe dtha t

nin e ou t o f 1 6 permit s issue dfo r powe r plant s durin g tha t

perio dcontaine dcontro l requirement s significantl y mor e stringen t

tha n th e NSPS . Thes e tighte r requirement s wil l lea dt o Z O percen t reduction s i n sulfu r

dioxide emission s an d2 5 percen t reduction s i n participat e emission s beyon dlevel s allowe dunde r th e NSPS . (Th e mean s o f complianc e fo r

thes e facilitie s i s unknown , bu t i t probabl y wil l ofte n involv e additional scrubbin g o r

lower-sulfu r

fuel. ) Becaus e thes e contro l level s wer e establishe dbefor e 1979 , however , muc ho f thei r cos t t o th e industr y shoul d b e capture di n th e analyse s i n Chapte r II . Becaus e th e curren t

NSP S requir e suc h ahig h degre e o f control , situation s i n whic hth e PS D regulation s resul t i n significan t

additional emission s contro l shoul db e rare . Th e exception s concern possibl e require

ment s o f u p t o 9 0 percen t

contro l o n sulfu r

dioxide emission s fo r

plant s burnin g low-sulfu r

coal , rathe r

tha n th e requisit e 7 0 percent . Thi s situatio n 1 . Se e Nationa l Commission o n Air Quality , T o Breath e Clean Air , Final Repor t (Marc h1981) .

7 7coul doccu r i n area s desirin g t o limi t emission s furthe r

an dprotec t

ai r quality ; example s ma y b e Wyomin g an dNe w Mexico , whic halread y requir e mor e tha n 7 0 percen t

contro l o n som e powe r plant s firin g low-sulfu r coal . N o evidenc e suggests , however , tha t BAC T level s stricte r

tha n NSP S wil l b e establishe dwit han y frequenc y i n th e futur e fo r mos t regions . EFFECT S O N POWE RPLAN T SITIN G A n importan t

concern i s whethe r

th e Clean Ai r

Ac t impose s non economic , institutiona l constraint s o n th e constructio n o f ne w generatin g capacity . Complianc e wit hbot h PS D regulation s an dnational ambien t ai r quality standard s can pos e operational limitation s o n apowe r plan t at a particular

site . Suc hlimitation s can restric t ho w muc hcapacity can b e buil t i n certai n areas . Th e EP A report s tha t

bot h th e 197 1 an drevise d197 8 NSP S fo r utilitie s allo w a1,000-megawatt

coal-fire dboiler

t o operat e i n aClas s n PS D area , assumin g n o appreciabl e backgroun dconcentration s o r othe r source s nearby , an drelativel y fla t

terrain . 2

/ Unde r thes e conditions , on e larg e plan t complyin g wit hth e 197 1 NSP S woul dleav e littl e i f an y 24-hour

PS D incremen t

(see Tabl e 2 i n Chapte r n) , whil e th e sam e plan t complyin g wit h th e 197 8 revise dNSP S woul dconsum e approximatel y hal f o f th e 24-hour increment , usuall y th e mos t limitin g standard . Complianc e wit heithe r emission s standar dwoul dno t allo w afacilit y o f

thi s siz e t o b e locate deithe r i n o r nea r aClas s I area . Thus , i n certai n circumstances , suc h a s wher e th e terrai n i s mountainous , contain s Clas s I areas , an dothe r nearb y sources , complianc e wit hNSP S migh t no t b e sufficien t

t o protec t

th e Clas s n increments , an dfurthe r emission s contro l o r

movin g t o anothe r

site migh t b e necessary . I

f emission s contro l prove dto o costly , o r i f a n alternat e site wer e no t available , th e ne w plan t woul dno t

b e built . Bothth e nationa l commissio n an dth e Nationa l Academ y o f Science s report tha t th e majo r

constraint s o n powe r

plan t sitin g fro mPS D regulation s involv e th e presenc e o f "complex 1 1 (mountainous ) terrai n an dClas s I area s near o r surroundin g th e potentia l site . 3 / I n th e West , Clas s I area s 2 . Terrai n tha t

i s no t fla t tend s t o confin e an dthu s concentrat e pollutan t emissions . 3 . Se e Nationa l Commissio n o n Air Quality , T o Breath e Clean Air , an d Nationa l Academ y o f

Siences , O n Preventio n o f Significan t

Deteriora

tio n o f Ai r Quality , Nationa l Academ y Pres s (1981) . 7 8(Nationa l Park s an dcertai n national monuments ) represen t th e greates t potentia l constraint , a t

time s perhap s limitin g developmen t withi n a100

- kilomete r radius . In th e East , Clas s n area s an dth e presenc e o f othe r source s o f

pollutant s pos e th e greates t potentia l fo r

sitin g constraints . Bot h th e commissio n an dnationa l academ y als o conclud e tha t suc h constraint s ar e specifi c t o certai n site s an dar e difficul t t o quantif

y generically ; moreover , the y poin t

ou t tha t othe r legislatio n beside s th e Clea n Ai r Ac t severel y restrict s developmen t i n man y Clas s I areas , thu s makin g i t difficul t t o assig n growt h limitation s i n Clas s I area s t o th e Clea n Ai r Ac t alone . Finally , alternativ e site s ar e usuall y available , thu s allowin g aplan t t o b e buil t

somewhere . Muc hles s certai n i s th e incrementa l cos t o f relocatin g apowe r

plan t earl y i n it s plannin g process . Onl y tw o application s fo r PS D permit s hav e bee n denied , both in

volvin g permit s fo r

coal-fire dpowe r

plant s near

Clas s I areas . Afte r submissio n o f

additional information , on e wa s approve dwit hmino r modifi

cation . Th e othe r

powe r plan t eventuall y receive dapermi t afte r adoptin g mor e stringen t

control s t o reduc e tota l sulfu r dioxid e emission s b y 9 5 percent . Th e actua l incrementa l cos t o f achievin g thi s additional contro l i s unknown . EFFECT S O N CONSTRUCTIO N SCHEDULE S AN D RESULTIN GCOST S Betwee n 197 0 an d1980 , averag e powe r plan t constructio n time s increase dfro mfou r

t o seve n years . Th e reason s mos t ofte n cite dinvolv e th e numerou s operatin g license s an dpermit s require db y variou s law s enacte dove r

th e las t decade . Th e Clean Ai r Ac t i s responsibl e fo r

on e o f th e mor e comple x permi t processes , an dthu s i t

i s asuspecte dcontributo r t o protracte dconstructio n schedules . Th e PS D regulation s entai l certai n explici t an dimplici t

time-consum

in g tasks . Strictl y interpreted , th e regulation s ca n requir e one-year' s ai r quality monitorin g dat afo r th e permi t

application . Tim e i s als o take n u p i n developin g permi t

submissions , probabl y si x months . I n addition , th e reviewin g agenc y i s the n allowe don e year eithe r t o approv e o r

rejec t th e permi t application . Thus , assumin g th e permi t i s approved , u p t o 3 0 months can elaps e befor e constructio n begins . I n practice , th e tim e necessary t o obtai n aPS D permi t varie s widely , bu t i t i s usuall y les s tha n 3 0 months . Tabl e A- l show s th e tim e spen t i n th e variou s stage s o f

obtainin g apermit , base do n asurve y o f PS D permit s issue daccordin g t o th e requirement s o f th e Clea n Ai r

Act' s 197 7 amend

ments . Befor e embarkin g o n th e earl y stage s o f th e permi t

process , autilit y

7 9TABLE A. I PROCESSIN GTIM ESPEN T FO RNEWSOURCE S BEFORE AN D DURIN GPS D REVIE W Median Numbe r

90t h 95th Proces s Sequenc e o f Day s Percentil e a / Percentil e a

/ Initial Contac t t o Initial Submissio n Initial t o Fina

l Submissio n Fina l Submissio n to Permi t Issue Initial Submissio n t o Permi t Issue Initial Contac t to Permi t Issu e 4 2

5 7 157 27 1 33 3 44 0

29 8 32 3 46 3 61 2 48 7

31 9 32 8 52 8 63 4 SOURCE : Se e Dame s an dMoore , "A n Investigatio n o f Preventio n o f Significan t

Deterioratio n (PSD ) an dEmissio n Offse t Permittin g Processes, " prepare dfo r Nationa l Commissio n o n Ai r Quality (Revise dDecembe r

1980) . a / Uppe r quartiles ; 9 0 percen t

an d9 5 percen t

o f permit s wer e processe di n thes e number s o f

day s o r fewer . applican t typicall y contact s th e agenc y t o determin e whethe r monitorin g i s required , an di f

so , ho w muc han dwha t contro l requirement s ma y b e imposed . I f

th e critical permi t

stages , includin g monitoring , ar e assume dt o occu r betwee n initia l contac t

an dpermi t

issuance , the n i t

i s clea r tha t tota l processin g tim e i s usuall y complete dwithi n ayear , althoug h delay s o f u p t o tw o year s can occu r

i n rar e instances . Th e reason s fo r

th e relativel y shortene dtim e neede dt o obtai n a permi t compare dt o wha t

theoreticall y can elaps e probabl y involv e th e shor t media n tim e a n agenc y spend s o n reviewin g afina l permi t an ddeterminin g ho w muc h monitorin g t o require . Th e short processin g tim e fo r

fina l permit s i s evidence di n Tabl e A- l a s usuall y consumin g les s tha n si x months . 8 0Wit hregar dt o monitoring , th e sam e stud y responsibl e fo r th e dat ai n th e tabl e foun dtha t

reviewin g agencie s require dactua l on-site monitorin g dat a fo r particulat e matte r

an dsulfu r

dioxid e i n onl y 1 7 an d1 5 percen t o f al l cases , respectively . I n th e othe r instances /

eithe r monitorin g wa s no t required , o r

existin g stat e an dlocal dat acollecte db y publi c agencie s wer e availabl e an daccepted . Wit hregar dt o th e cost s associate dwit hincrease dlea dtime s fo r construction , i t

i s importan t

t o distinguis h betwee n tim e requirement s tha t can b e incorporate dint o th e overal l plannin g proces s an dthos e tha t fal l outsid e o f

thi s schedule , thu s resultin g i n delay . Tabl e A- 1 indicate s tha t th e overal l tim e require dt o obtai n aPS D permi t ca n cover

on e t o tw o year s bu t mor e commonl y involve s one . I f th e on e year

usuall y require dt o obtai n apermi t ca n b e partiall y o r

totall y absorbe dwithi n othe r plannin g require

ments , suc h a s selectio n o f fina l desig n an dequipmen t specification s prio r t o construction , the n delay i s reduce dt o les s tha n on e year . Tabl e A- Z present s estimate s o f projec t cos t increase s fo r

asi x month , 12-month , 18-month , an d24-month delay i n constructio n start-up . Thes e estimate s includ e th e cost s associate dwit hinflatio n a s wel l a s thos e associate dwit hextende dus e o f obsolet e capacit y (identifie di n th e tabl e a s energ y replacement) , i n thi s case , a500-megawat t oil-fire dplant . TABL EA-2 . ESTIMATE D COST S O FDELAY S I N CONSTRUCTIO N

START-U P O FA NE W500-MEGAWAT T COAL-FIRE D POWE RPLAN T (I n million s o f dollars ) Six-Month Dela y Energ y Replacemen t

4. 3 Inflatio n 2 5 « 0 Tota l 2 9 o3 12-Mont h18-Mont

h 24-Month Dela y Dela y Dela y 8. 6 13. 0 17. 4 50. 0 78. 0 104. 0 58. 6 91. 0 121. 4 SOURCE : Congressiona l Budge t Office .

8 1Th e averag e increas e i n norma l projec t lead-tim e associate dwit h th e Clean Ai r

Ac t i s estimate dt o b e si x months , whic h translate s int o som e $29* 3 millio n fo r

th e exampl e given i n Tabl e A-2 . Thi s estimat e assume s that approximatel y one yea

r o f permi t preparatio n an drevie w i s necessary , o f whic hhal f

fall s outsid e th e norma l plannin g schedul e necessar y fo r projec t start-up . Addin g th e cost s o f aful l monitorin g networ k fo r sulfu r dioxide , nitroge n oxide , an dparticulat e emissions , an dnecessar y ai r quality analysi s cost s fo r

developin g apermi t

( atota l cos t

o f approximatel y $140,000 ) result s i n apossibl e tota l cos t increas e o f

$29. 4 millio n fo r

th e exampl e given . Fo r

comparison , CB O estimatedtha t achang e i n th e interes t rat e or weighte dcos t

o f capital fro m1 0 to 1 1 percen t coul dresul t i n atota l projec t

cos t increas e o f

$10 1 million .

8 2APPENDI X B . ANALYTICA LASSUMPTION S AN D METHODOLOG Y

T o arriv e at

forecast s o f

pollutan t emissions , change s i n capita l an d annual costs , an dcoa

l marke t effects , th e CB O use dadetaile dlinea r programmin g mode l develope db y ICF , Incorporated . Th e ke y assumptions , includin g scrubber

costs , wer e supplie db y CB O fo r us e i n th e simulations . A revie w o f th e assumption s an dmethodolog y use dfollows . DESCRIPTIO N O FASSUMPTION S Tabl e B.7 , at

th e en do f

thi s appendix , define s th e majo r assumption s use di n th e modelin g effort . Table s B. I throug h B. 4 presen t th e estimate d cost s use di n th e analysi s o f scrubber s fo r

differen t coa l types . Thes e cost s ar e base do n arecen t

Tennesse e Valle y Authorit y study , Technical Revie w o f Dry FG D System s an dEconomi c Evaluatio n o f Spra y Drye r FG D System s (EPA-600/7-81-014 ) an dth e informatio n containe di n EP A Utilit y FG D Survey ; October-Decembe r 1980 , (EPA-600/7-81-021a) . Th e cost s o f th e basi c unit s includ e al l equipmen t an dmaterial s neede dt o transfe r th e flu e ga s fro mth e boiler

to th e stack , a s wel l a s collectio n an ddisposa l o f sludg e an dfl y as h residues . Th e estimate s i n th e table s als o reflec t asmal l expecte dincreas e i n th e rea l cost s o f equipmen t

an doperatio n betwee n 198 0 an d1985 , th e startin g poin t use dfo r

th e simulations . Tabl e B. 5 display s estimate dcost s o f upgradin g participat e contro l equipmen t neces sary whe n switchin g fro mhigh-sulfur t o low-sulfu r

coal , a s simulate dfo r computatio n fo r

Optio n IV . Th e cost s presente di n thes e table s giv e roug h approximation s o f th e cost-penalt

y involved ; only acase-by-cas e analysi s o f actual fuel-switchin g situation s coul dprovid e an accurat e estimate . Such informatio n wa s no t availabl e fo r

thi s report . METHODOLOG Y Th e effect s o f

th e assumption s an dalternativ e standard s wer e esti

mate dusin g th e IC FCoa l an dElectri c Utilitie s Mode l flCF/CEUM) . Th e mode l simulate dke y attribute s o f th e coa l an delectri c utility industrie s b y yea r an db y region . Fo r

th e coa l industry , forecast s wer e mad e o f coa l consumptio n b y sector , productio n b y minin g method , suppl y prices , coa l

8 3TABLE B.I . CURREN T NSP S Ite m

Annua l Sulfu r Dioxid e Limi t Desig n Contro l Efficienc y Actua l Contro l Efficienc y Scrubbe r Typ e Variabl e

(Coa l Typ e i n Pound s SO

- Per Millio n BTU s Consumed ) Ra w Coal Delivere dCoal Coa l to Scrubber 0. 8

0. 8 0.7 6 1. 2

1. 2 1.1 4 1.7 6 1.6 7 1.5 9 3.9 2 3.3 3 3.1 6 6.6 7

5. 0 4.7 5 8.8 9

6.6 7 6.3 3 0.2 4 0.3 6 0. 5 0. 5 0.6 7

(Percent Pollutan t

Control ) 7 0 6 8 Dr y 7 0

6 8 Dr y 7 0

6 9 Dr y 9 0

8 4 We t 9 0

8 6 We t 0.8 9

9 0 8 6 We t

Total Cost s fo r

SO

- an d Particulat e Contro l 144 Operatio n an d Maintenanc e Costs

— Fixe dan dVariabl e 2.1 5 (Dollar s pe r Kilowatt ) 145 14 6 22 8 23 1 (Mill s pe r Kilowatt-Hour ) 2.3 9 2.6 8 3. 9 4.3 7 23 5

4. 8 (Percent ) Capacit y Penalty Energ y Penalty 1.5 2 2.3 6 1.5 4 2.3 8 1.5 8 2.4 2 2.2 3 3.4 7 2.4 5 3.8 5 2.6 1

4.0 1 SOURCE : Congressional Budge t Offic e NOTES : Al l cost s base do n a500-megawat t powe r plant generatin g 5,50 0 hour s pe r year . Amortize dcapita l cost s no t included ; al l O& M cost s are first-yea r

costs . Cost s expresse di n mid-198 0 dollars . 8 4TABL E B.2 . OPTIO N I—EMISSION S CA P O F1. 2 POUND S O FSULFU R DIOXID E PE RMILLIO N BTU s O FFUE L CONSUME D Ite m

Annua l Sulfu r Dioxid e Limi t Desig n Contro l Efficienc y Actua l Contro l Efficienc y Scrubber Typ e Variabl e

(Coa l Typ e i n Pound s SO

- Per Millio n BTU s Consumed ) Ra w Coal Delivere dCoal Coa l t o Scrubber 0. 8

0. 8 0.7 6 1. 2

1. 2 1.1 4 1.7 6

1.6 7 1.5 9 3.9 2

3.3 3 3.1 6 6.6 7

5. 0 4.7 5 8.8 9

6.6 7 6.3 3 0.7 6 1.1 4 0. 8 1. 0 1. 0

(Percen t Pollutan t

Control ) 0 0 N A 0 Part

a / 0 N A 5 0 Dr y 7 0

6 8 Dr y 8 0

7 9 We t 1. 0

9 0 8 4 We t

Total Cost s fo r

SO

- an d Particulat e Contro l 7 1 Operatio n an d Maintenanc e Costs

— Fixe dan dVariabl e 0. 1 (Dollar s pe r Kilowatt ) 7 1 12 3 14 8 , 207 (Mill s pe r

Kilowatt-Hour ) 0. 1 1.7 7 3.6 4 4. 2 23 5

4. 8 (Percent ) Capacity Penalty Energ y Penalty 0 0 0

0 1.1 2 1.7 1 1. 8 2.2 4

2.8 1 3.4 8 2.6 1

4.0 1 SOURCE : Congressional Budge t Offic e NOTES : Al l cost s base do n a500-megawatt power plan t generatin g 5,50 0 hour s pe r

year . Amortize dcapita l cost s no t included ; al l O& M cost s are first-year

costs . Cost s expresse di n mid-198 0 dollars . a / "Part " indicate s 7 0 percen t contro l o f

portio n o f

flu e gas . 8 5TABLE B*3 * OPTIO N E-ACHIEV E 7 0 PERCEN T EMISSION S CONTRO L AN D SE T A 0. 8 POUN D FLOO R Ite m

Annual Sulfu r Dioxid e Limi t Desig n Contro l Efficienc y Actua l Contro l Efficienc y Scrubber Typ e Variabl e

(Coa l Typ e i n Pound s SO . Per Millio n BTU s Consumed ) Ra w Coa l Delivere dCoa

l Coa l to Scrubber 0. 8

0. 8 0.7 6 1. 2

1. 2 1.1 4 1.7 6 1.6 7 1.5 9 3.9 2 3.3 3 3.1 6 6.6 7

5. 0 4.7 5 8.8 9

6.6 7 6.3 3 0.7 6 0.6 2 0.6 4 1. 0 1. 0

(Percent Pollutan t

Control ) Par t a / Part a / 0 N A 5 0 Dr y 6 0 Dr y 7 0

6 8 Dr y 9 0

8 0 We t 1. 0

9 0 8 4 We t

Total Cost s fo r

SO

- an d Particulat e Contro f 7 1 Operatio n an d Maintenanc e Costs

— Fixe dan dVariabl e 0. 1 (Dollar s per Kilowatt ) 11 9 13 4 14 8 23 1 23 5 (Mill s per Kilowatt-Hour ) 1.3 2 2.1 5 3.6 4 4.2 2 4. 8

(Percent ) Capacity Penalty Energ y Penalt

y 0

0 1.04 1.6 1 1.3 7

2.1 1.8 1 2.8 1 2.4 5 3.5 8 2.6 1

4.0 1 SOURCE : Congressional Budge t Offic e NOTES : Al l cost s base do n a500-megawat t powe r plan t generatin g 5,50 0 hour s pe r year . Amortize dcapital cost s no t included ; al l O& M cost s ar e first-yea

r costs . Cost s expresse di n mid-198 0 dollars . a / "Part " indicate s 7 0 percen t contro l o f

portio n o f

flu e gas . 8 6TABLE B.4 . OPTIO N m—ACHIEV E 9 0 PERCEN T EMISSION S CONTRO L AN D SE T A 0. 6 POUN D FLOO R Ite m

Annua l Sulfu r Dioxid e Limi t Desig n Contro l Efficienc y Actua l Contro l Efficienc y Scrubber Typ e Variabl e

Ra w Coal Delivere dCoal Coa l to Scrubber (Coa l Typ e i n Pound s SO ~ Per Millio n BTU s Consumed ) 0. 6 1. 2 1.7 6 3.9 2 6.6 7 8.8 9 0. 6 1. 2 1.6 7 3.3 3 5. 0 6.6 7 0.5 7 1.1 4 1.5 9 3.1 6 4.7 5 6.3 3 0.5 4 0.5 0 0.5 0 0.5 0 0.6 7

(Percent Pollutan t

Control )

0 N A 7 0

5 8 Dr y 7 0

7 0 Dr y 9 0

8 5 We t 9 0

8 6 We t 0.8 9

9 0 8 6 We t

Total Cost s fo r

SO

- an d Particulat e Contro l 7 1 Operatio n an d Maintenanc e Costs

— Fixe dan dVariabl e 0.1 0 (Dollar s pe r Kilowatt ) 145 14 6 22 8 23 1 23 5 (Mill s pe r

Kilowatt-Hour ) 2.2 2 2.6 9 3. 9 4.3 7 4. 8 Capacity Penalty Energ y Penalt

y 0 1.5 4

0 2.2 2 (Percent )

1.5 8 2.2 3 2.4 3 3.5 0 2.4 5

3.8 5 2.6 1

4.0 1 SOURCE : Congressional Budge t Offic e NOTES : Al l cost s base do n a500-megawatt powe r plan t generatin g 5,50 0 hour s pe r

year . Amortize dcapita l cost s no t included ; al l O& M cost s are first-year

costs . Cost s expresse di n mid-198 0 dollars . 8 7TABLE B.5 . ESTIMATED COS T PENALTIE S IN OPTIO N IV ASSOCIATED WIT H FUE L SWITCHIN G (Per kilowat t

o f capacity ) Initial Coa

l b y Pound s S Per Millio n BTU s 0. 8 1. 2 1.7 6 3.9 2 6.6 7 8.8 9 b y Pound s SO ~ Ne w Coal Type s b y Pound s SO

- Per Millio n BTU s Consume d Per Millio n 0. 8 1. 2 1.7 6 3.9 2 6.6 7 8.8 9 X

2 0 3 0 6 0 6 0 6 0 X

X 2 0 3 0 6 0 6 0 X

X X 2 0 3 0 6 0 X

X X X 2 0 3 0 X

X X X X 2 0 X

X X X X X SOURCE : Congressional Budge t Office . NOTE : N o scrubber s ar e assume dt o figur e i n thi s estimate . distribution , an dtransportatio n cost s b y mode . Fo r th e electri c utilit y industry , forecast s wer e mad e o f generation , change s i n emissions , fue l us e (includin g coal b y type) , an dchange s i n cost s fo r capital , fuel , operatio n an d maintenance , an dpollutio n contro l fo r alternativ e standards . Th e mode l generate s aleast-cos t equilibriu msolutio n usin g astandard linea r programmin g formulation , whic h simultaneousl y balance s supply an d deman drequirement s fo r eac h regio n o f

th e Unite dStates . Thi s equilibriu m solutio n reflect s awid e variet y o f condition s affectin g both th e coa l an d electri c utilit y industries , includin g both governmenta l policie s an dnon governmenta l factors . Th e result s ar e summarize dregionall y i n term s o f production , consumption , an dprice s fo r coa l fo r utilities . Thes e provid e th e basi s fo r estimatin g othe r

impacts , suc h a s capita l requirement s an d environmenta l effects . Th e CEU M link s th e coa l an delectri c utilitie s industries . Th e electri c utilit y secto r

i n th e mode l i s structure di n suc h away as t o minimiz e tota l

8 8generatio n an ddistributio n costs . Th e mode l forecast s economi c capacity

expansio n an ddispatch . Th e mode l can operat e existin g capacity o f variou s plan t type s and/o r

buil dne w capacity . Further , i t can operat e capacit y i n an y o f fou r local categories—base , cycling , seasona l peaking , an ddail y peaking . I t

i s designe dt o buil dan doperat e capacit y o f variou s plan t

type s i n th e variou s loadcategorie s suc h tha t th e tota l o f

fuel , capital , an d operation s cost s i s minimized . Differen t pollutio n contro l regulation s (fo r sulfu r dioxid e an dothe r pollutants ) tha t

appl y t o specifi c type s o f plant s i n differen t

jurisdiction s ar e explicitl y modeled . Fo r older sources , actua l stat e emissio n limitation s ar e used . Fo r

source s subjec t

t o NSPS , eithe r

th e federa l standard s o r assume dPS D o r

stat e limi t

i s used , whicheve r

i s lowe r (se e Tabl e B.6) . Hence , consumptio n o f

an y on e coa

l typ e depend s o n it s pric e relativ e t o othe r coa l type s an dothe r

complianc e alternatives . Rathe r tha n merel y minimizin g delivere dcoa l costs , th e mode l minimize s th e tota l cost s o f generatin g an ddistributin g electricity . Th e curren t

NSP S an dal l alternative s wer e simulate da s follows . Al l existin g source s wer e assume dsubjec t t o th e applicabl e stat e an dlocal standard s containe di n th e Stat e Implementatio n Pla n (o r PS D determina

tion , i f lower) , an dal l ne w source s wer e subjec t t o th e alternativ e federa l emission s standard s bein g examined , excep t whe n thos e woul db e supersede d b y mor e stringen t

stat e regulation s i n effec t a s o f 1980 . Optio n I V wa s modele dsimilarly , excep t tha t ne w source s wer e permitte dt o increas e emission s abov e curren t NSP S level s i f

equivalen t

reduction s o f

sulfu r dioxid e (beyon dlevel s regulate db y th e SIP ) wer e obtaine dat

on e o r mor e existin g sources . I n al l cases , th e least-cos t solutio n fo r

electricit y productio n wa s simulated . Tabl e B. 7 outline s th e assumption s use di n th e mode l simulatio n analysis .

8 9TABL E B.6 . PREVENTIO N OFSIGNIFICANT DETERIORATIO N

ASSUMPTION S FO RSPECIFIE D STATE S (In pound s o f sulfu r dioxide pe

r millio n BTU s consumed )

Montan a Wyomin g Colorad o Ne w Mexic o Uta h Arizon a Nevad a Nort h Californi a Sout h Californi a Stat e Ne w Sourc e

Emission s Standard s 1.20 0.2 0 0.4 0 0.3 4 0.12/1.2 0 0.8 0 1.2 0 0.1 3 0.1 3 Assume dFederal PS D Emission s Limi t 1.2 0 0.2 0 0.2 0 a / 0.3 4 0.2 0 a / 0.2 0 a / 0.2 0 a / 0.1 3 0.1 3 SOURCE : Congressiona l Budget Office . a / Denote s state s wher e assume dPS D limi t i s mor e stringen t

tha n stat e standards .

9 0TABL E B. 7 MAJO RASSUMPTION S USE D I N CBO/IC FANALYSI S Paramete r Bas e Cas e Commen t Energ y an dEconomi c Condition s GN P (Percen t

pe r yea r real growt h 198 0 - 1985 = 2. 9 198 5 - 200 0 = 3. 0 Modifie dfro mrecen t CB O economi c forecasts . Worl dOi l Price s (198 0 dollars )

Natura l Ga s Price s an dAvailability Electri c Utilit y Energ y Deman d Electricit y Growt hRat e (Percen t pe r year ) Nuclea r Capacity

Substitutio n o f

Coal fo r Oi l an dGa s 198 5 = 37.2 9 199 0 =41.1 7 199 5 = 45.4 6 200 0 = 50.1 9 A s estimate db y IC F Ga s Model s

197 9 - 198 5 = 3. 2 198 5 - 199 0 = 2. 7 199 0 - 199 5 = 2. 7 199 5 - 200 0 = 2. 7 198 5 = 7 8 199 0 = 12 1 199 5 = 14 1 200 0 = 17 5 Reconversion s assume d an daccelerate dreplace

men t allowe dbu t

deterre d b y capita l cos t

penalt y an dstat e limits . Higher oi l price s encourag e th e substitutio n o f coa l fo r oi l b y electri c utilities , withi n assume dfinancia l an dinstitutiona l constraints . Estimate s o f futur e oi l price s assume a2 percen t pe r year rea l escalatio n i n price , whic hi s base do n recen t CB O forecasts .

Growt hrate s fo r

electricit y ar e expecte dt o remai n wel l belo w pre-198 0 historica l averages . Thi s i s consisten t wit hWharto n Economi c Forecastin g Assumption s (WEFA ) an dIC Fanalysi s o f th e electricit y market s Sinc e coa l i s asubstitut e fo r

nuclea r powe r i n generatin g electri c power , variatio n i n nuclear capacit y level s lead s t o variation s i n nationa l coal productio n forecasts . Th e estimate s ar e base do n aunit-by-uni t review . Curren t an dprojecte doi l an dga s price s indicat e i t i s economi c t o substitut e coal fo r oi l an dga s i n substantia l proportions , bu t institutiona l an d financia l constraint s mak e thi s unlikel y t o occur . I n th e bas e case , abou t

1 8 gigawatt s o f

conversion s are assumed . Th e accelerate dreplacement s o f oi l an d ga s unit s wit hne w coal unit s ar e inhibite db y addin g capita l cos t

penalt y t o th e cos t

o f ane w coal uni t an db y limitin g th e amoun t o f ne w coal capacit y i n ke y states—California , Texas , Louisiana , an dFlorida . (continued )TABL EB. 7 (Continued )

Paramete r Bas e Cas e Commen t Powe r plan t an d Industria l Fue l Us e Ac t

Utilit y Capita l Cost s pe r kilowat t (198 0 dollars ) Non-Utilit y Coal Deman d Industria l Coa

l Us e (Pe r millio n tons ) Stea mCoa

l Export s (Pe r millio n tons ) Metallurgical Coal Us e (Million s o f

tons ) Export

Domesti c Coa l = Abou t 85 0 Nuclea r = 1,020-1,25 4 Turbin e = 223-23 5

198 5 = 80 199 0 = 11 7 1995 = 17 1 200 0 = 22 5 1985 = 4 0 1990 = 8 4 199 5 = 12 0 200 0 = 19 6

198 5 = 5 1 199 0 = 5 6 199 5 = 5 8 200 0 = 6 0 1985 = 7 3 199 0 =6 7 199 5 = 6 6 Th e off-ga s provisio n i s no t i n effect , bu t

th e base

year ga s us e rul e remain s i n 198 5 onl y wit hth e bas e year quantit y define da s th e maximu mus e durin g 1970s . Oi l an dgas-fire dcombine dcycl e ar e prohibite dfo r

ne w powe r

plants . Capita l cost s fo r

ne w powe r

plant s ar e base do n th e mos t recen t (1979 ) technica l dat adevelope d b y EPRI . The y includ e atota l rea l escalatio n o f 1 2 percen t

betwee n 197 8 an d1985 , a s modifie db y CBO .

Base do n recen t

IC Fanalysis . Long-termestimate s o f

export demand s fo r

stea m coa l are base do n recen t

IC Fin-dept

h analysi s o f th e export

markets . Export deman dfo r

metallurgica l coal i s assume dt o declin e fro mabnormall y hig h level s i n 1980 , an dthe n increas e onl y slightly . Metallurgica l export s ar e assume dt o b e primaril y low-sulfur , high-Bt u coals . Domesti c us e o f

metallurgica l coa

l i s expecte dt o declin e du e t o th e sluggis h growt h o f th e U.S . stee l industry an dcontinue dproces s change s tha t reduc e th e us e o f

coke per to n o f product . (continued )TABLE B. 7 (Continued ) Paramete r Bas e Cas e Synfuel s (Coa

l inpu t i n million s o f

tons ) 198 5 = 7 199 0 = 24 199 5 =8 2 200 0 = 13 9 Residentia l an dCommercia l Coa l Us e Financial Parameter s Inflatio n Rat e (Percen t pe r year ) Discoun t Rate s (Percen t pe r year ) 198 5 = 8 199 0 = 9 199 5 = 1 0 200 0 = 1 1 198 0 - 200 0 = 8. 0 Coal Min e = 14.48 % Utilit y = 12.61 % Coal Transport

Rates

— Rail , Barge , andTruc k (Percen t tota l rea l escalation ) Minin g Cost s (Dollar s tota l rea l escalation ) Othe r Federa l Leasin g Polic y 197 9 - 1985 : Eas t = 25.0 % Wes t = 25.0 % 198 0 - 2000 : Capita l = 0.0 % Labo r = 0.0 % Material s = 0.0 % Enoug h Ai r Pollutio n Regulation s Mos t recen t federa l an dstat e rules . Commen t Estimate ddeman dfo r

coal-derive dsynfuel s i n 198 5 ha s bee n reduce dfro mearlie r forecast s t o reflec t

a reduce dgovernmen t

rol e i n promotin g commercia l synfuel s productio n an daproject-by-projec t assess men t o f announce dplans . Residential an dcommercia l coa l us e i s expecte dt o increas e slowly . Residential an dcommercia l deman di s assume dt o b e limite dt o low

- an dmedium-sulfu r coals . Th e annua l inflatio n rat e i s assume dt o b e 8 percen t pe r year , consisten t

wit h recen t

C.B O forecasts . Thes e nomina l rate s ar e base do n a6. 0 percen t rea l rat e fo r

minin g an da4.2 7 percen t rea l rat e fo r utilities . Transportatio n rate s ar e estimate dt o increas e i n rea l term s throug h 198 5 a s allowe dunde r th e Stagger s Rai l Act . Capital , labor , an dmaterial s ar e assume dt o remai n constan t i n real terms . Productivit y increase s ar e assume dt o offse t

an y rea l cos t

escalation .

I t i s assume dtha t

enoug h coal wil l b e lease db y 198 5 an dlate r t o avoi dartificiall y drivin g u p marke t prices . Control s o n utilit y emission s o f SO~ , N O , an dTS P ar e subjec t wher e applicabl e t o federa l NSPs f revise dNSP S an dPS D rules ; o r

t o stat e SI P rule s i f

mor e stringent .APPENDI X C . FINANCIA LEFFECT S O FDIFFEREN T ACCOUNTIN G METHOD S FO RCONSTRUCTIO N WOR K I N PROGRES S Particular

accountin g method s use db y th e electri c utilitie s can influenc e th e financia l conditio n o f th e industry an dth e cost s o f producin g power . The y ca n als o affec t th e industry' s cost s t o mee t th e Clean Ai r

Act' s NSPS .Th e mos t

significan t

regulatio n pertainin g t o utilit y finance s i s th e stat e publi c utilit y commissions ' treatmen t o f "constructio n wor k

i n pro gress. " I n mos t

instances ! utilitie s ma

y no t ear n return s o n CWI P invest

ment s befor e thei r

ne w facilitie s ar e full y operational . T o accoun t fo r th e los t revenu e afir mincur s whil e afacilit y i s bein g built , th e stat e PU C usuall y allow s autilit y t o establis h an "allowanc e fo r fund s use ddurin g construction " account . Thi s accoun t essentiall y represent s th e valu e o f tota l CWI P capitalize deac h year at arat e o f

retur n se t

b y th e commission . Th e capitalize dannual CWI P appear s a s incom e fo r accountin g purposes , bu t i t i s no t realize da s cas h unti l th e facilit y i s service . Whe n th e facilit y doe s begi n operation , th e capitalize dAFUD C i s adde dt o th e tota l investment , formin g th e rat e base . Th e rat e bas e i s the n depreciate dover th e operatin g lif e o f th e facility , wit hth e utilit y earnin g a n annual retur n o n th e undepreciate dportion . Althoug h th e utilit y i s ultimatel y allowe dt o earn a fai r retur n o n it s constructio n costs , i t mus t borro w o r

otherwis e maintain it s cas h flo w i n th e interim . Tabl e C. I compare s th e finance s o f ane w 500-megawat t

plan t unde r thre e differen t

accountin g an dpollutio n contro l hardwar e assumptions . Eac h facilit y i s assume dt o hav e begu n constructio n i n 198 0 wit hexpecte d start-u p i n 1987 . Th e firs t facilit y include s ascrubber a s part o f th e tota l plant , an dit s rat e bas e i s calculate dt o includ e AFUDC . Th e secon dfacilit y als o ha s ascrubber , bu t

th e utilit y i s allowe dt o earn aretur n o n it s CWI P investment

befor e plan t

start-up . Th e thir dfacilit y ha s n o scrubber , an d simila r t o th e firs t

facility , it s rat e bas e include s AFUDC . Th e calculation s assume eithe r

al l o r non e o f th e facilit y i s subjec t

t o CWI P o r

AFUDC , dependin g o n th e case . Figure C. I show s th e electricity cos t curve s fo r

eac h plan t

ove r it s lifetime . Both plant s usin g AFUD C i n th e rat e bas e d o no t start chargin g fo r electricit y unti l th e firs t year o f operation . Th e plan t

usin g CWIP , o n th e othe r hand , begin s addin g asmal l charg e t o existin g electricit y cost s durin g th e year s o f

construction . Thi s adde dcharg e fro mpassthroug h o f

9 5TABLE C.I . FINANCIA LCOMPARISO N O FA NEW500-MEGAWAT T POWE RPLAN T UNDE RDIFFEREN T ACCOUNTIN GAN D POLLUTIO N CONTRO LHARDWAR EASSUMPTION S (I n million s o f

dollars ) Plan t an dPlant with Scrubbe r wit hPlant

an dScrubber

N o Scrubber , AFUD C withCWI P AFUD C (I n Rat e Base ) (I n Rat e Base ) (I n Rat e Base ) c/ Total Plan t

i n Rat e Bas e Start-u p (nomina l dollars ) a

/ 1,19 5 89 2 93 3 Total Interes t Durin g Constructio n (nominal dollars ) a

/ 30 3 124 22 9 Cos t t o Consumer s Ove r Lif e o f Plan t (198 0 dollars ) b /

86,54 2 64,39 4 68,02 0 SOURCE : Congressional Budge t Office . a / Interes t

rate , AFUDC , an dretur n o n rat e bas e calculate dat 13.74 percent . b / Discoun t

rat e use dwa s 1 0 percen t ove r 2 5 years . £ / Life cycl e cost s o f

thi s facilit y als o includ e higher fue l cos t

fo r low

sulfu r coal . CWI P t o existin g electricit y cost s woul dresul t i n hig h electricit y rate s durin g th e year s preceedin g plan t start-up . A s Tabl e C. I shows , however, bot h plant s usin g AFUD C a s an accountin g procedur e hav e large r rat e bases , highe r interes t costs , an dgreate r

electricity cost s over

th e lif e o f th e plan t tha n th e facilit y obtainin g aretur n o n CWIP , whic hi s assume dt o offse t a portio n Q £it s annual investmen t durin g construction .

9 6

### Figur

e 'Ct . 

## Projecte d Electricit

yRate s Unde rDifferen t Accountin g Assumptions : 1980-201 0 

## 7 9 6 0 Rat e fo r plant wit h scrubbe rwit h allowanc e fo rfund s used durin g constructio n incorporate d i n rate base

Rat e fo r plan t withou t scrubbe r wit h allowanc e fo r fund s used durin g constructio n incorporate d i n rat e bas

t Rat e fo r plan

t wit h scrubbe r wit h cost s of constructio n wor k i n progres s

- incorporate d i n rate bas e

198 0 198 5 199 0 200 0 200 5 201 0 Year s SOURCE : Congressiona l Budge t Office . NOTE : Transmissio n an d distributio n rate s no t included . 

### I t i s importan t

t o not e tha t

th e cos t o f AFUp C t o aplan t

wit ha scrubbe r i s approximatel y equal t o th e cos t o f th e scrubbe r

itself . Th e presen t v^lu e differenc e i n tota l investmen t (wit hinterest ) o f

th e firs t tw o plant s show n i n Tabl e C. I i s equivalen t to $18 4 per kilowatt-hour . Thi s cos t i s approximatel y equa

l t o awe t

limeston e scrubber

withou t particulat e controls . Th e reaso n AFUD C i s employe da s an accountin g procedur e primaril y involve s th e reluctanc e o f stat e PUC s t o forc e presen t consumer s t o subsidiz e th e rate s o f

futur e consumers . Thoug hove r th e lon g term , utilitie s an dratepayer s enjo y lowe r cost s whe n CWI Pi s incorporate di n th e rat e bases , th e prospec t

o f yearl y rise s i n electricity rate s befor e aplant' s start-u p remain s a n unattractiv e optio n t o mos t PUCs . A recen t surve y reveal s tha t

man y state s allo w som e CWI Pi n th e rat e base , bu t suc htreatmen t

i s no t uniform , an dth e averag e amoun t allowe di s onl y approximatel y 2 0 percent . \J I n th e survey , 4 4 stat e PUCs , accountin g I/ Genera l Accountin g Office , "Constructio n Work i n Progres s Issue Need s Improve dRegulatory Respons e fo r Utilitie s an dConsumers " (Jun e 23 , 1980) . 9 7for $3 8 billio n out

o f th e $42. 5 billio n o f

tota l CWIP i n 1978 , provide d informatio n o n thei r

treatmen t

o f CWIP . I n thes e 4 4 states , 23. 4 percen t o f CWI P wa s allowe di n th e rat e bases . Th e rang e o f CWI P allowe di n rat e base s nationwid e wa s betwee n 2 1 an d2 3 percen t i n 1978 . Thi s 2 1 t o 2 3 percen t figur e may b e misleading , sinc e stat e PUC s ofte n emplo y an "AFUDC-offset " whe n CWI P i s allowe di n th e rat e base . Thi s offse t essentiall y subtract s par t o f th e real incom e generate db y CWI P an d replace s i t

wit hAFUD C accountin g income . Althoug hAFUD C represent s only on e accountin g procedur e that can adversel y affect s th e financia l conditio n o f autility , i t

i s perhap s th e mos t importan t

one . A s AFUD C increase s a s apercen t o f tota l revenues , th e quality o f

autility' s earning s diminishes . Thi s reductio n i n th e quality o f earning s i s perceive dnegativel y b y th e investmen t community , which , i n turn , become s reluctan t

to continu e lending , resultin g i n increase dcos t o f capital fo r

utilities . A 1 percen t

ris e i n interes t

rate s can ad d$25. 6 millio n t o th e tota l cos t

o f ane w 500-megawatt

facility . Such potentia l cost s an d thos e actuall y associate dwit hfinancin g autilit y subjec t t o AFUD C largel y overshado w th e cos t

o f mos t ai r pollutio n controls . 

# o '

9 8